The internet famously tosses middlemen right and left--but not in the building-supply industry. Many building and renovation staples--flooring, countertops, kitchen cabinetry--are too heavy for standard shipping. That forces suppliers to use distribution channels that add costs and delays.
With their Vancouver, British Columbia-based company, BuildDirect, Jeff Booth and Rob Banks are forging direct connections between manufacturers and end customers (DIY homeowners and contractors) while reducing costs. The company launched in 1999 but really took off after some post-housing-bubble tweaks to the business model. It raised $30 million in the first half of 2014, and now has annual revenue of more than $150 million. Booth recently spoke with Inc. about how he got started.
BuildDirect was born out of a problem. Previously, I was co-founder of a construction firm that built single-family homes in Vancouver. Materials I had ordered for a client's project failed to arrive on time, so I had to put up the family in a hotel and store their furniture for a month. It was expensive for me, it was frustrating for them, and I felt like I'd let them down. But it got me thinking about how the building process feels to consumers. First, there's a period of excitement while they imagine living in their new home. Then comes anxiety as they hear horror stories from home-build veterans. And finally, disillusionment sets in when someone fails them, as happened in this situation.
Inevitably, what fails them is the channel. I wondered: Could I completely remake the building-materials channel?
A broken chain
Globally, there are millions of manufacturers of building materials. Flooring is a $20 billion industry with more than 100,000 manufacturers in the U.S. alone. Many of those companies sell through retailers like Home Depot and Lowe's. But big-box retailers operate thousands of stores, where the average order size is $56, so it's not feasible for manufacturers to deliver full containers of products directly to each store. That means they must navigate a distribution chain with multiple touch points. Sometimes, products have to pass from the manufacturer to a national wholesaler to a regional distributor to a retailer to a subcontractor before getting into a consumer's home. For global suppliers, add an exporter to the mix. At every handoff, expenses are incurred and opportunities for mistakes and delays arise.
First up: logistics
My friend Rob Banks and I launched BuildDirect as an e-commerce platform allowing consumers and contractors to order directly from manufacturers. Because such orders are so heavy, shipping becomes complex and expensive. So we had to create a new delivery network to move heavy goods cheaply and over the shortest possible distances. We developed software to optimize shipping costs and efficiencies in real time using factors like the weather, customs tariffs, and the best routes. We then invited carriers--trucking companies and steamship lines, which always want full loads going both ways--to bid on jobs through our site.
Our first manufacturers were attracted by the simplicity of going right to the customer and by all the data we could give them about demand for their products--data that traditional retailers don't provide. With much lower shipping costs and no handoffs, BuildDirect could offer consumers savings of up to 80 percent. Our revenue grew from $20,000 in the first month to $1 million the first year to $14 million the next.
To do something like this, you have to create enough density on one side of the network for people to show up on the other side. When we started, we were trying to build a platform for the entire building industry, which was too broad. If you have only a few products in one category and a few products over here in another category, that's like Uber's having one black car in San Francisco. So we narrowed it to laminate flooring. The laminate-flooring manufacturers saw what we were doing and swarmed onto the platform. So we were able to give customers incredible choice in that narrow category at very deep savings.
Then came hardwood flooring and tile flooring. Consumers started showing the platform to their contractors and subcontractors, who then used us on jobs for their other customers. Now 57 percent of our revenue comes through repeat business and referrals.
Surviving the collapse
The collapse of the housing industry in 2008 hit us hard, but we decided to double down. I sold my house and used some of the funds to help BuildDirect lease 10 warehouses, eight in the U.S. and two in Canada. We persuaded manufacturers to hold inventory there on consignment. That allowed us to delay payment until products sold. This also brought us closer to customers, so we could offer most of them delivery in 48 hours. The manufacturers were willing to go along because all that proprietary data we had collected over the years gave us an almost perfectly predictable supply chain. So there was little risk to them.
Now that the market has improved, we are adding category after category, and have a pipeline of new products coming to market in the next 18 months. Last month we had 150 manufacturers; now it's 200. And we are scaling our technology as we grow. Meanwhile, as we ship more orders, more carriers are bidding into our system, which brings those prices down. Our shipping rates have dropped 30 percent this year while industry wide they have been rising.
We haven't disrupted the building-supply industry yet--we've only begun. But we expect to reach $1 billion within two to four years.
For manufacturers, one of BuildDirect's key selling points is its abundant data. Until recently, a dedicated data team collected and analyzed those numbers; the rest of the company simply acted on the team's findings. But this caused problems when, for example, the team drew conclusions on the basis of average sales in a category rather than on sales of individual SKUs. Inspired by Nate Silver's The Signal and the Noise, CEO Jeff Booth now encourages all employees to prod and test any data that comes their way, to reduce potential distortions. "It's like a peer review process, where data is published and many on the team try to disprove it," he says. "Ultimately, it came down to clean data instead of big data."