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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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Quick-Step throws hat into luxury vinyl flooring ring

Quick-Step LVF Silver Lining Oak, HiBy Ken Ryan

Quick-Step, the Mohawk brand that made a name for itself first in laminate and later in hardwood through its Q-Wood collection, announced its entry into the crowded—albeit still-fast-growing—luxury vinyl flooring segment.

Quick-Step is in the process of launching 16 SKUs nationwide through specialty flooring stores in August and September. Quick-Step said it is combining “innovation with art” in creating what it calls “a new kind” of luxury vinyl flooring.

“Quick-Step is a well-established and highly respected brand name in the flooring industry,” said Roger Farabee, senior vice president of laminate and

hardwood products for Mohawk Laminate & Hardwood, North America. “Retailers know that the Quick-Step name symbolizes products offering cutting-edge innovations, the industry’s best designs, consistent quality, and excellent customer service/product availability—all at an attractive price.

Quick-Step said its new offerings would be “waterproof,” not “water resistant” like many other LVT products on the market. According to the company, in controlled lab testing, Quick-Step LVF products were submerged underwater for three weeks and had less than 0.5 grams water gain, whereas competitors’ products experienced 7 grams of water gain and noticeable warping under the same conditions.

The waterproof angle is just one marketing advantage Quick-Step is touting with its new luxury vinyl flooring introduction. Farabee said the company’s luxury vinyl flooring overcomes “the number one challenge experienced by other LFV floors on the market today,” namely susceptibility to temperature extremes that can cause some luxury vinyl floors to expand and contract in direct sunlight resulting in waving, curling and gapping.

Quick-Step’s luxury vinyl floors are said to resist heat and sunlight. “The dimensional stability designed into Quick-Step’s luxury vinyl floors keeps them stable up to 110 degrees Fahrenheit and as low as 32 degrees Fahrenheit, so Quick-Step floors won’t warp or gap like many other vinyl floors,” said Jurgen Goessens, product director of luxury vinyl flooring for Mohawk Laminate & Hardwood, North America. “Our floors are a great choice for homes with windows that allow constant sun exposure.”

Another critical advantage that Quick-Step is marketing is a so-called “flat” production process as opposed to a “rolled” process employed by some other manufacturers. Farabee asserted that Quick-Step’s flat production “does not break the proprietary fiberglass layer, resulting in a finished product that ‘wants to lay flat’ once installed, unlike competitor floors that ‘want to curl up’ on the edges.”

Quick-Step’s 16 SKU line features only in-house developed decors to ensure unique, proprietary designs, with no variation from product run to product run, and a low repeat pattern of 10 planks per design.

An industry executive who has seen the Quick-Step product believe the company will have success despite a plethora of entrants already entrenched in the market. “The category is certainly feeling some congestion with multiple players, but in a world of sameness, in which 20 people offer the same stuff, there is always room for someone like Quick-Step to be the innovator,” said Jeff Striegel, president of top 20 distributor Elias Wilf, which will carry the Quick-Step product.

Striegel said the Quick-Step foray into a packed field reminds him of the time Mannington entered a saturated laminate market and yet succeeded with truly innovative offerings.

He noted that Quick-Step is already a step ahead of many LVT players with its heat-tested product that can be installed in direct sunlight. “There is a difference to the Quick-Step product right out of the gate, and then you add the expertise they have on the bevel and that you can install horizontally, vertically, or on an angle, and you already have a recipe for success. You peel back this onion and you see layer upon layer of differentiation.”

 

 

 

 

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No stopping resilient's momentum

In a black universe, vinyl is the shining star. That was the assessment of Elias Wilf president Jeff Striegel, who like many of his brethren sees resilient products as the beacon of light amid the darkness. In recent years, many of the leading flooring distributors have increased their percentage of resilient offerings, from the high single digits to low double-digits. Continue reading No stopping resilient's momentum