2007 Hardwood Update - October 2007
By Brian Hamilton
Like other segments of the floorcovering industry, U.S. hardwood manufacturers are bracing themselves for a rough ride the rest of this year and probably for most of 2008. There are few signs that the housing industry, in particular the builder market, which consumes about 58% of residential hardwood and 47% of all hardwood sold in the U.S., will turn around anytime soon. Major homebuilders are losing money hand over fist, inventories of existing homes for sale are rising, and homeowners are going through foreclosure in record numbers. Commercial projects are helping some companies, but overall they make up only about 12% of all hardwood sales.
In stark terms, hardwood flooring sales, which make up more than 10% of overall flooring purchases, are projected to drop 13% this year to $2.04 billion, and not reach peak 2005 levels until 2010, according to the US FLOOReport.
Margins are also being squeezed by a combination of too much capacity, falling manufacturer prices because of weak demand, and raw material costs that, if anything, are rising. It’s all compounded by the fact that demand for wood in the rest of the world is not slowing down. The National Wood Flooring Association believes wholesale prices have generally leveled off and probably won’t drop much further.
Despite the U.S. woes, times are actually pretty good for some Canadian manufacturers such as Lauzon and Mercier because that country is in the midst of a housing boom, especially in western Canada, where there’s a tar sands oil rush in progress and builders can’t put up houses fast enough. At worst, the Canadian market will cushion the blow from the U.S. market. Most Canadian manufacturers say the U.S. market will just keep them from having a spectacular year.
Meanwhile, U.S. manufacturers are tightening their belts as best they can, and most say they are taking the slower times to position themselves for the inevitable time when the market turns around. They say there’s likely to be continued consolidation in the industry similar to Mohawk’s purchase of four Columbia Flooring wood plants and Shaw’s acquisition of Anderson Hardwood last month. Armstrong, the industry’s Goliath, was still on the block as we went to press, but there are still many smaller players in the market.
No company is positioning itself like Lumber Liquidators, which could change the dynamics of the hardwood business—now dominated by sales to distributors—over the next several years. With 104 stores and a brisk Internet business, the company could be among the top five manufacturers this year. It has an aggressive expansion plan underway, highlighted by its intention to raise $150 million through a public stock offering. If it executes its plans, there could be twice as many Lumber Liquidators stores within three years.
One bit of good news for the domestic industry is that a convergence of factors is poised to slow Chinese and other imports to this country, or at least bring their costs more in line with the rest of the world. China is far and away the largest supplier of foreign hardwood flooring to the U.S. From 2001 to 2006, Chinese imports jumped from $8 million to $231 million and last year accounted for 36% of imports and 11% of the overall market.
But that trajectory could change. On July 1 the Chinese government, in its attempt to rein in its burgeoning trade surplus, reduced its export tariff rebate on thousands of products, including an 8% reduction on flooring products. Some experts believe that reduction alone could add 20% to the cost of Chinese flooring. Two other factors include the gradual appreciation of the Chinese yuan, as well as a booming market for wood flooring in China. The cost of raw materials, including energy, is also rising dramatically in China.
While this will change the landscape for Chinese manufacturers, it will also hit some of the major U.S. players that import some of their products from China. In some cases they may decide to look for other sources.
Also in the works is an amendment to the Lacey Act, which stops the import of things like exotic animals. The amendment, which is being pushed by both industry and environmental groups, would extend the ban to include illegally harvested trees and require chain-of-custody proof. China, which imported $3.9 billion in timber logs last year, gets a lot of its wood from Russia, and it’s been estimated that as much as 50% is taken illegally—in fact, Russia plans to monitor the environmental sabotage through satellite imagery starting next year. Russia is also implementing an 80% export tax, which could have a profound impact on the Chinese market. In addition, Greenpeace says that as much as 90% of wood cut in Indonesia and Peru is also cut illegally.
Most manufacturers still plan to add new products over the next year, many of them at the higher price points, although perhaps not quite as many SKUs as in years past because a flop can cost a lot of money.
Engineered floors are poised to dominate the market, and now account for half of all sales, partly because they can be installed in moisture-sensitive areas where solid floors can’t. They’re also easier and faster to install in places like apartment buildings and high rise buildings. Plus, once they are in place, engineered floors are virtually indistinguishable from solid floors.
Meanwhile, the nation’s hardwood suppliers are waiting for the market to turn around again.
“I’m old enough to remember the ’80-’82 recession, and when the market took off in ’83 it took off fast,” said one executive on the importance of being prepared for an upturn.
Last month, Anderson surprised the floorcovering world by agreeing to be acquired by Shaw Industries. The acquisition of Anderson, which had estimated sales of $151 million last year, gives Shaw a strong position in the hardwood sector (see The Distribution Evolution on page 16 for a complete analysis).
The 61 year old company, which made the first engineered wood floor in the U.S., has an advantage over some domestic manufacturers because it uses labor from South Carolina prisons to produce some of its products. While the prisoners are paid the same hourly rates as regular employees, Anderson doesn’t have to worry about laying regulars off during slow times—it just cuts back on prisoner hours.
Anderson is working on forming and strengthening relationships with distributors and retailers that it believes can weather any storm. For example, it recently updated all its displays in Avalon Carpet’s stores.
The company also tries to anticipate trends and it hopes that ability will help it through the downturn. It introduced factory finished handscraped engineered flooring back in 2001, as well as the first aluminum oxide finish. Its most recent products, the Virginia Vintage line of engineered flooring, feature the look of aged, hand painted planks. It’s now one of the top selling lines for Anderson.
The firm plans to bring out a line of Brazilian exotics later this year.
Armstrong, the world’s leading hardwood producer, with an overwhelming 32% of the market last year, was almost five times larger than second place Mohawk. The company continues to expand its product line. Its Global Exotics line of both engineered and solid wood has extended the firm’s reach into exotics. A year ago, Armstrong began offering locking hardwood floors: the Armstrong Locking Collection and the Bruce Turlington Lock and Fold. Both are selling well, the latter especially in Lowe’s stores. In August, Armstrong was awarded a patent for its NextGen locking technology, a system where the lock is cut into two or more layers of engineered wood, which results in greater strength and a tighter fit. The technology is used in both the Armstrong Locking and Bruce Turlington lines.
The company has launched 500 new SKUs in the last two years, but the rate has slowed now, due to the weakened economy. However, the firm is adding a 3⁄4” thick engineered floor, with wider planks, and it’s being tested by several large builders. It was developed partly because builders are using wider truss systems in new homes and the new product adds stability. Another new product, Premier Performance, featuring acrylic infused technology, is being marketed for both residential and commercial use, but will be launched initially as a higher end residential product.
Mohawk Hardwood is in the early stages of integrating the August purchase of four Columbia plants—three in the U.S. and one in Malaysia—into its operation. The U.S. assets included two pre-finished solid wood plants and one engineered plant. The Malaysian plant produces engineered products. Before the sale, the plants were operating at about half capacity, with about $180 million in annual sales, giving Mohawk plenty of room to grow, cut costs and maintain product consistency. With the purchase, Mohawk is now the number two player in the industry, but still well behind Armstrong. The challenge for Mohawk, which had been Columbia’s largest customer, is to make sure it has good balance and market penetration but not too much penetration, which can make it too susceptible to economic downturns. Mohawk is maintaining the Columbia brand, which will be a distributor brand and include only finished products. Columbia still owns its plants for unfinished wood.
Mohawk will introduce new products to both the Mohawk and Columbia brands early next year.
MANNINGTON WOOD FLOORS
Mannington, which manufactures only engineered floors, hasn’t slowed down on its product development despite the downturn. This has been the firm’s biggest year with 31 new SKUs, but next year should be even bigger, with the introduction of up to 50 new products. Mannington maintains about 120 SKUs at any given time, so many older products will be phased out by the end of next year.
New products are accounting for more than 10% of sales so far this year. The firm introduced the fifth generation of its Caspian Collection, which features a locking, fold down installation system. It’s being well received, especially in high rise buildings, where rapid installation and sound abatement are important.
The firm’s entry level handscraped floor, Castle Rock, has been its most successful product.
Mannington is just beginning to focus on the commercial business.
Canadian firm Lauzon is reaping the benefits of the Canadian housing boom, although the U.S. is still its most important market, accounting for about 65% of sales. As a result of the downturn in the U.S. market, the company is predicting an average year in revenue. Wary of the high cost of making a mistake in a down market, Lauzon is increasing its market research, especially by holding focus groups with clients. It has also more than doubled its mill tours for distributors and their clients so they can be “Lauzonized,” as well as educated about the company’s environmental story.
Next year Lauzon plans to add new wood species to its lineup, hoping to match the success of its high end Eterna line. There will also be added emphasis on marketing its Classics Commercial line next year.
Lauzon has been pumping $19 million into its Thurso, Quebec sawmill to create one of the largest hardwood sawmills in North America. The mill, which will manufacture random length boards, custom orders, and orders for industrial customers, will lower production costs by up to 40%. The investment will also nearly double the mill’s capacity, from 30 to 54 million feet. It’s the first part of a $50 million investment (the government is contributing $6.3 million). Lauzon will sell the prime wood cuts to the furniture industry, and much of the dust and scrap will be turned into wood pellets to help create electricity for the plant. Lauzon is also pursuing custom commercial projects.
While hardwood sales were flat for Shaw in the first half of the year, the company continues to ramp up production of its new Epic line of engineered hardwood in a converted yarn plant in South Pittsburg, Tennessee. Epic, which comes in both 3/8“ and 3⁄4“ thicknesses, is the first line Shaw is manufacturing itself and it’s already showing signs of becoming a huge success. The firm is educating its subcontractors and builders about the advantages of engineered flooring. It has also been marketing the green qualities of that product, its stability, ease of installation, and the fact that engineered wood offers wider planks than solid flooring.
Shaw, which typically invests as much as $3 million to bring a new line of flooring to market, is being pretty cautious in the current slowdown about introducing new products. The firm will probably bring ten or so to market in the next year, most of them outsourced.
Engineered flooring represents at least 60% of the firm’s hardwood sales. Shaw was expecting to manufacture more of its own products in the future because there’s room to expand the Tennessee plant, but last month’s acquisition of Anderson Hardwood adds a whole new dimension to its plans.
For more about Shaw’s acquisition of Anderson, see The Distribution Evolution on page 16.
Like other Canadian firms, Mirage’s booming domestic market is soothing the sting from its U.S. business. Mirage, known for its high end, high quality products, expanded one of its plants last year. At Surfaces 07, it introduced a new glueless locking engineered product called Mirage Lock.
Mirage says sales have exceeded expectations in the U.S. Its products have been popular in projects like high rise residences and in Main Street commercial businesses, because it installs quickly over a wide variety of subfloors. Increasing its commercial business has been a renewed focus for Mirage this year. Engineered flooring is the fastest growing segment for the firm.
Mullican, which has one of the most complete hardwood lines on the market, doesn’t plan to introduce many new products in the near future. But it is pushing the fact that its prefinished solid domestic floors have been verified as sustainable by Appalachian Hardwood Manufacturers Inc., which means the products come from a sustainable forest in the Appalachian region. The company believes that consumers are becoming much more interested in green products and it expects the new designation to provide sales momentum.
Unlike most of the major manufacturers, prefinished solid flooring still makes up 80% of Mullican’s sales. But the firm’s engineered products, a new category for Mullican in 2006, are starting to gain traction. The firm’s wider plank, hand sculpted and wire brushed flooring is selling well, even at roughly $14 per foot retail. However, exotics are losing a little steam.
PINNACLE INTERIOR ELEMENTS
High end supplier Pinnacle anticipates stronger sales this year, primarily because it has invested in a new display system that can hold all 104 SKUs of its products. The new displays can show everything in eight linear feet and require much less floor space than the older displays, which required 24 feet for just one collection. This means dealers had to use a lot of floor space to show the entire Pinnacle line. Pinnacle will direct ship to dealers without additional cost to help them control inventory.
The company says most of the “Innovation” dealers who are using the new displays have had sales increases approaching 20%, with some as high as 80%, while stores with the older displays are flat or down through July. Pinnacle hopes to have all 1,000 displays in place this fall. Dealers who use the displays get a more competitive pricing program, co-op advertising and other benefits.
Pinnacle’s handscraped, distressed and exotic lines are selling well. The company is considering producing a lower priced engineered floor that would feature shorter planks and contain less expensive core material than its other products.
Unlike most other manufacturers, BR-111, the leading importer of Brazilian flooring, says it has seen an uptick this year in remodeling work, which has helped offset the slow builder market. This year, the company began reaching out to the A&D community. It’s offering continuing education classes specifically for members of the American Institute of Architects and the American Society of Interior Designers and is poised to release a new D&A Design and Architectural Series of flooring for the high end housing and commercial markets. The company will also continue to push brand awareness with targeted consumer advertising and will support its dealers with product promotions and a new cash awards program for sales associates.
The company has just introduced its Triangulo engineered products in a new 5” plank and anticipates heavy sales. The Triangulo line is being pushed this month with special pricing during its Green Month promotion.
Over the last few years, BR-111 has been one of the strongest advertisers in the floorcovering industry. It’s spending nearly 12% of U.S. sales, compared to Armstrong, which spends about 1%.
Lumber Liquidators manufactures about 70% of its primary brand, Bellawood, in its Toana, Virginia plant. The Boston firm also cuts deals with independent sawmills to take an entire year’s supply of wood from each. It has six value priced brands, which it sells exclusively through its own network of stores. The firm also sells laminate flooring, cork and bamboo, and miscellaneous interior items such as vanities. In 2006 the fast growing company increased its revenues by 35% to $332 million and through the first half of this year revenues totaled $197.7 million.
Lumber Liquidators plans to open 25 stores this year, and up to 40 annually over the next several years. New stores typically become profitable in three months and return their initial capital investment in seven months.
Lyptus, a subsidiary of Weyerhauser that specializes in Brazilian eucalyptus flooring, is counting on growth by revitalizing its engineered line. The firm expects that makeover to be ready early next year, perhaps in time for Surfaces. The yet-to-be-named product, which will sell for about 10% more than Brazilian cherry, is part of Lyptus’s planned expansion into the southern U.S., where it’s also working to develop a distribution network. Nearly all of Lyptus’s current sales are in the North. The new line will initially target the residential market, probably through sales to builders. The company said it is also “riding the green wave” and believes that its environmental story will help insulate it from current economic conditions.
SCANDIAN WOOD FLOORS
Brazilian flooring manufacturer Scandian hasn’t been hit as hard as some other manufacturers, partly because its exotic floors are still selling reasonably well and the Scandian brand is fairly new to the market. The company launched its first engineered floor last year and continues to move aggressively in that category. Sales this year could be roughly 50% engineered, compared to 15% last year. Scandian has just incorporated a Unilin clic system in its Bacana engineered flooring, and is shipping displays to feature the new product. Seven of the original ten colors are available in a 4” plank.
A new handscraped collection, Sonata, will debut at Surfaces 2008. Scandian is working to gain floor space at retail stores and is likely to have a new all-encompassing display next year.
Tarkett Woods went through a complete makeover a few months ago, starting with a new management team, new products and a new approach to the market. Larry Knust is the new GM, Wendy McIlquham is director of marketing and Darrell Tweed is the sales manager. The new team has also decentralized the business, giving their regional managers new clout. The firm plans to return to Surfaces next year with new offerings after missing the last couple of years and is viewing the show almost as a coming out party. The company launched a lot of products last year, more engineered than solid, and is just now seeing the impact. It’s also applying the flexibility that comes from manufacturing more than 90% of its products in Johnson City, Tennessee, by offering more services, such as special order colors and custom molding.
The company is promising significant changes next year, but it won’t talk about them now.
MERCIER WOOD FLOORING
Sales in this Canadian firm’s home market are surpassing all expectations. It’s also working on developing its retailer network in the U.S. and last year signed Herregan Distributors Inc. to expand sales in the Midwest. Two years ago, Mercier, the inventor of prefinished hardwood flooring, rolled out its first engineered line. Engineered flooring already makes up about 30% of sales, the firm says, despite the fact that Canadians generally prefer solid flooring.
Mercier expects to introduce several new products at Surfaces next January.
Junckers, unlike other hardwood manufacturers, targets the commercial market. In June, the company moved its U.S. corporate office from California to New York City, mostly to be closer to major architects and designers. The move also put it fewer time zones away from its parent company in Denmark. In addition, it named Karen Gerdes the new president of U.S. operations, and Candace Canola the new chief financial officer.
The company said sales have been good this year, thanks in part to projects for Starbucks and BMW dealerships.
SUNSHINE WOOD FLOORING
Sunshine was one of the first importers of Chinese manufactured hardwood and bamboo flooring to set up shop in the U.S. This has been one of the roughest years ever for the firm. New Chinese taxes have added about 15% to Sunshine’s costs, on top of the appreciating yuan, which effectively eats up most of its margin. In addition, the booming Chinese economy is putting pressure on energy prices and other basic costs. With the U.S. market down—especially its large retailers—Sunshine believes sales will be off as much as 30% to 40% this year. It doesn’t plan to offer any new products soon.
About a year and a half ago, Sunshine decided to go after the Chinese market and now has nearly 100 stores there which are owned equally by Sunshine and its dealers. The firm is also expanding its product line into high end doors and has decided to start selling vinyl, laminate and tile produced by American companies, for the first time. About a third of its business is with small to medium builders and contractors who have been with them for years.
Copyright 2007 Floor Focus
Related Topics:Armstrong Flooring, Shaw Industries Group, Inc., The American Institute of Architects, Mirage Floors, Engineered Floors, LLC, Anderson Tuftex, Tarkett, Mannington Mills, Mohawk Industries