Distributor profit margins when the market slows

Thin, and thinner than the gross number suggests. Statistics Canada's 2024 wholesale release puts gross margin at 17.1% and operating profit at 5.0% of revenue, across C$1,486.5 billion of sales. Petroleum drags that average down: it earned a 2.4% gross margin in 2023, against 23.9% for building materials and 27.5% for machinery and supplies.

Al Bates, in a 2022 Distribution Strategy Group paper, says distributors have been stuck near 3% profit for decades. That is his reading of the industry.

On Canada's Canadian Industry Statistics pages, the four trades in the table show pre-tax margins from 5.7% to 9.5% in 2023, the newest year they carry, and those figures are still preliminary. The table holds the finding that shaped this article: lumber and hardware wholesalers lost 10.5% of revenue and 24.1% of profit, and electrical and plumbing wholesalers grew revenue 2.5% and still lost 8.8% of profit.

Operating margins in the latest fiscal years run from 1.1% at BlueLinx to 13.9% at Grainger, with Fastenal the outlier above that at 45.0% gross and 20.2% operating. The two companies whose gross margin fell most, Builders FirstSource and BlueLinx, are both in building products.

Use the table below to compare yourself with yourself. These are large companies, and each draws the cost line differently: WESCO's cost of goods excludes depreciation and amortization, for one. A 30% gross margin at one firm and 28% at another tell you little. A move of two points inside your own business tells you a lot.

Into three buckets, and price is only one of them. I split each decline into lost sales at last year's margin, the change in margin rate on the sales that remained, and the change in operating costs. I have not seen this split published, so the arithmetic is mine, and every input comes from the linked filings and official pages.

Two of the four raised their margin rate and made less money anyway. All four spent more on operations in a year when sales fell or stood still. Lost sales is the biggest bucket in three of the four. The filings attribute the cost rises to specifics: Builders FirstSource's $41.7 million SG&A increase came primarily from acquired operations and its ERP implementation, BlueLinx names the Disdero acquisition, the extra week, channel growth and technology, and Watsco names labor, facilities and transportation, partly tied to the A2L transition, plus three acquisitions.

Watsco is the cleanest case. Its release credits pricing optimization technology and manufacturer price actions for the record margin, and that gain nearly paid for the lost sales. Then SG&A rose 3%, and operating costs account for most of the fall from $782 million to $720 million.

Canada's lumber and hardware wholesalers tell the same story. Revenue less cost of goods works out to about 20.6% of sales in 2022 and 22.1% in 2023. Margin rate up. Profit down 24.1%.

Builders FirstSource is the case that argues with me, and I come back to it below. BlueLinx carries its own footnote: 2024 included a $12.7 million import duty benefit, and 2025 had an extra week.

Because the branch, the truck and the crew were sized for last year's orders, and their bills don't shrink when the orders do.

Across all Canadian wholesale in 2024, operating expenses rose 4.5% on revenue that fell 0.2%. Eight of nine subsectors gained gross margin, and operating profit stayed at 5.0%. The gross margin gain went straight to the cost line.

Lumber and hardware wholesalers in 2023 show which line moved. Labour was about flat at -0.2%, and other operating expenses rose 11.8% while revenue fell 10.5%. Watsco names higher labor, facilities and transportation costs, partly tied to the A2L transition, plus three acquisitions. Builders FirstSource's nine-month SG&A did fall 1.6%, from $2,889.3 million to $2,843.9 million. Builders FirstSource's third quarter of 2026 reports lower wages from cost-saving actions and lower variable pay, and SG&A still rose 0.3% with fuel, insurance and acquired operations on top.

A dealer told me an app does not win a buyer's market, because freight and wages come first. I sell eCommerce software, and that dealer is right.

The ones where the concession needs more volume than the market holds. A two-point price cut at a 28.0% gross margin needs 7.7% more volume just to keep the same gross profit dollars, and that is before the truck, the picker or the credit line. With a placeholder of 5 points for those variable costs, it needs 9.5%.

Set that against the demand on offer. John Burns Research and Consulting's dealer survey (April 2026, building products only) has dealers projecting 2026 volume growth under 1%, with revenue up 5.2% mainly on price, and that outlook predates the cost effects of the Iran conflict. In that market the extra volume can only come from a competitor, who can match your price by lunch.

A building supply dealer told me it is a buyer's market, with the same number of suppliers chasing fewer properly financed projects, and that they chose to turn down unprofitable work. That choice is the whole argument of this article. The job you refuse costs you revenue. The job you take at the wrong price costs you next year too, because your customers now know the number.

The table is arithmetic. Replace my 5 with your own figure: delivery, picking, commission and carrying cost as points of sales. The 5 is a placeholder, not a benchmark.

The losses on individual lines and trips. A gross margin report sees the invoice total and misses the picks, the drive and the people behind it.

The clearest example I can point to comes from a vendor, so treat it as that vendor's claim. Randy MacLean of WayPoint Analytics, writing on the American Supply Association's site in June 2026, describes a six-line invoice of more than $1,000. One line earned $94. The other five lost money. The invoice netted $12.87.

He also compares 10 distributors and $725 million of data. Five took no targeted action on money-losing picks, and their operating profit went from $47.4 million to $27.5 million. Five acted, and theirs went from $20.5 million to $31.5 million. WayPoint sells this analysis, the groups were not randomized, and several of the article's percentages do not match its dollar figures, so I use only the dollars.

Bates's model makes the same point at the customer level: a third of your accounts cost you 45% of your profit. It is a model, so measure your own. He also says about 2% of customers will always be unprofitable, and suggests giving them a competitor's contact details.

A dealer told me about a free delivery rule that got abused: a single small item sent to a distant city, on the house. Nobody quoted that job badly. The rule was the leak.

An industrial supplier told me his buyers center on price, and that inventory, delivery and quoting leave no margin, so he wins the sale when it is urgent.

You can run a rough version this week with what you already have: