The risk-reward of installed sales
Installed sales. It’s one of those industry terms that means different things to different operators. And the variety of activity that falls under installed-sales umbrella ranges widely.
For national LBM giants, it might mean partnering with tract builders to put up frames. For single-location lumberyards, it probably means installing trim, or hanging doors.
Builders FirstSource, the $17 billion LBM giant has plans to expand its installation sales efforts. Meanwhile, industry experts who spoke to HBSDealer about trends in installed sales, described a less aggressive approach as more prevalent among independent lumberyards.
“When most dealers step into their contractors’ world, they step lightly,” said Steve Sallah, CEO of LBM Advantage, referring to installed sales. “Some people do it carefully. Some people don't really want to touch that.”
Then there’s Builders FirstSource, which sees its brand of installation sales growing significantly in 2024. The company did $2.5 billion of material labor sales in related installation in 2023. Another way to quantify BFS’s installed sales business is that it accounted for 15 percent of BFS’s top line.
During the Dallas-based company’s recent fourth-quarter earnings call, CFO Peter Jackson described installation as a focus point, and a focus that helps the company solve its builders' pain points, such as labor availability.
“We do it successfully in a lot of markets today,” Jackson said. “Our focus is to grow both organically and inorganically. The low-hanging fruit is the markets that we are already doing some level of installation, expanding the products that we install in those markets. But we're also looking at new markets that have not done installation in the past.
The company has developed what Jackson calls an “installation playbook” to help guide organic growth.
Growth in the installed sales arena is likely to come through acquisitions. Jackson said BFS is “looking for people who are already doing it well today that could fit into our profile through M&A.”
‘Don’t dabble.’
Russ Kathrein, vice president of lumber and building materials for Fort Wayne, Indiana-based Do it Best, during his career has overseen installed sales from a variety of perspectives, including leadership posts at BMC/ProBuild and Alexander Lumber.
His main advice: “You can't dabble in it. If you dabble in it, you're dead. You've got to do it right.”
There are, of course, independents who do it right, and profitably. But success in installed sales requires expertise in accounting, in billing, and in knowledge of contract law. “There’s an investment you have to make,” Kathrein said. “You can't just say, ‘Oh, we'll just hire a subcontractor.’ You have to be aware of what you’re getting into.”
One concern is liability for a product installed incorrectly, Kathrein said. “In the traditional role of the lumberyard, if something goes wrong at the job site, the retailer can fall back on the manufacturer to make good. “But when you install the product, that doesn't go back to the manufacturer,” he said. “That goes back to who installed it, and that's you.” And the liability can be significant, he added.
Kathrein has seen installed sales work well during his BMC days, when it was farming 6,000 homes a year, and installing trim to about 4,500. “We had a whole separate business unit,” he explained. “We had a whole accounting system. We had staff to support it. We used subcontractors, but our leadership was on staff. If you're just going to sub it out and just leave it to the subs to run it, that's when it's not successful.”
A steady pipeline of projects makes it work, he added. It’s also difficult to operate a successful installed sales program in the absence of a steady stream of projects that national production builders bring to a market. “You can't have a whole bunch of people involved and then tell them to come back in a month when the next project comes in,” Kathrein said. “There’s got to be economies of scale in the market.”
Weekly Paychecks, familiar products
During the Builders FirstSource Investor Day last year, the meeting room echoed with multiple questions from investors about installed sales, which was estimated as 15 percent of the Dallas-based LBM giant’s top line.
Financial analysts were curious to know how far and how BFS intended to grow in this area.
CEO David Rush said the company would probably not expand into areas it doesn’t already sell, such as HVAC, plumbing or electric. But it does intend to leverage its expertise in all the products in its catalog to increase profits from installed sales.
For BFS, the business has grown increasingly attractive over the last five years, as the labor challenges faced by builders increased, creating a profitable need. Rush said success in installed sales begins with customer relationships. The company has been successful in varying its approach, depending on the market, of increasing installed sales where appropriate, while avoiding taking business from builder customers.
Attracting the best labor is another key. Rush pointed to its policy of paying its third-party contract labor every week, as opposed to every other week, as a recruitment advantage.
An example of an independent dealer who has found success in the installed sales market is HBSDealer’s 2021 Independent ProDealer of the Year: Espy Lumber.
Under the direction of Tim Hurd, the installed sales program has ratcheted up, generating millwork sales growth as it provides an additional service to Espy customers in the high-end Hilton Head, South Carolina market.
Hurd described the “trust factor” as a critical component of installation services. Every window manufacturer has unique installation requirements, and Espy makes it their job to follow their specifications.
“The customer knows they’re doing business with Espy Lumber, instead of two guys in a pickup truck or a framer,” Hurd said. “When you think about it: is a framer really the right guy to be installing $100,000 worth of windows?”
In Hilton Head, six-figure window jobs and replacement projects are no exaggeration. Hurd described a $5 million 25-year-old house on the beach where a package is above six figures, and installation will run another $50,000.
Communication and construction
A key consideration for any installed sales program — which can also go by the names of ‘construction services’ or ‘turnkey labor and materials’— is recruiting and retaining labor. Today’s construction environment is famously short on skilled labor, creating both a demand from the builder customer for construction services, and a challenge for the prodealer to deliver those very services.
Greg Brooks, an industry analyst and moderator for the Executive Council on Construction Supply, said installed sales, by whatever you call it (he prefers “construction services”) is generally growing. And it’s most commonly found in high-volume homebuilding markets like Dallas and Atlanta, and also for multi-family and light commercial construction.
Strong union markets also seem to be a repellant to installed sales programs.
For independent prodealers, a major decision point revolves around competition with the trades and framers in the community.
A common refrain is “I don’t want to compete with my customers.” But in Brooks’ experience, success is a matter of communication and relationships.
“It depends on how you do it and how you explain it,’ he told HBSDealer.
Brooks explained one such way: Introduce the installed sales as an option and an advantage for builders who want it, not as an effort to capture market share. The message is: “If you're a framer, and I'm competing against you for this job, I will back out. I'm not going to compete with you. Instead, what I can do is I can bring more business to you.’
“Some people have had success with that, and some people have not,” he said.
