Wood: State of the industry- Housing starts, pricing stability help lift sales

Home Inside FCNews Wood: State of the industry- Housing starts, pricing stability help lift sales

April 11/18, 2016; Volume 30, Number 21

By Reginald Tucker
A resurgent new home construction market combined with a return to raw materials pricing stability helped push U.S. hardwood flooring sales to $2.059 billion in 2015, a 6% increase over the previous year. In terms of volume, that translated to approximately 830 million square feet sold at the wholesale level, Floor Covering News research shows.

“New home construction is where the growth is, and it’s continuing to improve and get stronger,” said Dick Quinlan, senior director of hardwood products at Mohawk, which also markets the Columbia Flooring and Quick-Step brands.

Other manufacturers attest to the strength of the new home construction market and the positive impact on the wood sector. “The wood industry historically follows the new construction market and 2015 was no exception,” said D
an Natkin, senior director, residential products, Mannington. “For 2015 we showed volume was a little higher than some of the estimates.”

New home construction statistics for 2015 support manufacturers’ growth estimates for the industry. According to the National Association of Home Builders (NAHB), nationwide housing starts reached 1.11 million units in 2015, a 10.8% uptick over the previous year. Single-family starts, the bellwether indicator within the new home construction sector, posted a robust gain of 10.4% to 715,000 units.

“New construction was the biggest factor impacting wood flooring sales activity in 2015,” said Jamann Stepp, director of marketing and product management for USFloors. In particular, he cited strength in the multi-family sector. “[Within our own company] we saw an 11% uptick in hardwood sales over 2014.”

While many suppliers were encouraged by the housing sector’s performance last year, some were hoping for even higher numbers. “We expected new construction to be much stronger than it was last year,” Quinlan said. “We felt strongly that construction would grow by about 14%, mostly based on what many of the pundits were projecting at the beginning of 2015.”

Even still, a million-plus-unit increase is nothing to shake off, particularly in an economy that has been slow to get back on track since the economic downturn that started around 2008. “There was a lot of optimism coming out of the gate that new construction would be very strong,” Quinlan stated. “It’s still growing a lot better than it has been over the past few years—just not as strong as we expected.”

Other key end-use sectors, namely the residential remodel/repair market, also contributed to hardwood’s growth in 2015. While it didn’t match the high double-digit increases generated by new home construction demand, the residential replacement business put on a respectable performance nonetheless.

“Our growth in the U.S. market was double the industry standard, and it was largely due to our presence in the residential replacement market,” said Yves Myrand, vice president of sales and marketing for Lauzon Hardwood Flooring.

That was also the driving force for sales at Boa-Franc, maker of the Mirage brand of hardwood flooring. “Residential replacement continues to bring strong growth as wide-width, textured and character-grade engineered products continue to lead the way,” said Brad Williams, vice president of sales and marketing. “Also, the high-rise segment continues to grow and there has been an increase in the number of commercial specifications that involve wood flooring.”


Engineered gains ground

Given the strength of the new home construction market, one might naturally assume that solid ¾-inch products dominated sales activity. However, many manufacturers report surging sales of new products featuring engineered construction.

“Clearly the engineered segment is driving the most growth,” Natkin said, citing internal research that shows engineered represents about 52% of the market. “If you were to go back two to three years ago it was about a 50-50 split, but engineered has had a significantly higher growth rate over solids the past few years.”

Others attest to the strong growth of the engineered segment, citing performance attributes and visual enhancements. “The offerings are broader, giving consumers a wider selection and greater aesthetic variation,” said Drew Hash, vice president of hardwood, Shaw Floors. “Certain looks, lengths and widths can be achieved with engineered that either do not exist with solid or are more challenging to produce. [Furthermore], engineered hardwood tends to be easier to install with fewer restrictions. That combined versatility is attractive to consumers and is welcoming more of them into the space.”

The builder community in particular—normally the domain of solids—is increasingly embracing other formats. This phenomenon, experts say, is paving the way for the introduction of newer, more advanced materials to make inroads to job sites earlier in the construction process.

“As you move around the country, we’ve seen in traditional solid markets some builders switching to more engineered flooring,” Mohawk’s Quinlan explained. “We’ve seen some shifts in the Northeast, for example, where markets have moved from traditional solid installations to ½-inch engineered flooring so that they are able to continue to nail the product down but still get a better price. Also, many builders are starting to recognize and appreciate the stability of engineered products. The core items are still selling, but compared to about five or six years ago the builder market is shifting more rapidly to newer products.”

Other industry observers agree. Much of the sales activity, according to USFloors’ Stepp, “appeared to be in the

3⁄8- and ½-inch engineered segment. The solid ¾-inch tongue-and-groove format is still viable but only in certain geographic areas.”

This seismic shift flies in the face of the typical consumer’s mindset when it comes to the difference between solid and engineered formats and the perceived features and benefits to the homeowner. Citing consumer feedback, Jeff Striegel, president of Elias Wilf, a top 20 distributor, said participants in a study conducted by one of its retailer customers were polled in the months following a hardwood flooring purchase. The results found that many shoppers could not recall if they bought solid or engineered hardwood flooring at the point of sale. This despite the fact that many of those same shoppers went into the sale thinking “thicker” solid wood flooring is probably better than thinner engineered flooring.

“At the end of the day, the average consumer does not understand the difference between solid and engineered,” Striegel said. “In the case of engineered, thinner might actually be better for a particular application. If you live in a high-humidity area—or if you have dampness in the home—you probably don’t want to put a solid wood floor in there; you will hate it inside of three years when it’s buckling and cupping. But if you put an engineered floor down you’ll be fine.”

What the consumer does understand—and appreciate—is value and the perception attached to hardwood flooring. “[In the focus group] when they were talking about wood or ceramic, customers used the term ‘flooring,’ Striegel explained. “But when they talked about sheet vinyl or carpeting, they referred to it as ‘floor covering.’ The mindset among the consumer was: If I put wood or ceramic down, I’m never going to change it. But if I put down vinyl or carpet that means it’s only temporary. In other words, when customers install wood or ceramic they view it as an investment.”

That’s particularly the case with respect to homeowners seeking to upgrade their floors—a demographic that makes up a large segment of the business. According to Brian Jones, vice president, product management, wood for Armstrong Flooring, shoppers in the market for hardwood flooring are looking to meet specific design or functional needs. “Consumers may redo an entire house but more often upgrade to hardwood in the kitchen and in many cases throughout the first floor,” he said. Typically the recommendation by the retailer is going to be based on the requirements of the project or the region. “Our engineered hardwood business continues to grow primarily because some looks (such as the wider and longer boards) are available only in engineered; in other cases the climate or type of construction dictates the choice.”


Raw materials pricing

Robust end-use market activity and strong wood flooring consumption weren’t the only factors that positively impacted category sales in 2015. A return to stability in terms of raw material pricing also turned the tide back in suppliers’ favor, enabling many companies to control lumber costs and better forecast their production needs. It’s a far cry from 2013-14 when lumber pricing fluctuations wreaked havoc on the market.

“In 2014 raw materials were less available, which drove a lot of price increases on the solid side of the business,” Quinlan stated. “We’ve seen some upward movement in veneer prices but raw material costs have been pretty stable this year. We’re not seeing the big problem of not being able to get materials that we saw in 2014—beyond the normal types of issues that we basically plan for every year when we know there’s not going to be any logging done in the winter months. There’s not an overabundance and there’s no real shortage.”

Mannington’s Natkin agreed, adding that in general raw materials were less of an issue in 2015, meaning there was not quite the same pressure on pricing that forced manufacturers to pass the higher costs up the supply chain. At the same time, he said his company—which competes heavily in the engineered realm—did face some stiff competition from imported engineered goods in the form of dumping from China. This activity, he noted, tends to have a deflationary effect on pricing. In the end, Natkin said Mannington was able to hold the line—to a certain extent—through product differentiation and assortment. “We drew a line in the sand on certain price points,” he noted.

Canadian suppliers faced a different set of challenges on the price front: currency fluctuations. “The change in the exchange rate negatively impacted us by reducing our profitability,” Lauzon’s Myrand said. In essence that means everything the company buys in the U.S. costs 30% more, which forced Lauzon to adjust its selling prices accordingly. Thankfully, he said, most of its raw material needs (or about 80% of orders) are fulfilled by its own sawmills. “Another plus is we manage our own forests.”

Other Canadian suppliers attest to the dilemma. “Availability of raw goods has been a great advantage to prices, but on the other side exchange rates haven’t helped,” said Alex Decarie, CEO of Power Dekor North America, which specializes in engineered hardwood flooring products, wide-width/long-length laminate floors and LVT.

Boa-Franc also felt the pinch. “Increased lumber costs and higher demand in wider widths continue to put pressure on manufacturers’ raw material yield,” Williams said. “This resulted in increased manufacturing costs, which translated into higher prices on the market and moderate growth for the hardwood flooring sector.”

All in all, though, 2015 marked a period of “normalcy” for most suppliers, Shaw included. “For the first time in several years, we did not see any massive swings—up or down—in our core lumber and veneer raw materials,” Hash said.


Outlook for remainder of 2016

With 2015 in the rearview mirror, many hardwood flooring suppliers are hopeful the primary factors contributed to prosperity and growth last year will translate into continued success for the industry in 2016.

“We certainly continue to see growth this year,” Quinlan said. “In solid we anticipate flat to low growth for the next five years but with engineered we’re expecting to see increases in the 6% to 8% range. And a lot of that growth we believe is going to be driven by the newer formats and products coming into the market. In fact, we’re making significant capital investments to increase our U.S. production capacity in some of our new longer/wider products.”

Others will be focused on expanding their geographical reach as a means to drive revenues. “We plan to double our business in three years in the U.S. market, mainly through distribution,” Lauzon’s Myrand said. As for the Canadian market, he expects continued stability throughout 2016 with “significant growth” coming from both its builder and retail customer bases. “Our goal is to grow at a faster rate than the overall industry.”

That’s also the goal of USFloors, which managed to exceed the sector’s overall growth rate in 2015. Stepp said he expects the industry to grow by at least 6% when 2016 is in the books. “My outlook is very positive.”

For other companies, the key to a strong 2016 lies in an expanding customer base. “Thus far in 2016 the hardwood category has grown, and we expect that trend to continue,” Hash said. “We are also seeing more consumers entering the market, which is exciting.”

Similarly, Mannington expects to see “slow and steady growth” for the year, with category sales projected to rise in the 5% to 7% range. “I don’t think we’re going to see any kind of ‘hockey-stick’ effect,” Natkin said. His only concern is the upcoming election. “The market tends to act irrationally during Presidential Election years. But generally speaking I don’t expect to see any hiccups on the horizon.”

Others are hoping to ride the coattails of a rising new home construction market as well as a continued increase in both new and existing home sales. NAHB statistics show total home sales increased every month from January through March, with a slight dip in April. Still, according to NAHB chief economist David Crowe, “Strong job growth and pent-up demand will keep housing on an upward trend.”

All of which is music to suppliers’ ears. “Hardwood market growth in 2016 should be fueled by a strengthening housing market and continued growth in consumer demand,” Armstrong’s Jones said. “Consumer confidence, on-trend designs and home appreciation should also contribute to growth.”

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