April 27/May 4, 2015; Volume 29/Number 2
By Ken Ryan
Flooring executives predict a more stable economic environment will continue to steer the hardwood segment on a course of slow and steady growth, with 2015 sales expected to increase 6% to 9% on average over 2014, and units up about 5%.
Although economic challenges remain—first quarter new construction estimates were revised downward for the year, for example—there are many favorable signs including more robust remodeling activity and less volatility in raw material costs.
Michael Martin, president and CEO of the National Wood Flooring Association (NWFA), said the market high in sales for hardwood was reached in 2006; following the recession, it took until 2013 for the market to recover to 2006 levels. Martin said that based on his data, sales in 2015 are expected to climb 8% to 9%.
The expected increase in 2015 will be the fifth consecutive year of growth for the hardwood category. Last June, FCNews reported that hardwood sales in 2013 increased 10.2% to about $1.816 billion, while units increased about 5.8% to 726 million square feet.
After a slow, weather-hampered start, 2014 turned out to be a better-than-expected year for the industry’s major hardwood players. “We believe the market in 2014 was ahead approximately 7% to 8% due to price increases stimulating higher sales,” said Neil Poland, president of Mullican Flooring. “The first quarter of 2015 was mediocre as the demand did not lift on a year-over-year basis or sequentially from the fourth quarter of 2014. We are still bullish on 2015. We believe the demand will strengthen as the year progresses due to the expansion in the pent-up demand for new home construction.”
Harry Bogner, senior vice president of hardwood for Mohawk, said dollar growth outpaced units largely because of price appreciation in solid wood driven by the run-up in lumber that led to multiple price increases. “We continued to realize price appreciation up to the first eight months of ’14. That would explain dollar growth outpacing units. Price appreciation has leveled off and we are starting to see some downward shift. We’re seeing a decline in lumber prices; while they are still higher than they were one to two years ago they are coming down from six months ago. We are feeling a little bit of a tailwind in the industry, and that is a good thing.”
According to Dan Natkin, senior director of wood and laminate, Mannington Mills, while 2014 “was a year of stabilization and regrowth, I see subtle growth for ’15. We are not seeing anything that would show a hockey stick recovery [a sharp increase]; instead we are seeing subtle and organic growth. I don’t see any particular head winds that would cause [the increase] to roll back at all.”
Lumber Liquidators fallout
The biggest industry story in 2015 thus far was the “60 Minutes” report alleging Lumber Liquidators sold Chinese-made laminate containing high levels of formaldehyde, a known carcinogen. Although the report was about laminate, the hardwood industry took fast action to ensure customers that its products are CARB 2 compliant.
While many agreed the story initially put the industry in a self-defense mode, ultimately it may have done some good, at least for those who play by the rules. Bogner surmised the consumer is going to be a lot more aware of what goes into the product she purchases, and that will be true for hardwood as well as other products. “It gets people to think, ‘Where was this product made? What goes into it?’ It also has an impact for people wanting to be green in their purchases. There is the potential for domestic manufacturers to capitalize on a Made in the USA story and show they are CARB 2 compliant at the same time.”
Poland said the report stimulated an immediate concern from builders about Chinese products. Many builders, he noted, have experienced problems from toxins found in Chinese drywall products—which created health issues for homeowners—along with the corrosion of structural components of the home. “Builders are genuinely concerned about having similar problems with excessive levels of formaldehyde in engineered or laminate flooring made in China. Therefore, we believe many builders will move even more aggressively toward Made in the USA products.”
Luc Robitaille, vice president of marketing at Boa-Franc, makers of the Mirage brand, said the case will certainly cast a shadow on imported products, especially those from China that normally attract consumers with low price. “It will make consumers more cautious about what and from whom they are buying their flooring, regardless of the category. And it will certainly give an edge to specialty retailers who can now better explain the value of investing a little more money in high quality North American-made products that are compliant with the various regulations.”
Pricing, raw materials
A year ago, raw material supplies were a thorn in the side of the hardwood industry. A severe shortage of lumber resulted in rising costs for raw materials, forcing manufacturers to raise prices, sometimes quarterly.
Today, the availability of lumber and veneer has improved considerably compared to the very tight market the industry faced as recently as the first half of 2014. “The lumber shortage corrected itself later in 2014, and our understanding is that supply currently is adequately meeting demand,” Martin explained. “Pricing remains competitive.”
Joe Bondi, vice president, Armstrong Floor Products, NA, residential, noted that the second half of 2014 saw stability in raw material and pricing as supply outpaced demand due to the fact that the market did not provide the growth in new construction or remodeling that was expected. He said he expects modest growth in 2015, with increases in demand in both the new construction and remodeling markets.
Bogner said the current forecast for veneer pricing/raw materials is “stable,” and that is good news. “I will take stable because it has positive results for our industry.”
Importers potentially face a much different issue when it comes to pricing on engineered wood products. The International Trade Commission (ITC) is set to establish new anti-dumping regulations in late May that reportedly will substantially increase the percentage they pay. Some say this will have an immediate effect for many China manufacturers and importers of record in the U.S. “For the end user, this ultimately means an increase in the price of finished goods,” said Jamann Stepp, CEO of Nature Flooring, an importer. “As for raw materials, supply and demand are issues that in turn increase costs. Over the course of the last three or four years, retail prices for entry level engineered hardwood have eroded. Upgrade engineered products still command a higher retail price, but the volume is limited.”
Product trends
The look of hardwood flooring has changed dramatically in the last 10 years. Whereas smooth and clean was trendy in 2005, today’s floors might have ended up in a dumpster 10 years ago with rustic and distressed looks featuring mineral streaking, knots, handscraping and wirebrushing that aim to add character. “Old World or reclaimed looks that are longer and wider have just exploded,” Bogner said. “You have these massive engineered planks now that look like they came off the side of a barn.”
These new looks were created as a result of consumer demand, executives said. “Perhaps the biggest trend we’re seeing is the diversity of consumer style preferences and the need to offer an increasingly wide variety of styles, sizes and finishes to help consumers achieve the looks they desire in their homes—whether that be rustic or contemporary,” said Drew Hash, vice president of Shaw Hardwood.
Poland said fashion is more important than ever in the hardwood flooring business. Design trends are rapidly changing, with new flooring styles (domestic species such as hickory and oak), colors (all variations of gray and many browns) and surface textures affording multiple opportunities for new looks.
Flooring is no different than a piece of furniture that adds to the aesthetic of a home, Bogner said; it is fashion and it is art. “It’s a conversation piece. Consumers want something their neighbors don’t have. The results are some very differentiated products.”
Robitaille said that while wood floors with character marks, texture and color variations are still very popular, “we also see smooth surfaces making a comeback. And regardless of the wood surface appearance, the width is getting wider.”
Along with longer and wider planks, in addition to random widths, the market continues to trend toward engineered, which now commands close to 60% of the market vs. solid. Experts said solid was flat in 2014 while engineered grew double digits. That gap is expected to grow in 2015, as even traditional solid markets such as the Midwest and Northeast increasingly opt for engineered.
“Engineered hardwood offers more choices in the market at affordable prices, with a look and feel that consumers appreciate,” Bogner explained. “It is especially appealing for those looking for particularly wide planks. Engineered wood is real wood and it makes for a good floor.”