Desert Ridge, Ariz.—Against the backdrop of supply chain bottlenecks, labor shortages, multiple price increases and rising inflation, a record number of FEI Group members descended on Phoenix for the group’s first convention in two years. Why? “We’d like to think it’s because we’ve built an awesome conference with great speakers, opportunities for peer-to-peer exchange to see our supply partners,” said Graham Howerton, president. “But I think the other part of it is it’s been two years since we’ve gotten together and these people really like each other. They enjoy the time they spend with each other. So we get to be together again.”
Sadly, the convention was also the first since the sudden passing of FEI Group founder, Dave Gheesling, nearly a year ago, who was honored with a moving tribute to kick off the event. Gheesling built an organization that currently boats 310 members across its five divisions with 879 locations. Flooring—the Home Solutions and Multifamily Solutions divisions—accounts for about a third of the members, who collectively exceed $5 billion in annual revenue. All told, they have 17 million square feet of warehouse space across the country, and in any given month have $221 million of flooring inventory on hand with accounts receivable up to $289 million in that same month.
If you’re an FEI Group member, you are considered the best of the best. Case in point: It is estimated that there are approximately 1,700 flooring contractors that operate in its members’ spaces. Yet, one in three new home builds are installed by an FEI Group member, and one in four of all apartment turns are installed by an FEI Group member.
Howerton, Andy Hogan, CEO, and Max Holland, COO and president of the Home Solutions division, sat down with FCNews publisher, Steve Feldman, to discuss the current state of affairs and what lies ahead for FEI Group.
Dave Gheesling’s legacy lives on
Let’s talk a little bit about Dave Gheesling, who founded the group and passed suddenly 11 months ago. You led off the convention with a moving tribute. Tell me what you view as the legacy he left.
Hogan: He was instrumental in building the culture of the FEI Group and, on top of that, core values. It was Dave’s idea to begin the company back in 1998.
Howerton: He had a vision to see the call to action, to bring together a community of flooring contractors, to not let them fall into the business commodity trap. He was able to not only see it but execute it.
How did he execute it?
Howerton: It happened with Dave’s unique ability through one conversation to identify whether that person could be a part of building something different. He was looking for the mindset. Do they have the mindset to do something completely different? And to check your ego at the door. Think about the group instead of yourself. And Dave was very good at identifying very quickly the people who had that mentality versus the people who didn’t.
So, from the beginning, the foundation of the core group of people shared Dave’s vision. They knew where he wanted to go and were enthusiastic about helping him get there. I’m not just talking about the membership. It was also our supply partners and our team.
Talk a little bit about that culture, both within FEI Group and the membership.
Howerton: One of the first things he did was develop a vision statement for FEI, which hasn’t changed since 1998. The very bottom of that vision statement is persistence, integrity, class, attitude, respect. And then it evolves all the way up to how you perform your daily functions and how you plan your business, how you strategize.
The way he could engage with one person in a crowded room. You could stand in a room with nearly 700 people, have a one-on-one conversation with Dave and you’d forget there were 698 more people in that room—so laser-focused on you, so laser-focused on your question. He always let you finish your statement. And he never said, “OK, that’s nice, that’s cool.” He asked you a question that made you think about the next answer you gave. I’m trying to learn to be the intentional listener he was. That’s probably what he left to me.
Has anything changed with the group since his passing?
Howerton: The tragedy of it forced us to go through some change. But it also allowed us to make some changes because different people think about things in a different way. We have brought in some new people who are all in their late-30s/early-40s because they bring a different perspective.
Holland: It’s important to remember that Dave had already identified where we were going to change. He was already starting to implement and execute needed changes because we are bigger now. We have to look different and we have to evolve and grow. And he had some of those foundational things identified already that we’re now just able to execute.
Can you be more specific?
Howerton: That we need to build successful groups outside of our core businesses—flooring and kitchen and bath. That we needed to widen our view. In fact, Dave wanted to implement change faster and more broadly than Andy and I were comfortable with at the time. He really wanted to go. He was going to scramble everything. I mean everything, as an entrepreneur does. He’s there for the build. So we had to hold him back a little bit. But to Max’s point, he had already thought about where we were going to go. Xterior Contractor Alliance came out of that. Dave said we’d built the backbone. FEI Group is just a sturdy, strong backbone. And off that, we can do all sorts of things. Because of Dave’s vision, we will be in other businesses outside of where we are now.
Surviving a pandemic
You said not one FEI Group member went out of business over the last two years. Why? And tell me some of the things FEI Group did for its members over the last 18 months to maintain their edges in their marketplaces.
Howerton: The “why” is we have very purposely and methodically for the last 23 years worked on giving members access to all the other smart operators in our group. This goes beyond sitting in a room and exchanging ideas. Probably the single biggest help is members visiting other members. They get on a plane with their team, visit one of our other members and the member opens the book. “This is how we do this. This is how we do that. This is how we interact with this customer. This is how we pay. This is how we incentivize. This is how we manage. This is how we hire. This is how we recruit. This is how we train.”
So our members have learned from each other—the best of the best—how to be better, more efficient, more profitable operators. That’s why our group of 100 made it through this. They were already two, three, four, five, six steps ahead of the isolated independent flooring contractor.
Then there are all the best practice projects. We did something called Big Rocks Financial Workshop, a two-day workshop with CFOs across every business unit. Now the people that are making critical decisions about their businesses have been through all these leadership development programs. So if you get to sit in a room and get a financial one-on-one session from Ken Jackson at Shaw Industries, you’re going to be a better financial buy-in because of it.
All these things we’ve done over the years help us weather these storms. And our members picked up the phone and called each other. Dave was at the head of all this. We had conference calls almost every Friday. They were just to hear each other’s voice. They were there for moral support. They were there to hear Dave end every call by saying, “Just take the next-best step.” And every phone call was full.
This was over the last 18 months?
Holland: This was right through the middle of COVID-19. They wanted to hear what one of our other members had to say about what was going on in their market. So, there was some, “So what are you doing to weather this specific issue?” But the truth is the emotional support through that last 18 months may have been more important than all the other business we were going to talk about.
Hogan: Meanwhile, we were still procuring product. We assisted with all the price volatility with all five of the divisions. We assisted on calls to goods. We assisted on sourcing issues. We were moved to the front of the line or front of the queue as far as those sourcing issues because of the power of the group.
Was every member still profitable in 2020?
Holland: For many of our guys, 2020 was a lost year in terms of their forecast to grow. When we looked down the road, 2021 is the budget that was built for 2020. But everybody on the flooring side was profitable. Our guys got hurt on the kitchen and bath side because of retail remodel [stagnation] early in the year. But the fourth quarter was a huge surprise for anybody that had a retail presence for kitchen and bath remodeling.
What lessons were learned from the pandemic?
Holland: It was hard to forecast going into the pandemic. Nobody expected that third and fourth quarter, including our supply partners.
Hogan: We didn’t forecast this type of inflation. We couldn’t crystal-ball it—the ability to look six, nine and 12 months down the road. We’re an anomaly. This is totally unprecedented what we’re going through right now.
Is it almost impossible to forecast right now given all the volatility out there, whether it be supply chain, inflation or home affordability?
Hogan: Or if eviction moratoriums come back into play. Those things you cannot predict.
Howerton: Unfortunately, too, down to the micro level, you can’t predict anymore that you’ll have 80 crews that will show up on Thursday morning. It might be 60, and 50 might take jobs. You can’t predict and plan to service your customers. The other thing our members said, especially on the flooring side, was they got lost because business was so good in 2018 and 2019. They were working in the weeds every day and not knowing their business. One said one of the biggest mistakes he made was he just got sucked into all this greatness. But he didn’t step back. He said, “I wasn’t doing long-term planning. I wasn’t working on my strategic plans. I wasn’t thinking down the road.”
Tackling labor challenges head on
There will be 1.7 million housing starts in 2021. Closed 1.1 million. There’s a 5.24 million shortfall in houses right now, a seven-year runway for demand. Builder confidence is at an all-time high. What does that all mean for these Home Solutions members from a labor standpoint?
Holland: That’s a good point. I think the labor shortage and the labor demand for more money is real. As they have had some successes over the last 18 months and improved their bottom line, a lot of that is going to have to go to labor because labor is now able to demand more. It’s an employee’s market.
How does that effect these members?
Howerton: What our members have to do now as much as ever is be very creative around recruiting and retaining, not just labor but all the other important personnel. Our members must build their infrastructure technology and their people because they know they have a long runway ahead of them of really high demand. The other thing they have had to do is fire bad customers because the bottom line is they can’t get to everything. They have 100 jobs that can go out today but have orders for 125. What our members have done is fire bad customers that don’t pay on time, complain all the time, have callbacks for nit-picky things. And that’s helped our members be more profitable, efficient and a little cleaner on the operations side.
How do they maintain their same level of profitability when the cost of labor is going through the roof?
Howerton: You’re not going to capture all of it short term. But the bottom line is our clients don’t have other alternatives. Let’s face it: We have the best of the best. And most of the home builders and property managers in the country know that. They know who they can count on to get the work done and get it done right. So, we tell them, “If you want us to keep meeting your deadline, we’ve got to pay labor more. Here are the four increases we’ve gotten this year. If I don’t pass those on, I can’t do your work anymore. I have to go work for the other builder who’s willing to accept them.”
So most of them have passed on these increases and gotten them?
Hogan: Because it’s in every trade in the new home build—framing, plumbing, roofing, everything.
Holland: There’s been six price increases in the cabinet business and we’re on our fifth or sixth in the roofing business. Both industries have somewhere between eight- and 14-week lead times right now. Windows and doors are even worse than our category in terms of price increases and lead times. It’s just the reality, unfortunately.
Is there anything that you can do as a group to help them in this area?
Howerton: It’s too soon to share but hopefully I can down the road. Through our exterior business, we made contact with a woman who owns an exterior company on the West Coast and she had created a program for the recruitment, training and development of young people that aren’t destined to go to college that truly want a trade. There’s a real way to recruit. There’s a real way to get them trained along with job placement. Is it going to solve all our needs? No. But sometimes you just have to do the small things.
Solving supply chain hardship
Supply chain issues. How are you and your members dealing with these challenges?
Hogan: That’s a tough one. There’s no magic sprinkle dust to force these manufacturers to serve us better. But we do have the power to get at the front of the queue in a lot of ways because we do a big chunk of Lennar, Horton, KB Homes and Pulte. And when you do those homes and Shaw or Mohawk has the specification, they will not screw up on service to the flooring contractor when they’ve got a contractual arrangement with those builders.
Property management faces setbacks
Some 326,000 new apartment units, 95% occupancy rate, rent growth. But for the longest time there was a moratorium on evictions. How did that affect the members?
Howerton: It obviously slowed our turn business substantially. People weren’t moving from apartment market to market for job growth as an example, which is the driver typically behind movement. Move in move out, right? So, if you talk about the traditional apartment community, turns were very, very slow. And even when units became available, they would not necessarily spend the money to turn them because they didn’t have a renter waiting to move in.
Hogan: And their budgets got shot.
Howerton: Monthly rent collected on about 12 million apartments was pretty good on the national average—what did hurt the industry were the many concessions to get those people to pay their rent that month. A lot of lease-ups were done, which slow turns. So what they would do is say, if you’ll sign a new lease, I’ll take three months off your rent and tack it onto the back of your new lease. So instead of a 12-month lease you got them a 15-month lease. These types of concessions hurt cash flow.
Here’s the other side that’s going to hit us in a very big way, and I hope it doesn’t hit us this year or next year. You’ve got a whole bunch of old, tired, stale apartment units that need rehab. And that’s all going to come to a head. And if they want to compete with single-family for rent, all those units are going to have to have new flooring, new carpet, new paint, new cabinets and new countertops or they’re not going to be able to compete. So, we’re also getting ready to have a tidal wave. And if that tidal wave starts now, we don’t have enough labor and we surely can’t get enough materials. That’s coming, but we do think it’s further down the road.
What’s the forecast for the multi-family business in 2022?
Howerton: Continued growth. We could be in that 350,000 to 375,000 range for new units completed for 2022. But nobody will commit to a number because of the construction delays. No one can forecast the ability to get lumber, asphalt shingles, etc. You’re looking at the end of the second quarter for some of our manufacturers getting caught up again.
Safe to say I’m better off right now being a Home Solutions guy rather than a Multi-Family Solutions guy?
Holland: Both have their challenges. But I’d say now, with the rental business, if you’re a Multi-family Solutions member who focuses on traditional apartment community and single-family for rent, you’re in a really good position because both are growing at a really significant pace.
Diversification garners growth
How many of your flooring members are also in cabinets?
Holland: Of our 55 single-family flooring contractors, 25 and growing.
Howerton: I think by the end of 2022, at least 50% of our Home Solutions members will offer cabinets and/or tops.
The fact that you expanded into these other categories provides opportunity for the flooring members?
Holland: This is why this whole thing works. Our members and affiliates have access to the best intelligence and information about becoming a cabinet, kitchen and bath contractor in the industry. We have already created some of the best supply partnership programs in the industry, like with MasterBrand Cabinets. So when our members want to get into that business, they have a huge resource already at their disposal. This week, many of our Home Solutions and Multi-family Solutions members are sitting in the kitchen and bath breakouts just to learn. There’s nowhere else they can get that.
One of the best benefits you provide to these members.
Howerton: We very purposely have built this so our members have ease when it comes to diversification.
Out with the old, in with the new (products)
What’s happening on the product side with mix? Are you seeing more and more waterproof at the expense of carpet?
Hogan: Totally. Rigid core in single-family is king. It is the dominant product now, whereas carpet is still in bedrooms. With the big boys—like a Pulte, KB, Lennar or Horton—it’s either rigid core or laminate. Carpet’s getting hurt, hardwood’s getting hurt and tile is still hanging in there.
We’re seeing a big comeback for laminate.
Hogan: Things start in Texas. Whereas 10 years ago in single-family, things would start in California and move east. Now, if you want to see where the trends are you go to Texas. And laminate in Texas is really starting to grab hold and mainly because of D.R. Horton. D.R. Horton is a believer in laminate. And they’re the biggest builder in the country.
What supplier is going above and beyond for the group or doing a better job than others?
Hogan: Dal-Tile. No company, especially in this anomaly that we’re in, is perfect. Every company has had sourcing issues. And I’ll say this about Daltile: They’ve tried to manage their issues and tried to put the Floor Expo member at the front of the queue. Dan Butterfield and Patrick Warren have been phenomenal.