For the second time this year, hardwood flooring suppliers have raised prices, and with limited lumber supply, rising raw materials costs and cash-flow constraints for sawmills, another round of hikes are likely.
In May, Armstrong and Mohawk announced 6% increases that took effect in July. This followed similar raises in March by many manufacturers. And “we may not be done,” according to Daniel Call, vice president, wood product management, Armstrong. Since the company’s last price increase, lumber and energy prices have continued to rise dramatically. “Appalachian and southern oak in typical flooring grades are up 10% to 15%. Kiln-dried lumber prices are up 20% to 30% on the open market.”
Dewevai Buchanan, vice president of hardwood for Unilin, which produces hardwood for the Mohawk, Columbia and Century brands, said the price increases are unavoidable. “Capacity has been either taken out or reduced by the [decline of the] small mill operators,” he said. “There are not as many loggers in the market today. Supply is short. These are the basic drivers.”
However, the good news is that lumber supply is improving as the cold wet weather from the winter changed to hot and dry, according to Neil Poland, president of Mullican. “There are sawmills increasing their production as log supplies have improved versus the winter but [things are] still tight,” he said. “Also, in some regions of the Eastern U.S. a small number of mills are starting up again. These start-ups will help especially if that particular region was void of hardwood sawmill production.”
Poland argues that price increases are a necessary evil and should be accepted to “help the supply chain back into the forest. Loggers, landowners, sawmills and many flooring plants were operating at a loss for the last several years, thus a price increase was desperately needed to enable the channel to return to a minimal profit. The retail selling price of hardwood flooring even with this price adjustment has only increased minimally on a gross basis over the last 10 years and is most likely behind the rate of inflation.”
Don Finkell, president of Anderson/Shaw Hardwood, agreed that improved weather conditions have enabled more lumber to flow into the market. But he sees this as a short-term condition. “Prices are not going down and I expect a further escalation of lumber prices in the coming winter,” he said. “There is still a limited supply of lumber to the industry and with higher prices you would normally see the industry increase supply, but many sawmills are in a cash flow bind.”
Indeed, small business credit remains an unresolved challenge to stable lumber prices. Call said smaller mills cannot expand or reopen, inventories are extremely low compared to historical averages, and credit relief is not on the horizon.
“Financing for increased production that would normally come from banks is much harder to come by now,” Finkell said. “Banks look at your previous performance to predict future performance and for most companies in the wood products industry that is not stellar.”
Most executives interviewed said they expect a continuation of tight lumber supply and consequently higher prices for solid wood floors. Conversely, many believe engineered wood floors will still offer value due to price competition from China. “Anderson/Shaw is investing heavily to increase the yield from lumber on solid wood floors, and that will partially mitigate the effect of raw material prices although not by very much,” Finkell said. “It is just a rising tide caused by reduced supply of raw materials.”
In this difficult market, providing outstanding service and delivering new and innovative products is a must-have. “These are things we can control,” Buchanan said. “Things like investing in merchandising and new products. We will continue to do what we are doing well.”
Armstrong has sought to off-set some of the cost increases by aggressively implementing lean manufacturing initiatives since late last year, Call said. “These initiatives improve lumber yields. We also maintain long-term relationships with major mills, which gives us a limited ability to delay on inflation. No company can fully protect customers from inflation of this magnitude, however year-over-year inflation in July was 30% to 40%.”
Signs of progress
Finding positive signs in this market depends on one’s perspective. For Buchanan, it’s seeing signs of stabilization and less volatility; Poland said flooring production remains below demand, but the gap is not as wide as it was three months ago.
Boa-Franc, maker of the Mirage brand, is one supplier that has been able to maintain price stability. In so doing, it helps Mirage’s sales network stay competitive in a tough market, said Luc Robitaille, vice president of marketing. He does see some tangible signs. “There is an increase in traffic at the retail level for remodeling and renovation,” he said. “This increase is regional with some markets doing better than others. But at least we are getting a sense that consumers are starting to think about spending some money, which is a good sign.”