Hardwood Report - March 2010

By Brian Hamilton

It would seem that hardwood sales have nowhere to go but up after the sharp declines over the last two years. Wood has been the worst performing segment during that time, with a 21% decline last year alone, after a fall of 22% the previous year. Sales, which are tied heavily to the homebuilding market, are now down about 43% from their peak in 2006, when sales were $2.95 billion. Last year’s sales were estimated at $1.69 billion, according to Santo Torcivia of Market Insights. And the industry is running at about 40% capacity.

That might even be considered good news given what has happened in homebuilding. Toll Brothers, the largest builder of luxury homes in the U.S., said the value of contracts signed in 2009 was off a staggering 81.8% from 2005. According to the Commerce Department, an estimated 374,000 new homes were sold in 2009. This was down nearly 23% from the previous year and was the lowest number of new home sales since the government started keeping track in 1963.

Most of the hardwood manufacturers we spoke to don’t expect much growth this year, but most also cling to the hope that the worst is over, and, indeed an arrest of the bleeding would be seen as progress. There are signs that may be happening. For example, Pulte Homes, the largest builder in the country, saw its homebuilding revenues climb 5% in the fourth quarter over 2008. The National Home Builders Association is projecting that new single family home sales will rise about 25% this year, and that starts will increase about 27%. However, it also projects that multi-family starts, where wood is increasingly popular, will fall about 24%.

Home improvement spending is also likely to hit bottom in the current quarter and steadily increase through the year, according to Harvard University’s Joint Center for Housing Studies. It predicts a bottom at $103.9 billion, rising to $110.9 billion in the third quarter. By comparison, remodeling reached $146.2 billion in the second quarter of 2007.

“With signs of stabilization in the national economy, homeowners are once again planning home improvement projects,” says Nicolas P. Retsinas, director of the center.

Additional fallout
Manufacturers say that the price of raw hardwood has been rising rapidly, mostly for solid flooring. Prices rose anywhere from 20% to 25% last year, depending on the manufacturer. They have continued to go up this year and may well spike again this spring. There are a couple of reasons for this situation. One is that there are far fewer sawmills as many of them have simply gone out of business, and more manufacturers are bidding for the same logs. Also, severe weather has made it far more difficult for loggers to get into the forests and harvest the wood. Given what has happened with weather in the eastern half of the U.S. in recent months, that difficulty is likely to continue. If demand should happen to pick up even moderately, prices hikes could also accelerate. Armstrong, the industry leader, has already announced a price hike this year.

Trends
Generally, most hardwood sales are in the low and high price points, while the middle is being avoided by consumers. Nearly every manufacturer we spoke to has new products, many of them detailed, engineered handscrapes, aimed at lower price points. Consumers are increasingly looking for value. They like character wood because it hides wear better, and manufacturers have responded. Today, prices of some domestic handscrapes are very competitive with Chinese imports, which have an advantage in labor costs. Increasingly, domestic manufacturers also have another advantage. Distributors of imported flooring often have to order more wood than they can possibly sell in a reasonable time period, and many of them have to pay cash up front. That makes domestically produced products even more attractive.

The move toward lower prices points also seems to have put sustainability on the back burner for most consumers, since Forest Stewardship Council certified products usually cost more because of the documentation fees required throughout the supply chain as the product changes hands. However, manufacturers haven’t forgotten about sustainability, and they know that environmental issues will command greater attention later on. For example, makers of engineered products are adding post-industrial waste to coreboard, and Greenguard certification is becoming more common. Many manufacturers are still aiming for FSC certification, which can be a valuable marketing tool.

Lacey Act
New provisions in the Lacey Act to stop illegally imported hardwood appear to be having an impact, according to Torcivia of Market Insights. He believes it has cut into the exotics business because importers don’t want to be held liable, and the penalties can be severe. In addition, complying can be a headache. The act requires more time consuming documentation in order to import goods and the added cost is passed along through the supply chain. There’s also no advantage for engineered floors, even though they typically use far less exotic wood.

Enforcement has also apparently started. Agents from the U.S. Fish and Wildlife Service raided a guitar manufacturer in Nashville last November on the suspicion it was using illegal wood. “Everybody in the chain is liable for verifying the authenticity of materials,” Torcivia said. “A retailer is easy game for the lawyers.” Because of this situation, the National Wood Flooring Association’s Responsible Procurement Program is growing. First tier certification in this program verifies that a product comes from a responsibly managed forest. Mullican and Anderson were the first two firms to received RPP certification.

The Players
Armstrong, the wood industry leader, had its largest product introduction ever last year, an introduction that it also believes was the largest ever in the industry. Its brands include Bruce, Robbins, Armstrong, HomerWood and T. Morton. Because of this aggressive posture toward new products, Armstrong believes it gained marketshare in both the builder and retail segments. Through the first nine months last year, sales fell to $390 million from $500 million in 2008. Last year it developed 160 new SKUs, and relaunched a similar number under the Armstrong brand name, which is sold exclusively in the independent channel. However, the firm is taking the opposite approach this year, and while it is developing new products, no new products are on the verge of reaching the market. All the products it showed at this year’s return to Surfaces were introduced last year. Its best selling product from last year’s launch has been a Bruce solid in oak, maple and hickory in widths of 3”, 4” and 5”. Bruce is largely sold through home centers. In the higher price points, a new parquet in the Armstrong Century Estate collection, which comes with granite inlays to match popular granite countertops, has also shown strength.

Armstrong, which is searching for a new chief executive as management turnover continues (it recently replaced its chief financial officer, and its human resources vice president left last fall), has recently cut production at wood plants in Oneida, Tennessee and Center, Texas, after idling a Mississippi wood plant last year, but the cutting is likely done. Armstrong has seen raw materials, primarily for solid flooring, rise nearly 10% already this year, on top of hefty increases last year. The firm also recently announced that it would start serving retail members of CCA Global Partners direct, and it is building a dedicated sales staff.

Shaw has essentially reinvented its hardwood business over the last few years, helped substantially by the purchase of engineered specialist Anderson and solid specialist Zickgraf. The combination of the brands gives Shaw a comprehensive product line, probably equal to any in the industry. Don Finkell, who was previously in charge at Anderson, was promoted to CEO of Shaw’s wood business. Shaw’s wood sales began to pick up in the fourth quarter last year and have continued into the early part of this year. After cutting production at its Epic facility early last spring, Shaw has added a shift there. It has also added a shift at its Zickgraf facility. Also, attendance at Shaw’s winter markets was up, so the firm is hopeful that the worst of the slump is over. Its best sales last year were in the Southwest, especially in Texas, which hasn’t been hit as hard by the implosion of the builder market as some other parts of the country. Its sustainable Epic engineered products, manufactured in Tennessee, have been its best sellers. Shaw has grown the line considerably over the last couple of years and it includes a full offering of handscrapes. While price points go as high as $10, the bulk of Epic sales have been in the $6 to $8 range, and Shaw says Epic sales growth last year approached double digits. Smooth Sailin’ (smooth finish) and California Dreamin’ (handscrape), both new Epic maple offerings, come in 5” planks. All Epic products last summer earned Cradle to Cradle Silver certification from McDonough Braungart Design Chemistry. All Shaw wood products also earned Greenguard Children & Schools indoor air quality certification late last year. Shaw has also introduced a new scuff resistant finish, which it is calling ScufResist Platinum for Shaw products. The same product for its Anderson and Zickgraf divisions, which have their own distribution networks, has a different name, but eventually nearly all Shaw, Anderson and Zickgraf products will use it. Shaw continues to incorporate technology from Anderson in its products, and a recent focus has been to use it in Zickgraf solid products. Last year Zickgraf launched several handscrapes with the Anderson influence.

Anderson describes the market as “two steps forward, three steps back,” as the economy continues to take its toll. It scaled back some of finishing work done by prisoners, but recently invested in a modern finishing line in Clinton, South Carolina. The engineered specialist continues to take an aggressive posture on many fronts, from flooring introductions (27 new SKUs at Surfaces) to a new adhesive product line to an improved abrasion resistant finish. Its product focus follows the theme “affordable luxury,” and, like other players, it is offering fashion forward styles at much lower prices than it would have a couple of years ago, largely to compete with imports. Its new Tropical Impressions follows that strategy, and the majority of the product is composed of post-industrial waste, thanks to enCore (“en” for environmental), a new core material for engineered products developed by Anderson that’s made from post-industrial waste. Anderson says it’s twice as hard as typical coreboard and can contribute toward LEED points. The firm’s new environmental adhesive line, which Anderson has exclusive rights to for now, gives installers a one-step way to put down adhesive, sound deadening, and a moisture barrier. Also on the environmental front, last November Anderson became the first company to be certified under the NWFA’s Responsible Procurement Program. In addition, last fall all of its hardwood products were Greenguard certified for indoor air quality.

Mohawk has been working to solidify the national distribution footprint for its Columbia hardwood brand, and in the last year has made changes in about 50% of its distribution base. As a result, the brand has increased its penetration as Mohawk has continued to invest in the product line. The majority of its 200 SKUs are new, so Mohawk has essentially revamped the brand since its purchase in 2008. The focus is on American species. In the last year, Mohawk has also cut production, closing a Columbia plant in Melbourne, Arkansas, and scaling back a Columbia plant in Danville, Virginia. Mohawk’s Century brand, which is sold through specialty wood distributors, also added distribution last year. The Mohawk brand, which is sold through its own distribution and has the largest assortment of products among the three brands, introduced a new merchandising concept at the winter Floorscapes and ColorCenter convention, featuring a wing display system rather than a waterfall. The brand is also using HGTV design personality Taniya Nayak to market the product. The most significant product launch recently has been in the Mohawk and Columbia brands, focusing on a value price handscraped engineered line. The Mohawk version is Brandymill, and Columbia’s is Pagosa. They feature a distinct chatter effect in the most fashionable colors. They are being produced at price points that a few years ago only Asian imports could manage. Mohawk says it is working on enhanced performance products for the builder market, which could debut late this year, but it wouldn’t divulge additional details. The Mohawk brand works closely with its soft surface division to sell into that segment.

Torcivia estimates that Mullican had one of the best years in the industry. The Johnson City, Tennessee firm concentrated on increasing its presence in the repair and replacement market, and it seems to have paid off. The firm has just added a second finishing line in Johnson City for solid prefinished hardwood, with a $6 million investment. It also placed a lot of displays last year, and its FSC certified Green Haven products continued to gain traction. Mullican believes that having the certified line gives retailers a good option when they need a sustainable hardwood, and keeps Mullican at the forefront when they need something else. The firm has just rolled out its Green Haven engineered line, consisting of ten domestic and ten exotic species. It also introduced Castillian, a handsculpted and wirebrushed look in a low gloss polyurethane finish, with one whitewash option. It comes in 6” and 7” widths and is at an aggressive price point. All its engineered products are made in Asia. Mullican, the first solid manufacturer in the NWFA’s Responsible Procurement Program, plans to use that certification aggressively in its marketing.

Mannington, which only sells engineered hardwood, believes 2010 will likely be a better year, although that may only mean flat sales as opposed to more declines. The firm anticipates that the builder market is likely to pick up, and it’s budgeting for a 7% increase, even though the new home sales may be about a third of the 2006 total. Mannington sees renovation rising just 2%. Last year Mannington sold more standard oak than usual, primarily because consumers are looking at value priced products. However, its handscrapes and other character products are also selling relatively well. Its new Black Isle Hickory, which made its debut at Surfaces, looks to be one of its next best sellers. It has a handstained, rustic look. The firm will have a fairly sizeable new product rollout this year, much of it earlier than usual, as it pursues its “innovation with style” theme. It includes the unusual Earthly Elements, a 12”x12” and 12”x24”wood tile that can be installed in any direction because of a tab system Mannington developed. It provides the capability to produce unusual patterns like herringbone.

Johnson Premium Hardwood of City of Industry, California has been adjusting its distribution model over the last couple of years as one way to deal with the down economy. While traditional distribution accounts for most of its business, increasingly it has been going direct in some key markets. This year it is planning to add two more direct markets, although it wouldn’t reveal where. Johnson knows that going direct entails more risk and more work but overall it believes the dealers it serves directly will have a better focus on Johnson products through improved customer service and margins will be higher. Overall, Johnson, primarily an exotics company, says it did better than the market last year, partly because of two new East Coast distributors it added last year. Its handscraped products, such as its Tuscan and Texas Series, have been its best sellers. The firm also continues to bolster its product offering. This year it’s planning to expand its ForeverTuff product line—containing its most abrasion resistant finish—beyond exotics into domestic oak, maple, and hickory. Johnson is also being audited for FSC certification and is pursuing certification under the NWFA’s Responsible Procurement Program.

Last year, Home Legend named Jamann Stepp vice president of sales, with a focus on developing a direct channel for its wood, bamboo and cork products, and this year the firm is implementing that new strategy. Until last year the firm only dealt with mass marketers but this year its own sales force, which is still being developed, is targeting independent retailers, including those in buying groups. It added a distribution center on the East Coast and now has distribution points on both coasts. It’s working with common carriers on ways to move product efficiently through the new channel. Stepp, who had a long history at Shaw, believes it will be easier for a company like Home Legend to get better penetration if it doesn’t rely on distributors, which often have their own imported products to promote. Home Legend had an aggressive launch at Surfaces and it will likely introduce more new products later this year. With hardwood, its strategy is to offer everything in solid, glue down and floating floor, to appeal to consumers with different needs in all parts of the country. The firm also has a small private label business, which makes up about 10% of sales.

Dalton, Georgia based USFloors, which sells hardwood, bamboo and cork flooring, grew its sales last year although it described the year as one of highs and lows. There would be periods of good sales, which would end abruptly for no apparent reason. USFloors sells mostly direct, although it has some traditional distribution in a few areas. The firm specializes in sustainability, and as part of that mission has solar arrays installed on its manufacturing and warehouse buildings. It sells the electrical power it produces back to the local utility for a credit and it plans to expand its solar electricity generation. In general, it believes that green products are doing better in the market than others because sustainability is the top criterion for about a quarter of floorcovering buyers, and it’s generally a more affluent group. This year its focus will be on growing its new Navarre line, an engineered product in widths of 7 ½” and 10 ¼” with an oil finish that it just introduced this year. It has a version of the product called Avignon for the commercial specified market, which it also expanded into last year with an array of products. It likes oiled products because they can be spot-repaired easily. Another focus will be on its Corboo, a combination cork/bamboo product, as well as its strand bamboo, where it also has oil finished products. It also has a wood grain enhanced bamboo project, in which a pattern is printed on a strand bamboo base and is finished with aluminum oxide.

Canadian manufacturer Mirage had its best sales in Canada last year, as the U.S. declined. Sales overall were down by low double digits but the firm anticipates a better 2010 in both the Canadian and U.S. markets on increasing remodeling. Unlike many hardwood players, Mirage hasn’t developed value price point products, believing that they don’t fit its higher end niche, as the firm is the perceived leader in quality. Its newest products are two 5” engineered floors, Handcrafted Oak in its popular Sweet Memories series, and its Alive series, a brushed, open grain look. Last year Mirage worked to increase internal efficiencies by improving processes. It also scaled back production somewhat last fall, although some workers have since been rehired. Despite price pressures for raw materials, Mirage has been able to maintain its price structure.

Johnson City, Tennessee based ArborCraft was purchased by flooring supply firm Q.E.P. Co. last month. ArborCraft, formerly Harris-Tarkett, was owned by private equity firm New Stream Capital, which purchased the company from Tarkett in 2007. For Q.E.P., which makes adhesives, underlayment, and flooring installation tools, it will be the first venture into floorcovering manufacturing and will increase the overall size of the company about 50% to 600 employees. However, the publicly traded company (it delisted from the Nasdaq but trades in the pink sheets) has historically grown by acquisition, and it may consider buying other flooring companies. Q.E.P. will take a hands-on approach to managing ArborCraft and will put its own people in place. The firm, which also looked at other hardwood firms, was attracted to ArborCraft because of its long history, the quality of the Harris brand, and the fact that it has domestic manufacturing.

Throughout last year, ArborCraft continued to work on its distribution. Last fall it added NRF Distributors in New England, which managed to get a couple hundred displays to retailers, but generally ArborCraft, like most firms, was hurt by the economy. It has recently added two 5” engineered products. Craftique Tejas is an aggressive cross scrape, and Taos Distressed is a soft distressed product with dark edges. These were developed with the help of Texas based distributor Swiff-Train. The firm has also added more special order items at Home Depot, which changed its display system.

Canadian manufacturer Mercier did about 80% to 90% of its business in Canada last year, with the rest in the U.S. It had close to double-digit growth in Canada but did no better than anyone else in the U.S., so overall sales were about flat. Mercier has one advantage in the market—its own sawmill. This helps create more cost certainty. Its Mercier Pro line, an entry level product in both solid and engineered, which is aimed at builders and the DIY market, has been selling well. In general, Mercier likes to keep its products simple. It offers every stain in every species, and in the U.S. market it only offers two grades of wood. It sells more red oak, yellow birch, and maple than any other species.

A new species of hardwood is poised to enter the market this year from a new company, Monarca Coffee-Wood, a Medellin, Columbia based firm with U.S. operations in Greensboro, North Carolina. As its name suggests, the wood is harvested from the coffee tree, which is actually more like a large bush than a tree. The wood will come from the thousands of small coffee farms in Columbia that now dispose of the wood by burning it. By selling the wood, the farmers will have another source of income. However, it’s not an easy material to transport because most of it is located on steep mountainsides. The trees can be cut down after five years, and like bamboo, they will grow back. However, after the second cutting, the tree has to be completely replaced. The wood has a very distinctive look, and is naturally light colored with a closed grain, which enables it to take stains well. Because the branches generally aren’t more than five inches in diameter, the flooring is constructed more like bamboo, with 1” wide strips that are edge-glued together. Initially there will be about six colors, and there will be a dozen products available at about $10 per foot retail. The flooring will be constructed in Columbia, and finishing will be done in the U.S. The company is now working on securing distributors.

Like most Canadian manufacturers, Model had a much better year in Canada than in the U.S. or overseas in 2009, although even its domestic business was off as oil prices fell and housing starts in the oil shale development area of western Canada declined. In the last few months, it has begun to see a thawing of the wood market, with a slow but constant recovery, although there are few signs the U.S. will help the company much until 2011. Its relatively new engineered products—Model, primarily a solid specialist, has been in the engineered business about three years—especially Modelloc, with a click installation system, are its fastest growing products. They have been reasonably popular in multi-family construction because they can be installed quickly and save time, yet allow installers to charge the same price. With more business this year likely to come from renovation, Model believes the locking product is well positioned for the DIY market. Unlike some other manufacturers, Model has avoided moving to extreme wide plank products, primarily because there’s too much waste in the manufacturing process and it doesn’t fit with the company’s sustainability message. In addition, it also believes fashion will eventually come back to narrower floors. The way its E Series is produced, it uses about 15% more of each tree than competing products. Model has also avoided chasing the exotics market, although it does offer tigerwood and jatoba. It also markets flooring for gymnasiums. Model is investing about $4 million in its production process and promises that it will bring a new approach to producing wood. It plans to introduce new products later this year using the new process.

Macon, Georgia based BLC Hardwood Flooring, primarily a solid flooring company, has some advantage in the market because it’s owned by Battle Lumber Co. of Wadley, Georgia, which has one of the largest sawmills in the country. Nevertheless, last year was a difficult one for BLC and this year may not be much better, unless the builder market turns around. It’s seeing some signs of a turnaround in the replacement market, but generally jobs are smaller than usual. A few years ago, BLC could see the slowdown coming and began to make some changes, chief among them switching to an all prefinished product line, which it completed in 2008. That also required some changes in its distribution network, but it made sure not to create competition for its current distributors. Last September, the company hired Randy Lovelace as its sales manager, and now it is about to come out with a new handsculpted character line in a matte finish called Mountain Lodge. One of its best sellers in the last year has been its value Cottage Series, especially in hickory, which is one of its best selling species across all product lines.

BR-111, which is a consortium of Brazilian flooring manufacturers (anywhere from four to ten may be suppliers at any given time), has seen its worldwide sales fall. However, it says it hasn’t been affected in the U.S. by the new requirements for imports in the Lacey Act because all its products meet the requirements. It is also taking part in the NWFA’s Responsible Procurement Program. Like other firms, it has reduced its staff and cut costs. It says it hasn’t faced any serious credit problems with distributors. Today, about half the products it sells in the U.S. are engineered, a category that’s fairly new for the company. It has products ranging from 3” wide up to 22”. The Designer & Architectural Series, a new product, uses end cuts and waste strips to create mosaic wood patterns for the floor, wall and ceiling. It also features plywood cores made from post-industrial waste. The firm will also soon roll out a locking engineered product.

Weyerhaeuser, which sells its hybrid eucalyptus product, Lyptus, is taking a conservative posture and isn’t adding to its 33 SKUs this year. The company is reviewing its options for expansion in the face of declining sales of exotics in general without moving to commodity price points. It is generally a medium priced product that is produced in Brazil and grown on plantations, and its products have been certified by PEFC, the world’s largest forest certification organization. Last year, the firm added Florida distributor Mastercraft to handle its products in parts of the South.

Max Windsor, based in Rancho Cucamonga, California, has added significant distribution in the Southeast and parts of the Midwest, a national distribution plan that it began two years ago. Last year, the company hired Peter Spirer and Bob Rawlins, who cut their teeth in the carpet industry, as national marketing managers, with the task of developing national distribution. Spirer was the founder of Horizon Industries, which he sold to Mohawk in 1992. Max Windsor’s products are sold through independent flooring retailers throughout the country, but its sales are strongest in the West. The company is taking a regional approach and putting its efforts on specific areas one at a time so that it doesn’t spread itself too thin and get nothing significant accomplished. Max Windsor, like other firms, is attacking the value end of the business. It has introduced Concord, an engineered hybrid with a high density fiberboard core and a click system. It comes in hickory and maple.

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