Ceramic: State of the Industry: The industry looks to education and innovation - Mar 2019
By Jessica Chevalier
Over the course of less than a decade, we have seen the domestic ceramic market transform, more than doubling the number of producers on U.S. soil. While that is certainly something to celebrate, it hasn’t come without challenges, and with all manufacturers except Portobello now producing tile, those challenges are, to some extent, intensifying due to headwinds from a variety of directions: the high cost of trucking, import rates and price points, the proliferation of LVT and the installer shortage combined with the high cost of installation.
Add to that the fact that the import market is still strong. Despite the dramatic increase in product made on U.S. soil, import rates climbed in 2018, with major tile importers consistently reporting growth numbers that are outpacing the consumption rate.
In spite of the challenges, Market Insights LLC estimates that the total ceramic tile market grew by 2.2% in 2018, down from 6.3% in 2017. And it’s notable that while U.S. production accounted for only 28% of domestic consumption in 2007, by 2017 that number had risen to 38%, so the market is largely headed in the domestic direction.
Michael Franceschelli, CEO of Florida Tile, points out that this increase isn’t solely the result of the production shift. “The total consumption in square feet has continued to increase, but this is not a singular correlation,” he notes. “Faster response times, shorter lead times, and interacting within common time zones all help, as do the marketing initiatives and campaigns that help educate consumers on the positive attributes of tile as a stylish, durable, and environmentally responsible choice for surfacing floors, walls and countertops.” It’s a useful point to remember: the success of a category isn’t just based on its presence in the market but the nurturing of “tile culture” over time.
As Franceschelli notes, one of the biggest boons for the ceramic tile industry today is the way in which format innovation-both larger traditional sizes and gauged panels-has enabled it to move beyond the traditional kitchen and bath floor and wall formats and extend into other areas, both residentially and commercially, particularly as countertops and cladding. In addition, thin panels can skin floor and wall surfaces, eliminating the need for costly, messy demolition, and today several manufacturers are introducing dramatic products that create a wallpaper-esque aesthetic. In a sense, the category’s dedication to styling has propelled it from a workhorse product to a high-style design element in a relatively short number of years.
While each leader in the ceramic category may have a slightly different vision for how their organization and the industry should achieve success, what they all agree on wholeheartedly is that the domestic ceramic tile market is very different than it was a decade ago or even five years ago, and in this new landscape, what once worked is no longer a sure thing. While the innovation revolution in printing and formats propelled the industry a step forward in a relatively short amount of time, the years since have been something of a drudge. And, ultimately, it may be that this sort of slow-and-steady going-chipping away at challenges little by little-is the path of the industry in the years to come.
By dollar value, imports have been growing steadily since 2009, increasing 5.8% last year to $2,218 million. Italy still leads by dollar value, though it fell from $751 million in 2016 to $747 million in 2017; in 2018, Italy accounted for 32% of the total import value.
In the second position, China saw its import value grow to $589 million last year, accounting for 26% of the total import value, following 2016’s $517 million rate.
Spain overtook Mexico for the third position in 2017, increasing its imports by 20.5% over 2016 to 14% of the total. Spain has been able to reach “interesting price points, comparable to China,” explains Atlas Concorde’s Saguatti, due to “incentives out of Europe.” Mexico’s share fell from $265 million in 2016 to $220 million in 2017, or 10%.
Turkey, Brazil, Peru, Germany, Portugal and Japan-listed from largest to smallest-all account for less than 5% of imports to the U.S., by dollar value.
Keep in mind, however, that the import rate may have been inflated toward the end of 2018 as a result of the Trump administration’s trade war with China. It stands to reason that importers would have stockpiled tile prior to the implementation of the 10% tariff in September 2018 and in anticipation of the possible 25% tariff, which may never come to fruition.
THE DOMESTIC LANDSCAPE
Each of the manufacturers that has established U.S. production as of late was a powerhouse player in some other part of the world that had a presence in the U.S. via importing and saw the possibility of gaining more margin on the manufacturing side by moving production to the market in which it was selling. Therefore, in some ways the domestic landscape has not changed as dramatically as it might first appear. After all, the “new” players were already here selling, so the fact that they are now selling U.S.-made product rather than Italian-made product, for instance, doesn’t upend the market entirely.
That reality, however, isn’t the whole picture, as some have both established U.S. production and continued selling lines made elsewhere, often under different names.
According to Joe Lundgren of Joseph Lundgren Consulting, at present there is undoubtedly extra product in the market; no domestic manufacturer is running at full capacity, and some are reducing prices as a means of moving excess tile.
“Many manufacturers are coming here and trying to get a slice of this pie,” says Davide Saguatti, marketing director for Atlas Concorde. “Now that we are all here and producing, it’s slowing a bit for a time. Obviously, everyone is worried about price threats with the big boxes playing a big role, and it’s tough to defend the manufacturer brand because of the distribution network. But, for the manufacturer, defending the brand is more important than ever-delivering something more to the end user and conveying your message.” Saguatti believes that Atlas Concorde’s “plus” is its “Italian heritage merged with the needs of the U.S. market.”
Doug Snell, vice president of sales and marketing for Stonepeak, agrees that the path toward success in the U.S. market can be harder than some foreign manufacturers first estimate. “Just because a manufacturer shows up in the U.S. doesn’t mean that the market will switch over from imports to domestics,” says Snell. “It doesn’t always work that way. Here, it’s about relationships, shaking hands. There’s a learning curve in entering this market.”
The flip side of the coin is that competition is a good thing, driving innovation and improvement. Says Juan Molina, general manager, sales and marketing for Del Conca, “Having more domestic competition offers the market more choices and raises the level at which we must all compete.” That is certainly the case, and there is no doubt that domestic manufacturers have been innovating at a rapid pace and pushing the market to places it hasn’t been before.
Marco Fregni, CEO of Florim USA, which sells under the Milestone brand in the U.S., adds, “Because of these benefits of domestic manufacturing, I believe the U.S. market has changed its expectations in terms of selection and lead time.” That, ultimately, is another boon for U.S. manufacturers, as it, in a sense, trains the market to demand what U.S. manufacturers are best positioned to provide.
All that said, Saguatti believes the U.S. market may undergo significant changes in the coming years, noting that, in parallel categories-such as paint, wallpaper and countertops-where the brand is insignificant to the end user, manufacturers have gathered strength through mergers and acquisitions. “It’s early in the market for that now,” he says, “but it will go in that direction. Even though our umbrella group is big, we are a small manufacturer, trying to determine how to defend ourselves when product won’t drive growth.”
To understand why import rates continue to rise in a market where domestic production has increased, consider that ceramic tile consumption is largely consolidated in the U.S. Coastal states account for the highest consumption, according to Lundgren, with California, Texas and Florida leading. All these are states with ports, which means that importers don’t have far to go on land after they’ve gotten their products to the coast. This convenience has grown in importance as the rates for over-land transportation have risen.
Like consumption, production is also consolidated. Atlas Concorde, Crossville, Del Conca, Florim, Portobello, Stonepeak, Wonder and Dal-Tile all have factories in northeastern Tennessee-with Florida Tile a few hours north-close to the natural resources needed to produce porcelain tile but almost 500 miles away from the nearest big market.
While quite a bit has been written about the impact of electronic logging device mandates for truckers (which went into full effect in early 2018), the ceramic category has felt the struggle more intensely than others because its products are heavy and therefore more costly to ship. In fact, Lundgren explains that two products with equal price points can leave their respective manufacturing facilities in China and Tennessee to travel to the same California location; by the time they reach the customer, the Chinese product will cost “significantly less” with freight factored in, a reality that certainly pinches U.S. producers.
In addition to the increases due to the government regulations, the trucking industry is also suffering from a shortage of laborers, similar to what we see in the construction and installation trades. This complicates timelines and drives rates up.
Of course, while the trucking industry is seeking its own solutions, domestic tile manufacturers must also find means of alleviating this challenge. Though it is not a comprehensive solution, Lundgren reports that some relief may be found in turning to other forms of transport, namely rail and water. Several domestic suppliers have rail spurs-often used to bring raw materials in-and may utilize these to move finished product to particular regions, shortening the distance the shipments must travel by truck. Unfortunately, however, the rail system is more robust in areas such as the Northeast where ceramic tile use is more limited, and sparse in others, such as the Southwest and the Sunbelt, where ceramic tile use is more widespread, so rail is obviously a limited solution.
Similarly, manufacturers may look to waterways for some relief, suggests Lundgren, floating material down river and dropping it off at ports to be distributed by truck thereafter. Again, this solution is fairly limited, yet one that may provide some degree of relief.
THE DISTRIBUTION DILEMMA
As the ceramic market has changed, so has the distribution game. As it is often cheaper to bring product in from abroad, distributors have leaned heavily into that endeavor and are working hard to build their own brands-not simply represent a manufacturer brand.
That doesn’t mean, of course, that importers are partial to imports over domestics, just that with the accessibility and affordability of imports in the market, distributors have a leg up in the bargaining process. “Today’s distributors buy lines, not brands,” says Lundgren. “This has happened over the last five years.” This practice allows distributors to cherry pick, bringing in exactly what they need and eschewing what they don’t. When the power structure was in favor of the manufacturer, they might have said, “You like that line? Well, you have to take these three with it,” thereby utilizing mass to strengthen both the bottom line and the brand.
And because technology has leveled the playing field with regard to design, even if a U.S. manufacturer rolls out a stunning new aesthetic, distributors know they can get a similar look from abroad, in relatively short order, often from China, which has proven to be especially nimble in reproducing other manufacturers’ aesthetics.
It’s a complicated situation, but one Michael Kephart, president and CEO of Wonder Porcelain, hopes may soon swing in favor of U.S. producers. “Bringing in product from China to the West Coast is very cost effective, and it’s hard for U.S. manufacturers to compete. But in China, labor costs are going up. Energy is too. And there is a lot changing geopolitically that is creating headwinds there. U.S. producers have to defend themselves to service and supply the market. For us, that’s harder on the West Coast, and that leads to West Coast distributors making a larger impact in the value chain of the U.S. ceramic industry. I’d bundle big retailers in with them too. Both privately and publicly held players have sharply focused on logistical operations. Some of that has been the ability to source from Asia. But we are optimistic they might see that domestic supply options can also be part of their business models.”
Distributors that have been aggressive in responding to market dynamics have seen a payoff. Snell points to Emser’s push eastward and Bedrosians heavy diversification into panels as strategies that have benefited the firms that employed them. And Molina adds that those distributors that have responded to the consumers’ current preference for local sourcing and “localized” their globally sourced lines with community-based branches are also seeing that strategy pay dividends.
All in all, Fregni believes that the distributor’s global approach gives them a leg-up, adding, “The major importers are a step ahead of everyone because they have a very sensitive thermometer. Because they are global-source companies, they use their thermometer to jump on anything that can give them an advantage. They buy in multiple currencies from all over the world, and they have built up the knowledge and experience to make them strong and capable of changing strategies very fast to minimize the loss and maximize the profit.”
Developments at the retail level are just as complex. Saguatti says, “Floor & Décor is being chased by the big boxes. They have to find a way to defend themselves that the big boxes can’t imitate. Traditional dealers are being squeezed between the manufacturers’ flagship stores and big distributors that sell directly to the public. At some point, the end users will ask themselves why they are going to an independent dealer and paying more when the porcelain is basically the same everywhere. Consumers are getting more savvy and beginning to understand this. For the small neighborhood dealer, it will be tough. As the market is commoditizing and everyone has access to the same technology, manufacturers can supply product to the big boxes that was only at the independent dealer previously.”<
Installation labor challenges continue to plague the ceramic tile market, and this challenge rises above all others because it isn’t about shifting channel strategies or trimming out cost but innovating a centuries-old process and changing societal mindsets.
There are two factors at work here. First, the installation of ceramic is hard, slow work, and it’s time-consuming. And, second, there are few people who seemingly want to do it.
As for the former, for years, manufacturers have been seeking a solution to expedite the process, and, to be fair, some progress has been made, particularly on the thinset and grout fronts.
Click systems, akin to what we see in other materials, have been rolled out from time to time, but these have been largely unsuccessful and limiting. And, ultimately, manufacturers must be certain that a click solution that streamlines the installation process doesn’t also undermine the category’s strengths-its long-term durability and waterproof nature-thereby shooting the category in the foot its standing on.
Hopes about potential streamlining innovations that enable tile to be installed more easily, more quickly and, consequently, more cheaply vary greatly among industry experts.
“We have a thinset method over concrete, but I think it’s about as fast as it will go,” says Snell. “Lick and stick? Who would use that? DIYers? We aren’t looking at it.”
Mark Shannon, executive vice president of sales for Crossville, points out that even a revolutionary solution is dependent on market acceptance, adding, “It’s possible that innovation to speed up tile installation will happen. Lots of manufacturers are hoping for it, but adoption is key.” He also notes that A&D typically won’t spec products that aren’t dictated under formal standards, so until that happens, acceptance may be limited to residential use.
“We’ve been trying as a company, as a leader in the space, to create products that take labor out and make it faster, from an installation perspective,” says JT Turner, president of Dal-Tile. “I think we’re getting closer. We don’t have anything to market yet that I would say is revolutionary change. We’ve been evolving in that direction. Hopefully soon we’ll have something out there that dramatically changes that labor equation, but it’s for sure the number one impediment to the growth of the business. We are just significantly more expensive installed than any other floorcovering. Also, ‘professionally installed’ creates an environment where [the consumer] waits today. They are quoted a much longer lead time for a ceramic install than they would be for just about any other kind of flooring.”
Lundgren believes that a click product is, in a sense, the industry’s holy grail. “Whoever gets the first click-together wins,” he says.
The creation of a game-changing innovation would alleviate some of the burden on the installation pool, but the fact remains that the industry still needs to increase its ranks. “I can remember in 1991 and 1992 when [presidential] candidate Bill Clinton was talking about the future, and that it looked somewhat like today,” recalls Molina. “Back then, he said that the USA needed to invest in schools to teach the next generation that the future careers were going to be software related-send your kid to learn code. Well, he was right! Every parent pushed their kid to be software engineers. [But] guess what, all those Silicon Valley engineers need flooring!” Molina believes that employing smart political policy is a good approach to solving the crisis: training immigrant populations as well as offering service men and women education programs that result in a path to a great career with high income potential.
Donato Grosser of D. Grosser and Associates sees the shortage as specific to qualified, expert installers and notes that poor installers doing poor work may ultimately give the industry a black eye.
Franceschelli agrees, noting, “A while ago, there was an advertisement supporting professional automobile repairs that stated, ‘You can pay me now, or you can pay me later.’ That principle is widely applicable, including for tile installation. If a job is not done by skilled labor with quality materials-pay me now-the risk of subsequent dissatisfaction and proper remedy will be quite distasteful-pay me later. Long term satisfaction, functionality and value justify a properly completed project.”
Across the board, the experts with whom we spoke praise the Ceramic Tile Education Foundation’s efforts to educate and certify installers and simply hope to see that effort expand.
And Shannon points out that the entire industry should be working at the grassroots level to enact change, partnering with local schools and organizations to educate young people and the under-employed populations about the opportunities of ceramic tile installation.
According to Turner, “There is a huge effort in the Las Vegas market to begin education as early as junior high school and to focus on kids and educate them as to what a tradesman’s career looks like. In today’s economy, tile setters, plumbers and carpenters are all at a premium, and the reality is there is a better economic outcome for many young people today in the trades than there is going on to higher education. Shop is something that our industry is trying to drive back, providing funds for high schools to re-open their shops.”
Saguatti concurs, believing that the real solution to the labor crisis will ultimately be found in education rather than innovation. “I don’t think tile will ever present a game-changing solution to the issue of installation because it’s like asking Ferrari to make a comfortable car,” he notes. “I have seen locking systems, and it’s right to try, but for tile I think there is training to be done. Pioneers in porcelain countertops, for instance, focus 80% on training and 20% on product.”
SELLING THE CERAMIC CATEGORY’S VALUE
The Tile Council of North America’s “Why Tile?” campaign, launched in April 2017, was widely supported by industry players; however, there remains a widespread understanding that there is no silver bullet solution to the challenges the category faces.
The fact is, the impact of LVT has been felt across the category because many consumers simply aren’t looking for “Mr. Right” but for “Mr. Right Now.” Americans today rarely commit to forever homes, so why would they commit to forever floors? The fact is, “long-term value” and its partner “resale value” are luxuries that many Americans don’t have the financial liquidity to invest in. In fact, Saguatti believes that the “forever floor” message may actually be counterproductive and instead advocates messaging centered around “cleanability, durability and the fact that ceramic can present a complete solution, a seamless environment from bath to kitchen to outdoors for the floors, walls and countertops.”
Snell suggests that the industry’s next moves should, perhaps, focus not only on promoting ceramic’s pluses but also drawing attention to LVT’s negatives, and that bet may indeed pay off in consideration of the market’s current fondness for “waterproof.” After all, the only truly waterproof flooring installation is ceramic.
Fregni adds, “We need to try to go after other hard surfaces segments, such as laminate and LVT, as well as carpet and hardwood. The only way we can do this is to let the consumer know about what I call a responsible, cautious and knowledgeable decision. Porcelain has its advantages that we must convey properly to the end user. For one, it is natural, and it promotes a healthy indoor environment; it’s also easy to clean and hard to chip, scratch and crack. It’s versatile. It’s long-wearing, and it’s durable.” He points out that tile is a responsible decision for the consumer, especially with the huge social movement toward well-being, adding, “We need to take care of our families, and we can start doing that in our house and workplace, since those two places combined represent 90% of where we spend our day.”
Kephart believes that social media allows the industry and manufacturers a means of selling ceramic’s attributes directly to consumers-or at least consumers who are plugged in-via a direct channel it hasn’t possessed before, and that is an opportunity that should be taken advantage of.
As was mentioned earlier, innovation has provided the ceramic tile category opportunity to diversify into areas and applications where it wasn’t used previously, and these fronts offer a great deal of promise. Ceramic tile producers are an innovative group, and, as overcapacity and low prices squeeze standard floor product, they are working feverishly to find new markets and uses for ceramic products. Gauged porcelain panels opened up a great deal of opportunity, and, once the market is up to speed with regard to the handling and installation of these large slabs, the sky’s really the limit-floors, walls, countertops, cladding.
Stonepeak, which was an early adopter of panels and the first to produce them on U.S. soil, reports that the product already represents a large part of its business, and notes that the standards for the product, introduced at Coverings 2018, represent a great step forward.
Both Dal-Tile and Crossville have formal countertop programs in the market. Of course, challenges remain with gauged panels, as the product requires different tools-including even larger forklifts than are standard in the floorcovering industry-to install and a different knowledge base, but the industry is hopeful that demand will drive development on those fronts.
Several manufacturers also offer outdoor paver products, a boon with the trend toward outdoor living. And Del Conca is taking that one step further, launching a 3cm porcelain paver program for driveways.
Pricing was crunched in 2018, as excess supply drove prices down. Daltile’s Turner says, “The product mix is under pressure as multilayered flooring grabs the low- and mid-range of the market. There is excess capacity in the market, so that drives the prices down. Additionally, you still have a very strong U.S. dollar and a very low cost international supply chain at the moment-no inflation in ocean freight; no inflation in fuel. And with a strong U.S. dollar and the rest of the world’s economy softening, you have a lot of capacity available in different parts of the world-and everyone would like to get into the U.S. market. So, it’s really keeping prices tamped down. On the wall tile and countertop side, it’s always a competitive market from an import perspective, and not [impacted by] multilayered flooring at all, and we are seeing the mix improve as an industry in those places because they are places people are willing to spend money. They see value in master baths and kitchens, and those are the primary places for some of the more decorative products.”
Companies look to different approaches to deal with this pressure. “Companies like ours are making up for the price pressure with efficiencies, cost improvements, product enhancement, and finding more diverse markets for products,” explains Crossville’s Shannon, but by and large, the manufacturers with whom we spoke expect this pressure to continue in 2019.
Perhaps one of the most important things for manufacturers to remember is that it’s very hard to get pricing back up once it has been lowered, so any action taken now will likely reverberate for years to come.
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