Exclusive: NAFCD board tackles key issues

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NAFCD
NAFCD board members

Chicago—Supply chain disruptions. The state of the economy. Rising costs of fuel and transportation. Hiring and recruiting. These were just some of the hot-button topics on the table at the 2022 North American Association of Floor Covering Distributors and North American Building Material Distribution Association (NAFCD + NBMDA) convention held here late last year. During the convention, FCNews caught up with the NAFCD executive board members to get their take on some of these pressing issues as well as the overall state of the floor covering distribution industry.

Participants in the roundtable discussion included: A.J. Warne, incoming president; Kyle Gorny, immediate-past president; Dori Blitzstein, vice president; Shane Richmond, past president; and Derek Brooks, distributor-director. Reginald Tucker, FCNews executive editor, served as moderator.

Following are excerpts of the discussion:

FCNews: The last time we were all together, at NAFCD 2021, the hot topics of the day were shipping containers on the water; supply chain disruptions; logjams at the ports. Fast forward one year, where do we stand now? Are you all able to get supply on a consistent or reliable basis?

Kyle Gorny: Well, insofar as LVT, we’re buying a lot of made-in-America products so it’s a lot easier for us to get.

What about those who are still importing?

Dori Blitzstein: I’m finding that we’re struggling because our containers arrived in nine months when we had expected them to arrive in three months. It missed the peak season and we had a multitude of containers arrive in September and October, and now we’re sitting on a lot of inventory at very high costs. Now freight has come down and so the market is at a lower price point, but we can’t afford to go to the lower price point because our costs are higher. It’s a real struggle to begin to cost average and figure out how you can go out to the market and be able to sell the material against your competitors and still make a decent margin and be profitable.

A.J. Warne: For us, we’ve seen ocean freight really come down. I think the challenge is that there are more reports of ocean freight coming down than what is actually coming down—because if ocean freight prices plummet today, that affects the material that I have in my barn in 45 or 60 days from now. The material that is still on its way here doesn’t necessarily have the lower cost. I also think a lot of the reports of the decreases in the price of ocean freight are missing the fact that inland transportation is still constrained, especially in midsize ports. The Mid-Atlantic doesn’t have any extremely large ports and in those midsize ports the drayage or inland transportation is still more than double what it was when the pandemic happened in 2020.
The shipping companies are also constraining supply because the prices are coming down so they are making fewer sailings. As a result, it’s lowering the service rate for people who are relying on imported goods, but it’s also helping to have the price come down at a slower pace than what it would be if the market just dictated how much supply there was in the market six months ago.

Shane Richmond: I would agree, agree with both A.J. and Dori to a certain extent. Coming out of convention last year, we still had some volatility on inbound container freight and from a supply chain standpoint it’s gotten much more consistent. But to A.J.’s point, it takes a little time for those container freight rates to catch up with orders that were placed months ago. With container inventory, you’re not planning a month or two ahead; you’re planning six months ahead and you’re trying to make decisions ahead of time and doing the best you can. I think we’ve seen some more consistency from the supply chain overall, but there are still factors that are impacting distribution businesses every day.

Derek Brooks: We buy a lot of product from Europe—probably equal to Asia. Across the industry, everybody’s inventory’s inflated at cost—to Dori’s point—due to freight cost being 30% (which used to be 6%) and buying inventories based on six-month lead times or nine-month lead times. So it is lightening up a bit. Our European freight, however, is not coming down but capacity is opening up. So the raw material impacts on both sides, whether it be Asian products or European products, are softening because capacity is opening up. The good news is everybody in the industry’s in this inflated inventory stance. But to A.J.’s point, it’s just managing that freight. What we’re seeing in ports like Montreal, it can get there in two weeks but it sits there for five weeks, so you’re buying product but then it’s just sitting there.

Another challenge that we talked about this time last year was the shortage of truck drivers. Is it still a struggle or is the situation getting any better?

Gorny: It’s definitely the same scenario, especially on the drivers’ side. For Blakely Products, we look for a driver that not only drives but, after he’s done with his route for the day, he will come back to the warehouse and load up and help manage everything. With the new drivers—all they want do is drive now because they can go anywhere and that’s all they have to do is drive. The universal worker is no longer around.

Richmond: From a recruiting standpoint, it’s not just drivers—it’s across the entire footprint of the business. It’s the professional positions, your finance team, your purchasing and credit personnel, etc. Drivers continue to be an issue, very much like they were last year. Rates are going up, wages are going up and the number of people out there looking for jobs are far below the demand for the jobs that are open. As a result, we’re seeing upward wage pressure on those positions and in order to fill those internal positions, we’re having to fill them at a higher rate. This makes internal equity a real issue for the drivers you already have. Hiring any new people puts upward wage pressure across the business.

You would think that—although we haven’t defeated COVID-19 yet—we are coming to grips with it, developing better treatments, etc. People have been out of the workforce for a long time. One would assume that the longer this goes on, the better situation would be in terms of addressing the labor issue?

Warne: Claudia St. John spoke to issue this really well [during her presentation at the conference]. The people who exited the workforce through COVID-19 are not coming back. We lost 8 million workers during the pandemic. A large number of them either died of COVID-19, have long COVID-19 and now are on some sort of disability program. Some stayed home with children because of the excessive cost of childcare. There were also many people who went to gig work who decided that they cannot enter the workforce as a full-time, W2-type position.
This isn’t going to get any better anytime soon. We’re not going to be back into a position where there’s excess people who want jobs that aren’t there for the next seven years, according to these economists. I feel really fortunate because Abraham Linc takes a proactive approach to retaining employees and we have not really faced the hiring problems that other companies have. We have a very high average of people tenured at our company, and I think a lot of it has to do with where we’re located. We’re based in a less challenging market in terms of employment, but we work really, really hard to make sure we have employees who love coming to work at Abraham Linc and love doing their job. People either work for us for about two weeks or for 20 years, for the most part.

So there’s more of an emphasis on retention?

Warne: Yes.

Another challenge we talked about last year was the rising cost of fuel. We have certainly seen that coming down in terms of the average driver, but what about diesel fuel to run the trucks? Are you seeing some relief in that regard?

Blitzstein: Diesel is still very high. The challenge for us is our biggest marketing program is that we offer free freight for orders $300 or over. The bottom line issue is we have to be continually growing our business in order to be able to afford to have that kind of marketing program. The fuel costs still hit the bottom line so it still hurts.

Brooks: We outsource all of our freight so we don’t have any internal systems like a lot of U.S. distributors; we work with big companies like XGS. We’re also seeing reduction in cost fuel surcharge, so there is a light at the end of the tunnel—hopefully diesel doesn’t continue to climb.

Richmond: Comparatively, when you look at where we were last year, diesel fuel is probably higher right now. For us, on the outbound freight side—the delivery side—it’s just a fact of the way the market is right now. Last year was painful because it was climbing. Now it sort of found its peak and it’s just sitting there. It’s moving a little bit here and there, but for the most part I think diesel is expensive as it’s ever been for us. We’re just moving forward. There’s nothing we can do about it.

Blitzstein: You just have to sell more.

Gorny: We’ve adjusted our delivery charge and our customers get it. They’re not stupid. They watch the news, they see what’s going on, they get it. We haven’t had any complaints—no pushback at all.

Blitzstein: Unfortunately we can’t adjust our delivery charge because that is our marketing [campaign] to try to build our business and has been that way forever in our company. Our customers would not understand that at all.

For a mature industry like floor covering distribution, we haven’t seen a ton of consolidation activity. More recently, though, that activity seems to have picked up a bit. In light of recent news (i.e., Belknap White purchasing STC; Crown Products’ purchase of All Tile and Blakely Products before that), do you see the pace of consolidation through acquisition consolidating?

Gorny: I think it’s going to continue, especially with the news this past week.

Richmond: If you’re looking for me to make a prediction on what private equity’s going to dol, I’ll pass on that question [laughs].

Blitzstein: As long as I’ve been in the business, it’s gone up and down. There has been a flow to it and usually there’s a lot of acquisitions and then it just stops for a little while and everybody kind of adjusts to the industry and then it starts up again. I also could not predict what private equity is going to do.

Richmond: Private equity sees a lot of value in these distribution businesses. Obviously these investors are seeing that there’s value and these are profitable companies, especially if you can package them together and cut your costs on the back end in order to run these businesses profitably. I understand why it’s happening, and I think that it will continue as long as the economy will allow it to.
One of the things we talk about all the time in the flooring distribution industry is we have a lot of family-owned businesses or entrepreneurial businesses and there’s always that struggle of that crossover from the first generation to the second, or the second generation to the third…and so on. I think we’re just in a glut of these companies that have gotten to that point either with no succession plan or not a healthy succession plan. They’re taking advantage of some of that private equity money that’s out there in the market.

Brooks: 2021 into 22 were the record years; it was an amazing time. So these business are being sold on this historical data, and I think we’ll continue to see this for a little while. However, come this time next year, I’m not so sure that it’ll continue because you’re going to start to see more pressure on margins, competition, inventory inflation, etc.

Related to that that question…what are the prospects of the industry seeing the emergence of a big, national distributor?  

Warne: It already exists. Shaw and Mohawk, at their core, are distributors. MSI is a distributor. If you think about what they do—for a large portion of their business, they are buying goods that they don’t manufacture in a building that says their name on it and distributing them across the entire country. It’s just a challenge of can that model compete with regional distribution effectively in every single market. I think that they’re bound to have places where they’re not well tuned to do that, because even within the market geography of Abraham Linc, we have one portion of the market that wants to buy a product a certain way; another portion of the market maybe only 300 miles away that wants to buy the product a different way. Trying to evaluate and plan for that with product across an entire country is a big challenge if you want to really do a full spectrum of flooring.
When you expand into that large of an area, your opportunities are really in only hitting the middle 50% of the market. There’s going to be 25% of the market on either side of you that you don’t have an opportunity for, and that’s going to be filled in by local distribution. Consolidate all you want—it opens up space for more local regional distributors when these big mega distributors start collecting more territories.
Distribution consolidation is all I’ve ever known. In my youth I just started as a territory manager for Abraham Linc when CMH and J.J. Haines consolidated, which for the East Coast was a very big deal. We’re talking about the No. 1 and No. 2 distributors on the East Coast; they consolidated the first week that I was a territory manager for my company. And so it’s all I’ve ever known and I’ve seen how much space it’s opened up for other distributors in that market when those folks did that. So I think there are national distributors, but I don’t think national distributors are super effective at getting a huge chunk of market share in every single market.

Some of those companies you mentioned aren’t technically considered full-line distributors and there’s a manufacturing component to each of those companies. Do you make that distinction in terms of, again, the feasibility of prospect of a full-line distributor that distributes other products other than those brands that a particular company makes?

Richmond: When you’re talking about flooring distribution—and to A.J.’s point about Shaw and Mohawk and these particular brands of flooring—distributing those products nationally is viable. They’re doing it, and they’ve been doing it for a long time. I think when you get outside of those traditional flooring products, your LVT, hardwood, etc., and you start talking about sundries and supplies and tools and all the other things that go along with that for many of us in the flooring distribution space—I think that becomes much more difficult to do on a national level. There are so many different brands that are sold regionally; there are so many different products and different product types and adhesive where you use a different product type in the Northeast and another product type in the South. There’s such a variety of products that you need across the flooring industry that I don’t think you can just pile a bunch of products up in one warehouse in the middle of the country and ship those out to the entire country profitably. On a limited amount of SKUs where you’re just doing 10 LVTs or 10 different types of hardwood, I think it’s easier. However, when you start getting into your sundries and supplies distributors that are handling 3,000–4,000 SKUs that we’re regularly distributing to customers, I think that becomes much more difficult on a national basis.

Warne: It’s like anything else—everything’s a hybrid now. Look at Amazon, for example. Amazon is both the distributor and—in a lot of circumstances—the manufacturer of a lot of the products that they sell. They have the best-selling stuff. You can get an Amazon Basics phone charger the same way that you can get an Apple brand phone charger or a phone charger from another brand. Everything is hybridizing; Shaw and Mohawk manufacture—that’s what they’re known for and that’s what they’re really good at. They manufacture their own carpet or LVT or hardwood or laminate, but they also buy things from people, too. The fact of the matter is there’s probably more demand than there is capacity for production in the United States. And I think that you’ll always see things like the hybridization of these things. It’s something that our industry struggles with to wrap our minds around sometimes.

Richmond: One of the other important functions that flooring distributors provide is being a finance arm for our customers. They have multiple credit lines with multiple distributors in a given marketplace, and many of them will spread that risk out across multiple distributors. Obviously, we all have to move goods around and get it where our customers need it, but I wouldn’t want us to forget that floor covering distributors provide a very important financing function to the flooring dealers in the marketplace.

In listening to Alan Beaulieu’s keynote presentation, he presented a mixed-bag forecast. If you’re sitting servicing the commercial side of the business, you’re looking good; residential, new construction—maybe not so much. He also mentioned that we’ll probably continue to see higher food and gas prices, albeit against some disinflation although we might not feel it right now. Respectively, how do you think 2022 is going to end for your company—up, flat or down? And what are your prospects insofar as you can predict for 2023?

Gorny: For 2022 we’re going to end up. I have a strange feeling about the commercial side of work in the first quarter of 2023. I say that only because a I’m not seeing a lot of big quotes come through from bigger customers. That’s a big indicator for me that things in Michigan are slowing down a little bit, commercial-wise.

Blitzstein: We’re definitely up in double digits, and I plan for us to continue that trend in 2023.

Richmond: At Fishman Flooring Solutions 2022 has been a solid year following a great year in 2021. I think the industry as a whole has seen another year from a top-line standpoint with all the price increases that we’ve seen in the last 18 months or so. Sales have been up in line with that. For 2023, we’re looking, realistically, to have a mix of business across the commercial and residential space. We expect the residential business to ease somewhat next year. As Beaulieu stated in his keynote, we’re going to see a slowing of the growth—that’s not recessionary, that’s not business dropping off, that’s growth slowing. On the commercial side we think is going to be up again next year, possibly significantly. In fact, the easing of the growth may actually help with us recruiting, wage inflation and some of these other things we’re seeing out there.

Brooks: At Torly’s 2021 was a record year and 2022 will finish up double digits as a record year as well. Top line, of course; bottom line, not as much due to the cost inflation cost materials, freight, maintaining larger inventories, etc. There’s good pressure on those areas, but if we see that easing with the capacity that’s opening up and the margins coming back to where they need to be. Our focus is to have diversification through multiple channels, whether it’s in within residential or commercial residential or property management builder business. We don’t want to participate in recessions.

Warne: Abraham Linc had a great year in 2020, a better year in 2021 and 2022 is continuing the climb. I would say that unit sales are approaching flat, but dollars are definitely up. I’m bullish on 2023. I think there’s a lot of people who have as much work as they want to have, whether they’re in the flooring business or not. I think we have a lot of people who are employed. Especially the people who aren’t watching the news real closely are probably feeling pretty good about the economy. I feel like Abraham Linc is really fortunate to be in a good position from a mixture of channels. We participate fairly evenly across what we consider our four main channels and I feel really strongly about 2023.

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