November 6/13, 2017: Volume 32, Issue 11
By Ken Ryan
Former NFL Hall of Fame football coach Bill Parcells used to say, “You are what your record says you are.” If that logic was applied to the flooring industry’s top 20 distributors, that record would be fairly exemplary as the group posted gains averaging 4% in 2016. By way of comparison, the gross domestic product—the monetary measure of the market value of all final goods and services produced in the U.S.—grew 2.9% for all of 2016.
Flooring distributors once again showed that even in a slow-growth economy, in which obstacles like an ongoing labor shortage delayed or extended projects, wholesalers were able to rise above it.
With regard to the lack of skilled labor impacting all construction trades, including flooring installation, there is no short-term fix to this issue, observers say. While many aspects of the housing market are improving—housing starts are up and prices have increased—the lack of qualified installers remains. This problem began surfacing in 2012 as construction activity picked up and the unemployment rate dropped; it has worsened in the years since.
Jerry Howard, CEO of the National Association of Home Builders (NAHB), said the cause for the shortage was workers leaving the industry after jobs dried up during the recession. Many workers fled to other industries or other countries, and many haven’t come back. Some took jobs in the manufacturing and auto industries, while others found work in the energy sector.
“Simply put, they were getting any work they could and had to go into other sectors to find ways to put food on the table,” Howard said. “We are now at the point that there is a serious shortage of workers. It’s a real problem that ripples throughout the home-building process that ultimately costs the consumer.”
Distribution executives said that while labor shortage is a concern, there are other issues such as land availability, affordability issues and modest activity that have held the market back from reaching its fullest potential. “There has been no real momentum in the discretionary replacement of existing floors without any other construction or remodeling activity,” said Jeff Hamar, CEO of Galleher, a top 10 distributor based in Santa Fe Springs, Calif. “I think this is due to the fact it has been roughly 20 years since the first introductions of natural looking vinyl products, second-generation laminate and urethane- coated, wider-width wood flooring. Products installed after 1998 haven’t ‘uglied out’ and don’t need to be replaced.”
Despite some challenges, there have been positive signs that have fueled growth, namely an improved job market, favorable stock market, and—at least statistically—higher consumer confidence. According to the Conference Board, consumer confidence in October 2017 increased to its highest level in almost 17 years, boosted by the prospect of improving business conditions. However, not everyone is seeing this confidence translate into higher flooring sales. In fact, some say a lack of confidence continues to keep shoppers on the sidelines, thus impeding growth and contributing to less than normal existing home sales.
The inventory shortage that has plagued the housing market for over two years has lessened the pace of sales. The 1.7% decline seen this past August was the fourth in five months and brought the annual rate to the lowest level in 12 months.
Private label growth
In the past decade, the industry has witnessed a large increase in imported products, many of which are well suited for private labeling because they allow the distributor to tailor the offerings to specific markets, picking and choosing patterns, constructions and designs that fill voids in their current lineups or complement other flooring options. The ability to customize the program to suit specific market needs is a strong attribute of private labeling and is one reason why it continued to rise.
Several distributors cited private-label lines as their best performers in 2016. For example, Denver Hardwood’s top selling line was Neptune, a private-label rigid core waterproof offering. Overall, the company’s private-label program was cited as a major factor in Denver’s success.
As opposed to brand name national programs that oftentimes are not market specific, distributors can design private-label programs for their specific markets. In so doing, they can increase margin opportunities, don’t have limitations to where they can take the product and can protect their customers from being shopped online. Indeed, private labeling ensures the distributor have single distribution on the products in that brand.
How companies fared
While macro trends such as housing and economy impact all distributors to some degree, there are those wholesalers who face challenges specific to their own markets. That was the case for T&L Distributing in Houston. Its string of unfortunate events actually began in February 2015, when Shaw decided to distribute its Anderson hardwood brand. Losing that business cost T&L $10.6 million for 2015. Later that year oil sunk to $30 a barrel, leading to a slow fall selling season. In 2017, T&L took another hit to the tune of $5 million, when Mannington sold its VCT business to Armstrong. “There have been some very bright spots and some negative,” Bob Eady, president, acknowledged. “Oil prices still are up and down. The rest of the country loves it; I hate it. Oil pricing has an effect on our economy. Texas lost 88,000 jobs last year.”
T&L, as well as Reader’s Wholesale and Swiff-Train Co., also dealt with the disaster that was Hurricane Harvey in 2017. The long recovery and rebuilding will eventually result in a spike in business for wholesalers in southeast Texas but probably not before 2018.
In the last seven years, Galleher has averaged 20-plus percent growth year over year to nearly 250% in that time. However, 2017 saw only a 7% gain, Hamar said, as the distributor experienced problems with quality, availability and styling of its domestically sourced products. “We also were forced to change from Roppe to Johnsonite mid-year and lost a couple million of sales in that transition. We also relocated our manufacturing operation from Los Angeles to a much larger facility in Phoenix, and that really impacted sales this year. Combine all of these negative headwinds and we would have had growth of close to 15%. I’m not making excuses—just putting into context that we have much sales momentum going on out here.”
For Lee’s Summit, Mo.-based Tingle Flooring, a newcomer to this year’s top 20, being nimble and opportunistic continues to pay dividends. While its flooring division was relatively flat, Tingle’s installation products division increased 11%. As Chip Moxley, president, put it: “Undoubtedly the economy is helping to sustain our business, but real growth is coming from new products that both retail and commercial customers want for their floors today.”
Like many others, Tingle increased the percentage of its LVT/WPC business from 20% in 2015 to 27% in 2016, while laminate (8%) and hardwood (27%) stayed relatively the same.
Herregan Distributors, Eagan, Minn., has been particularly bullish on LVT/WPC, with more than one-third of its business now devoted to the category. Other top-tier distributors are all in double digits percentage-wise in terms of product mix, a number that continues to rise. “We continue to take WPC market share which is impacting our business,” said Pat Theis, vice president of sales and marketing. “We feel the economy has also helped at retail.”
Similarly, William M. Bird cited a better retail market and LVT/WPC for its increase of 5% from 2016 to 2017. “LVT/WPC is the fasted growing segment with our flooring,” Maybank Hagood, CEO, said, echoing a sentiment shared by virtually every other distribution executive.
Commercial slowdown
While the LVT segment produced strong gains on the residential side in 2016, commercial sales of LVT and other products were not as strong, resulting in less project activity, distributors report. “My fear from things I’ve read and what I’m seeing out in the market is that some commercial flooring selections are shifting to things like polished, painted and stained concrete,” said Torrey Jaeckle, vice president of Jaeckle Distributors, Madison, Wis. “Any market shift like that is going to hurt the traditional flooring distributor as well as manufacturers, as none of us that I know of are involved in that product category.”
Looking ahead, Jaeckle sees a mixed bag on the economic front, with the immediate future looking promising.
“On the commercial side, I expect more robust growth throughout 2018, as that is what key economic indicators are telling us right now. On the residential side, I think overall the industry for our region is going to see more lackluster growth compared to 2017 as GDP growth slows as the year progresses before entering a mild recession in 2019.”