Wood: New formats, pent-up demand drive revenues in 2015

Home Inside FCNews Wood: New formats, pent-up demand drive revenues in 2015

June 20/27, 2016; Volume 30, Number 26

By Reginald Tucker

The U.S. hardwood flooring market continued on its upward trajectory in 2015, although the rate of growth slowed slightly over the course of the year. FCNews research shows the segment generated $2.059 billion in 2015, a 6% jump over 2014. That’s a tad lower than the 7% growth rate achieved in 2013, when the category hit the $1.816 billion mark. 2015’s sales figures also represent the first time since 2008 that the category eclipsed the $2 billion mark.

In terms of volume, 2015 hardwood flooring shipments totaled 815 million square feet, a 5.8% uptick over the year prior. By comparison, hardwood flooring volume grew roughly 6% over the 2013–14 period. Analysts say this correlation of greater dollar-to-volume growth reflected higher raw material prices incurred by manufacturers over the corresponding period. That 815 million square feet marked the category’s highest volume since 2008.

On the downside, hardwood flooring sales are still off significantly from 2006—19.7% in dollars and 29.7% in volume.

Looking at the bigger picture, the hardwood flooring sector grew to represent 10.1% of total flooring sales in terms of dollars but just 4.4% with respect to volume. Compared to five years ago, the hardwood flooring category accounted for 9.8% of total sales and roughly 4% in terms of volume. More significantly, the wood flooring category in 2015 represented the third-largest hard surface category—in terms of dollars—behind resilient and ceramic, respectively. However, wood comes in fourth place with respect to total hard surface square footage shipped, trailing resilient, ceramic tile and (surprise) laminate.

One of the primary drivers for growth in the hardwood flooring sector was the increase in engineered production and consumption, as evidenced by the wide range of new formats and construction types available. These run the gamut from wider widths (6 inches or more) to longer boards (6 feet or longer). “Engineered products are leading the growth due to their broad style and design options,” said Brian Greenwell, vice president of sales and marketing, Mullican Flooring. “This growth in engineered is directly aligned with the rebound in residential construction, along with increased residential remodeling [activity].”

While it didn’t match the high double-digit increases generated by new home construction demand, the residential remodel/replacement business performed well nonetheless, representing roughly 30% of wood flooring activity in 2015.

Industry observers say the trend correlates precisely to the shifting ratio of engineered to solids, particularly in markets typically accustomed to solid strip. FCNews research confirms the engineered category now represents roughly 55% of category activity—up from a 50-50 split just a few years ago. This shift is especially evident in markets such as the Northeast, which is traditionally a stronghold for solids. But with the advent of alternative formats, such as a ½-inch engineered option, professional installers and contractors have a product they can still nail down to the substrate.

“The fatest growing formats appeared to be 3⁄8- and 1⁄2-inch engineered tongue and groove,” said Jamann Stepp, director of marketing and product management, USFloors. “Solid 3⁄4-inch is still viable, but only in certain geographic areas.”

This growing preference for longer planks and wider widths is paving the way for a deeper utilization of engineered hardwood, thanks to the aesthetic flexibility of the product, notes Drew Hash, vice president of hardwood, Shaw Floors. Also, “engineered products tend to be easier to install, which is appealing to the growing number of do-it-yourself consumers.”

Hash said Shaw in particular enjoyed “tremendous success” last year with its engineered hardwood offering as reflected in a $40 million capital investment in its South Pittsburg, Tenn., manufacturing facility. According to Shaw, the investment adds more than 60% capacity to the existing hardwood manufacturing facility.

With this wholesale shift to engineered products, industry observers are seeing markets traditionally accustomed to solids beginning to make the switch. “As you start to move around the country, we are seeing some markets that had previously used engineered flooring and have started to expand into some of the newer categories such as wider/longer products,” said Dick Quinlan, senior director of hardwood products at Mohawk, which also markets the Columbia Flooring and Quick-Step brands. “Installers and contractors are being more aggressive in taking on new styles and designs, including wire-brushed and scraped products. They have been growing very nicely for us in the builder market.”

Indeed, the new home construction arena in the U.S. in 2015 contributed to an environment that was conducive to greater hardwood flooring consumption, even though prospects for the overall builder market were lower than many analysts’ expectations. According to the National Association of Home Builders (NAHB), nationwide housing starts reached 1.11 million units in 2015, a 10.8% increase over 2014. Within that sector, single-family starts posted a robust gain of 10.4% to 715,000 units.

Still, many analysts were hoping for more robust increases. “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,” Quinlan told FCNews. “It’s still growing a lot better than it has over the past few years—just not as strong as we expected.”

 

Mitigating factors

The acceptance of expanded hardwood flooring formats among key end-use sectors was not the only factor that drove the hardwood flooring business in 2015. Industry observers also point to a return to raw materials pricing stability last year, following a tumultuous period in 2014 whereby manufacturers incurred significant increases in lumber costs. Supplier say raw materials were less available at that time, which drove a lot of price increases, particularly on the solid side of the business.

“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,” Shaw’s Hash said.

That sentiment was echoed by other major suppliers, Mannington included. “In 2015 raw materials were less of an issue; there was not quite the same pressure we saw in 2014,” said Dan Natkin, senior director, residential products. Instead, he said the company had to contend with pricing pressures brought on by an influx of imported, lower-priced product from China. “This tends to have a deflationary effect on pricing.”

For some hardwood flooring manufacturers, especially those based north of the U.S. border, there was no relief from fluctuations in raw material costs. In fact, several suppliers were not only negatively impacted by escalating lumber prices, but an unfavorable currency exchange rate further pinched profit margins. “The change in the exchange rate negatively impacted us by reducing our profitability,” said Yves Myrand, vice president of sales and marketing, Lauzon Hardwood Flooring.

That pretty much mirrored the experience Mirage Hardwood Floors faced in 2015, according to Brad Williams, vice president of sales and marketing. Specifically, he said double-digit increases in lumber costs—coupled with higher demand for wider products—put pressure on manufacturers’ raw material yields last year.

 

Impact of onshoring

Economists have documented the mass exodus of hundreds of thousands of manufacturing jobs from America to China as well as other countries as a result of drastic cost-saving initiatives and fierce competition. But in recent years, industry observers have seen an incremental return of those same jobs back to America as domestic companies reevaluate the cost-benefit equation of outsourcing production.

This phenomenon, often referred to as “onshoring”or “reshoring” is taking place across a diverse range of markets and industries, including hardwood flooring. “I think this is definitely happening, and for varied reasons,” said Don Finkell, president of American OEM, a private-label supplier to the domestic hardwood flooring market. “First, there are cost increases tied to labor in China as well as other costs of doing business in that country. However, the price of the Chinese product does not bear this out. Most people agree that the price of Chinese-made wood flooring keeps going down. Perhaps some of this is because of the devaluation of the Chinese currency and the slower growth in their national economy.”

But the bigger reason for onshoring, Finkell argues, is the uncertainty surrounding some Chinese-made goods. Among the primary factors at play here: “First, and most dramatic, is last year’s CBS ‘60 Minutes’ report on high levels of formaldehyde in Chinese-made laminate sold by Lumber Liquidators. The result of this publicity collapsed the Lumber Liquidators’ stock price and generated a lot of class-action lawsuits from their customers. It is an understatement to say other retailers do not want those problems to visit their door. As a result, they are more careful about their flooring purchases from China. In addition, consumers are more aware of where their purchases are coming from. This gives impetus for American-made goods.”

The second issue, Finkell noted, also stems from Lumber Liquidators but it involves the U.S. Lacey Act. The U.S. Justice Department raided Lumber Liquidators’ Toano, Va., headquarters in September 2013 in search of potential violations of the Lacey Act after the results of an undercover investigation conducted by the Environmental Investigation Agency was made public. The ensuing investigation by the Justice Department, conducted with Lumber Liquidators’ cooperation, ended in a criminal consent decree against Lumber Liquidators and fines in excess of $13 million.

Another consequence of the settlement, Finkell said, is Lumber Liquidators’ sourcing is going to be closely monitored for at least five years. “The result is that major companies need to be more careful in verifying the legality of their Chinese wood sources. This is more complicated than you might think since a large portion of Chinese wood products are estimated to come from illegal or unverified sources. This uncertainty does not affect the consumer as much as it affects the executives who are responsible for sourcing wood floors who will be the ones to face the consequences for Lacey violations. More of them are deciding that they do not need to take the risk.”

The final factor is the retroactive nature of the ITC Antidumping petition. Initial rates for Chinese imported multi-layered wood floors was in the 5% range. Last year the duty retroactively reset at 13.74% for all covered wood flooring imported between Dec. 1, 2012, and Nov. 30, 2013. Importers were sent a bill for about 8% of the value of their imports from covered suppliers during that 12-month period. This year the Department of Commerce is calculating the duty rate for the next 12-month period, Dec. 1, 2013, to Nov. 30, 2014. “No one knows at this point what the rate will turn out to be,” Finkell said. “It is an uncertainty that more importers would like to avoid if they can find an alternative.”

These factors, in addition to a growing Made in America sentiment among American consumers, are combining to make a better market opportunity for domestic wood flooring manufacturers, he added.

Rise of domestic exotics

In line with the scale back in some imported species—particularly from Southeast Asia and parts of South America—industry analysts point to a corresponding rise in the production of domestic exotics in the U.S. market. Specifically, demand for homegrown exotic species such as hickory, walnut and maple—essentially any American species other than oak—has been skyrocketing in recent years.

“The true exotics that were popular several years ago (tigerwood, cumaru, jatgoba, etc.) are not in demand as they were, say, six to eight years ago, USFloor’s Stepp said. “Today’s consumer seems to prefer slightly rustics to distressed visuals.”

Distributors and retailers credit the overall trend toward traditional, time-worn looks in home decor.

In addition, broad changes in the overall economy also impacted sales of exotic hardwood floors, according to industry executives. During the heyday for exotics in America (roughly 10–12 years ago), there was a solid supply chain in place and importers were very aggressive with their pricing. But the economic crash in 2008 had a chilling effect on the exotic market. “Customers started buying less product in the wood business,” Mohawk’s Quinlan said. “The crash changed the market significantly.”

At the same time, Quinlan noted, the Lacey Act was coming into play. This put additional pressure on exotic hardwood importers and marketers who were now charged with the responsibility of ensuring that their suppliers and agents across the chain complied with new regulations pertaining to sourcing. As a result, “the market got smaller for some of the Brazilian and South American suppliers at large,” he explained. “When their markets suddenly dropped 30, 40 or 50%, they went out of business.”

In response to the shift from tropical species to domestic exotics, many hardwood flooring manufacturers have adjusted their product mix accordingly. “We do have some exotics in our line, such as Brazilian cherry, but we really don’t promote them heavily because consumers are moving away from the red tones,” Mullican Flooring’s Greenwell said.

Other suppliers are responding accordingly. At Mohawk, for example, the focus is on introductions that highlight maple and hickory as well as walnut looks in an engineered format. “This has allowed us to introduce some new species that have more of a tropical look but are domestically grown and produced,” Quinlan said.

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