Building and Construction Distributors Can Increase Their Margins More; Here Are 10 Ways To Do It

In the building and construction business, many distributors keep their return on capital high by earning healthy margins on high-turn products. This strategy has paid off especially well in recent years, even after accounting for post-COVID-19 pricing concessions. But the trend has continued long enough that industry watchers are left wondering whether it still has room to run.

In this Executive Insights, we’ll look at the conditions that have enabled distributors to expand their EBITDA (earnings before interest, taxes, depreciation and amortization) margins. Then we’ll examine where remaining opportunities for EBITDA margin uplift can be found and what distributors can do to capture them.

A supportive environment for margin growth

Public building products distributors have materially expanded their EBITDA margins over the last 10 years (see Figure 1).

This trend is partly due to consistent demand for building products following the 2008 financial crisis and the subsequent collapse in new residential construction. Key construction measures have shown steady growth. Between 2010 and 2023, spending in commercial and residential construction increased 5.7% and 9.9% per year, respectively.

Another factor is the stable deal environment for building and construction distribution (see Figure 2). Lately, margin uplift has been a consistent rationale for M&A in the sector.

That hasn’t always been the case. When Wesco International acquired RS Electronics in 2012, for example, the strategy was to expand Wesco’s electronic product offerings and customer base for industrial original equipment manufacturers. But when Wesco merged with Anixter in 2020, margin improvement was a core financial rationale.

When it comes to acquisition targets, scaled building products distributors tend to generate higher margins than do smaller ones. Reasons include purchasing synergies, favorable pricing and cost efficiencies. M&A can help distributors improve margins by addressing other exogenous conditions like shifting customer preferences or supplier consolidation and fragmentation.

Opportunities for further improvement

Despite years of chasing margin uplift, there’s still a good deal of untapped opportunity across numerous building and construction product categories (see Figure 3).

Building products EBITDA margins can be highly variable by category. Access control products tend to have the highest margins, reflecting the growing consumer appetite for technology. The lowest margins, perhaps predictably, can be found in lumber. Even within categories, margins can vary (see Figure 4).

Although all categories have opportunities to increase margin, certain attributes are particularly favorable to achieving higher margins. They include:

• Exposure to repair & renovation
• Alignment with mission-critical end-user needs (e.g., emergency repair)
• Distributor consolidation
• Supplier consolidation
• The need for value-added services

These attributes may be more present in some categories than in others.

The 10 levers of margin uplift

Against that backdrop, what levers can distributors pull to unlock margin upside? Here are 10 that we’ve identified, with technology enabling many of them (see Figure 5).

1. Pricing
   Systematically assess whether you’re charging the optimal price for the value of different services, taking into account variations at the regional level along with the timing of different needs
2. Value-added offerings
   Find new ways to build up your capabilities in value-added products (think private label or prefabricated) and services (like installation or inventory management capabilities).
3. Footprint density
   Customers typically won’t drive more than 10-20 minutes to buy. So increasing your share of the local market can boost customer loyalty and position you to sell more value solutions.
4. Category management
   Create upside by diversifying stock-keeping unit assortments, optimizing for high-turn products and prioritizing higher-margin sales.
5. Cross-selling and upselling
   Online cross-selling and upselling tactics not only help retain customers; they can also lead to higher-margin sales and a bigger basket size.
6. Procurement
   Scale — whether achieved organically or through M&A — can give you the power to obtain better terms from manufacturers.
7. Network optimization
   Other benefits of organic and M&A growth include the ability to right-size locations, serve customers from the most optimal branch, and build new branches to bring products and services closer to customers.
8. Transportation
   Increasing the number and size of shipments gives you more flexibility as to how much of your fleet is owned versus leased to manage costs.
9. Support services
   Combining and eliminating overhead functions delivers reliable savings, although impact may or may not be as high as other levers.
10. Direct labor
    Improved and expanded analytical capabilities can help you streamline staffing through better labor forecasting, distribution center slotting and facility workflow.

Additionally: Technology enablement. Any of the margin uplift levers we’ve just described can be enhanced with technology (see Figure 6). Examples include pricing and supply chain management tools as well as platforms for ecommerce, customer relationship management and human resources.

Charting a path to sustained margin improvement

Building products distribution has enjoyed a decade of steady EBITDA margin expansion, thanks to a favorable macroeconomic environment, strategic M&A activity, and sustained demand in both the residential and commercial markets. But as margin gains become consolidated and new margin uplift becomes harder to achieve, distributors must shift from riding tailwinds to actively engineering further improvements.

The good news: Meaningful opportunities remain. By making the most of margin-rich product categories and pulling targeted cost and revenue levers, distributors can unlock the next wave of profitable growth. The path forward will require a realistic assessment of the time, capabilities and resources involved, with an eye toward achieving real impact in the medium term. If you are a distributor or investor seeking to improve margins and drive value creation, reach out to L.E.K. Consulting to discuss how we can help.

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