2023 Distribution Report: Coming off record years, distributors are seeing some slowdown but believe the future still looks good – Nov 2023

By Jennifer Bardoner

For as long as Kevin Gammonley has been in the industry, there have been those who have railed against the future of distribution. And yet, he’s witnessed distributors’ role expand. No longer are they simply “middlemen”; many have gone the route of developing their own product lines and brands. Nor are they simply order takers and logistics providers; they are a trusted resource. And when inflation ramps up, demand falters and products become harder to obtain-as is currently happening to some extent-the strategic benefits they provide take on even more relevance, says Gammonley, a 24-year industry veteran and executive vice president of the North American Association of Floor Covering Distributors (NAFCD).

MARKET ACTIVITY
As the saying goes, “All good things must come to an end,” and the market is now slowing following a retail spending spree that lasted roughly two years. But the current situation is hardly dire, our sources agree.

“This is not an inordinately difficult time-it’s nothing like 2008, 2009,” says Dunn Rasbury, director of business development for A&M Supply, a comprehensive interior-building products distributor with a growing flooring division. “It is a little bit of a downturn from the super-hot period we had post-Covid.”

2021 saw unprecedented residential activity that carried into 2022 as consumers took advantage of savings, government subsidies and low interest rates to update their homes, and builders constructed new homes as quickly as they could. But rising interest rates and costs have since deflated demand.

“Coming off a record year in 2022, we certainly have seen slower growth in 2023,” says Greg Vale, vice president of sales and marketing for Fishman Flooring Solutions, a 100+-year-old Baltimore-based distributor that serves 15 states throughout the eastern U.S. “We started to see weakness in the builder and residential remodel segment late in Q1 as home pricing and interest rates continued to grow.”

Still, the general slowing does not look the same for everyone, with some reporting sustained activity.

AJ Warne is the vice president of sales and marketing for West Virginia-based Abraham Linc, a diversified distributor that serves the Mid-Atlantic. He says that in his market, “They’re building houses whether the interest rate is 2% or 8% and whether home prices are rising or falling, because there just are not enough houses for the people who want them here.”

And Dori Blitzstein, vice president and co-owner of Baltimore-based hard surface distributor Roesel-Heck Company, says, “While I’m hearing retail is slow nationally, I’m finding it’s really very specific to different territories that we service. If we move closer to the coast, retail is actually picking up there. I’m not sure if it’s because more people are going to their vacation homes and remodeling their homes or because they’re staying at their vacation homes more permanently, but they’re doing more remodels.”

At the retail level, Rasbury believes the difference could also come down to something controllable: service. He’s visited dealers that are still booked out to December, while others just around the corner have only seen two customers in a week. “I think if you’ve got a really good service model, you’ve got really good installers and you’re really taking care of the customer, there’s every chance you’re still in pretty good shape right now,” he says.

Warne, who is current president of the NAFCD, notes that while most members are down overall, “it depends a lot on what segments they primarily service.” His company does a lot of multifamily and commercial work, mostly negotiated and value engineered (VE), and “those are on really different cycles than residential replacement and builder business,” he points out.

Commercial activity has spent the past year picking itself back up, by and large, after losing its footing during the pandemic shutdowns. Ted Kozikowski, CEO of hardwood and resilient supplier Galleher, reports that “the sustained robust performance” of the West Coast distributor’s commercial division helped to offset last year’s softening on the residential side.

However, that, too, could be nearing an end. In September, the American Institute of Architects’ (AIA) Architecture Billings Index dropped to 44.8-its lowest score since December 2020-signaling a decrease in demand. Regarding the drop in score, AIA chief economist Kermit Baker noted a hesitance to commit to new projects, in addition to a decrease in billings.

“Our commercial vertical continues to show strength, but we anticipate that market to slow, as well, with tighter financing on commercial projects,” Vale says.

In the meantime, VE activity is heating up as project managers take a harder look at their budgets, driving more contractors and distributors to negotiated work. Blitzstein says that amid the current economic climate, bids are often going to whoever brings the best VE solution, whereas before, specifications typically stuck.

“I would think that the companies that are highly specifying projects are probably struggling a little bit to keep those specifications intact,” she says. “We also specify, and now we have to do that much more protection over our specifications to make sure they don’t get VE’d by anybody else.”

Some of the shift could also come down to inventory, Warne points out. “People aren’t carrying the level of inventory needed for the number of specifications they’re writing, so they are facing challenges with having material when they need it,” he explains, adding that his company has a 99% fill rate. “Take a commercial LVT, it’s nothing for us to have a couple hundred thousand square feet sitting there ready to go. I think we’re getting selected more often because clients know they’re not going to be let down when they go to place an order.”

PRICING AND INVENTORY
Though market activity may be slowing, much of this year’s slump is tied to price increases that drove up top-line revenue, making it hard to compete year over year now that pricing has started to come back down.

“It’s really hard when prices are down such a tremendous amount to get back to those same dollars,” says Warne, reporting that his prices have fallen roughly 20% from their peak. “Our units as a company are up double digits. Our dollars want to be flat, but they’re off by just a small percent. But we’re forgetting what 2019 and 2018 looked like, because that was the last time we had real numbers that weren’t affected by the wild gyrations of the Covid economy.”

With freight the biggest factor in pricing, according to Blitzstein-who is next in line to lead the NAFCD-distributors have dropped their prices as the supply chain bottlenecks brought on by the pandemic got cleared. Rasbury says pricing has been stable for four or five months now, adding, “I’m not hearing about any fluctuations one way or the other anytime soon.”

That is not to say that the supply chain is not experiencing anymore challenges, however. The Uyghur Forced Labor Prevention Act (UFLPA) is causing holdups on many domestic flooring shipments from Asia, a drought at the Panama Canal is limiting the number of boats through, and the war in Israel could complicate the transport of products and raw materials from parts of Asia to points west.

“It seems like since Covid hit in 2020, every year there is another dynamic that impacts the distributor’s ability to secure product in a timely manner,” says Gammonley.

Rasbury says his average lead time is currently 120 to 180 days, noting that “if it comes in on the West Coast, it’s taking almost as much time on rail to go from one coast to the other as it is on the water from Asia.” Blitzstein says she’s still waiting on shipments ordered in December.

“The core of the distribution business is to have a broad selection of products available to dealers at the local level and have those available when the dealer needs them,” says Gammonley. “That’s become more and more challenging, so distributors need to have adaptable, flexible sources of supply. Even if they’ve got a primary manufacturer set, they need to build relationships with companies, because you never know what may happen in the near future.”

Rasbury has shored up his supply chain through multiple sources of inventory for key product categories. Kozikowski has also grown his list of supply partners, as well as Galleher’s private labels. Warne and his team try to keep ahead of upcoming challenges like UFLPA through keeping an eye on the apparel business, among other indicators, and then adjust accordingly. And, like Blitzstein, he is currently ordering more inventory than is needed for the anticipated day-to-day.

“We believe having the material when the customer wants the material is the most critical thing for our success,” Warne says. “And it’s especially important when there’s a lack in residential demand, because if a retailer is getting 50% of the residential leads they normally get, they really want to show a product they’re confident is going to be in stock so they don’t miss an opportunity when somebody selects something and wants it installed this week, when their installers aren’t busy.”

Blitzstein experienced this during the pandemic when flooring adhesive was in short supply. Her company had just received several truckloads of product from Taylor Adhesives, and the availability convinced competitors’ customers-many of whom are now regular customers of Roesel-Heck-to place an order, effectively doubling their business. Now, she says, “We’ve found ourselves stocking product that nobody else stocks, in very heavy increments. We’ve grown our business in that way because nobody expected they would be able to get the product the next day,” adding that the company is also able to offer free freight for any orders over $300 thanks to its targeted service area, which encompasses a wealth of commercial and government activity.

“Over the past few years, we have adopted a proactive stance in bolstering our inventory levels, even when many of our competitors were reducing theirs,” Kozikowski says. “We recognize the importance of not over-relying on any single region or country to maintain a robust inventory across all vital product segments.”

BRAND STRATEGY
Supply chain volatility isn’t the only reason Galleher has begun expanding and diversifying its network. The distributor’s private label program has Kozikowski searching not just for assurance of availability and competitive cost but also for suppliers capable of realistic finishes and advanced product construction.

“This shift toward increased imports is, in part, a response to evolving fashion trends, as overseas suppliers have exhibited agility in innovating and keeping pace with market demands, especially in the realms of wider, longer wood flooring and SPC flooring,” he says. Though he adds, “At the same time, however, it’s important to emphasize that our commitment to our domestic suppliers-who make up more than half of our manufacturing partners-remains unwavering. In the long term, our steadfast commitment as a reliable partner to our customers necessitates the diversification of our supply sources.”

As manufacturers have gone direct, distributors have developed their own brands, and they have managed to carve out a competitive niche. Their one-on-one relationships with the customers they serve help them tailor products to specific needs and markets, and their smaller market size provides them with flexibility.

“The existence of our proprietary brands furnishes us with a heightened degree of control and influence over the trajectory and expansion of our business,” Kozikowski says. “This level of control equips us with the agility needed to promptly adapt to shifting marketplace dynamics within each of our business segments, keeping us ahead of the competition by consistently offering products that align with our customers’ desires. We firmly believe that this competitive edge underpins Galleher’s ongoing success.”

A&M’s private label brand, Artisan Mills, has been a core component of its flooring business since it entered the sector more than a decade ago. Though 76 years old, the company is still a relative newcomer to flooring, and it initially struggled to find domestic partners. Others have added private labels more recently as a way of ensuring some sense of control over their own destiny, the importance of which has been underscored since the pandemic. Roesel-Heck developed a private label program in 2017, “not because everybody had a private label, but because we felt a need to have something that really belonged to us so nobody else could determine our destiny with that product line,” says Blitzstein. And Fishman launched its private label program in 2021 “as a tool to drive value to our customers,” Vale says.

Four years ago, Abraham Linc began transitioning from a model focused on manufacturer brands. Today, about 90% of its revenue comes from its private label collections. Many on the distribution side note that the market is so flooded with brands that consumers, by and large, can’t keep up, diminishing the significance of most brand names. Meanwhile, private labels traditionally offer enhanced revenue opportunities for dealers thanks to their lower overhead costs, as most are sourced internationally even if they are developed by a distributor.

“I think brands matter, but quality and price point are of high importance,” Gammonley says. “Customers come back to distributors on a regular basis, so a distributor has to deliver products that live up to customers’ expectations and offer them at different price points for different applications. That’s part of the value a distributor brings to customers, along with helping them understand, ‘What is the application for this product, and what other options are there?’”

With mergers and acquisitions common and private equity now at play, private labels also ensure that a distributor doesn’t get left emptyhanded should a bigger competitor suddenly enter their market and strip them of the right to market a core supplier brand. Still, manufacturer brands remain the basis of distribution, and our sources stress their ongoing importance and relevance. Of the 14 new product lines Rasbury has added in the last 12 months, only two were private label.

“We really like to represent brands,” Blitzstein says. “Brands are easiest for us because they have a whole company backing them, they provide us with marketing support and with training, and we often have backup stock at their mills, and that’s very important for us.”

Copyright 2023 Floor Focus 

Related Topics:The American Institute of Architects