Top 20 distributors: Flooring distributors grind out gains in 2015 behind strength in commercial sector

October 30, 2015

October 26/November 2; Volume 30/Number 10

By Ken Ryan

Screen Shot 2015-10-30 at 4.29.34 PMThe industry’s top 20 flooring distributors are a resourceful bunch, continuing to find ways to grow their businesses while navigating through choppy economic waters.

While the commercial sector has been strong in 2014-15, residential remodel—which accounts for about half of floor covering demand—continues to underwhelm.

“Just like 2014, we see the market as disappointing compared to expectations for 2015 of mid- to modestly high single-digit growth of floor covering in the U.S.,” said Bruce Zwicker, CEO of Glen Burnie, Md.-based Haines, the industry’s largest flooring distributor. “Floor covering demand in 2014 was predicted to grow 7% or more following strong 7% growth in 2013. But 2014 did not live up to expectations.”

The good news is that the commercial sector is on mostly solidfooting, particularly property management, which one distributor described as “the goose that is laying the golden egg.” Well-positioned distributors have been able to shift more of their business to commercial while waiting for retail to rebound.

The strong commercial business has resulted in some healthy sales increases for distributors; however, because commercial work produces lower margins than residential work, the percentage of overall gross profit has taken a hit.

Sales, distribution climate

As previously noted the residential remodel sector concerns distributors most. With the exception of a strong 2013, that segment has remained mostly sluggish since 2008 as consumers continue to delay big-ticket purchases.

“Today’s retail consumer is fickle,” said Jeff Striegel, president of Elias Wilf, Owings Mills, Md. “Whatever it is—a war in the Middle East, rising gas prices, the Pope comes to America and shuts down three cities—it can be anything that makes the consumer fickle.”

Adding to that impediment is what some executives call the “lack of available discretionary income.” After adjusting for inflation, consumers’ incomes have not Screen Shot 2015-10-30 at 4.29.45 PMimproved much since 2009. Furthermore, many are saddled with debt, particularly younger consumers with significant college loans to pay off.

“Consumers are not quite confident enough to spend on discretionary big-ticket items,” Zwicker said. “When they do they spend on other big items like cars and roofs. Other big spends are often prioritized by consumers over floors. Plus, homeowners are less convinced that they would get a return on investment on home remodeling expenditures. Remodeling spending has been driven more by higher income consumers who have the confidence and wherewithal. This is fine but we need the broad market of consumers to step in to really move the needle.”

Several distributors said August 2015 was a rough month for business, but no one seems to have a clear reason why. “The year was moving along quite strongly, but in the last 90 days things slowed down a bit, tempering overall performance,” said Scott Rozmus, president of FlorStar Sales, Romeoville, Ill. “Reports from the field and feedback directly from customers suggest that in many of our markets retail traffic was down.”

Meanwhile, the auto industry saw its strongest sales in a decade in August.

While both flooring and automobiles are considered large-ticket items, more favorable credit terms in the auto industry have allowed consumers with spotty—or even poor—credit history to purchase vehicles.

Specialty retail is still strong for those dealers and distributors who are diversified in all segments. As Jeff Hamar, president of Galleher, Santa Fe Springs, Calif., put it, “You have to be where the market is and not where you hope it is going to be.”

Despite these challenges, the industry’s top-tier distributors continue to do what they do: generate year-over-year revenue gains. These wholesalers have thrived in part by taking market share away from smaller competitors, having diversified product portfolios and being more important in their local markets.

Being well positioned has been a godsend for Adleta, according to John Sher, president. Ten years ago the Carrollton, Texas-based distributor was not even in the hardwood business; today its portfolio is 1⁄3 wood, 15% laminate and sundries, and the rest LVT/resilient. “We are pretty fortunate not to be tilted into any one category; we were able to diversify, and that is a great thing,” Sher said. “Our plan for years has been to participate in every market without becoming too dependent on any one area.”

At one time Denver Hardwood was 100% wood; today the distributor is still about 90% wood but the other 10% is comprised of LVT, sundries and laminate (IVC Balterio, specifically). “We are happy with our 2015 results but I don’t know if I could make that comment if not for our product diversification,” said Enos Farnsworth, president.

For All Tile in Elk Grove Village, Ill., logistical improvements for the distributor and its CCS supplies company that it acquired in early 2014 have paved the way for a nearly 7.5% increase in 2015. “Combined trucks equals better logistics and cost savings for our customers, better distribution for our suppliers and more control over our deliveries,” said Bob Weiss, CEO.

All Tile opened a new CCS facility in Davenport, Iowa, on Sept. 1, marking its initial presence in the Hawkeye state. Weiss said All Tile would be expanding into Indiana in the fourth quarter of 2015.

Galleher, which has made two acquisitions since 2009 to fuel its business, is on a run of five consecutive double-digit yearly gains, having gone from $50 million in 2010 to a projected $175 million in 2015. “Through August we are up 18% over last year,” Hamar said.

As it grows Galleher continues to launch initiatives. It is expanding its in-house manufacturing capacity, relocating several branch facilities to larger locations and working on data-driven models to help improve results in its major sales channels.

Oil production woes

Lower gas prices have helped sales of automobiles nationwide and boosted consumer confidence; however, in the major oil- producing states including Texas, Oklahoma and Louisiana, the downturn in oil production has resulted in massive layoffs. Four of the top 20 distributors are headquartered in Texas.

“A loss of jobs and what it does to the general psyche does more harm than what the advantage at the pump can do down here,” said Sher, whose company covers a seven-state region including Texas, Oklahoma and Louisiana.

Jonathan Train, president and CEO of Swiff-Train in Corpus Christi, Texas, said the decline in oil production affects many jobs. “The general feeling is that oil prices will remain depressed and have a negative impact into 2016.”

Bob Eady, senior vice president of sales and marketing for T&L Distributing in Houston, said when T&L was budgeting for 2015 it did not predict that oil would drop to $45 per barrel. “It has really slowed down the market here. Texas, Oklahoma and Louisiana do much better when oil is $100 per barrel but then the rest of the nation would suffer. So it’s a tradeoff for us.

Product trends

Being aligned with the right vendors in trending products like LVT has been a formula for success for ages. As LVT continues to be the nearly perfect product, suitable for most commercial and residential applications, distributors continue to expand its assortment in the category. LVT has gotten so big some distributors have separated it from the broader resilient categorization.

For Herregan Distributors in Eagan, Minn., LVT accounts for the majority of its resilient portfolio, which is more than 50% of its business. “Mannington and Metroflor continue to be the leaders in our markets in LVT,” said Pat Theis, vice president of sales and marketing. “We are also seeing aggressive growth in our fiberglass sheet vinyl business.”

Distributors said the burgeoning WPC category will be carefully watched going forward. Striegel said he expects 30 to 40 new WPC product introductions at The International Surface Event in Las Vegas in January, in what could be a preview of an explosive 2016. “There’s a saying, ‘You have to run to where the noise is,’ and LVT and WPC are making lots of noise these days. Any time you have a product that solves a problem it seems to do well. One of the issues people have with LVT is that there is some telegraphing, so there are limitations of what you can put it over; however, WPC solves that problem.”

The biggest change in laminate is its lack of acceptance in the builder community. With the advent of 12 mil, the product looks like a ½-inch hardwood and is less expensive, which has helped it gain appreciation. “A few years ago I didn’t have laminate in a single builder account,” Striegel said. “Now 40% of my builders [use it]. Laminate is thick, durable and the visuals have come so far, a flooring expert would not be able to tell the difference between 12 mil laminate from Mannington or Quick-Step and hardwood. It can be a $2 laminate that looks like a high-end DuChateau.”

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