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Top distributors: Wholesalers overcome labor shortages, slow growth to post modest increases

November 6/13, 2017: Volume 32, Issue 11

By Ken Ryan

 

Screen Shot 2017-11-13 at 9.32.13 AMFormer NFL Hall of Fame football coach Bill Parcells used to say, “You are what your record says you are.” If that logic was applied to the flooring industry’s top 20 distributors, that record would be fairly exemplary as the group posted gains averaging 4% in 2016. By way of comparison, the gross domestic product—the monetary measure of the market value of all final goods and services produced in the U.S.—grew 2.9% for all of 2016.

Flooring distributors once again showed that even in a slow-growth economy, in which obstacles like an ongoing labor shortage delayed or extended projects, wholesalers were able to rise above it.

With regard to the lack of skilled labor impacting all construction trades, including flooring installation, there is no short-term fix to this issue, observers say. While many aspects of the housing market are improving—housing starts are up and prices have increased—the lack of qualified installers remains. This problem began surfacing in 2012 as construction activity picked up and the unemployment rate dropped; it has worsened in the years since.

Jerry Howard, CEO of the National Association of Home Builders (NAHB), said the cause for the shortage was workers leaving the industry after jobs dried up during the recession. Many workers fled to other industries or other countries, and many haven’t come back. Some took jobs in the manufacturing and auto industries, while others found work in the energy sector.

“Simply put, they were getting any work they could and had to go into other sectors to find ways to put food on the table,” Howard said. “We are now at the point that there is a serious shortage of workers. It’s a real problem that ripples throughout the home-building process that ultimately costs the consumer.”

Distribution executives said that while labor shortage is a concern, there are other issues such as land availability, affordability issues and modest activity that have held the market back from reaching its fullest potential. “There has been no real momentum in the discretionary replacement of existing floors without any other construction or remodeling activity,” said Jeff Hamar, CEO of Galleher, a top 10 distributor based in Santa Fe Springs, Calif. “I think this is due to the fact it has been roughly 20 years since the first introductions of natural looking vinyl products, second-generation laminate and urethane- coated, wider-width wood flooring.  Products installed after 1998 haven’t ‘uglied out’ and don’t need to be replaced.”

Despite some challenges, there have been positive signs that have fueled growth, namely an improved job market, favorable stock market, and—at least statistically—higher consumer confidence. According to the Conference Board, consumer confidence in October 2017 increased to its highest level in almost 17 years, boosted by the prospect of improving business conditions. However, not everyone is seeing this confidence translate into higher flooring sales. In fact, some say a lack of confidence continues to keep shoppers on the sidelines, thus impeding growth and contributing to less than normal existing home sales.

The inventory shortage that has plagued the housing market for over two years has lessened the pace of sales. The 1.7% decline seen this past August was the fourth in five months and brought the annual rate to the lowest level in 12 months.

Private label growth
In the past decade, the industry has witnessed a large increase in imported products, many of which are well suited for private labeling because they allow the distributor to tailor the offerings to specific markets, picking and choosing patterns, constructions and designs that fill voids in their current lineups or complement other flooring options. The ability to customize the program to suit specific market needs is a strong attribute of private labeling and is one reason why it continued to rise.

Several distributors cited private-label lines as their best performers in 2016. For example, Denver Hardwood’s top selling line was Neptune, a private-label rigid core waterproof offering. Overall, the company’s private-label program was cited as a major factor in Denver’s success.

As opposed to brand name national programs that oftentimes are not market specific, distributors can design private-label programs for their specific markets. In so doing, they can increase margin opportunities, don’t have limitations to where they can take the product and can protect their customers from being shopped online. Indeed, private labeling ensures the distributor have single distribution on the products in that brand.

How companies fared
While macro trends such as housing and economy impact all distributors to some degree, there are those wholesalers who face challenges specific to their own markets. That was the case for T&L Distributing in Houston. Its string of unfortunate events actually began in February 2015, when Shaw decided to distribute its Anderson hardwood brand. Losing that business cost T&L $10.6 million for 2015. Later that year oil sunk to $30 a barrel, leading to a slow fall selling season. In 2017, T&L took another hit to the tune of $5 million, when Mannington sold its VCT business to Armstrong. “There have been some very bright spots and some negative,” Bob Eady, president, acknowledged. “Oil prices still are up and down. The rest of the country loves it; I hate it. Oil pricing has an effect on our economy. Texas lost 88,000 jobs last year.”

T&L, as well as Reader’s Wholesale and Swiff-Train Co., also dealt with the disaster that was Hurricane Harvey in 2017. The long recovery and rebuilding will eventually result in a spike in business for wholesalers in southeast Texas but probably not before 2018.

In the last seven years, Galleher has averaged 20-plus percent growth year over year to nearly 250% in that time. However, 2017 saw only a 7% gain, Hamar said, as the distributor experienced problems with quality, availability and styling of its domestically sourced products. “We also were forced to change from Roppe to Johnsonite mid-year and lost a couple million of sales in that transition. We also relocated our manufacturing operation from Los Angeles to a much larger facility in Phoenix, and that really impacted sales this year. Combine all of these negative headwinds and we would have had growth of close to 15%. I’m not making excuses—just putting into context that we have much sales momentum going on out here.”

For Lee’s Summit, Mo.-based Tingle Flooring, a newcomer to this year’s top 20, being nimble and opportunistic continues to pay dividends. While its flooring division was relatively flat, Tingle’s installation products division increased 11%. As Chip Moxley, president, put it: “Undoubtedly the economy is helping to sustain our business, but real growth is coming from new products that both retail and commercial customers want for their floors today.”

Like many others, Tingle increased the percentage of its LVT/WPC business from 20% in 2015 to 27% in 2016, while laminate (8%) and hardwood (27%) stayed relatively the same.

Herregan Distributors, Eagan, Minn., has been particularly bullish on LVT/WPC, with more than one-third of its business now devoted to the category. Other top-tier distributors are all in double digits percentage-wise in terms of product mix, a number that continues to rise. “We continue to take WPC market share which is impacting our business,” said Pat Theis, vice president of sales and marketing. “We feel the economy has also helped at retail.”

Similarly, William M. Bird cited a better retail market and LVT/WPC for its increase of 5% from 2016 to 2017.  “LVT/WPC is the fasted growing segment with our flooring,” Maybank Hagood, CEO, said, echoing a sentiment shared by virtually every other distribution executive.

Commercial slowdown

While the LVT segment produced strong gains on the residential side in 2016, commercial sales of LVT and other products were not as strong, resulting in less project activity, distributors report. “My fear from things I’ve read and what I’m seeing out in the market is that some commercial flooring selections are shifting to things like polished, painted and stained concrete,” said Torrey Jaeckle, vice president of Jaeckle Distributors, Madison, Wis. “Any market shift like that is going to hurt the traditional flooring distributor as well as manufacturers, as none of us that I know of are involved in that product category.”

Looking ahead, Jaeckle sees a mixed bag on the economic front, with the immediate future looking promising.

“On the commercial side, I expect more robust growth throughout 2018, as that is what key economic indicators are telling us right now. On the residential side, I think overall the industry for our region is going to see more lackluster growth compared to 2017 as GDP growth slows as the year progresses before entering a mild recession in 2019.”

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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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