Is the pandemic the main concern for the New Zealand building materials sector?

Over the past three years, the recent COVID-19 pandemic has had a pronounced impact on consumer behaviour within many industries in New Zealand. 

No different than the building & construction supply chain regarding accessibility and sustainable importing of materials from international manufacturers and suppliers. Given the heightened concerns and apprehension over the availability of imported goods brought on by the pandemic, could the answer to the supply shortfall be as straightforward as simply ordering and stocking a larger quantity of goods from these international suppliers to allow for longer logistical processing movements?   

The truth is that some of the supply issues exposed in recent times could have been avoided if the competition had been established in specific sectors. An instance of this phenomenon that has gained considerable media attention pertains to the plasterboard category, in which Winstone Wallboards, a subsidiary of Fletchers, has come under scrutiny by the Commerce Commission regarding their rebate strategy. Throughout the Commerce Commission study, there has been considerable discourse regarding plasterboard, particularly in light of supply shortages that have exposed the dearth of alternatives for certain critical building materials. These scarcities have underscored the hazards that arise from depending solely on a limited number of key suppliers while also emphasizing the advantage of promoting competition among alternative suppliers. 

We recently conducted research in the area of buyer-supplier relationships within the building merchants and particularly focused on the ‘preferred supplier’ aspect of the source of the materials. The outcome of the research highlighted major challenges for new entrants trying to enter the market and compete with established suppliers and concerning questions about the rebate intake from merchants that have huge implications regarding the cost of materials that impacts affordable and low-cost housing.     

Attainment of ‘preferred supplier’ status with the building merchants necessitates a supply agreement that outlines the exchange expectations between both parties. The agreement must include essential components such as product qualities, dependable supply, backup service requirements, and logistical capacity to serve merchant branches across the country, just to name a few. Rebate payments are a key factor in supplier success, as they can vary depending on certain criteria, such as the supplier’s market share, the buying power of the merchant and the willingness of the supplier to outrank other suppliers in the hierarchy. The heightened rebate expectations have demanded an increase in supplier pricing at the merchant level, and in some cases, suppliers have chosen to go directly to the market, bypassing the merchants to avoid excessive rebate costs.

Another outcome of the research is the conservative nature of the specification marketplace. Stringent processes are in place to ensure that three essential steps are taken for each product to be approved for use on each project.

1. Each product specified must have a product certification attesting to the suitability and compliance with required standards.
2. Architectural and design teams determine product specifications on plans.
3. The accurate and careful installation and documentation of the products used on the construction site are managed by the builders and monitored by council building inspectors.

Architects tend to opt for products featuring a reliable track record to ensure minimal risk that accompanies familiarity with established brands. Unless a new entry offers a distinct advantage, it may find it difficult to overcome the clout of the more renowned products, making it a challenge to gain market penetration, therefore providing competition.

In conclusion, our research has shown that rebate payments play a crucial role in the supplier-merchant exchange relationship, and the specification stringency sector is subject to stringent processes. As we look towards the future, it is imperative for the building industry to shift its focus from the pandemic-related challenges that have affected the supply of materials. Instead, the industry needs to address the competitive landscape within the materials supply chain, characterized by high rebate structures and preferred supplier preference within merchants. These factors significantly reduce competition and drive-up pricing, posing a significant challenge to the industry. Therefore, the industry must rethink and explore paradigm shifts in developing new effective strategies to overcome these obstacles and ensure sustainable growth and profitability.

Nigel is a business manager with over three decades of experience in the construction and building supplies sector. He is also a postgraduate student at the University of Otago.