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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.