What we can learn from the changing UK merchant market

Alan Hegarty is MD at the Ardale Group which owns three Builders Merchants in Dublin, as well as a wholesale business including such brands as Basta. In assessing the productivity and performance of their business, Alan compared it with Builders Merchants in the UK. He shares some of his findings in this article.

In Ireland the merchanting sector is quite fragmented, many are owner operated and they file abridged accounts. Therefore the information available is quite limited.

We widened our search to the UK, where there are a number of multi branch groups, many of them remaining in family ownership. Owing to their sizes, they file full accounts, which we can use for analysis.

There has been considerable consolidation in the UK market over the past few years, resulting in larger groups. Of the 23 merchants analysed, the smallest branch number was five, with the largest number being 60 depots. We excluded the largest operators such as Travis Perkins and Grafton.

We analysed the 23 merchants in various areas;

Gross Margin:

Overall Gross Margin varied from 16% to 41% with an average earned of 31%. Further analysis of this pointed toward a diversification of sorts on the offering toward higher margin areas. The two highest margin merchants operated skip hire and plant hire. Plant Hire is an interesting diversification and add on for existing branches. It can operate as an up-sell to the existing customer base. An analysis of two listed Plant Hire operators, HSS and Speedy Hire, show them making 54.9%, and 55.2% respectively as gross margin. Interestingly their EBITDA margins are quite high at 20.22% and 25.8% respectively. A number of the merchants operate timber importing and distribution businesses, with gross margins in excess of 30%.

Other routes to improving gross margin include specialist kitchen displays, specialist plumbing counters, and civils depots.

Kitchen displays are an area that Steve Collinge, a regular contributor to The Hardware Journal, is encouraging to maintain footfall in branches. An interesting angle alonge the lines of Howdens in the UK is to have a kitchen offering to the small builder. Firms such as U Form can facilitate this in a relatively capital light investment. There are also kitchen flat pack offerings that are popular in the UK. Howdens have a gross margin in excess of 62%.

Plumbing and Heating is seen as a complementary area for expansion of an existing locations’ turnover. We will look at this further later.

Plumbing and Heating is seen as a complementary area for expansion of an existing locations’ turnover. We will look at this further later.

Toward the lower end of the margin scale at 16.06% to 23.22%, the merchants were more focussed on the heavier side of business, with a strong aggregate business. One had a strong brick distribution business. All bar one was concentrating efforts to diversify into higher margin areas.

Average Branch Turnover:

There was huge variance in average branch turnovers across the entire list. Average branch turnover across the 23 merchants is £5.55m.

Builders Depot has five branches with an average turnover of a very impressive £19.4m in each. The branches are strategically located throughout London.

Overall the most common average branch turnover range is £5m-£7.3m.

There are a number of merchants that operate branches at lower turnover levels, from £1.3m to £3.4m. These generally are more specialised offerings such as HPS with an average depot turnover of $1.6m. They operate a specialist heating and plumbing offering.

Depot Turnover is an interesting area that we have discussed extensively internally against that of a general merchant. Is there a turnover level that is required to make a general merchant marketable to a third party purchaser?

We would feel that a minimum turnover of €4m-5m is required to make a general merchant attractive to a third party purchaser. At a lower turnover, the operation is more suited to an owner operator, and purchases of merchants of this size are infrequent. The dominant purchasers in the market place currently are groups, who will require the ability to generate a certain turnover and profit to justify head office time allocation, applying systems etc. A logical move maybe for the smaller merchants to move towards a more specialist offering in the future.

Turnover Per Staff Member/Average Staff Numbers:

Overall in the study, the average turnover per staff employed was £216,273. There was quite a wide variance from the lowest at £147,419 at Nicolls & Clarke to £313,279 at HPS, the heating and plumbing merchant.

Overall the average staff number per depot was 25. There was a large variance from the lowest being five at HPS to an average per depot of 44 at MP Moran.

This points towards Heating and Plumbing being a strong upsell for Merchants, generating on average, sales in excess of those currently generated per existing employee. Gross Margins are also in excess of 31%at HPS. Wolseley (part of Ferguson Plc) is generating a Gross Margin of over 29% across their 551 depots in the UK.

We are aware of merchants in Ireland who have generated new sales through a specialist counter of over €1m-€2m per annum per branch.

Stock:

The overall average stock turn was 7.23 times. There is a wide variance in stock turn overall, with the higher stock turn numbers existing in heavier side merchants, with stock turns of 12-15 times.

At our company we are constantly discussing how much stock we should be holding to maximise sales, but minimise cash tied up in working capital. An interesting method of analysis for the 23 merchants in the UK is stock as a percentage of annual depot sales. The average figure is 11%. The majority of the merchants are nearer 8-9%.

Debtors:

The average debtors per branch is €656.082. The average debtors figure as a percentage of depot sales is 12.8%. Obviously the lower this figure, the better the working capital management of the branch will be.

There is a lot to be learnt from the handling of debtors in the UK. The accepted system is a lot more structured. If your account is 30 or 60 days, you pay within 30 or 60 days, unlike Ireland, where we are constantly being pleaded to extend. I remember building in the UK in the early 2000’s. We had an Architect working on several projects for us, and they were being paid decent fees. One day I received a legal letter regarding overdue fees. I rang them, and said we are all working together, this is a partnership etc. He politely told me that his terms were clear in his engagement letter, and the fees agreed, he had done the work, so he expected payment as per the agreed timelines. All seems fair to me. Needless to say, we complied going forward! So, if we apply this to our customers. We are asked to price in most cases.

We give a good price to secure the sale. The customer is assessed for credit worthiness, and ability to pay, we make a call on credit terms. We have priced the sale on the basis of a timely sale. In some, not all cases, payment is delayed for what could be a low margin or competitive sale. We are told, they are awaiting a cert, or payment, or are in dispute etc.

But most likely all labour has been paid. So we become a bank to this customer, but cannot or do not charge him for this overdraft. Should we as a collective be enforcing terms more stringently, or should we be outlining in our pricing, that if this is not paid within the agreed time, an interest amount should apply or the price adjusted upward?

Other Observations on the UK Market

There has been a lot of consolidation in the UK merchant space over the past number of years, with Cairngorm Capital buying out a number of operations, such as Parkers, Chandlers and Grant & Stone. Huys Gray have also been on the acquisition trail and MKM were also recently enough bought out by Bain Capital.

What we are seeing in the UK is the smaller independent merchants being brought into larger groups, to reduce the cost base, and increase buying power.

Merchants are looking to add to their offering through adding more value added services and margin increase areas such as kitchens and plumbing.
There is a real drive in the UK towards online spend. Considerable money is chasing this area. Ireland is definitely behind this curve.

Online Offering Growth

There has been considerable conversation about the potential of online, and the growth of online. From a merchant perspective, we see the growth potential of it, but take up and conversion is slow currently.

It is generally reported that on-line sales in the DIY sector in Europe average circa 7% and growing substantially every year, circa 25% growth per annum.

The big upside to trading on-line is the product is paid for when ordered, so the complete debtor function is removed from the cycle.

A number of the larger UK offerings such as Travis Perkins with ToolStation and Kingfisher with Screwfix, are placing the future of their groups growth potential on their hybrid on-line offerings. We are at first hand seeing the growth of Screwfix on the ground here in Ireland. This follows a few years of testing the market. The operation is simple: offer a limited range, and make the offering really compelling. Mash that with a hybrid of existing stores and on-line. This makes it easy for the customer to review the product and pricing, and then decide, does he buy online or in-store via click and collect or collect in store. There are considerable costs in enabling your existing system to provide live stock levels, and to sync that with your on-line offering. The costs of entry are considerable.

On top of this the UK has seen considerable growth in such pure online offerings as www.ManoMano.co.uk and www.cmostores.com.

ManoMano originates in France, but also has a strong UK offering. ManoMano have considerable Private Equity Funding, and have a stated aim to get to annual sales of €1 billion PA. They have thus far raised $344m in funding for their rapid expansion. 2019 sales grew 50% to €600m. They operate in France, Spain Italy, Germany and the UK. CMOStores is an interesting offering. They also have raised considerable Private Equity, and have refined their offering into specialist websites for roofing, drainage, and insulation. They have also developed a website direct to the builder, www.cmotrade.co.uk. This is the first time that we have come across a merchant openly offering rebates to customers. They are openly advertising cmotrade in the housebuilding and construction related magazines in the UK. Turnover is estimated to currently be running at £60m per annum.

Another on-line company is www.victoriaplum.com, a successful pure play on-line bathroom and sanitary ware operation. Turnover for 2019 was £64m, with a Gross Margin of 38.9%. In October 2019, the company was sold to Private Equity.

The Private Equity cannot be wrong. We therefore envisage that there will be a considerable move in Ireland toward online in the medium term.