November 10/17, 2014; Volume 28/Number 11
By Ken Ryan
By all accounts, 2013 was a big year for flooring distributors. While the overall flooring market grew about 7%, according to expert estimates—with hard surfaces up 9% and soft surfaces 5%—the majority of the top distributors reported top-line growth of 10% or more. In some cases, much more.
Speaking to that, Terry Gray, senior vice president at NRF Distributors, said 2013 was a “banner year” for us.
For most, the steady pace of growth did not continue into 2014, although it will end up a decent year, closer to the mid-single digits on average. (See chart below)
“The expectation of everybody in the industry was that the growth rate in 2014 would be as strong, if not stronger [than 2013],” said Bruce Zwicker, CEO of Haines, the industry’s No. 1 distributor in revenue. “This was predicated on three things: New residential would continue to grow at a very fast rate, remodeling was recovering based on the trend in the second half of 2013, and the commercial sector started to show signs of improvement.”
The reality is 2014 has not lived up to expectations. A hard winter affected much of the industry, stifling builders who could not break ground on projects and forcing consumers to postpone purchases. The weather finally warmed up in the spring, but the market never really heated up.
“The new residential sector growth rate has really slowed,” Zwicker said. “Not that it is declining, but its growth rate has slowed. Plus, remodeling has become sluggish again and commercial is still pretty flat.”
According to Zwicker, the first quarter of 2014 did not bode well for the rest of the year. “In short, the trajectory that we saw in 2013 did not continue into 2014, and this year started with a horrible first quarter. We had a very bad winter and we all thought it would catch up, but it didn’t. After the first quarter there was no continuation of the strong 2013 trajectory.”
There are some contributing macro economic factors at play in creating the less desirable figures. In new residential, housing affordability decreased and credit remained tight. In remodeling, many consumers are still not willing to spend money on high-ticket discretionary items. Experts blamed everything from geo-economic problems such as weak business conditions in Europe to geo-political events including the threat of ISIS, the conflict between Russia and the Ukraine and the recent Ebola outbreak that spooked many Americans. One positive trend has been the precipitous decline in gasoline prices.
“Big news events such as the Middle East, Ebola, the stock market, can cause a pause in consumers’ attitude and halt purchasing,” said Jeff Striegel, president at Elias-Wilf. “This is the new norm.”
Looking back
A year ago, distributors were basking in the glow of a strong 2013. Builder business was pretty good, contract was positive and retail was decent, according to distributors. Back then there was no reason to think economic conditions wouldn’t lead to double-digit revenue gains in 2014.
“2013 was a perfect storm for us,” said John Sher, president of Adleta. “We had gotten through 2013 without increasing infrastructure; we had a lower expense base and pretty good sales. This year we had to add warehouse space and bring people in.”
Depending on the market, 2014 either started off slow or never got going. “The first quarter of 2014 looked good and then all of a sudden the builder market went to pot,” said Buddy Faircloth, president of Cain & Bultman, a Jacksonville, Fla.-based distributor that covers all of Florida and southern Georgia. “Retail in the last two quarters has been really tough. The commercial side of the business has been soft as well. It’s still tough out there.”
Much of the talk at Surfaces 2014 centered on pent-up demand. Many say that is still the topic at hand as too many consumers continue to sit idle. Faircloth said there are still tens of thousands of homes in Florida that are sitting dormant, waiting to be foreclosed on, or in “phantom” foreclosures in which the homeowner walked away but the banks haven’t foreclosed on the property yet.
“We in Florida have been the No. 1 market in true foreclosures for the last 22 months, and we don’t see that going away too soon,” he noted.
The market is dramatically different in California, which is outperforming much of the country, according to Jeff Hamar, president and CEO of Santa Fe Springs-based Galleher. “We were up 25% in 2013 over 2012, and we are up 20% in 2014 over 2013. If you are focusing on high-end residential or multifamily you could be outperforming the market.”
Hamar suggested the uneven recovery is not so much regional as it is channel based. Whereas multi-family might be up, Main Street might be way down, he said, adding that while most companies are reasonably well positioned across all flooring platforms, “as the market fractures into subsegments, you will see disparity in performances.”
Being well positioned in hardwood and LVT is a good place to be these days, said Jeff Garber, vice president of sales and marketing at Ohio Valley Flooring, Cincinnati. “Wood and LVT dominate our growth and probably that of the entire industry. These products offer local distribution an excellent opportunity. We can customize color pallets to local needs. We inventory products locally for the builder market, and that really helps with the inconsistent timelines of the construction business. We can help our customers by holding jobs until the construction schedule catches with up normal delays.”
The top 20 flooring distributors outgrowing the overall market in 2013 reflects the reality that growth comes to those companies that take market share away from weaker competitors and have invested in technology to streamline their businesses to operate more efficiently. “It’s not the environment to take a lot of risk—it’s an opportunity at someone else’s expense,” Striegel said. “If you can’t take [share] or are not built for it, it will be quite the uphill challenge.”
Looking ahead to 2015, the phrase “guardedly optimistic” about sums up the feeling of the distribution brethren. “We see [the market] vacillating between demand growing at a moderate rate and fearing that the growth rate may decelerate,” Zwicker said. “We hope for a moderate growth rate of 3% or 4%.”
Technology
The leading distributors are also at the forefront in investing in the latest technology, from employing iPads and iPhones to make sales people more efficient to submitting trucking logs electronically to keep costs down and avoid unnecessary hiring.
“Technology is something we look at constantly,” said Bob Eady, senior vice president of sales and marketing at T&L in Houston. “There is also a cost to technology. You have needs and you have wants, and you have to ask yourself, ‘Is it something we need or just something we want?’”
Increasingly, however, committing to technology is becoming critically important for distributors. “With what other industries are doing, and with the technology that’s available, it’s inexcusable not to invest and develop this within our own companies regardless of where we are in the chain—manufacturing, distribution, or retail,” said Jeff Jaeckle, president of Jaeckle Distributors in Madison, Wis.
“Besides the basics which many companies have had for a while now—warehouse bar coding, CRM, going more digital in the field, etc.—the biggest investment we’ve made in the last couple of years is with analytics which gives us greater insight into our business, markets, products and activities. It enables us to make better decisions on a whole range of things, which positively affect our company and customers. And there is so much more we can do with analytics; we’re really just scratching the surface. Needless to say, our technology budget is significantly higher today than it’s ever been in the past.”
Indeed, investing in the right technology, distributors say, allows them to potentially cover more customers, sell more product, and lower costs at the same time.