Homeowners Move Far Less Often

Sources: U.S. Census, John Burns Real Estate Consulting

Builder Confidence Quickly Recovered and Is Making All Time Highs

Note: a score above 50 represents good conditions while a score below 50 represents poor conditions
Source: NAHB/Wells Fargo Housing Market Index

1. E-COMMERCE

Recent dynamics and emerging implications: Online purchase of easily shipped, small ticket R&R projects (<$5,000) has accelerated through the COVID-19 pandemic, with at least some of this increased activity likely to represent a permanent change in buying behavior. E-commerce had been a developing channel for many building product verticals even before the pandemic. In the past year alone, Home Depot’s online sales grew 80% versus total sales growth of 13%, while Lowe’s online sales grew 106% versus total sales growth of 19%. Similarly, many categories have seen online sales growth fueled by the pandemic; for instance, online paint spend is estimated to have increased by 42% over the year to July 2020 versus 23% growth for in-store sales. Despite this sector-specific trend toward online buying, companies still face three key digital challenges:

• Manufacturers and distributors must be omni-channel; even before COVID-19, only 50% of consumers’ home improvement purchases were store-only and over 50% of residential contractor spending had an online component (online ordering and pickup in store or online ordering and delivery to client location). A 2020 global construction survey found that 75% of engineering and construction companies were planning to increase their spending on digital transformation, implying higher digital expectations from their vendors.
• While manufacturers can sell online or provide online concierge services to consumers, they must weigh higher margins against increased channel conflict.
• Not all companies are investing in their online capabilities. L.E.K.’s research found 83% of more successful companies (defined as those that are taking market share and have high Net Promoter Scores relative to peers) have made a meaningful investment in digital customer experience, while only 19% of less successful firms have done so. Priorities include digital customer and supplier engagement, digital tools for remote selling, digital collaboration in product development and supply chain, and developing a means to address new cybersecurity threats.

> M&A implications: Some manufacturers have built powerful digital platforms that can take an omni-channel approach to balancing the concerns of all channels and fostering growth online; companies able to manage this conflict have earned premium outcomes in M&A assignments.

2.  OUTDOOR LIVING

> M&A implications: Companies in and around the outdoor living thesis have earned higher multiples in sale transactions as a result of COVID-19, as purchasers are strong believers that the trend is long term and not just a short-term fad attributable to a “COVID bump.” We expect industry growth to continue outpacing broader construction activity and still represent an attractive area for investment going forward. Manufacturers and investors who are unrepresented in the outdoor living space can find multiple entry points given the many subcategories, with further opportunities to consolidate product specialists into broader solutions.

3. MODULAR CONSTRUCTION

Recent dynamics and emerging implications: Labor shortages in construction trades have been a growth constraint for several years and have persisted in 2020. Furthermore, single-family homes are constructed very similarly to decades ago, creating an opportunity for modular construction to help address shortages in construction trades that have been a growth constraint for several years and, despite broader unemployment increases across the nation, have persisted in 2020. However, some caution is needed as modular and semi-modular construction represents only 3%-4% of residential homes today. The Great Recession led to modular construction exits as companies sought strategies that could drive a faster return on capital, and this has started to occur again in 2020 (e.g., Skender, Guerdon) with the Wall Street Journal reporting that Softbank is investing in Katerra to ensure the company’s liquidity. Semi-modular construction — prefabricated/prior assembly of selected components — is likely to have the stronger prospects going forward. A 2020 Dodge Data & Analytics survey found that market participants planned to increase their use of prefabricated single trade assemblies over the next three years; meanwhile, major builders are developing capabilities in this area (e.g., Pulte acquired ICG, a provider of off-site framing).

> M&A implications: We have seen multiple clients evaluate opportunities that can make their products more job site ready, including factory built/pre-assembled products. There has even been interest in the modular construction space broadly from players outside of what has historically been a niche industry. New construction-focused manufacturers and distributors will need to ensure that they have developed the capabilities to support a more prefabricated world, and that could include acquiring modular or prefabricated capabilities and developing relationships / partnerships with these businesses.

4. CONSOLIDATION IN DISTRIBUTION

Recent dynamics and emerging implications: The decade long run in distribution consolidation is set to continue as Amazon looks to further disrupt traditional routes to market and earn a higher share of the pro customer’s wallet, with distribution specialization being a key strategy to limit this impact. Furthermore, larger players that are able to drive industry consolidation have become further advantaged as low-cost distribution models and customer online preferences have accelerated the need to invest in e-commerce and logistics. Manufacturers will need to be thoughtful as they plan for the future, balancing the need for enhanced service to existing channel partners with alternative investment in building downstream property owner relationships, supporting alternative channels or selling direct as a means to reduce dependency on fewer distributors. Distributors can enhance manufacturer and customer support by leveraging new capabilities from consolidation.

> M&A implications: Building and construction distribution had 38 announced or closed transactions from January-December 2020, similar to 2019, but at a record level of transaction values. Even when the HD Supply/Home Depot transaction is excluded, reported transaction values totaled ~$4.8 billion compared with ~$1.1 billion in 2019, representing the highest level of deal value in the last five years. Strong multiples continue to be paid across all verticals of building products distribution; while certain verticals are nearly fully consolidated (e.g., roofing and wallboard), several other verticals remain fragmented (e.g., masonry and landscape products). November 2020 illustrates all flavors of M&A rationales, including serial roll-ups (e.g., SRS’s acquisition of C.C. Supply), strategic acquisitions and/or integrations (e.g., Home Depot’s acquisition of HD Supply) and private equity investment (e.g., American Securities’ acquisition of Foundation Building Materials and subsequent purchase / combination of Beacon’s interiors business).

5. INCREASING INPUT COSTS / SUPPLY DISRUPTIONS

All told then we see a continuing recovery in automotive M&A as we move towards the end of the year and into 2021 with several factors driving this. As the leading advisor to the industry, we are well positioned to help execute your strategic objectives and initiatives.