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Are multiple price hikes impacting sales?

January 20/27, 2014; Volume 27/Number 19

By Louis Iannaco

Screen Shot 2014-08-14 at 12.38.13 PMWith one price increase after another being instituted on hardwood flooring over the last 18 months, one has to wonder the accumulative affect on sales. While the consensus among hardwood flooring executives, from both the manufacturing and distribution side, is that a number of elements are impacting the segment’s sales, it may be surprising that price hikes are lower on the totem pole than other factors.

Most observers believe supply has been affected by the decrease in operational mom-and-pop sawmills. The reduction of these mills constitute the “root of the issue,” noted Patrick Barnds, Armstrong’s vice president of product management. And, with the lumber industry having been hit particularly hard by the recession, it continues to be challenged by capacity issues.

“When demand was low, many loggers and sawmills went out of business,” Barnds explained. “Getting those businesses back up will take time.” These lumber capacity issues have led to significant raw material price increases for manufacturers. “A lot of this is good, old-fashioned supply and demand.”

Additional reasons for the increases, executives noted, include fewer loggers, alternative uses for logs and increased levels of government regulations.

Executives also agreed that the ongoing popularity of hardwood seems, for the most part, to be trumping the price increases as consumers continue to buy solid hardwood flooring or look for alternatives, such as engineered hardwood. As Jeff Garber, vice president and general manager of Ohio Valley Flooring (OVF) in Cincinnati, noted, the price increases “haven’t slowed demand [for wood] at all.”

Barnds also believes that even with the increase in costs, hardwood still provides value to the homeowner. Putting it in perspective, on a $5,000 project a homeowner may be taking on an increase of $600. “Significant? Yes,” he said, “but probably not enough to stop her from putting wood into her home and enjoying it for the rest of her life.”

There is no doubt the number of increases taking place in such a short time span has been unusual for the industry. At Mullican Flooring, Brian Greenwell, vice president of sales and marketing, noted how 2013 was “extraordinary” in that the wood industry had three to four price increases and could have justified more due to continued price escalation for raw materials.

“The severe shortage of lumber has led to these price increases,” he explained, “and manufacturers continue to attempt to keep up with demand. Thus far, the increases have not impacted sales because consumer demand remains strong.”

Company executives also agreed that the domestic price increases have not necessarily made products from China more attractive to dealers. As Garber noted, the higher prices from domestic producers have helped OVF’s low-end Chinese hand-scraped imports, “but the domestic producers don’t really supply this price point of product, so I don’t believe they’ve had a negative impact.”

Dan Natkin, Mannington’s director of laminate and hardwood business, believes the price increases have only allowed the company to marginally keep up with raw material inflation. Meanwhile, the segment’s popularity continues to flourish and remains one of the few flooring types that most consumers aspire to have in their homes. “For the most part, the price increases have not affected sales as the category continues to grow.”

Some people, like Charlie Kerfoot, hardwood product manager for CMH Space Flooring Products in Wadesboro, N.C., believe the recent price increases have encouraged consumers and retailers to look at alternatives such as engineered flooring instead of solid, LVT or laminates. Because pricing on solid hardwood products has increased much more than on engineered, “our solids are flat [in terms of volume], but dollars are up.”

Engineered products are driving CMH’s wood growth, but the increases have started to slow the advancements in hardwood sales, Kerfoot added. “The big question is how many more [increases] will the market allow before it starts to decline?” Like other executives, he believes the most recent price increases are the result of fewer sawmills and loggers coupled with a wet summer decreasing the harvest, therefore causing less supply.

The increase in new home construction has added to the demand, Kerfoot noted, and that leads to higher lumber and veneer costs, which in turn creates increases in hardwood flooring prices. Because of the Screen Shot 2014-08-14 at 12.46.53 PMupturn in the cost of domestic products, those from China are being considered more closely, he explained, but with recent news of lawsuits for excessive formaldehyde and illegally logged lumber, some buyers “are rightfully hesitant.”

According to Jeff Striegel, president of Elias Wilf in Owings Mills, Md., there are three key factors that have come to the forefront as a result of wood’s price hikes. First, he agreed with Kerfoot that the hikes have continued to drive and even accelerate the use of engineered hardwood. “Even the steadfast builder had to crack and begin to look at engineered versus solid in order to contain pricing.”

Striegel also believes the increases have “clearly” driven alternative product usage. LVT wood visuals are “smoking hot,” he said, and the advent of the 12 mil laminate, along with the realism of finishes, have helped “reposition and reenergize laminate at retail as an alternative product versus wood.” He noted 2013 witnessed the first acceptance of laminate in key builder accounts.

Finally, he believes the increases have brought the wood segment to a more appropriate level in the hierarchy of flooring in terms of cost. While solid wood pricing may have actually gone down over the past decade, “engineered wood has become a tremendous value in terms of wearability and durability,” Striegel noted. “The pricing continued to drop, so it could be bought at almost the same price as laminate flooring.”

Garber is another who still believes that despite all the increases, hardwood is highly valued among consumers and retailers. “And since all domestic suppliers have had to implement increases, the consumers have absorbed them and it appears the value of a hardwood floor is still desirable. We’ve had good growth from all our wood lines. The increases have not affected sales growth.”

The fast rise in demand, he added, along with the long lead times for cutting and drying lumber are major factors, as well. “It is a supply and demand issue on steroids,” Garber said.

“We’re still budgeting for an increase (in 2014) and hope to restore some of the profitability with better product mix. When supply catches up with demand, I’m sure we will see some price relief.”