Wood state of the industry: Housing growth, improving prices, improve category

Home Inside FCNews Wood state of the industry: Housing growth, improving prices, improve category

by Matthew Spieler 

Volume 26/Number 21; March 4/11, 2013

When the housing market collapsed it took with it the entire flooring industry. While every category was struck with a crippling blow, the wood sector arguably took it the hardest due to its close ties with the housing industry.

So it should come as no surprise as the housing market shows more and more signs of improvement, there is a growing sense of optimism within the wood industry. That positive sentiment is tapered only by concerns of raw materials prices climbing at unprecedented rates. There is also a slight fear as this way of thinking has come about every year since the meltdown, and by mid-year it’s back to the same-old disappointing outcome.

“We’re hopeful the improving housing market is for real,” said Milton Goodwin, Armstrong’s vice president of wood and laminate products. “We started seeing signs of a recovery going into the fourth quarter last year, but after five years of this I don’t like using cautious optimism because things have fallen off. The business community usually figures out how to exist once it knows what it is dealing with, so now that the election is over hopefully we can move on.”

Piet Dossche, president and CEO of USFloors, believes this time the recovery is for real. “The data confirming the housing recovery—new construction rebounding, remodeling activity up and a sharp reduction in foreclosures—has been consistent for several months, which tells me this is for real and not just the wishful recovery we have been praying for the last few years, only to find out by the summer the wheels came off the wagon.”

He added this recovery “will fuel itself and as housing prices recover, people will start selling their homes again and start moving and buying and building.”

And as that happens, the wood industry “should be able to take market share back from other categories—shares we lost during the downturn,” said Neil Poland, president of Mullican. He, along with other executives, believes this will be so because of consumers’ desire to buy wood and “as they gain their financial footing they will once again want all the benefits wood provides, which includes upgrading the values of their homes.”

But it will be up to manufacturers, Poland added, to drive consumers to want to once again purchase wood over other flooring types. Besides increasing a home’s value, some of the advantages he cited were it is natural, renewable, recyclable, adds warmth and comfort to a room, is easy to maintain and comes in a wealth of looks and species. “The more we can do to make [consumers] see the value of wood versus other flooring products, the better we will be able to convert [them] to buying our products.”

Beyond wood’s natural characteristics, many of the advantages executives cite are a result of the industry continually investing in technology to make the product look and perform better, and install easier.

As Dossche said, “There is no doubt that despite the economic downturn, the industry has not stopped innovating. In fact, it is just the opposite. We have stepped up our creativity to come up with innovative ways to present higher-value looks at more economical prices—expensive exotic looks digitally printed on strand woven bamboo; razor thin exotic veneers on multi-ply or HDF constructions with high protective wear layers, for example.”

The industry continues to look for ways to improve the consumer experience on a style, performance and value basis, said Rick Knowles, Anderson’s vice president of sales. “A number of years ago, consumers’ preference toward hardwood had more to do with it being a natural product. Now, that is a base preference on top of which they have higher expectations. They want it to look new for a long time, they want to be able to raise their families on it, they want style that fits their decorating requirements, and they want the look to be timeless. Because a wood floor is in the upper end of flooring choices, they want it to be a permanent part of the aesthetics of their homes.”

Poland told FCNews that “Americans in general are resourceful and entrepreneurial, and tough times usually stimulate innovation.” As such, while the industry has made “major advances” over the last five years, “we would have seen even a more rapid investment if conditions were better. We’re at the beginning of the upward curve on capital investment. Some companies have projects in the pipeline but others, like Mullican, stuck our necks out early with investment projects that will enable the industry to be competitive against other industries.”

Yves Myrand, Lauzon’s vice president of sales and marketing, believes recessions actually force companies to innovate more. “During tough markets, companies drop prices to maintain their volumes and this leads to price and brand erosion. In order to avoid the drive toward commoditization, technological breakthroughs and innovations provide differentiation for a brand as it takes the focus off the price and instead places it on unfulfilled customer desires.”

He pointed to a study by Interbrand, noting there are some luxury consumer brands that are performing better despite a worldwide recession. “At Lauzon, we have recently invested heavily in many technological advancements from our multi-million dollar photo optimizer in late fall 2012 to our imminent launch of a revolutionary flooring additive called Pure Genius.”

Starting to click

One of the areas where technology is coming into play is with locking systems. Used originally with laminate floors, mechanical, glueless locking systems have been slowly integrating the wood industry—mainly for engineered constructions—making the product easier and less expensive to install.

“Locking wood sales for the industry came in at roughly 10% to 15% of all hardwood sales last year,” noted Harry Bogner, senior vice president of hardwood for Mohawk’s Unilin division. “And sales for hardwood with glueless installation systems continued to grow consistently during 2012. The inclusion of locking systems in hardwood flooring products has had the positive effects of lowering installation costs and expanding the market. It is important to note, however, that home centers have historically led the way in the locking wood category by adopting locking technology much faster than specialty retail channels.”

He added manufacturers like Mohawk and its Columbia division are giving specialty retailers the chance to compete in this area. “With our Uniclic Clic & Press engineered hardwood products, the specialty retail channel now has the opportunity to be a player in the game by offering consumers a more expanded selection and a varied assortment of click woods, including all of today’s hottest designs.”

Luc Robitaille, vice president of marketing at Boa-Franc, maker of the Mirage brand, said the company first introduced a glueless system in 2006 and sales have grown every year since the launch. “We expect this to continue at an even faster pace in the next few years.”

Myrand believes locking systems “certainly” have their place in the market. “In Canada, glueless floors are in demand in the high-rise condominium segment. Considering how many high-rise buildings are under construction in Toronto, it is a market that can’t be ignored. But Lauzon still recommends the double glue-down technique to get a better result and no squeaking.”

He added that the use of engineered hardwood continues to expand. “To reduce urban sprawl and to minimize land costs, buildings in urban centers in Canada such as Toronto and Montreal are built upwards vs. outwards. Any installation that has a concrete substrate thus requires engineered flooring. And, of course, there is a huge interior design trend toward wide planks, which can only really be achieved with engineered because in a solid construction anything wider than 4¼ inches is problematic. Both of these factors indicate a big increase toward the engineered category.”

When it comes to the use of technology in general and making wood floors look and perform better, Goodwin said the industry has not stood pat. “We’re not only improving upon the products, we’re doing things much more effectively. As a result, wood flooring of today is dramatically better than it was 10 years ago—and less expensive.”

Cost factor

There is a small fear that rising costs could hamper the category’s recovery as the price of lumber has skyrocketed in recent months and is not showing signs of slowing. Over the last six months, prices have risen between 35% and 55%.

This spike in prices is attributed to a number of factors, including shortages of saw-mills and workers, and increased competition from other industries, including newer ones such as natural gas. The natural gas industry is vying for the same logs the flooring industry uses to build platforms for its fracking operations as well as to help build the roads to get to these sites.

“There was a time when the flooring industry would get about 60% of the log,” Goodwin said, “now we’re getting 40% with the rest going to other industries. And, in the case of natural gas, they are willing to pay more so we are forced to pay more.”

A growing trend that is also impacting wood flooring is the consumer’s desire to purchase domestically made goods as opposed to those coming from China and other far-off countries. Even WalMart, the largest buyer of imports, is starting a Made in the USA section.

As a result of this, not only are more manufacturers choosing to use domestic species, they are also bringing more production back to this side of the Atlantic with the opening of new plants or expanding existing facilities to handle more capacity.

“In recent years, there has been an obvious and steady increase in the importance of Made in the USA to consumers,” Bogner said. “Not only do consumers feel more confident trusting products produced by American manufacturers under U.S. regulations, there has also been a renewed pride in purposefully supporting brands that keep Americans working.”

Robitaille feels this trend stretches north of the border as well. “We feel this trend is not limited exclusively to the U.S. but rather to North America at large. And the fact that Canadian quality in hardwood flooring is very well known across North America has negated the impact this trend could have had on us. Furthermore, the U.S. and Canada have a long-standing relationship and we think consumers on both sides of the border are knowledgeable enough to understand that products manufactured in either country are equally good.”

This general desire for domestic goods may have stemmed from the recession, but executives point out there are numerous factors affecting the wood industry, from the economy to the anti-dumping case against imported engineered floors from China a couple of years ago.

Knowles said while there is “no question there is a movement toward domestic sources…this trend can probably be attributed to [various] reasons. Usually, in a major move, like building a plant or making some other large capital commitment, there are a number of contributing factors rather than one single reason. Shorter supply chain, more control, more flexibility, etc., could all be responsible [for the shift].”

In addition, he said, “Many import buyers have not forgotten the extreme challenges to their businesses when the market downturn occurred—their sales abruptly declined but the containers they had on order were still coming. So the retailer or distributor is either sitting on too much inventory and are having to liquidate, or they are missing orders because they do not have inventory. In either case, it puts pressure on the business. Most are realizing there is a cost associated with that type of business model, and many are coming to the conclusion sourcing domestically from a customer-friendly company is less of a premium than the back end or hidden costs associated with sourcing off shore.”

Knowles added Anderson and its parent company, Shaw Industries, made that decision several years ago—not based on short-term reasons, but more on a long-term strategy. “We feel domestic production gives us the best quality and most consistent supply chain to build value for our customers over the long haul. If you layer on top of that a consumer movement in North America toward supporting local communities and jobs right here, we strongly believe we are on the right track.”

Bogner pointed out, “over the past several years, most retailers and distributors have maintained lower levels of inventory in response to the tightening overall economic conditions. [This strategy] requires more rapid service. Made in the USA products are capable of filling these quick-turn requests better than most imports.”

Dossche believes there will always be products imported, “but I see a continuous increase in more manufacturing in the U.S.” His reasons are primarily due to costs and logistics. “There is no question that costs in China have risen substantially over the last five years and the price delta between buying products made in China and the U.S. has greatly decreased. On top of this, container transport costs have increased, credit has tightened and companies have been working hard to shorten their supply chains and reduce the inventories and cash requirements to support these longer overseas lead-times.”

Exotic trends

Interestingly, despite gravitating away from imported, exotic species, Michael Martin, CEO of the National Wood Flooring Association (NWFA), said, “One thing we have seen a lot of is the trend toward domestic exotics. As consumers are increasingly demanding Made in America products, manufacturers are finding new and innovative ways to bring them exotic looks with domestic species.”

Mullican’s Poland is one of many who feel domestic species such as hickory and maple “have replaced most exotics, especially with various stains and surface treatments to make them have that exotic look and feel. There is some walnut and cherry as well. Consumers want to be associated with extravagant looks but nowadays they do not want the prices associated with them. That’s where these domestic exotics come into play.”

Robitaille added, “A sure thing is that there is a growing demand from consumers for wood floors with character marks and color variations. Hickory and white oak are certainly among the ‘hot’ species that fit this trend, but we think our Handcrafted Oak and Aged Maple have totally reinvented the traditional oak and maple looks. They are bringing something totally unique to the market in terms of look and ambiance. It’s probably the reason why they are among our top sellers.”

Knowles said the grain [in hickory] has a lot of “pop,” and there is a great selection of design and texture choices accompanied by a great performance story. “We are seeing some trending back toward rustic sawn face looks in white oak and a trend toward white wash looks in walnut that are interesting visuals.”

While Dossche agrees species like hickory and walnut are becoming more popular, he feels it is due to manufacturers more than consumers. “This has been driven by the manufacturers in an effort to get away from the commodity oak species and products which have traditionally been the bulk of the sales in our industry. Consumers have no idea and certainly do not drive trends in the wood flooring industry—they buy what is presented to them. However, if they see the beauty and richness of a walnut, oak, acacia floor, they will purchase it as they seem to like the look and variety these species present.”

Regardless of species, prices and other relevant factors, NWFA’s Martin said, “In general, things appear to be looking up for wood flooring and the industry as a whole. From the perspective of our attendance at Surfaces, as well as our own Wood Flooring Expo, we see increased optimism and enthusiasm about individual business growth, as well as the industry in general. While we are hesitant to use the phrase ‘firmly on the road to recovery,’ we would say we are ‘on the road to recovery, but in the slow lane.’”

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