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Top distributors: New home construction, LVT/WPC surge help flooring wholesalers cope with slow economy

October 24/31, 2016: Volume 31, Number 10
By Ken Ryan

screen-shot-2016-10-31-at-11-46-41-amSlow and steady may win the race but many flooring distributors are frustrated by the pace of the economic recovery that continues to trudge along with growth in the low single digits.

Not every market in the U.S. is stagnant. California, particularly the San Francisco/San Jose market, is very strong, executives say. However, there are other regions that lack robust growth for various reasons. Take Florida, for example. “With the large population of retirees on fixed incomes in our state, and the concern regarding the election, people are not spending their money on big-ticket items like flooring,” said Buddy Faircloth, president of Cain & Bultman, Jacksonville, Fla., which covers all of the Sunshine State and parts of Georgia.

What many executives are experiencing is uneven and unpredictable growth, with not much consistency between months or by quarter. “Last year I said it was going to be OK, but disappointing; you could probably replay my notes from last year for this year,” said Bruce Zwicker, CEO of Glen Burnie, Md.-based Haines, the industry’s leading flooring distributor. “Last year the market grew about 3%-4% and we were all hoping for 5%. The last three years it has been less than 5%; 2013 was up 7% and it was the last year of good growth. This year it’s about 2%-3% growth. The first quarter was very strong—above 4% but still less than 5%, but we were happy. The second quarter was not as strong.”

On the West Coast, Jeff Hamar, president of Galleher, Santa Fe Springs, Calif., said his business has been growing briskly for the past few years, but he recognizes that is not the case for everyone. “For three years it hasn’t been what people expected. If you talk to the big guys no one is lighting the world on fire.”

Some leading economists—including Larry Summers, former Treasury Secretary and now Harvard economics professor—suggest we are in the midst of a phenomenon called “secular stagnation,” which refers to a condition of negligible or no economic growth in a market-based economy.

Hamar, for one, hopes this slow growth is not the new world order. “It doesn’t have to be but it might be,” he said. “The regulatory environment, the tax on capital gains, the slow-growth economy compresses wage inflation. Until you have 3%-4% economic growth you won’t see the economy take off.”

Where the market is strong is at the very high end, which in Northern California means homes valued at $2 million and above. “There is so much tech money out here it’s just unbelievable, so much Facebook and Google money—thousands of millionaires,” Hamar said. “It costs $3,500 a month to rent a studio in San Francisco. A $1 million home in Silicon Valley will get you 1,100 square feet for a house built in the ’50s that hasn’t been redone. Crazy.”

During the recession from 2007-2009, California suffered tremendously while cities like Houston were faring better than the rest of the country. Now, however, oil prices have plummeted and that has impacted distributors that serve Texas, Oklahoma and Louisiana. “Those three states do a lot better at $100 per barrel economically, which we had during the recession that the rest of the country experienced so dramatically,” said Bob Eady, president of Houston-based T&L Distributing. West Texas Intermediate (WTI), which is used as a benchmark in oil pricing, has ranged from around $45 to $50 a barrel in recent months.

Market segment activity
The retail/residential remodel market, a bellwether segment of the flooring industry, has been fairly soft in 2015-2016, which reflects continued softness in consumer spending. Americans’ personal savings rate, which measures savings as a percentage of overall disposable personal income, climbed to a three-month high of 5.7% in August. This would suggest many consumers are in a good place and have money to burn, and yet consumer spending fell 0.3% in August, indicating consumers are sitting on the sidelines. This kind of inaction hurts flooring, which is deemed a postponable purchase.

“This marks 41 years in the business for me and I don’t remember a time when I have seen retail so challenged to rise above it all,” said Jeff Striegel, president of Elias Wilf, Owings Mills, Md. “Retail is under pressure by a host of things—more competition from non-traditional guys including the big-box stores and emerging retailers like Floor Décor with its cavernous stores. Then there is technology and the fear of it. The better dealers have embraced this and I have seen a renewed interest in higher-end goods, and the need to be more knowledgeable on the product they are selling and to offer more differentiation. The guys who are doing what they did five years ago are struggling. Overall, retail has flatlined the last 12-18 months.”

New home construction has shown some vibrancy, with some builders moving into entry-level homes—something they weren’t interested in doing in the past. As Zwicker explained: “The luxury home market is getting saturated so they are now interested in entry-level homes, which is a more compelling proposition [for prospective home buyers.]”

Several distributors report new home construction is strong in their markets. Scott Roy, president/CEO of Gilford-Johnson Flooring, said that sector is better than expected, especially in the Southeastern areas of its territories.

FlorStar Sales in Romeoville, Ill., is also reporting strong activity. “Net-net is new home construction is pretty good and commercial is good,” said Scott Rozmus, president. “The residential retail replacement market has been spotty, alternating between good months then slow months.”

Multifamily remains strong and is expected to continue to grow over the next three to five years fueled by an increase in rental demand, particularly from younger households. According to Census construction data pertaining to buildings with five or more units, the share of new multifamily units built for rental purposes was more than 92% over the last two years.

Trends
In the last five years, Galleher has grown from $60 million in 2011 to a projected $185 million in 2016. Its growth has come from many factors including an acquisition, a fertile California market and a larger percentage of private-label goods. Nearly 35% of Galleher’s business is private label “and going up,” Hamar said. “Private label is compelling and it is product driven.”

Private-label offerings allow distributors to provide their dealers with looks that are customized to their specific regions as opposed to a product that is styled nationally in scope but might not resonate in local markets. Private- label laminate offerings, in particular, have trended higher in recent years in light of the product’s commoditization.

The major distributors have added more private-label brands to their portfolio, and that trend is likely to continue. At the same time, as the shift from soft surface to hard surface accelerates, distributors are adjusting their portfolios accordingly via a greater mix of LVT/WPC products and higher-margin supplies.

In an era of consolidation, the top 20 distributors continue to be successful by taking market share from weaker competitors, expanding their territories or product ranges, and investing in technology to become more nimble and efficient.

All Tile, a top five distributor, made what CEO Bob Weiss called “a huge, huge investment” in 2016 when it integrated Epicor Prophet 21, a leading enterprise software solution, into its business. Prophet 21 is said to provide complete business digitization from e-commerce to mobile sales and field services, to wireless sales counters and warehouses, and customer optimization tools. “We went live in August and had a real good conversion,” Weiss said. “We had a positive month when we went live.” The Carpet Cushion side of the business will be going online in spring 2017.

Looking ahead, flooring distributors are optimistic that 2017 will be better. “We are hoping and expecting more robust growth, due to a better economic environment, additional improvement on the housing side of things as well as market-share gains,” said Torrey Jaeckle, vice president, Jaeckle Distributors, Madison, Wis. “I am looking forward to having the turmoil of the Presidential election behind us and returning to some higher levels of consumer confidence, which really dipped in the latter half of this year. I think a lot of that can be attributed to this contentious election rather than the underlying fundamentals of the economy. But I am very confident growth will be much better next year than it was this year.”

Other distributors are also looking for at least a modest increase in business in 2017, citing a post-election economy in which consumers—presumably—will be motivated to spend on flooring again.

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