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Hardwood: State of the industry—Housing sector, engineered sales drive revenues

March 27/April 3, 2017: Volume 31, Issue 21

By Reginald Tucker

 

Screen Shot 2017-03-31 at 10.18.34 AMBy most accounts, 2016 was a respectable year for North American hardwood flooring manufacturers. Anecdotal information combined with preliminary estimates show the category grew between 5.5% to 6% in 2016, with volume increasing roughly 5%. That would put sales at the first point of distribution somewhere between $2.17 billion and $2.2 billion in sales with volume in the range of 860-880 million square feet.

While manufacturer estimates vary widely, suppliers are in general agreement on several points: Strong end-use sectors combined with high-performing sub-categories and innovative formats within the hardwood flooring sector are sustaining revenues.

“Primarily new home construction and residential replacement are the sectors driving the most growth for hardwood,” said Dan Natkin, vice president, wood and laminate, Mannington. “The category continued to increase in 2016, albeit at a slightly slower pace—3%-4% over the prior year.”

Other major manufacturers were also conservative in their estimates. “Last year was a fairly good year in hardwood sales with the category up by low- to mid-single digits,” said Christopher Moore, wood product manager, Armstrong Floors. “While the new home construction sector did not reach the lofty highs that many expected, a modest movement helped to lift sales of hardwood flooring to a respectable level in 2016.”

Some estimates were much more aggressive. Mohawk, which also counts the Quick-Step wood line among its brand assets, believes the prefinished hardwood flooring market grew close to 10% in 2016 vs. 2015. “The majority of this growth was driven by the new construction market, both in single-family and high rises,” said Roger Farabee, senior vice president, wood and laminate. “Remodel grew as well but at a slower rate. Commercial had the lowest growth and remains a very small part of the overall hardwood market.”

Within the prefinished segment, suppliers saw particularly brisk activity on the engineered side of the business. Indeed, in 2015 the industry saw a continued shift in the ratio of engineered to solid production. In fact, more manufacturers are developing engineered products that mimic the thickness of solid but offer the performance attributes of engineered. (Lauzon’s new Organik series, which features the company’s innovative Pure Genius anti-microbial technology, is a case in point.)

The trend toward wider plank visuals lends itself to engineered given their enhanced stability, experts say. Natkin estimates engineered will represent 60% of the hardwood market within the next two years—up from about 50% today.”

Screen Shot 2017-03-31 at 10.18.27 AMThe continued shift from solid to engineered is increasingly evident, experts say, especially as imports continue to take market share from domestic manufacturers. Brad Williams, vice president of sales and marketing for Boa-Franc, makers of the Mirage brand, cited several reasons why these thicker engineered products continue to increase their share. “With the builder market using wood subfloors, their goal is to make a flush transition with ceramic floors in the kitchen, bathroom, etc. As ceramic tiles trend larger and thicker, it’s a nice option to have the same in hardwood—wider and thicker. There is also the renovation market where flooring ripped out was ¾ inches thick. It makes for an easier renovation as the heights for doors and cabinetry were done based on ¾- inch thickness.”

For some buyers, it boils down to personal preference. As Michael Barnett, wood product manager, Armstrong, explains: “Innovation continues to happen across both structures and, of course, engineered offers opportunities for design innovation combined with its installation flexibility. While solid wood continues to be a coveted choice for homebuyers, certain looks, lengths and widths can be achieved with engineered that either do not exist with solid or are more challenging to produce. Engineered hardwood floors are also better suited than solid in certain installation applications, such as basements.”

The ongoing migration to engineered hardwood is reflected in the investments major manufacturers are making in the segment. Shaw Floors, for instance, completed the expansion of its hardwood flooring manufacturing facility in South Pittsburg, Tenn., specifically to meet the growing demand for its engineered hardwood flooring products. According to Vance Bell, chairman and CEO, the $40 million investment adds more than 60% capacity to the existing hardwood manufacturing facility. “The expansion of our South Pittsburg engineered hardwood facility is a prime example of our continued investment in new product development and advanced manufacturing practices. Hardwood is important to Shaw’s business growth strategy.”

Shaw is not the only company heavily investing in engineered production. Last summer Mullican Flooring announced plans to invest $15 million in equipment, buildings and working capital to expand its manufacturing operations via the acquisition of a 126,000-square-foot warehouse in Johnson City, Tenn. This latest expansion, which marks Mullican Flooring’s fourth major growth initiative in Johnson City during the past 16 years, will provide extra capacity as well as raw material and finished product storage space to meet increased manufacturing needs.

In that same vein, Wickham Hardwood has invested more than $7 million in a new, state-of-the-art engineered flooring line. The game plan over the mid to long term, according to Paul Rezuke, vice president, residential sales, USA, is to align its engineered offerings with its solid products.

Pricing stability
Screen Shot 2017-03-31 at 10.18.14 AMAnother factor that has positively impacted U.S. hardwood flooring manufacturers is the continued stabilization of raw material costs. In 2013 and into 2014, skyrocketing lumber costs negatively impacted margins for many suppliers—including Canadian companies—and forced several market leaders to raise prices. But manufacturers report the raw material pricing stability they experienced in late 2015 has carried over to much of 2016.

“There is great pricing stability at the moment,” Boa-Franc’s Williams said. “We believe the demand from overseas has softened with North American suppliers, which creates more of a need to supply the local market here in North America, so pricing is holding steady. At the same time, inventories throughout the pipeline are at good, balanced levels—which also contributes to stable prices.”

For Mohawk, lumber pricing stabilized overall in 2016—a trend that, according to Farabee, seems to be holding steady so far in 2017. “But this could change if demand for certain species (e.g. white oak) outstrips supply.”

That’s a real concern for some suppliers. Mannington’s Natkin says raw material prices are still high but have been stable through the first quarter of 2017. Certain species, such as hickory, walnut and white oak, he said, are showing modest inflation. “But it is generally under control for the time being.”

Stiff competition
While hardwood suppliers are keeping a close eye on raw material costs, they are also watching the rising popularity of competing hard surface products, particularly those that are doing a much better job of replicating natural materials such as wood. WPC, LVT and, yes, laminate all fall into this category.

Wood suppliers agree some of their products could be ceding market share to these competitive categories. “For the first time in my career, I can definitively say some of these categories have taken share within certain segments from hardwood,” Natkin said. “Particularly in new home construction, both single- and multi-family units.”

Others are not as concerned. Armstrong’s Moore believes that as long as hardwood itself is desirable, there will continue to be a proliferation of wood looks, whether in resilient, tile or laminate. “While hardwood is challenged by some look-alike products, we believe genuine hardwood flooring will continue to be desired by homeowners because of its natural beauty, enduring quality and durability. This is an investment that lasts for years and offers timeless style.”

Screen Shot 2017-03-31 at 10.18.48 AMMohawk’s Farabee agreed, adding: “Hardwood remains the top aspirational hard surface flooring product, and we don’t see that changing anytime soon. While the other categories have done a better job imitating wood, many customers don’t want an imitation; they want the real thing. No other product will ever be able to duplicate the 100% custom, unique look obtained with every hardwood floor that is installed.”

Williams believes some wood products—especially those on the lower end of the price spectrum—have ceded some market share to competing categories, but he thinks that pressure is coming primarily from builder and residential renovation markets, which tend to be more cost conscious. On the whole, though, he has not seen any dramatic market share shift from a numbers point of view to substantiate and support this increase is coming at the expense of wood.

Mitigating factors
Beyond pricing/raw material costs and competitive pressures (both within the category and externally), suppliers identified other issues that stand to impact hardwood’s growth. These range from global competition to changing retail dynamics right here at home.

“Imports continue to be unfairly dumped at low prices,” Natkin said, adding this is an issue primarily with engineered hardwood. “Despite the ITC actions, there is rampant circumvention and the U.S. government has failed to act on any of it.”

For Armstrong, one of the issues in the hardwood industry right now seems to be private-label imports. “At the entry level, where the growth rates are highest, most of the competitive landscape is dominated by imports, which keep margins thin,” Barnett said.

Mirage’s Williams also expects to see an increase in imports as well as additional pressure from “look-alike products” from other categories. But he also thinks home centers and large retailers are getting bigger and taking market share from the smaller independents. “Private-label programs also continue to take market share.”

Outlook for remainder of 2017
Despite these pressures, many suppliers are optimistic hardwood will continue to hold its own as a category. They cite, among other things, continued investment in manufacturing and innovation as well as strong demand among consumers and end users.

“The housing market will continue to strengthen, although single-family starts and completions remain more than 20% lower than the historical average,” said Neil Poland, president Mullican Flooring. He expects to see growth in the 4%-5% range for 2017. “Engineered flooring will lead this growth as housing grows more rapidly in Sun Belt markets.”

Others are more bullish with their projections. “We are confident that—if interest rates remain constant and the U.S. economy continues to be positive—growth will be in the 6% to 10% range,” Wickham Hardwood’s Rezuke said. “Our opportunities will derive from our increased expansion in the U.S. market, along with successful implementation of new products.”

Shaw also expects to see growth in the 6%-8% range for 2017, based on trends it is seeing in the new home construction market. “We will continue to outpace the growth of the flooring market,” said Drew Hash, vice president, hard surfaces. “Our wide breadth of categories and consistent standard of quality supports that outlook.”