Price Doing the Heavy Lifting for Supplier Growth; Still Not Enough for Margins

Building products revenue growth has been accelerating for the past four months. Specifically, days-adjusted revenue growth has inflected from a 3% decline in January to 2% growth in May. While acceleration throughout the first half of the year does appear to be a positive development, we believe the underlying trend is more nuanced.

Specifically, poor weather was a significant headwind in January and February, denting results more significantly than underlying demand. Part of the improvement in March and beyond for suppliers revenue is tied to a catch up from work that was delayed at the beginning of the year. Secondly, the acceleration more recently has been driven entirely by price realization, stepping up to the 4% level from the closer to 3% band that price had been trending at since last summer. 

While the spike in input costs this spring did necessitate pricing actions for many suppliers, in our view, price-led growth can be a less comfortable place to sit in certain product categories. Furthermore, our survey data suggests that price increases are not sticking cleanly even now, with more than half of our contacts handing out some form of price concessions to customers.

Ultimately, price realization has not yet been enough for suppliers to get on top of cost inflation, with manufacturer and distributor margins still declining on a year-over-year basis. Now, while oil costs have come down significantly over the past few weeks, we believe builders and retailers and keenly aware of this dynamic as well, and will be quick to continue leaning on many suppliers to rollback at least a portion of recent pricing actions, should cost inflation remain more muted.

At the same time, volumes have continued to decline by 1-2% year over year in each of the past three months, deleveraging suppliers’ fixed costs, and in some pockets, inspiring competitive behavior from suppliers. Ultimately, we believe a volume inflection will be needed to support margin expansion, as it should also empower suppliers to more confidently hold the line on pricing.