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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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HLC Summit: Change comes fast for ‘nimble giant’ Haines

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

By Ken Ryan

Charlotte, N.C.—Change may be inevitable, but the pace of change occurring at Haines in the past two years—all aimed at delivering a strong, stable, scalable and sustainable platform to the flooring market—has been downright dizzying at times.

As Michael Barrett, president and CEO, told FCNews, “If you are standing on the sidelines, you can’t make sense of all the changes. What we’re going through is complicated, complex—a [range] of complexities. We’re waging war on complexity. It’s a challenge, but it’s all about improving the customer experience.”

The April 8-10 meeting—technically the Northern Summit—was held in Charlotte, the southernmost point for this show in the distributor’s history. Charlotte was symbolic for a few reasons: Haines’ market presence is running deeper in the Carolinas; Charlotte is near to its spanking new main distribution center; and Charlotte is also home of the NASCAR Hall of Fame. So it was appropriate that Rusty Wallace, former driver and NASCAR Hall of Famer, was the keynote speaker.

As both Wallace and Greg Vale, senior vice president of sales for Haines, pointed out, there are similarities between NASCAR and Haines’ trajectory. Both organizations have evolved from their roots; NASCAR’s history dates to Prohibition when runners—people who delivered moonshine—souped up their cars so they could outrun the feds, to today’s aerodynamic and technical marvels. Haines has evolved from a Maryland-based distributor serving the Mid-Atlantic to the largest wholesaler in flooring, with revenue double the size of the No. 2 player and a footprint the length of the East Coast. “We are evolving and our ability to adapt has helped our customers adapt,” Vale said.

The newest piece to Haines’ growing business is the Concord hub, which replaced the old CMH Wadesboro, N.C., as the central station for products. The 500,000-square-foot facility can store 250 trailers and has 33,000 primary storage locations. Haines’ ultimate goal is to provide next-day delivery to any customer in its network. Currently, next-day delivery is at 85%. As Barrett explained, “A lot of distributors can offer next-day delivery but in small increments. We want to do it across 15 states. Nobody else can do what we can do given our portfolio size.”

Barrett took over as president and CEO of Haines about 15 months ago. He is one of several new or elevated members of the executive team who are tasked with transforming a $500-million distributor into a nimbler giant. “We have to go faster, and our team has embraced that. We’re focusing on customer facing improvements, better inventory planning. Our technology is aimed at improving customer-focused systems. We’re looking at the bottlenecks in our processes to make it easier to do business with us. We want to be the best at customer focus. We’re not there yet, but we feel we are further along the road now.”

In the past year, Haines has built out its executive team, brought on a finance/supply chain analytics team and an HR squad to improve effectiveness of people in the organization. It also has a new IT staff to help manage the business.

On the transportation side, Haines has completed phase two of its optimization, which is to have JB Hunt handle outbound delivery.

There were also external moves. Late in 2017, Haines formed a strategic alliance with top-5 distributor Belknap-White Group. Belknap became a minority stakeholder in a collaborative arrangement that will open doors for both companies. In early 2018, Haines executed an agreement with long-time supplier Armstrong to expand distribution coverage in the South and East.

“This business is transforming with lots of changes in the past year and more to come,” Barrett said. “Some moves are necessary to become more scalable and sustainable.”

Long-time Haines Loyalty Club retailers were supportive of the moves. “Haines has made some good decisions over the last several years,” said Ryan Commerce, owner of Indoor City, a Lancaster, Pa., flooring dealer, who has been with club since the beginning. “When you double in size following the CMH acquisition, you are going to struggle to combine those resources. I think they have cleared those hurdles and are on the other side of that. The mass and scale they have will provide value for everybody up and down the chain.”

For other dealers, it is about the bottom line. “I couldn’t ask for more from this group,” said Rob Smith, owner of RPS Carpet & Floors Wholesale, Baltimore. “Last year we were up 20% and I get great backing from their reps who support my business very well.”

Bill Zeigler, co-owner of Charles F. Zeigler & Sons, Hanover, Pa., added, “Considering the low cost, benefits and huge portfolio of products offered by Haines, there isn’t any program in the industry that compares.”

Haines Loyalty Club retailers and some suppliers were happy with the news that starting in 2019, Haines will have one summit. It will be held March 14-15 in Savannah, Ga. In the past, Haines has held a Northern Summit (usually near Baltimore-Washington) and a Southern Summit in Orlando. The Savannah summit will be held at the Westin Savannah Harbor Golf Resort & Spa and is positioned as a destination with more entertainment added. “I think that is a really a smart move, a great idea,” Commerce said of the single event. “Hopefully it will allow them the resources to provide even more for their members.”

John Himes, president of Wood Flooring International, said that as long as the Loyalty Club members attend, he’s all for the one summit. “To get in front of their customers is the goal, so if we can do it one set-up, so much the better.”

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Haines names Barrett president, CEO; Zwicker retires

Michael Barrett
Michael Barrett

January 16/23, 2017: Volume 31, Number 16

By Ken Ryan

 

Glen Burnie, Md.—Haines, the flooring industry’s No. 1 ranked distributor, has promoted Michael Barrett from chief logistics officer to president and CEO. He replaces Bruce Zwicker, who is departing after 13 years with the company.

A Haines spokesman confirmed the moves are part of a succession plan initiated by Zwicker and the Haines board of directors.

“Our board of directors, including Bruce, see this as the right time to transition leaders and renew our focus on growth and leadership in the floor covering industry,” said Pierce Dunn, chairman. “Haines finished 2016 strong, completing the CMH integration, creating new programs for our customers and suppliers, and building a strong management team. The board and our shareholders see opportunities for Haines to continue to improve service for customers and create more value for suppliers. We are thankful for Bruce’s 13 years of service and have confidence in Mike’s continued leadership in his new role.”

Zwicker issued a statement noting that, “Being a part of Haines, working closely with our customers, our suppliers and our dedicated employees has been a highlight of my career. I am proud of what we have accomplished together and see a bright future for Haines and its extended family of customers and suppliers. I have no doubt Mike and the Haines team will be successful in finding new and better ways to serve our industry.”

Barrett joined Haines in February 2015 to lead all Haines operations, including the company’s customer service, purchasing, warehouse and fleet operations. He has worked with teams across Haines making several operational improvements, including inventory optimization. Prior to Haines, his career included successive leadership positions running operations and customer service at QVC, Dollar Tree, Fingerhut, CVS and Sonoco Products Co.

“Haines has a proud, long-standing tradition of service.” Barrett said. “We remain dedicated to delivering the best products and services by connecting customers with reliable suppliers and employees with great careers. I am honored to lead Haines in continuing to serve our tight-knit community.”

The switch at the top is the latest in a year of executive change at Haines. Back in March the distributor announced the restructuring of its management team to prepare for the future. The move entailed the promotion of 16 individuals. That announcement followed the departure of long-time executives Scott Roy and Rosana Chaidez, each of whom left to become CEOs elsewhere.

More recently, Haines appointed Chris Pratt to chief sales and marketing officer (FCNews, Jan. 2/9). In the same announcement, the company noted Hoy Lanning, who served as chief sales and marketing officer for the CMH division, would be retiring as of Jan. 1, 2018.