Wood: State of the Industry 2023

HomeFeatured PostWood: State of the Industry 2023
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Many of the new Mirage hardwood flooring offerings for 2023 will be built on a new engineered platform. Pictured is Dreamville oak.

Despite ongoing and persistent pressures from competing, look-alike products, softness in key end-use market segments and overall pricing pressures, the hardwood flooring sector continues to demonstrate why it has maintained its staying power despite real challenges.

Take, for instance, the hurdle the industry had to face when suppliers around the globe had to scramble for alternatives to Baltic birch following Russia’s invasion of Ukraine. The sudden demand for raw materials put a chokehold on the total global supply—even for suppliers that didn’t typically source from that region. Nearly 15 months after the war started, however, it appears the impact has largely been contained.

“We’re hearing less about it today,” said Brian Carson, president and CEO of AHF Products. “We don’t use any core material from Europe, so we have not had any issues. By and large, we make our own plywood for the United States, so we were not affected by the shortage; we just ramped up production here in America, so it wasn’t a sweeping change for us. Furthermore, we also make our own plywood in Cambodia. I do know some of the manufacturers have converted over to other core material, and I think there was enough inventory in the United States that it gave people time to work on other things. Overall, suppliers are becoming more self-sufficient in the United States, which has helped mitigate the issue.”

Other major domestic suppliers were also able to weather the storm. “As it relates to our Harris Wood products specifically, we are 100% made in USA so, fortunately, we were not impacted at all,” said Renee Tester, vice president of marketing, e-commerce and digital at QEP, parent company of the Harris Wood brand. “And even the products that we import from various global partners, fortunately a lot of their core materials came from other regions.”

Ditto for Mohawk, which maintains a mixture of domestically made and sourced hardwood production. “We’ve always had a very robust due diligence process on our sourcing procurement, so we were not impacted by the invasion,” said Paige Nichols, product director, hardwood, Mohawk.

Seeing the proverbial writing on the wall and the potential harm that a shortage of species utilized in the core layer might cause, many hardwood suppliers serving the U.S. market—domestic and otherwise—took adequate precautions. “The Baltic birch plywood challenge put stress on everyone from an availability, cost and communication point of view,” said Brad Williams, vice president of sales and marketing, Mirage. “With so many unknowns tied to a war that we can’t explain or predict, we decided to take action early on in the process and to control our own destiny. We will be launching a new platform this summer with wood cores sourced and produced in North America by Mirage. That way we have a short- and long-term solution to support our customers’ needs.”

hardwood flooring
Shaw leveraged its efficiencies in sourcing and manufacturing to mitigate any potential issues regarding core materials. Shown is Utmost.

Others adapted accordingly. Shaw, which at one point was using Baltic birch as its core material, decided to pivot away from the material long before the invasion began. “What’s interesting is the perception is that the war is what drove everybody to pivot on that,” said Kyle McAllister, director of hardwood and laminate. “But I would argue that we, among other suppliers in the industry, were getting out of that material even prior to the war because of the raw material cost that had been passed onto that product. So we were already shifting gears to begin with, and we focused on the development of a mixed hardwood, domestically manufactured core.”

The same approach applies to those importing from Brazil. “Triangulo Hardwood Floors uses Brazilian pine that we sustainably manage on our own property in Brazil,” said Philip Key, the company’s vice president of sales and marketing. “Since we raise, harvest and produce our own core, we haven’t been affected by the terrible events in Ukraine like other hardwood manufacturers.”

While several other major suppliers also report being unaffected by the Baltic birch supply situation (add Boen, Mannington and Mullican to the mix of companies that have secured their own source of core material supplies), the category at large has experienced some unintended consequences. As AHF Products’ Carson explained: “I think the consequence is that core materials are more expensive than they were a year or two ago, because everybody had to move to a different option—which constrained supplies in those areas.”

For those North American hardwood flooring manufacturers that still feature Baltic birch in their core materials, the higher pricing (and strained availability) is worth any potential headaches. “At Mercier we are still using Baltic birch, although we were able to source it outside of Russia,” said Wade Bondrowski, director of U.S. sales. “Make no mistake, we’re paying a premium for it, but we believe using Baltic birch was the best way to make an engineered product and we’re going to continue to try to make the best products possible. It isn’t that we won’t be searching for alternatives in the future in order to become more competitive in some fields, but we will always use Baltic birch as part of our makeup because we feel it’s still the best you can use for the cores.”

Ironically, with so much of the attention focused on Baltic birch supplies these past 14 months, another potential wrinkle regarding an altogether different supply source may have gone unnoticed. Specifically, imported product from some countries in Southeast Asia (namely Vietnam) that, according to the U.S. Commerce Department, is suspected of circumventing tariffs and anti-dumping duties. In a posting the agency stated: “The U.S. Department of Commerce preliminarily determines that certain hardwood plywood products and veneered panels (hardwood plywood) exported from the Socialist Republic of Vietnam, which were assembled in Vietnam using hardwood plywood inputs sourced from the People’s Republic of China, are products of China and are subject to the antidumping duty and countervailing duty orders on hardwood plywood from China. Additionally, the Commerce Dept. preliminarily determines that certain hardwood plywood assembled in Vietnam using hardwood plywood inputs sourced from China are circumventing the AD and CVD orders on plywood from China.”

As this issue continues to unfold and develop, U.S. hardwood flooring suppliers that source from Southeast Asia—particularly Vietnam—report no hiccups in terms of availability, delivery or compliance. “We bring in two products from Vietnam, but we have not heard anything from our suppliers or the U.S. Department of Commerce,” said Jamann Stepp, vice president, hard surfaces, The Dixie Group, which markets the high-end Fabrica Wood brand. “Our suppliers have gotten their supply channels back to some level of normalcy, and our lead times are much better. Obviously, a big chunk of what was happening a couple years ago was the lack of containers, and the crazy amount it was costing us from that perspective. But you also had the Baltic birch timber and lumber that was all being delayed or not sold due to Russia invading Ukraine. All that’s still going on, but it doesn’t seem to be disruptive today and has not really been in the last probably six months or more for us.”

End-use market dynamics

In a move to address tighter consumer remodeling budgets, Mohawk added new products to fit a wider variety of price ranges. Pictured is Camden Isle from the TecWood line.

Another challenge impacting hardwood flooring suppliers—if not the flooring industry by and large—is the softness seen in the new home construction market. While there has been some positive albeit minimal improvement with respect to single-family housing starts, it’s common knowledge that builders have largely pulled back from the production levels seen in the heydays when nearly 1.8 million starts were the norm in the U.S. It’s a phenomenon that quickened during the height of the pandemic but was further exacerbated by the numerous interest rate increases by the Federal Reserve—which, in turn, further raised costs for new home builders and resulted in higher home prices for potential buyers.

“At Shaw, we’re heavily weighted in the single-family builder channel, so we did recognize some of that softness in the beginning,” McAllister said. “However, things have picked up. What I’ve seen is consumers who want hardwood and know what they’re looking for going after that product. So where you tend to lose in these macroeconomic headwinds, you might lose at the entry level for hardwood flooring. Because people that are shopping that entry level price point are on the fence. They could go to wood-look products that are at a lower price point or they can go with real wood. And a lot of times you’ll see they’ll shift away from the wood side because of the price point you get with manufactured goods. However, consumers looking for real wood products know what they’re getting into and they expect to pay a higher price point because its wood. So where we’re seeing the benefit is at the higher end.”

Other suppliers attested to the impact these larger macroeconomic issues have on key end-use sectors such as builder and, by extension, hardwood flooring consumption. “We’re definitely seeing some softening in the builder market, and it has been a challenge,” said John Hammel, senior director of hardwood and laminate, Mannington. “The impact of all the inflationary activities going on over the past couple of years, combined with what the Federal Reserve has been doing to bring that under control, it’s just become expensive to buy a new house. I know home builders have had to do a lot to try to entice people to continue buying. Combine all that with a tight labor pool and it’s been a big challenge for home builders, no doubt. However, it’s not quite as doom and gloom as what was predicted maybe going into the new year, but it’s still soft.”

In the interim, high interest rates combined with low housing inventory are keeping many buyers on the sidelines. “With 70% of homeowners sitting on mortgage rates of 4% or less, we are unlikely to see an inundation of homes soon,” said Pat Oakley, vice president of sales and marketing, Mullican. “Once rates fall, we expect increased activity and a strong recovery with existing home sales and new construction rebounding.”

The Dixie Group’s Stepp concurred, citing the cause and effect relationship between ongoing rate hikes and home starts. “Anytime you have a major rate hike and an increase in interest rates, that business is going to slow down a little bit,” he explained. “I know mortgage applications in the last several weeks have been down compared to the same time last year, relatively speaking. So, until we get this inflation under control and these rate hikes suspended (hopefully at some point next year), I think you’ll see a stagnation in the new construction market in certain areas.”

Mercier’s Bondrowski agreed. “I just read that housing starts were down 2.4% over this time last year, which is right about the time we started to feel a little bit of a pinch. I think the housing market will be strong in the future. I just think people right now are a little shocked still with the interest rates being what they are. Once the shock wears off and it becomes more of a norm, I think we’ll start seeing the housing market return to something that we would be more accustomed to.”

It’s that optimism that gives suppliers hope that the new home construction market will eventually bounce back—and in a big way when it does. “I think once we see interest rates start to level and/or steadily decline, we will start to see the new home construction market pick back up,” Mohawk’s Nichols said. “In the past couple of months, single-family construction has started to pick back up after dropping toward the back half of last year. Applications for building permits increased by double digits from the previous month, which is a positive, as well as housing pricing starting to decline, which will help to increase buying power. I think it will all depend on how quickly inflation and interest rates start to decline, but we are staying optimistic that the market will pick back up in the back half of the year.”

Mirage’s Williams said he sees the situation improving in the medium-term. This despite low housing inventory levels and persistent inflation. “Some markets have built inventory, but homes are still needed in many markets,” he explained. “Eventually we will start to see home purchasers get back into the market.”

But what about the ever-important bellwether residential replacement market? Some executives say that’s the segment we should be more concerned about. “The larger issue is not new home construction; it is the remodel market, which has been sluggish to say the least,” said Dan Natkin, CEO and managing director of Bauwerk Group, parent company of the Boen Hardwood and Somerset brands. “The long-term prognosis for home construction remains strong and wood continues to be a product of choice for that market. We strongly believe consumers will return to remodeling activity as interest rates settle back.”

Williams from Mirage agreed that residential replacement has not provided the typical buffer when new construction typically slows down. “That could be due to more consumers than normal who advanced renovations during the pandemic,” he explained. “That has now provided a hole in this sector along with costs still being at a high point. With demand softening, we will see prices soften and that should get those renovating consumers back into the market.”

Triangulo’s Key believes the market dynamics will equalize once things move toward equilibrium. “When someone buys a new home, they normally sell an existing home—and the new homeowners will upgrade the décor,” he explained. “With that said, we survived and thrived over the past three decades and feel very confident that as inflation is addressed and interest rates drop, it should improve home sales overall.”

Outlook for remainder of 2023 and beyond

Despite the existing challenges, as well as those on the horizon and yet unseen, many hardwood flooring suppliers remain hopeful the category will continue to fare well. “2023 will be tough with a very tepid remodel market in the first half of the year,” Bauwerk Group’s Natkin said. “However, we do believe the back half of 2023 and 2024 will see growth year over year.”

Mercier’s Bondrowski said the hardwood category is poised to run about even—from a volume perspective—with last year. But if sales growth exceeds expectations, he’s not looking for the same percentages experienced over the past few years. “I do believe we’ll run about maybe even, perhaps just a tad off, but that’s OK,” he said. “It isn’t going to be like ‘21 and ’22; this is not a COVID-19 renovation spike situation. This is a space that we feel still has a lot of potential, but it’s going to look more like ‘18 and ‘19. If you look at those numbers, what we did in ‘19 and what we’re doing right now, there’s great growth potential.”

Suppliers are watching the numbers closely. Research conducted by Mirage shows the first quarter was sluggish as some retailers reported slow walk-in traffic. However, the company saw a boost in orders entering the spring selling season. And that’s welcomed news. “One good sign for us is our website traffic increased along with online sample ordering in the first quarter (YOY), which we believe will translate to good future sales,” Williams stated. “It’s still too early to tell if it will sustain through summer and fall, but we are projecting either a mild decrease or mild increase in 2023 for the hardwood category. We are hopeful and working hard for the latter.”

AHF Products has shored up production capacity to ensure a consistent supply of both core layers and finished products to meet customer demands.

At AHF Products, Carson is taking the long view. “If you ask me about the next six months for flooring in general, including wood, I would say it’s going to be uncertain and probably moving sideways. But if you ask me about the next six years of flooring and for wood, I’m as bullish as ever.”

Why? Because it could take that long, Carson said, for the number of new homes to reach anticipated demand. “In order to address the current shortfall of homes compared to the projected population growth, a total of 17 million new homes will have to be built in the United States by 2030; that’s 1.7 million homes a year from 2020 to 2030. Last year was a gangbuster year for building, and we about reached that number. But this year is going to be lower than that.”

Of course, that’s a lot of ground to make up and Carson said he expects there will be a deficit of new homes for at least the next seven years. But the silver lining, he added, is the number of upgrades that will likely be made to existing, aging properties. All of which bodes well for hardwood flooring. “That means you’re going to see more consumers prop up existing homes. You’re going to have higher interest rates, maybe not as high as they are today, but higher than they’ve been over the last decade. That means consumers are going to be much more inclined to renovate where they live now.”

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April 24/May 1, 2023

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