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Top 20 distributors: Wholesalers navigate through rapid changes and challenges

October 28/November 4, 2019: Volume 35, Issue 9

By Ken Ryan

Changes are occurring in the flooring distribution industry faster than ever, and wholesalers are running hard just to keep pace. Two years ago, rigid core did not exist in the marketplace to any great degree. Today, it is the most dominant subsegment of the LVT category and is growing at more than 30%—in the process taking market share from every other flooring segment and even cannibalizing other areas of the resilient category.

While the stratospheric growth of SPC and WPC has created buzz in the market, it has also cut into profits for distributors even as top-line revenue inches higher. As hardwood has become slightly less in demand among end users relative to competing look-alike categories—both at the retail and builder levels—it is suppressing profits since WPC and rigid core flooring is generally less expensive than hardwood on a square-foot basis. Throw in a 25% tariff into the mix and you have a recipe for angst among wholesalers.

“Extreme downward pricing pressure in the waterproof categories is making 2019 a tough year,” said Allen Gage, president of top 20 distributor Tri-West, Santa Fe Springs, Calif., echoing a sentiment shared by many of his brethren. “Hardwood and vinyl sheet goods have been significantly affected by the LVT and waterproof categories. It is very hard to produce the same gross profit dollars when selling a product for half the price. LVT will continue to grow; however, a wholesaler of any size had better have its costs in line, or it will be difficult to make a profit in the foreseeable future.”

After a rather stellar 2018, during which the majority of wholesalers posted mid-single-digit increases (and higher) 2019 has hit a snag. A few top 20 distributors are reporting down years compared with 2018 while others are calling for lower-than-expected gains. Jeff Hamar, president of Santa Fe Springs, Calif.-based Galleher, a top 5 distributor, observed that the flooring industry has essentially “dipped into recessionary territory” during the second and third quarters. “I don’t think this year turned out to be the year anyone expected. In two short years there has been a fundamental change in the flooring industry. You’re having to do a lot more work for marginal increases in top-line revenue while all your other costs are going up.”

The broad consensus among distributors is unit volume has clearly outpaced sales in 2019. “Like most other distributors, we’re seeing a low-single-digit increase in sales dollars but a significant increase in units,” said Bill Schollmeyer, president of Gilford-Johnson Flooring. “We’re strong in the LVT and rigid core categories, and while the square footage sold continues to grow, it has put downward pressure on our top-line sales numbers.”

Geopolitical issues and economic uncertainty exacerbated by tariffs has contributed to the general softness in 2019, executives say. “Tariffs and perceived instability [in the market] have added challenges to business on top of a stretch of several years of significant growth,” said Jud Hurt, president of Ohio Valley Flooring, Cincinnati. “The growth of vinyl plank—a fraction of the cost of wood and ceramic—has made an impact as well.”

Tariffs—a thorny issue

A year ago, distributors were fearful that a 25% tariff would be a big deal, perhaps a game changer that would stifle the fast-growing LVT category. However, tariffs have not been the calamity once feared. It is more of a double-edge sword, as tariffs have lifted top-line revenue for distributors while at the same time made it more difficult to plan long term. “Tariffs contributed to a fair amount of confusion and uncertainty earlier in the year, but with the shift to Cambodia and Vietnam this is becoming less of a factor,” said Enos Farnsworth, director of distribution sales for Denver Hardwood.

Anne Funsten, president of B.R. Funsten, Manteca, Calif., thought tariffs would be a bigger deal than they have turned out to be. Her biggest issue, she noted, was a computer conversion at Funsten that led to a bumpy couple of months.

Still, it would be remiss to call tariffs a complete non-factor. Some distributors say it has impacted their business negatively. “We have had significant price increases because of tariffs and freight,” said John Sher, president of Houston-based Adleta.

Bob Weiss, CEO of Elk Grove Village, Ill.-based All-Tile, a top 5 distributor, said the ever-evolving tariff situation is difficult to harness. “With sudden changes and threats, it can be difficult to keep pace and inform everyone in a timely fashion,” he explained. “B2B is an important tool that our customers should be using as a cost-saving vehicle during these turbulent times.”

What’s perhaps most concerning for distributors is the tariffs—whether sticking at 25% or going higher or lower—is making it difficult to nearly impossible to plan and forecast over the long haul. “We are constantly looking at new product and sources as an alternative to uncertainty around the tariff challenge,” one distributor said. “It’s hard to conduct business with the fear of the unknown lurking.”

Whether the tariffs on flooring products will stick or be rolled back is a pretty big issue for distributors who carry significant inventory. In the event of a complete rollback, many would be on the hook for millions of dollars of suddenly overpriced inventory. Toward the end of 2018, some distributors stockpiled inventory in advance of a scheduled Jan. 1, 2019 increase, which was eventually postponed. One of those first movers was Steve Kleinhans, president of Phoenix-based Big D Supply. “We stockpiled six months’ worth of inventory on tariff-related products before the end of 2018. This year, we have changed sources on some of these products to other countries as our inventories depleted. We were well prepared for the tariffs and did our homework to make a smooth and successful transition.”

Product mix fluctuation

The shift from wood and ceramic to WPC and, now, rigid core has forced players to shuffle their supply chain by adding or removing some vendors or bulking up on more private-label lines. Some have ventured into new markets in search of opportunities. Gilford-Johnson, for example, entered the Carolinas with a full offering of products while realigning its sales management team to be more involved in local markets.

Glen Burnie, Md.-based Haines, the industry’s largest distributor, jettisoned several suppliers in 2019, which led to a 3% decline in sales (unit sales were up, however). “We expanded with some of our lines into additional territories, and we are also narrowing the lines we carry—which is contributing to our up-and- down movement in sales,” said Hoy Lanning, president and CEO.

Growth has been slower than anticipated at All-Tile, as one of the wholesaler’s larger suppliers eliminated many of its products. As a result, All-Tile was forced to rebuild the lost volume with new products, which “doesn’t happen overnight,” Weiss explained. “Thankfully, that was the exception, and we are very comfortable with our lineup of suppliers for now and into the future. Many of our suppliers have added additional capacities throughout the world and have reduced their exposure in China, which should be a positive going forward regardless of future tariffs.”

Last month, Somerset Hardwood partnered with All-Tile, becoming the distributor’s only U.S.-made hardwood flooring supplier. Somerset will complement non-domestic brands such as Mirage, Kahrs and Indusparquet, as well as the private-label CasaBella line.

Weiss noted that selling a balanced mix of flooring products is vital for the health of the industry. “If everyone sells the same products that are available at home centers and big box stores, consumers will not need a professional channel to buy through. It is important for retailers to promote their unique abilities that only they can provide to their communities.”

Private-label advantages

At a time when margins are increasingly squeezed, turning to proprietary brands has been a boon for many distributors. This is not a new trend but has grown in importance over the years. Hamar said those companies that planned accordingly are reaping the benefits now. In his case, roughly 75% of Galleher’s $200-million-plus revenue is derived from private goods. Its Monarch business, for example, does more than $100 million in revenue. “Decisions distributors made a decade ago are now playing out,” Hamar said. “If you embarked on a path of proprietary brands, new technology and social media back then you are probably doing OK today. But if you are just now embarking on a private-label strategy, it is probably too late.”

Industry outlook

Despite a rough middle of the year, distributors see some hopeful signs ahead, citing measurables such as improved builder confidence—which in October jumped to its highest level since February 2018—and lower mortgage interest rates. As further evidence, sales of new U.S. single-family homes rebounded more than expected in August, the latest sign that the struggling housing market was benefitting from lower mortgage rates. A few distributors said these positive signs could bode well for next spring.

On the other hand, 2020 is a presidential election year. While historically a presidential election year has provided a boost to the economy, no one is sure what to make of the next 12 months. Asked for a prediction, Funsten hedged her bets, stating: “There are just too many wild cards happening to reliably predict business in 2020.”