Leading Lights

It has been a tough year for merchanting, but there is cautious optimism that 2011 will mark the start of recovery. Builders’ Merchants News’ Leading Lights listing shows consolidation remains a driving force in the sector with the big getting even bigger. Dean Stiles reports.

Travis Perkins swallowed the BSS Group last year making TP by far the largest UK merchant with sales of £3.1bn. TP, along with the other big four – Wolseley, Grafton and Saint Gobain – account for around a quarter of the UK’s £42bn building material sales.

Comparisons between merchants are difficult regardless of size with no two merchants the same – even among the big national players. TP has a high-street presence through its Wickes outlets and competes with retail giants such as Kingfisher’s B&Q outlets and Homebase.

TP is a solidly British business unlike Grafton and Wolseley which both have substantial overseas operations. In the case of Wolseley, its UK sales account for only 19% of its business. And, within the UK, there are pronounced regional variations.

Grafton, with 71% of its revenues coming from Britain is more exposed to the northern half of the country than TP. The UK outside of the London and the South East is one of the toughest economic zones in Europe at the moment.

The sharp contraction in construction since 2008, with housebuilding particularly badly affected, is the most important issue facing the building materials sector.

There is also the still unknown effect of last October’s government Spending Review. Public sector cuts of £81bn are a major challenge to the private sector if the current fragile recovery is to be maintained. The spending cuts will have direct and indirect consequences on the construction industry, but details are not yet clear.

TP’s performance reflects the effect of the downturn and is not dissimilar to that of many merchants regardless of size. Its merchanting market fell by over 30% from its peak in 2008 and although activity has picked up a little, from a longer term perspective, activity levels are currently around 20% below their peak despite a 4% increase in sales last year.

“We are seeing the exact reverse of what we saw when we went into recession,” said Geoff Cooper, chief executive at TP. “Two years ago, mortgage costs fell and consumers had a little more cash in their pockets, which helped retail a lot. But, commercial construction and new residential stopped. Now, consumers have been overtaken by rising inflation but house- building, commercial work and repair and maintenance is being re-established.”

Forecasts for this year are varied and again show the effects of regional differences. Companies are cautious in their predictions. TP reported a 10% lift in merchant sales in the first two months of this year.

Grafton said its like-for-like UK sales for January and February rose 8% which would likely translate to low to mid single-digit percentage growth for 2011 as a whole according to Michael Chadwick, Grafton’s executive chairman. He believes that Britain is in a “modest growth phase”.

Grafton has been hard hit by the collapse in the Irish economy, reporting turnover in its Irish merchanting branches down 11.5% to € 327.8m (2009: € 370.2m). The outlook for Ireland remains unpredictable, said Grafton.

In Northern Ireland, Grafton reported turnover was lower, but the rate of decline moderated through the year. “The economy and construction sector is emerging from a deep recession and turnover in the merchanting business stabilised as the year developed.”

Geoff Meldrum, chief executive of Northern Ireland-based Beggs and Partners, said it was a challenging year in terms of trading, with all business areas under pressure.

“This reflects a challenging property market and the public sector preparing for reduced spending: there is a distinct lack of major projects in the public and private sectors. Our outlook for 2011 remains cautious, though we hope things will bottom out in 2011,” he said.

There is a similar picture in Scotland. Mark Northway at Beatsons, one of Scotland’s independent builders’ merchants, said: “Despite difficult trading conditions the company managed to improve its turnover while maintaining gross margin levels and increasing net profit for the year ended 31 July 2010. The company continues to be cautiously optimistic for the year ahead.”

Richard Errington, managing director of Crossling, is concerned that performance will suffer as government cuts kick in. His company experienced a similar pattern to many with a poor first half followed by a better second. “We are looking to be proactive and keep giving a good service to our customers and take any opportunities which come along,” he said.

Welsh merchant, Huws Gray bucked the trend with turnover in 2010 up by almost 13% despite tough market conditions. As with TP, acquisitions helped. “While the early part of 2010 saw the recently-acquired branch at Colwyn Bay start to bear fruit, the company added to the branch network in August when acquiring Ainscough Building Supplies near Wigan to strengthen our presence in Lancashire,” said Terry Owen, managing director of Huws Gray.

“In a first for the company, it was decided to retain the long-established trading name, while at the same time, providing significant investment in terms of branch refurbishment.

“With the right circumstances, this trading name retention will be our policy for any future acquisitions,” he said.

“Continued heavy investment in branch refurbishment, our transport fleet and IT capabilities, allied to a motivated and energetic workforce, means we seem to be performing well despite the severe economic downturn, and indicates that we are well positioned for future growth in 2011 and beyond,” Mr Owen said.

HPS, which trades in London and the South East reports turnover in 2010 up 18% on the previous year. Peter Wilson, sales director said: “Despite a slow start in January due to adverse weather conditions, the end of 2010 finished particularly strongly with both new and established branches doing well.”

Acquisitions and good plumbing material sales also helped JT Dove.

It acquired Timber and Building Supplies in Boldon and opened plumbing and heating units in Teesside and Hexham.

Steve Robinson, chief executive, said: “The year was hampered by three months of the worst winter weather on record. However, after a slow start in 2010 we saw like-for-like growth figures of 16% in the second half of the year, excluding December.

“Our plumbing and heating businesses matured and gave a full contribution and we are confident the sales growth will continue into 2011.”

TP, a bellwether for UK merchanting, remains cautious about prospects for 2011. despite reporting like-for-like sales in January up by 22% in merchanting. Sales trends in February weakened and TP expects conditions for the next 12 months to remain difficult.

There are also new challenges for merchants, with growing interest from contractors in off-site fabrication that reduces material and component cost.

Against this are new opportunities driven by demand for greater sustainability in construction materials and materials with low-carbon footprint.

National merchant leaders

Regional leaders

Merchants under £50m turnover

Merchants under £25m turnover

Abbreviations:

Financial data: Information is supplied by the companies listed, independently verified where possible, and accurate at 22 March 2010.

This report was first published in the April 2011 issue of Builders' Merchants News.