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Eye on inflation: Flooring industry meets economic threats head on

June 11/18, 2018: Volume 33, Issue 26

By Ken Ryan

 

The flooring industry is operating amidst significant inflationary pressures, the likes of which haven’t been experienced since the end of the Great Recession. In fact, the U.S. Bureau of Labor Statistics reported in June that inflation climbed 2.8% in the last 12 months to its highest level in six years.

Inflation impacts all industries, including flooring, which is heavily dependent on raw materials and transportation—both of which have endured substantial cost increases.

“Inflation is a real business challenge that is facing Mohawk and many other industries today,” said Brian Carson, president, Mohawk Flooring N.A. “We hear about it in the newspapers, on TV, everywhere. We see it in our personal lives when we go to the store, the restaurant and even the gas station. The good news is our economy has strengthened over the past few years, but that strength has created constraints in many areas of our businesses—from lumber and petrochemical materials in our products, to transportation and labor to produce and deliver them.”

In response, suppliers across the board are announcing significant price increases in products. Others along the supply chain have acted in kind, passing along cost increases to their end users. At the same time, companies are working to maximize efficiencies to better withstand an inflationary period that some believe will be the new norm.

“If you have only been in business since 2006, you haven’t seen inflation—we have been in a deflationary period,” said Tim Baucom, executive vice president of the residential division of Shaw Floors. “Since the Great Recession we’re feeling legitimate inflationary pressures for the first time. Going forward, we have to manage and lead with an inflationary mindset rather than a deflationary mindset, because we are moving toward a period like in the early ’80s where even if you are making significant improvements in product, you will have to raise prices to maintain profitability, so you can reinvest in your business; otherwise, you will fall behind.”

Like other manufacturers, Armstrong Flooring has implemented price increases and surcharges in cases where it can no longer absorb the effects of inflation. According to Steve McLean, director, global procurement, the company is proactively working to manage the impact of inflation primarily in lumber, resilient raw materials and transportation costs. “We consistently monitor basic energy, petrochemical feedstocks, key raw material markets and macro-economic indicators globally to understand pricing trends. This enables us to identify risks and opportunities in the market. Our efforts include negotiating with suppliers, particularly where prices are not warranted by market dynamics. We also leverage the extensive global supply base we’ve built up over decades to give us flexibility in sourcing.”

Distributors in the middle

Flooring wholesalers feel the pain of inflation as acutely as any member of the supply chain, as they have faced steady margin erosion even while looking internally to control costs. The consensus among several of the top 20 flooring distributors is the consumer of any goods or services should bear the cost of inflation. Accordingly, wholesalers typically pass along a portion of their increased input costs to the channel, much as their various suppliers do as well.

Raising prices or kicking the inflationary can down the road is not enough, however. At the same time, both distributors and their channel partners are working together to drive efficiencies. That’s according to Scott Rozmus, CEO of FlorStar Sales, a top 20 wholesaler based in Romeoville, Ill. Whether it involves finding lighter-weight (but still protective) packaging, reviewing and optimizing delivery routes, introducing additional technology to improve the speed and accuracy of order entry, or otherwise simplifying the business process, he believes any activity that reduces cost provides an opportunity to pass less along. “While we certainly are committed to such efficiencies, at the end of the day much of inflationary supply chain pressure has to get passed along to that end consumer of the goods or services.”

As with others, Haines has certainly dealt with cost increases, particularly in the transportation arena where ELD (electronic logging devices) mandates have caused a significant contraction of capacity. The industry’s largest wholesaler has worked over the past three years to find ways around what was then a projected increase in costs.

“As this forecast has become reality, these plans are helping us,” said Michael Barrett, president and CEO, Haines, Glen Burnie, Md. “We have worked to engage companies such as JB Hunt and CH Robinson to assist us contractually to ensure our costs are kept under control. On the delivery side, we have a multi-year contract with moderate escalators that has aided us in managing through the cost component of transportation. Companies like Hunt also have much greater capability to ensure our driver pool is maintained through their capabilities in sourcing and hiring drivers. The one variable that does affect us and others is fuel. As fuel continues to rise, we will have to address the cost impact of this charge. On the inbound freight side, the positive impact that CH Robinson provides is the ability to find capacity needed to move freight. We are seeing costs escalate here as well and we continue to monitor to ensure we can achieve our goals.”

Both of these approaches are within Haines’ business model. What is somewhat out of its control is manufacturer price increases. As Barrett explained, “[Manufacturers] are balancing all the transportation cost issues but are feeling pressure on energy costs to run factories as well as raw material cost increases. In these cases where price increases are happening, we are having to pass them through. We continue to look for ways to keep our costs under control, so we can minimize any internal need to raise fees or other costs. We will maintain that approach for the foreseeable future.”

To a large degree, increases in raw materials and transportation costs are part and parcel of doing business in any industry, flooring included. What’s different now as opposed to, say, six years ago is the pace of inflationary pressure, executives say.

Several distributors began working on inflationary strategies long before inflation began creeping into the picture. Madison, Wis.-based Jaeckle Distributing, for example, has had a fuel surcharge in place for many years to help cover the fluctuations in costs that can’t always be addressed through constant price revisions. That helps keep things more stable so the company doesn’t have to reissue standard pricing as frequently. “That said, price changes are happening more frequently these days, and it can be a challenge to stay on top of things and keep all pricing updated,” said Torrey Jaeckle, vice president. “We’ve had one vendor who has increased prices three times already this year. Given the fact that product might only be ordered by a customer once a month or so, it can be confusing for customers to be getting billed different prices on every subsequent order. It also creates issues for distribution and retailers who might bid a job several months in advance only to find costs have changed significantly once the order actually comes through.”

What’s more, he added, vendors seem to be giving less notice on price increases now, which gives distributors less time to implement the increases, which means they are absorbing some increases at least for a short period of time until they can work through the logistics of implementing it on their end. “In addition, pricing has become much more complex over the past several years, which increases the time to implementation,” Jaeckle said. “Many prices are now negotiated between the retailer, distributor and manufacturer, and when prices change trying to get all three of us on the same page with regards to new pricing going forward can be a challenge and time consuming.”

Adleta, a top 20 wholesaler in Carrollton, Texas, has absorbed as much as it could, according to John Sher, president. For the first time in years it has been forced to increase its delivery costs. “However, our one-charge drop fee is still a tremendous value,” Sher explained. “Our customers have told us the consistent Adleta delivery on our trucks with Adleta-employed drivers trained to handle flooring products is one of the value adds we bring.”

Exacerbating the inflationary pressures in 2018 are increases in labor—both in hiring and retaining—insurance premiums and fuel costs. “Workers costs have gone up; entry-level costs have gone up substantially in the last three to five years but really in the last year,” said Jeff Striegel, president of Elias Wilf, a top 20 distributor based in Owings Mills, Md. “The fact is labor, insurance and fuel all continue to rise. This time it’s for real.”

Given the tight labor market, several manufacturers say they have been forced to pay bonuses for new hires and to retain quality employees.

Retailers react

To no one’s surprise, flooring dealers say they are experiencing the same pressures as everyone else. Strategies to combat the inflation differ somewhat, however. Nick Freadreacea, president of The Flooring Gallery, Louisville, Ky., said some material costs can be caught upfront and passed on in some cases or not at all. “Retail prices are usually easily adjusted, but builder/multifamily can be hard to change more than once a year,” he said. “Freight and fuel surcharges are those hidden cost that are harder to recover, and those items really eat into the bottom line of a company.”

Adam Joss, co-owner of The Vertical Connection Carpet One, Columbia, Md., said inflationary pressures haven’t negatively impacted his business since the increases get passed on to the consumer anyway. “Personally, I think there’s more to it than just labor shortages and raw material costs—it’s also a result of years of consolidation.”

In talking to many of its dealer partners, Mohawk’s Carson said he knows they have seen inflation in their costs as well—things like installation labor and rents. “At Mohawk, we are constantly investing in our plants to innovate new products, but also to innovate our processes to drive efficiencies and lower our costs and to do our best to offset inflation. Despite these efforts, sometimes the input costs rise to a degree where we have no alternative but to pass them along. I know that’s difficult, but it’s a reality in today’s markets. I think these pressures of additional inflation will be with us for a while.”

Keeping its plants financially healthy is the fuel that allows for continued investment in new products, new capacities, new services and new efficiencies, Carson added. “These investments in innovation are vital to all our businesses whether the dealer, the distributor or the manufacturer. Mohawk will always be committed to continuous innovation.”

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Dealers report mixed reviews for first quarter

April 16/23, 2018: Volume 33, Issue 22

By Ken Ryan

 

The first 100 days of 2018 have yielded some uneven performances for flooring retailers and distributors, with most reporting a slow start in January and February followed by some improvement in March/early April. Still, the prevailing sentiment is that, to date, 2018 has been an underachiever, saddled by late winter weather woes in the East and Midwest along with burgeoning inflationary pressures.

Cathy Buchanan, owner of Independent Carpet One Floor & Home, Westland, Mich., didn’t mince words when asked to assess the first 100 days. “I wish you wouldn’t have to bring up the past when it comes to the first three months of 2018 because they were horrible,” she told FCNews. “I haven’t seen numbers down like this in at least four years. We didn’t make our mark. For January through April 10 we are down 12.7% in written sales. Thank goodness for our delivered sales.”

Buchanan would not use weather conditions as an excuse, either. While acknowledging that it does play a part, she noted it will play a completely different role once the weather breaks. “People will be focusing on their yards and enjoying warm weather. It’s a catch-22 with the weather. I have to think positively, but that is a hard thing to do because we are heading into the summer months when traffic is typically down. I can’t explain this phenomenon; it doesn’t make sense. Retail is struggling and maybe it is due to e-commerce purchases.”

Flooring retail continues to be a roller coaster business month to month, and regional differences play a role. For example, in San Antonio, Atlas Floors Carpet One got off to a rough start before things started to turn around, according to Billy Mahone III, manager. “Overall business has been up the first 100 days, but it is interesting how we got there.” January and February were slower than normal, he noted, but business has been booming since. “We are expecting business to be steady through the rest of 2018, resulting in a moderate, single-digit increase over last year.”

It was also a slow start for The Vertical Connection Carpet One in Columbia, Md., which experienced a lighter-than-normal January. “Since then, business has picked up nicely,” said Adam Joss, co-owner. “We’re pushing full steam ahead; we’re pacing for a record year. At some point, business will turn. However, we don’t see any signs yet.”

A year ago, weather in the mountains out West was brutal with record snow. Not so much this year, and the results proved favorable to dealers like Dillabaugh’s Flooring America in Boise, Idaho. “The first quarter was eerily manageable,” said Casey Dillabaugh, owner. “The mild winter of 2018 has made our ability to fulfill the needs of both residential and commercial contractors at the same time as our retail work.”

Similar to their retail brethren, distributors reported some mixed results. For example, Scott Rozmus, CEO of FlorStar Sales, a top-20 distributor based in Romeoville, Ill., said the first 100 days of 2018 were a little slow vs. 2017. However, he noted 2017 was particularly strong by comparison. “In talking with our clients, weather across the Midwest impacted business in parts of February and March, which usually are fairly busy months. January was OK, but folks were slower later in the quarter.”

Jeffersonville, Ind.-based Gilford-Johnson Flooring, another top-20 wholesaler, finished the first quarter very close to its budgeted goal. However, as it entered the second quarter, call volume and sales were slower than last year. “But I remain very positive, especially now that the Mastercraft acquisition in Florida has been integrated into Gilford-Johnson and the Florida team is fully trained on all of our product offerings,” said Dennis Cook, president and CEO.

Inflation concerns

Industry observers have seen consumers trading down from higher-priced products like wood into LVT and WPC during the first 100 days. The result: Dealers are closing sales, but the ticket might be smaller. Then there is the issue of inflation, which is beginning to rear its ugly head.

“Over the next year it appears evident we will see some significant inflation,” FlorStar’s Rozmus predicted. “Suppliers across the board are announcing significant increases. Many cost inputs are increasing substantially, whether in raw materials, such as plasticizers, or in transportation costs—not just freight per se, but additional costs due to newer regulations, driver scarcity, etc. Many people in the channel have limited experience managing in an inflationary environment. The consumer or end user ultimately needs to bear the cost of inflation but getting there sometimes is easier said than done.”

For Bob Weiss, CEO of All Tile/Carpet Cushions & Supplies, in Wood Dale, Ill., the first 100 days has been more about managing a new location. “We just moved into our new corporate facility in Wood Dale, so the excitement of the combined operations has permeated the first 100 days,” he said.

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Rising transport costs take their toll on distributors

March 19/26, 2018: Volume 33, Issue 20

By Ken Ryan

New government regulations have exacerbated the ongoing trucker shortage in the U.S., resulting in higher inbound freight costs for flooring distributors that could spread across the entire supply chain.

The problem is twofold: More than 70% of the goods Americans consume are carried on the nation’s highways, but a new report says the industry needs to hire roughly 90,000 new truckers each year to keep up with demand. At the same time, new government regulations—including implementation of the electronic logging device (ELD) mandate—are forcing some smaller trucking firms and individuals out of business, thereby worsening the shortage and creating problems like product shortages and delivery delays.

Observers say there is no reason to think the labor situation in the trucking industry should get better any time soon. In the short term, truckers must switch from logging their hours on paper to doing it electronically by April 1or face penalties; drivers will no longer be able to fudge their hours on paper to stay on the road longer.

“There has been a shortage of truckers for quite a while,” said Bob Weiss, CEO of All-Tile/Carpets Cushions & Supplies, a top five flooring distributor based in Elk Grove Village, Ill. “What is compounding the problem are new regulations that are tighter.”

Scott Rozmus, president and CEO of FlorStar Sales, a top 20 wholesaler based in Romeoville, Ill., said the biggest issues they are facing are delays and the difficulty of finding available, reliable carriers. “Obviously, costs are going up, too, but ultimately the consumer will need to bear those costs.”

Other distributors are feeling the impact as well. Carrollton, Texas-based Adleta, another top 20 flooring distributor, had to go out and hire additional drivers because of the shortage. “It’s no easy feat to find a driver with a clean and safe driving record,” said John Sher, president. “[As a result], all inbound freight has gone up dramatically. While we have been absorbing this, we will have no choice but to pass this on.”

The improving economy is adding to the problem. The reason: as more goods are shipped, more drivers are needed. It’s classic supply and demand economics. “There will be increased costs moving forward as the new cost structure realities begin to show themselves,” Weiss explained.

At issue is the ELD mandate, a federal rule that took effect Dec. 18, 2017 which requires trucking companies to record their hours of service on ELDs (devices that synchronize with a vehicle engine to automatically record driving time for more accurate hours of service recording). With ELD implementation, any delays at docks or warehouses will result in higher transportation costs for the shipper, according to transportation officials.

Jaeckle Distributors, Madison, Wis., has been operating with electronic logs since 2008, so the new ELD mandate hasn’t impacted the way it operates. However, it has impacted other carriers it works with and has added another layer of complexity for carriers who are new to it.

“We have not seen a significant rise in LTL [less than truck load] costs; however, I am seeing a decline in the overall service quality we’re experiencing with other carriers,” said Bill Simonson, vice president of operations. “We are finding increased damage and more occurrences of freight not being picked up. That is either due to lack of experience, shortness of drivers, or lack of hours available to drive.

“And, of course, you are dealing with a good economy, rising volumes and fewer drivers to move the freight. We’ve been adding drivers to our staff and we’re more confident with our ability to control quality in this environment than we are with some of the third-party carriers out there.”

Jeff Striegel, president of Elias Wilf, a top 20 distributor from Owings Mills, Md., said the implementation of electronic logs has prompted a tangible percentage of the smaller independent trucking companies to exit the business. “Losing 10%-12% is a dent in the overall capacity, which was strained to begin with,” he explained. “A lot of the drivers I am around have gotten older and they are not willing to spend the money [required of the electronic logs] into one truck; it has really shut down a portion of the trucking capacity, and there wasn’t an abundance to begin with.”

The American Trucking Association reports the industry has struggled with a driver shortage for the past 15 years. During the Great Recession, freight volumes dropped, allowing the industry to meet demand with fewer drivers. But when volumes recovered in 2011, the driver shortage became a problem again, the ATA found.

According to a study conducted by DAT Solutions, just one truck was available for every 12 loads needing to be shipped at the start of 2018—that’s the lowest ratio since 2005.

Striegel, as well as others, predicts the situation could get worse. “Hiring a driver is the hardest position to fill. Between [the government] closing loopholes and the new restrictions in place, it has put constraints on my existing fleet.”

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NAFCD: Mood, attendance on the rise as business rebounds

Speakers, revamped structure lend to event success

Nov. 18/25 2013, Volume 27/number 15

By Jenna Lippin

Screen Shot 2013-11-25 at 11.04.42 AMChicago—The mood through-out the 2013 annual convention of the North American Association of Floor Covering Distributors (NAFCD) + North American Building Materials Distribution Association (NBMDA) held here Nov. 12-14 represented a new phase of the flooring industry, one that many members have been awaiting. Optimism is spreading, business is better and as one attendee said, “These things are fun again.” Continue reading NAFCD: Mood, attendance on the rise as business rebounds

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Distribution: Resilient

Why LVT is today’s flooring sensation

By Ken Ryan

Oct. 21/28 2013; Volume 27/number 13

Luxury vinyl tile (LVT) isn’t merely the shining star in the resilient category—it may just be the best all-around product the flooring industry provides its customers, according to some distributors who continue to grow their businesses on the back of LVT offerings.

“First off, it is a visually stunning product,” said Jeff Striegel, president of Elias Wilf. “You cannot tell the difference between LVT and wood, the visuals are that amazing. And the performance…I don’t think there is a better product out there in the market than LVT.” Continue reading Distribution: Resilient

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FCNews’ annual top 20 flooring distributors

 Distributors emerging from economic stronger, more relevant than ever

By Ken Ryan

Oct. 21/28 2013; Volume 27/number 13

Screen Shot 2013-10-25 at 4.47.45 PMDistributors. They are the backbone of the industry, the group on which manufacturers rely for moving their products to the point of sale. It is a segment that faces as many challenges as any and works on razor-thin margins.

Still, the good ones have not only succeeded but thrived. In fact, most project growth of 5% to 15% in 2013, driven in part by a housing comeback, both remodeling and new construction.

FCNews’ annual top 20 distributor listing not only looks at the industry’s leaders but also reveals the 10 highest-volume wholesalers in the resilient, wood and laminate categories. In most cases, the information was obtained from the respective high-level executives. Continue reading FCNews’ annual top 20 flooring distributors

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NAFCD elects 2013 board

ORLANDO, FLA.—The North American Association of Floor Covering Distributors (NAFCD) has announced its 2013 slate of executive officers and directors.

Executive officers appointed for 2013 include incoming president, George Roth of Lockwood Flooring; vice president, Craig Folven of Herrigan Distributors; secretary, Rosana Chaidez of J.J. Haines, and treasurer, Chris O’Connor of CMH Space Flooring. Continue reading NAFCD elects 2013 board

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NAFCD announces 2013 officers and board members

Chicago– The North American Association of Floor Covering Distributors (NAFCD) announced its 2013 slate of executive officers and directors at the 2013 NAFCD Annual Member Business Meeting during the 2013 NAFCD Annual Convention and Executive Networking Forum, in Orlando, Fla., November 13-15.

Executive officers appointed for 2013 include: Continue reading NAFCD announces 2013 officers and board members

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Value in the form of merchandising

By Emily J. Cappiello

Although some companies choose to sidestep distribution, the segment has proven itself as one of the most important components of the supply chain. Not only do distributors take manufacturers’ products from point A to point B, they also bring an extra line of credit; technological help; rebates and product savings; knowledgeable representatives; sales, and can even help businesses build websites. Continue reading Value in the form of merchandising

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Distributors tighten credit standards; stay committed to supporting retailers

By K.J. Quinn

The job of a flooring wholesaler has never been easy, and today is vastly more complex than it was several years ago. While distributors have essentially morphed from selling agents to service companies, one critical core function which remains constant is serving as a source of credit for customers to help finance their businesses.

“Well-capitalized wholesalers provide an often overlooked or underappreciated service to the channel,” said Scott Rozmus, president, FlorStar Sales, Romeoville, Ill., and a member of the North American Association of Floor Covering Distributors’ (NAFCD) board of directors. “They help the engine go.” Continue reading Distributors tighten credit standards; stay committed to supporting retailers