Leadership

Building On Big Data

BuildDirect is fixing its sector’s supply chain and transforming e-commerce. But what you need to know is how it exploits customer data.

Written by Nick Rockel

Technologies Inc. is sitting at a boardroom table in his company’s smartly appointed head office, explaining how he aims to revolutionize the building-supplies business. As he talks, he scribbles diagrams on a notepad. Jeff Booth is a rambler with a fondness for industry jargon, and the notepad helps keep him on point. Stretching across the wall-length whiteboard behind him is an elaborate schematic studded with purple sticky notes—a visual aid in a regular lean-out process aimed at spotting and expunging inefficiencies at BuildDirect. It could be a sketch of Booth’s brain, which moves faster than words can carry him.

BuildDirect’s digs near Vancouver’s financial district befit an up-and-coming dot-com. Awash in natural light, the open space is punctuated by polished concrete pillars atop deep-brown hardwood. The staff average 28 years in age. Booth, trim and fastidious in a lilac shirt, dark pinstripe slacks and black loafers, fits right in.

But the 43-year-old entrepreneur is no stranger to the blue-collar industry he’s seeking to transform. Booth used to build houses for a living, and when it comes to his sector’s shortcomings, he shares the missionary zeal of tool belt-wearing TV star Mike Holmes. “We got into this business because we felt pain for the customer,” says Booth. He discovered that the best way to ease that suffering was by harnessing the data his customers were giving him—an area of huge opportunity for many kinds of businesses. In the process, he aims to create nothing less than the Amazon.com of flooring, decking and roofing.

The building-supplies industry is hidebound and ripe for streamlining, Booth argues. Founded in 1999, BuildDirect offers do-it-yourselfers and contractors significantly lower prices than Home Depot, Lowe’s and other big-box retailers. It can do that because it brings the manufacturers much closer to the customers. By analyzing demand patterns on its website, BuildDirect can predict buying surges for particular lines and share that information with suppliers. As a result, its warehouses stock the right products—which vendors give BuildDirect on consignment—at prices that keep them moving.

But that alone wouldn’t address the pain of consumers, who account for about 60% of the company’s sales. “Our key [customer] is Debbie Do-It-Yourselfer,” Booth says. And, as Booth knows from his previous career, sourcing building supplies can be confusing and fraught with delays for a professional, let alone a DIYer. When Debbie wants to buy new tile for her kitchen floor, she faces a long and winding supply chain. It starts with a manufacturer, then moves to a trading house or exporter, both of which could be in Asia, explains Booth. On this side of the ocean, there’s an importer or wholesale distributor that sells to a regional distributor, which in turn supplies retailers.

Getting suppliers to give him goods on consignment is the biggest coup I ever heard of in e-commerce.

Each of these steps means markups and holdups. By eliminating most of the middlemen, BuildDirect saves Debbie an average of 50%, Booth estimates. More important, the company reduces the intimidation factor. “The biggest part [for the client] is that thought: €˜This industry is absolutely overwhelming, how do I navigate it?'” Booth says.

So, BuildDirect keeps things simple and transparent. While most of its competitors charge for product samples, BuildDirect sends them out for free and follows up with a call from a sales representative. When Debbie places her order online, the website quickly calculates shipping costs and provides a delivery date. She pays for freight, but BuildDirect has a 30-day money-back guarantee that includes the shipping outlay—something it can offer in part because it’s figured out how to transport heavy packages expediently.

“It’s a really sophisticated combination of marketing, acquiring the customer and being right on top of the costs,” says investment banker Brent Holliday, who helped BuildDirect secure a recent infusion of $20.5 million in growth capital . “And then going back with the demand data to the supplier and saying, €˜You need to put your product here and to price it here.'”

The close relationship with suppliers sets BuildDirect apart from most online retailers, adds Holliday, a partner with Vancouver’s Capital West Partners. Most e-commerce sites are portals that concentrate on attracting customers, he says. “Jeff had that aspect to his business, but he focused on the supplier. Being able to get the supplier to give him the goods on consignment was the biggest coup I think I ever heard of in e-commerce.”

Then there’s the company’s focus. Build- Direct keeps things manageable by offering a lot of depth but in select categories. For example, it’s very good at flooring, notes Mike Edwards, executive director of Vancouver- based startup accelerator GrowLab. “To have had the discipline to not stray and try to boil the ocean, that’s one of the key reasons why they’re enjoying their overnight success now,” he says.

How does a 120-employee upstart run by a university dropout build a business out of “big data” that outmanoeuvres global giants? And how long before the giants give chase?

Like so many overnight successes, BuildDirect took more than a decade to make it. The company almost vanished into the U.S. housing crisis, which demolished its fast-growing business. Booth, whose brow bears the deep furrows of someone who has thought and worried long and hard, remembers precisely when things started going sideways in the fall of 2008. “I think it was October 23. One day, we were doing X in revenue; the next day, we were doing 60% of that number. It just turned off.”

The secret sauce is that everyone thinks data

Although the U.S. building-supplies market had begun to collapse in 2006, BuildDirect didn’t notice because it was busy expanding. Then, the financial crisis hit. From 65 employees in 2008, the company shrank to 40. “In retrospect, how close we came to going out of business was probably very close,” Booth says.

Booth doesn’t shy away from difficulty. Born in Regina, he moved with his parents to the Vancouver suburb of Richmond. At their urging, he enrolled at the University of British Columbia. When he quit after one year, they kicked him out of the house.

He became a realtor, cold-calling prospects from the phone book before eventually co-founding his own firm. In the mid- 1990s, he paid a contractor he knew to teach him the craft of home construction, then launched a house-building company. “I’m most satisfied when I’m solving big challenges,” says Booth.

By 1999, he was living with a group of friends, including finance graduate Rob Banks. The gregarious Banks, who now runs the supply side of BuildDirect, wanted to join the tech boom. Booth wasn’t interested in giving up his successful business for a dot-com—until he found himself unable to finish a house on time because the flooring didn’t arrive. Wanting to hold someone accountable, he found the supply chain was too long and complicated. “That’s when the light bulb went on,” Booth says. “If it’s this hard for me and I’m supposed to know this industry, then how does the end-buyer solve this riddle?”

Booth and Banks launched BuildDirect out of their house and, right away, focused on the vast U.S. market. They had lofty goals—”This business was never about going IPO,” says Booth, “it was about that change”—but they were green. First, shortly after raising $500,000 from friends and family, they weathered the bursting of the tech bubble. Then, in a costly exercise that nearly killed the company, the pair spent a year and a half figuring out how to ship their product. Their eventual triumph was a turning point.

The problem: FedEx and UPS provide an efficient network for delivering online purchases, as long as the packages weighing 68 kilograms or less. Hiring mathematicians and software engineers, Booth and Banks developed a system that accommodated BuildDirect’s bulky goods and invited bids from trucking companies and steamship lines. Even if freight adds 30% to the final bill, the manufacturer-direct approach would still yield big savings over the competition, the partners reckoned. “Then, over time, you’d scale it and more carriers would bid in, and the price would come down and the volume of products would get more competitive,” Booth explains.

Which is exactly what happened. Posting $1 million in revenue for 2002, BuildDirect surged to $28 million in 2004. When the housing crash reversed this growth curve, the team decided to seek new opportunities in the data collected by their website. They realized that the information revealed which products were selling well and in what locations. If BuildDirect could fine-tune a predictive model, the firm wouldn’t have to grind suppliers on price because it could reduce their costs by telling them exactly what to make.

“Jeff is just wicked smart,” says Verne Harnish, a BuildDirect investor who founded the Entrepreneurs’ Organization and now runs a Virginia-based education and coaching firm. “He’s got this mind that is tuned exactly for this Internet retail world we’re in now, which is primarily driven by metrics and algorithms.”

In 2010, Booth and Banks became distributors themselves . On the strength of what their data revealed, they persuaded manufacturers to give them product on consignment; the first supplier coughed up $500,000 worth of inventory. “When that all sold out right away, more and more manufacturers wanted to look into the data,” Booth recalls.

The consignment model let BuildDirect bring pricing down to what a customer previously would have paid when ordering by the container, says Banks. “Now, you’re going to get the same price and you can buy a smaller unit, and it’s ready the same day or tomorrow.”

Derek Smyth, Toronto-based managing director at OMERS Ventures which, last June, committed $16.5 million to Build- Direct, thinks the company has finally put all the puzzle pieces together. “These guys have been grinding away at this market for more than 10 years,” Smyth says. “Now, they’re really in a position to take advantage of everything that they learned and grow the business aggressively.”

BuildDirect doesn’t own a single store, but it knows that customers want to touch and feel the goods. Among the towering shelves of its samples warehouse in Booth’s hometown of Richmond, a handful of workers label and package freebies of bamboo flooring and ceramic tile as electric saws whine in two adjoining cutting rooms. This 12,000-square-foot hub dispatches about 300 packages a day. BuildDirect has customers in more than 70 countries, but the U.S. accounts for the bulk of its sales, and is serviced by eight distribution warehouses.

Free samples were just one draw for Andy Papdopoulos, a contractor who works in the Toronto and Muskoka areas. In the past two years, he has ordered five large shipments from BuildDirect after finding more choice on its website than local suppliers offered. The first time, Papdopoulos says, he got the product for 20% less, including shipping, than his regular providers charged. He dealt with a single rep and could track his order online. Free samples were another draw.

Papdopoulos also likes the BuildDirect site’s rich product information and customer reviews. Indeed, making purchasing easy is one of the company’s main strengths, says Axel Kuhn, principal at Toronto-based ePath Consulting, which advises online businesses. BuildDirect is good at search-engine optimization, so its site is simple to find. Its presence on YouTube and in social media makes it easy to engage with and evangelize. Using its shopping cart is a breeze. “They have a lot of trust factors that they’ve established on their website,” Kuhn says.

But he believes BuildDirect’s biggest accomplishment is unifying a fractured industry for shipping large packages. Whereas Amazon.com and others focus on relatively easy-to-transport consumer products, BuildDirect belongs to a new breed of e-tailer tackling more logistically complex categories.

Let’s say Debbie in New Jersey visits the site, adds a particular SKU (stock-keeping unit) of tile to her cart and clicks on “Calculate Shipping.” Right away, she sees the freight cost. Kuhn figures the BuildDirect staff collect real-time data on various shipping alternatives, as well as customs and duty fees, then use a decision engine to instantly calculate the lowest total cost for delivery. BuildDirect works with 100 carriers at any given time. As Booth explains, it ties all of them into its database in what amounts to a competitive auction. “If one of our partner carriers says, €˜On this amount of loads in this area, I’m going to reduce freight by 5%,’ automatically that feeds back into the system and they get more of the business.”

BuildDirect also gleans valuable information by charging freight separately. If, for example, it notices that Debbie and many other New Jersey customers aren’t completing the purchase of a particular product, it’s a signal to move that SKU closer to the region so shipping is cheaper. “You see very cleanly whether you have a demand problem, a pricing problem or a delivery-pricing problem,” says Booth. “And a delivery-pricing problem is always, €˜Is it close to the customer?'”

All of which leads Kuhn to describe BuildDirect as a technology company first. “Bringing all of those logistics together, that supply-chain information together, in real time, is a very difficult thing to do,” he says. BuildDirect has a five-member team devoted to analytics, but it’s a companywide ethos. “Data is at our core,” Booth confirms. “The secret sauce is that everyone thinks data.”

With the U.S. construction sector reviving, BuildDirect is back on a sharp growth curve. Although Booth won’t reveal revenue, he projects more than 100% growth in 2013. The company plans to hit $1 billion in annual sales within five years.

Smyth thinks that’s credible. The Build- Direct data engine would be tough for a would-be rival to replicate. And because the online sale of building supplies is a big opportunity that’s still in its infancy, the company can grow into a billion-dollar business just by serving the North American market. Smyth believes Home Depot and other giants still see Build- Direct as a small, niche player. In five years, he predicts, they’ll regard it as a big threat.

Booth, for his part, argues that Build- Direct offers a different value proposition than the home-improvement chains, and to a different buyer. Its average order size is $2,200, much higher than Home Depot’s. “They would be more like Safeway and we would be more like Costco,” Booth says. “This is a new infrastructure, a new way of buying building materials.”

If bigger rivals do follow in BuildDirect’s tracks, Booth is ready for that challenge. “We had the luxury when we started of a blank piece of paper with only one thing: remove this bottleneck in the industry,” he says, tapping his trusty notepad. “We had to relearn the supply chain to be able to do that. But our advantage was that we could whiteboard something brand new.” And, as the writing on the wall behind him shows, a house that Booth builds always makes room for improvement.

Photographs by Darren Hull

Originally appeared on PROFITguide.com
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