ATLANTA, GA (Nov. 29, 1999) -- Last week, I mentioned that we'd take a couple weeks off from writing about Pathfinder companies to cover home improvement retailers such as Home Depot (NYSE: HD) and Lowe's (NYSE: LOW). I've worked in the construction business for 22 years, and while I'm a full-time Fool now, I do some consulting for home builders on the side.

Let's first break down the market for home building supplies. There are three types of customers:
  • Large home builders
  • Small builders, renovation contractors, and institutions
  • Home owners
The large builders tend to buy huge quantities of materials under contract. Usually, the companies that sell to them will not sell to the general public. To operate this type of concern, you don't need a sales floor; you need a large warehouse, delivery trucks, and a staff to take the orders quickly. The advantages of this type of business are its high volume and low overhead. However, it's based heavily on price, and if you lose a large contract there can be some serious difficulties.

Let's go down one step. Where do smaller builders, renovation contractors, and your local college buy their materials? Your local building supply place used to take care of them (more on this as we go on). These buyers need a place from where they can get deliveries or physically pick the materials up if they are in a hurry. These customers know what they want, although sometimes they may need to look at a catalog. Usually these buyers simply need an order desk and well-trained sales people to write up the orders. They need to be able to move in and out quickly, and they often purchase in fairly large dollar amounts. I worked in a building supply store that serves these kinds of needs. Our customers had long-term relationships with us, and while our price was important, our service, quality of materials, and ability to deliver quickly was more of a concern to them.

Where do you go as a home owner? You can't go to the places used by the mega-builders; they just aren't set up for retail. If you go into your local building supply center, you could buy what you want, but you better know EXACTLY what you want. There is no showroom to speak of, and the lumber is back in the warehouse. You have to give the sales desk a list of what you want and they would have it pulled for you. In the place I worked, we were always happy to help you with advice. However, it was difficult to provide decent service to a home owner when there was a line of impatient contractors waiting to give precise orders.

So where do you go? There have always been some lumberyards that sold to the general public, but they have limited inventory. One possibility is a "home center." Generally, these places have a large retail space and sell exclusively to home owners. What I never liked about them is that the lumber, tools, and building materials tend to be very low quality. The staff was not trained well, which is not helpful to the home owner that is unsure of what he or she needs. Finally, many of the home centers force you to carry virtually everything you buy through the checkout. This isn't easy when you are buying concrete blocks. Because of these reasons, contractors will only buy in these places when they are desperate.

So, how can home owners get their needs met? These customers buy in small quantities, but they come back (repeat purchase). There are a lot of them. They love to shop in your store if you provide them with some advice and help with their projects. The store I worked at had loads of these customers that wouldn't step foot in a "home center" no matter how cheap it was. So, if you set up right, you can do well selling to these customers. However, you don't want to do so at the expense of the higher-dollar volume of contractors and institutions.

Can you do this? Can you serve both needs? The solution was found pretty easily. Take the "home center" concept, but supply good quality material, and cross it with a building supply. To do so, you need a large retail area, a wide variety of materials, a contractor's sales desk separate from where home owners purchase, a trained staff, and some delivery trucks. What you get is Home Depot or Lowe's, businesses that are rapidly replacing the old "building supply" and "home center" places. Both of these companies have Drips, and we'll start looking at them in detail next week.

A reminder: Drip Port sent $100 to buy more Mellon Financial (NYSE: MEL) today, as mentioned on Friday. To discuss this column, please visit the Drip Companies message board.