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Top distributors: Amidst improving economy, wholesalers keep watchful eye on tariffs, freight increases

October 29/November 5, 2018: Volume 34, Issue 10

By Ken Ryan

 

Business is good, by many accounts. So why doesn’t it feel so great? That is a sentiment shared by several top 20 flooring distributors who, despite having experienced low- to mid-single-digit revenue increases in 2017 and again in 2018, are less than exhilarated by the current business climate.

On the one hand, the economy is percolating on several fronts: There has been steady hiring; the unemployment rate is at its lowest point since 1969; and consumers—for the most part—are spending. On top of that, corporate taxes have been cut, factories are busy, demand for homes is strong and household wealth has ticked up.

Conversely, the above-mentioned numbers that collectively sketch a picture of a vibrant economy don’t reflect the reality for a range of businesses. Indeed, masked by the overall potent economy are tariffs imposed by the Trump administration and retaliation by U.S. trading partners that have begun to cause U.S. flooring concerns. Even more vexing, however, are the freight increases that have been exacerbated by raw material hikes, a worsening shortage of truckers as well as newly imposed government mandates such as electronic logging devices (ELDs) that have put a crimp on distributors’ bottom lines. (See “Freight woes” story here.)

Good, albeit not great
Most of the top 20 flooring distributors reported top-line increases in 2017, with many projecting slightly better growth in 2018 vs. 2017. Haines, the industry’s No. 1 wholesaler, was one of the exceptions—it was down 4%, mainly due to supplier losses.

Santa Fe Springs, Calif.-based Galleher, now a top five distributor, saw its business grow roughly 8% in 2018 vs. 2017, which is the company’s first below-double-digit increase in several years. As Jeff Hamar, president, explained, “Between the years 2012 and 2015, Galleher was killing it. In 2018, I would describe it as business has been good, but I wouldn’t say it is great. I don’t think it has exceeded anyone’s expectations. It has not been as good as we had expected.”

That sentiment was shared 3,000 miles away in Maryland, where Elias Wilf also posted an 8% gain in 2017, and is trending 3-4% higher in 2018, although not without a great deal of effort and resourcefulness on the part of the distributor. “There is an interesting dynamic out there,” Jeff Striegel, president, told FCNews. “I have never seen a time where business is actually OK and pretty decent, but it doesn’t feel that way. It feels way worse than it really is. If you talk to suppliers and distributors, they say everything is upside down.”

Another distributor put it this way: “We are growing, we’re up 6%. I know we are doing well. But it seems like it should be a lot better.”

Clearly, the economy is improving as reflected in the low unemployment rate, consumer confidence and other encouraging data points. However, the healthy economy has been pressured by wage increases, which has forced distributors to pay more across the board. This situation is particularly acute with respect to logistics. While distributors can control many things in their operation, they are held hostage to outside forces such as rising fuel costs, tariffs and freight.

The tariff effect
The newly enacted 10% tariffs on wood and vinyl products imported from China have not affected wholesalers to any great degree just yet because they can absorb the costs or pass it on to their customers. Most choose the latter. However, the business model will certainly change come January 2019 if a threatened 25% tariff on Chinese imports takes effect. “Ten percent won’t have that much of an impact,” Hamar said. “However, 25% changes things in a big way.”

Galleher noted that one of his key suppliers has been busy moving substantial vinyl capacity out of China to Taiwan and Vietnam—two countries not impacted by the tariffs. “Three months ago, I thought the [U.S and China] would work it out,” Hamar stated. “My sense today is—with my contacts in China—that the factories are all freaking out. I see serious talking going on before we get too entrenched in this.”

Elias Wilf’s Striegel, among others, agreed that a 25% tariff is a big deal. “Suddenly a $4.99 selling price becomes $6.49, but that 25% difference really becomes a 40% mark-up at retail after you factor in the manufacturer, distributor and retail mark-ups. Tariffs could be a boon for domestic products like Quick-Step and some Armstrong stuff. We’ll see how that plays out.”

Even before the tariffs were implemented, onshoring was taking hold in the U.S. as larger flooring manufacturers have been purchasing equipment for the purposes of making LVT-related products domestically. In the last six months, for instance, Mannington has moved all of its residential LVT to the U.S., according to Striegel, who opined, “You may even start to see Chinese manufacturers opening facilities in the U.S. if the tariffs play out for an extended period.”

While some executives brush off the tariffs as being more annoyance than anything else, others see cause for longer-term concern. “The tariffs are causing us to look at our product lines [more closely], and we will have to look to our manufacturers to move some products to countries that are not tariff affected,” said John Sher, president of Adleta, a top 20 player based in Carrollton, Texas. “The big problem here is we have no idea which [product/country] Trump might want to impose tariffs on, so it’s unpredictable.”

Anne Funsten, president of B.R. Funsten, Manteca, Calif., said her company is trying to “manage around” the tariffs. In the meantime, she can’t say what the ultimate answer will be. “In some product categories we will gain, while others we will lose. I think the whole thing could have been better handled. It has been ill conceived.”

The tariffs are coming at a time of increased transportation costs and a tightening labor market that has made it difficult to find qualified installers as well as truckers. It is what Pat Thies, vice president of sales and marketing for Eagan, Minn,-based Herregan Distributors called “the perfect storm.”

Private-label opportunities
Private label as a percentage of business has been growing among the industry’s top 20 wholesalers for several years as proprietary brands allow distributors to focus on the most appropriate products for their local markets.

To that end, Galleher is among the most ambitious when it comes to private label as it has forged a successful and profitable strategy since 2012 when it launched its Monarch line of 100% engineered wood. From that seedling Monarch has risen to become a nearly $50 million business for Galleher; the line sells for $6 a square foot in northern and southern California, areas where hardwood flooring is still king. Reward, another private line featuring wood and rigid core LVT, does roughly $40 million.

Combined, Monarch and Reward generate roughly $90 million of Galleher’s $100 million private-label business, which has vaulted the distributor several spots in the top 20 in recent years. “You have to be in private label if you want to have any sense of margin control,” Hamar explained. “The downside is it is very expensive. It takes a massive amount of inventory, and there are long lead times. The middle tier distributor will have a very tough time [with a private label strategy].”

That sentiment was shared by Scott Rozmus, president and CEO of FlorStar Sales, Romeoville, Ill., who said that setting up and maintaining a private-label business is costly for a wholesaler and can hurt its bottom line. “In terms of profit margins, it is not always the case that a private label line is more profitable. Folks talk about margins, but there are enormous costs involved in setting up and running a private-label line that are not borne by the distributor in the case of branded lines. So, those costs—100% of the marketing, expanded logistics, sampling and so forth—need to be covered.”

For those who can pull it off, private label is a worthwhile endeavor. Denver Hardwood, for one, credits its growth in sales and market share as being directly related to its private-label program. “We experienced a slight growth in business and stronger market share with our private label,” said Enos Farnsworth, director of distribution sales. “While 2018 started a little slow, we are having a very strong third quarter and anticipate another year with a slight increase.”

T&L Distributing, Houston, is another proponent of private label, according to Scott Carson, director of products and marketing. “Without a doubt private label is growing and extremely important. These programs allow you to carry products that your local market wants and dictates. If we have to make multiple introductions in a year we can do that and move with the business thanks to our private program.”