Ceramic Tile: The Distributor's Perspective - Aug/Sep 16
By Jessica Chevalier
The U.S. ceramic floor tile business is strong right now. By dollar value, it grew by 7.3% in 2015, second only to resilient, and took a bit of marketshare as well. While the category is in a period of growth, it is also in a period of change. At present, U.S. production from new and expanded ceramic tile manufacturing facilities currently or soon coming online is estimated at 40% of the total 2015 market, rising to 50% over the next five years, says Market Insights LLC.
These events are of particular interest to dedicated ceramic tile distributors and wholesalers, who combine to move approximately 35% of the ceramic tile in the U.S. These important players in the business of tile have a unique perspective on the dynamics of the market and offer their insights on what is to come with the current changes.
PATHS TO MARKET
Ceramic tile’s journey to the end user varies from that of other flooring products due to the way that the tile market developed. In the beginning, there were ceramic tile stores and there were carpet stores, and the two matured their supply chains separately. Carpet, after all, was primarily manufactured in the U.S., while ceramic tile was more often imported from Italy, Spain, Mexico or China by distributors that were then selling it to tile stores, independent retailers or wholesalers.
Over time, both entities began to diversify their product lines with additional floorcovering products. However, their supply chains remained largely as they were—separate from one another.
When home centers came into the picture, they added a new dimension to the ceramic tile business. Primarily sourcing low-cost material from abroad, they increased the visibility of tile as an affordable and hardwearing floorcovering option, and became powerhouses in volume. However, because they order directly from the source, import the material themselves and distribute it via a private network, they move tile from the source to the end user without the help of an independent distributor.
For varying and primarily proprietary reasons, a few significant U.S. manufacturers have also taken distribution in-house, wholly or partially, in an effort to control their supply chains, selling product directly to A&D through showrooms or to independent retailers themselves. Together, these manufacturer-distributors and the home centers, both direct sales groups, account for 65% of all tile sold in the U.S. market.
Accounting for another 20% of the market are ceramic tile distributors, which import tile or buy directly from U.S. manufacturers and sell this product to independent retailers. Another 15% of U.S. product moves through independent flooring wholesalers, who sell ceramic tile directly to the specifier or end-user through company showrooms. Some organizations are hybrid distributors-wholesalers, including three of the businesses highlighted here: The Hamilton Parker Company, Nemo Tile & Stone and D&B Tile Distributors.
WHY THE BOOM?
Ceramic tile distributors are in agreement that the current boom in the ceramic tile market can be credited to technological innovation—manifested in increasing complex and realistic aesthetics as well as larger and thinner formats—on the manufacturing side of the business. These developments transformed tile from what some may have seen as a basic product to a fashion product, increasing the appeal for both specifiers and homeowners. Tile inherently offers great durability, cleanability and an impressive lifecycle story, but the added appeal of style has increased its desirability.
Matt Karlin, president of Nemo Tile, a third-generation family business based in New York City that both distributes tile and sells product through five locations in the Northeast, says, “The ability to create products that replicate other materials has really expanded the porcelain and ceramic game. Today’s products are not only aesthetically pleasing but also technically viable. For example, wood porcelain now has the texture of wood and is color body. Previously, a product might have been technologically viable but not looked good, or it might have looked good but come at too great a cost to the end user. These high-style products are now affordable, and because we have 1,000 different factories making something similar, there is a lot of it out there.” Nemo Tile plans to open two additional showrooms by year’s end, one in Red Bank, New Jersey and another in Boston.
Harold Yarborough, president and CEO of south Florida-based D&B Tile Distributors, agrees and also believes that the widespread interest in home design, flamed largely by home improvement shows, has pushed tile more into the forefront of consumers’ awareness. “Tile is more of a fashion product today,” he says. “The A&D firms have embraced the product and show customers that they can do more than wallpaper and paint. On the consumer end, HGTV and the big boxes provide more exposure than the category had 20, 30 or 40 years ago. In addition, manufacturers can now use inkjet printing to copy whatever they want: wood looks, linen looks, marble and stone looks. It’s more appealing to everyone.”
D&B has nine showroom/warehouses in Florida. The company works with around 25 manufacturers. It stocks 5,000 SKUs, but through its network has access to more than 100,000. Yarborough refers to D&B’s locations as “wholetailer” facilities, in which the company focuses on serving the trade but also welcomes retail customers, most of whom are referred by a tile contractor, builder, developer or A&D. Yarborough feels that this approach is key in his market, which is saturated with competition. He estimates that there are more than 1,000 tile-selling facilities within a five-mile radius of his headquarters.
THE PROLIFERATION OF U.S. PRODUCTION
At present, Dal-Tile, the Concorde Group and Wonder Porcelain have established or are in the process of building plans and establishing U.S. production, and Del Conca and Florida Tile are both adding capacity. As of yet, ceramic tile distributors and wholesalers are uncertain about how this will impact the U.S. market over all and their businesses specifically, but a market flush with domestically made product is likely to feel significant vibrations.
In total, as stated above, estimates by Market Insights put this added production at 40% of 2015’s total U.S. ceramic tile market, rising to 50%, or between 1.1 billion and 1.4 billion square feet of added product. That’s a lot of ceramic tile.
“There are a couple of different schools of thought on the new U.S. capacity,” says Karlin. “While trends are important, in the end it all comes down to price and availability. As a result, there must be a greater emphasis on having better materials in stock, so, in that regard, I think having more U.S. made product is great. On the other end of things, I worry that manufacturers are going to be over-producing, and I worry that this will spoil the market as we know it. If there is nowhere to sell it all, manufacturers will move it at a discount to whomever will take, it, and that will push people away from importing. I hope that isn’t the case, but my concern is that it will hurt the import business in three to five years. You can’t turn a kiln off, and you can’t export U.S. made tile. The export duties are just too outrageous.”
According to Steve Wallace, CEO of Longust Distributing, a flooring distributor that services the southwestern U.S., Karlin’s concerns are to some extend already in play. “As a rule, you never want to import anything that you can buy domestically,” says Wallace. “We added Atlas Concorde USA to our portfolio but dropped several foreign manufacturers at the same time. Our core partners, Crossville and Interceramic, are launching exciting products, and our ultimate goal is to do more business with fewer suppliers.” Unlike the other flooring distributors highlighted here, Longust distributes a variety of hard surface flooring materials and operates as a distribution-only business, with no showrooms or service centers.
Dave Sammons, director of tile services at the Hamilton Parker Company, said that he is taking a wait-and-see approach to the new developments, adding,“A lot of those factories are just now coming along, and it will be interesting to see how it all works out over next 12 to 18 months. We work with many of the companies that are establishing new or expanded U.S. manufacturing.” The Columbus, Ohio-based Hamilton Parker Company distributes ceramic tile, brick, fireplaces and garage doors. It has been in the ceramic tile business since 1983 and serves Ohio and a bit of northern Kentucky through three showrooms.
Yarborough is also waiting expectantly to see how U.S. production will impact his business. “One of our major suppliers from Italy, Atlas Concorde, is finishing up its plant now,” he says. “They are our number-two supplier in volume. To what degree this change will impact us, we don’t know yet. In our market, it’s important that we keep up with the latest fashion, so we import a lot of products. The American factories will have to stay on top of style. For a factory to manufacture for the whole U.S. is difficult; they will have to pull product from overseas to supplement, especially large formats. Most American manufacturers aren’t heavily into larger formats.”
Nemo has already experienced a boost through the new production, making the decision to pair with Wonder Porcelain now that it is manufacturing in the U.S. It is now the exclusive distributor of Wonder from Philadelphia, Pennsylvania to Maine. According to Karlin, though Wonder’s factory won’t be completed until spring, the company began shipping product manufactured overseas to Nemo in late June.
In addition to the aforementioned changes, the market has seen traditional distribution channels challenged, to some extent, as well. Dal-Tile, the largest manufacturer of ceramic tile in North America with over 40% marketshare, has long distributed its Daltile brand via five distribution facilities spread across the U.S. and Canada and more than 250 sales service centers throughout the U.S., Canada and Puerto Rico. Its American Olean and Marazzi lines, which account for part of that 40% marketshare, are distributed through traditional channels.
Over the course of the last six years, the second-largest U.S. producer, Crossville, has progressively been buying up formerly independent distributors—Master Tile in 2010 and 2011, Capco Tile & Stone Distributorship in 2015, Contempo Tile & Stone in 2016 and Design Materials in 2016—and has an additional 29 tile showrooms across the South. It continues to use traditional distribution as well.
Crossville notes that it isn’t seeking to acquire distributors, but instead is taking advantage of opportunities that come its way. “We’ve built our 30-year-old business on an immovable commitment and loyalty to our distributors, who are truly our partners in the marketplace,” explains Tim Curran, co-president of the Curran Group, which owns Crossville. “That’s why we have never actively sought to acquire distributorships, but instead have been open to opportunities as they have naturally arisen and proved to be beneficial for our business and brand long term.”
Florida Tile—the fourth largest player in the U.S. market, owned by the Italian Panariagroup—currently operates 23 tile and stone showrooms nationwide in addition to using standard distribution.
While there is no reason to believe that a tide change is underway, one can only assume that it causes distributors to sweat each time they see their suppliers taking even a bit of distribution in-house. But Yarborough isn’t losing any sleep over the it. Why? Because, ultimately, he can’t control it. “As distributors, our value is in expertise and support to the manufacturers,” he says. “Unless manufacturers want to be a retailer, like big boxes, there will always be a place for distribution. Distributors have to be as much a consultant as they are a sales organization.”
About Crossville specifically, he notes, “Crossville is our number one manufacturer, but they have 20 or 30 showroom locations in the Sunbelt. I suspect that all manufacturers are trying to make sure that they have a footprint in those markets, and, ultimately, they have no control over the direction of distribution, so they could lose their footprint in the market overnight. That’s what is driving them to establish locations, I think. They have so much competition coming into the U.S. market.
“Of course, one of our manufacturers could open locations in south Florida and put us out anytime they wanted. If XY distributor isn’t giving them enough exposure, they can take the line and compete with them. It’s happened to us, and the manufacturer was not successful at it. At the end of the day, how will all this affect us? We adjust. We have to. We are in a very competitive market, and we know how to adjust. Punch us and we’ll get back up. The fact is, no matter how much we sell, they are always going to want us to sell more.”
The value that distributors bring to the table for manufacturers should not be underestimated, according to these distributors, nor should the benefits of generations-old expertise. As we saw decades ago when carpet manufacturers ventured into retail, the old adage of “stick to what you know” more often than not turns out to be true. Knowledge matters. Experience matters and being a jack-of-all-trades typically yields both individuals and businesses that are masters of none.
“ You can only be really good at what you know,” says Karlin. “I’ve never bought another business, but I know what I can and can’t be good at. You have to know what your capabilities are. I know Nemo is capable of being diversified in a stone and tile mix. If we focus and hire the right people to train in setting materials, stone and tile, there won’t be a stronger distributor. I know how to distribute. Being diversified is key and being really good in the areas in which you are diversifying is most important.”
Wallace points to some of the tangible benefits that an independent distributor brings to the table, both for the manufacturer and the consumer, “We have a fleet of tractor trailers that deliver a wide range of flooring products to our customers,” Wallace notes. “We like to think that we can source products that are popular in our region and can get to market faster when we see a new trends emerging. You can replace us, but you can’t eliminate the costs that we absorb.”
Sammons highlights the benefits a distributor brings to the market with regard to product selection. “For manufacturers, taking distribution in house is a way to get their brand name out at the user level,” he says. “It also allows them to push their corporate values down the distribution chain. In some markets, they may be a threat to independent distribution, but they will be limited in the variety of products that they show, whereas a typical distributor may support more lines and offer a wider variety.”
TRENDS & MARKET ACTIVITY
As is expected, because the distributors with whom we spoke serve differing markets, they report a variety of products trends as well as strength in varying sectors; however, there is a degree of overlap.
First and foremost, wood visuals are hot everywhere. Yarborough reports that wood looks are one of his top three selected products, and Wallace says, “A large percentage of the growth has taken place with wood visuals.”
Large formats are also on trend. “Our [south Florida] market is influenced by Europe,” says Yarborough. “Styles hit us sooner than other places in the U.S. Today, 12”x24” is a standard size, or 24”x24”. The market is going large. If a manufacturer makes 36”x36”, the consumer wants that. Typically, the commercial market leads with trends, then homeowners see those products in a hospital or office building or hotel and say, ‘I love that. Let me shop for it.’ We have tiles up to 4’x4’ right now. In the next 36 months, I think it will be typical to see formats that are in the 30” and up range, squares and planks.”
In Ohio, Sammons reports that 12”x24” is a very popular size. And Wallace adds that manufacturers are offering increasingly larger sizes at competitive prices.
Karlin says that planks are actually decreasing in popularity in the New York area, due to installation challenges, “It’s funny because rectangular planks were really big three or four years ago. Now, it’s 4’x4’ and 60”x60”. Some of the longer plank materials have a tendency to bow and lip if not installed correctly. It’s gotten the architects nervous, so we are seeing a trend toward large squares. They can install them in running bond fashion to create a dimensional look.”
Commercially, the distributors note different areas of strength with regard to the sectors. Yarborough points to healthcare and multi-family high-rises as active sectors in Florida.
From the Southwest, Wallace reports that his commercial business, overall, has remained steady, though multifamily has slowed as of late. Senior living is gaining strength in his market.
Sammons points to retail, specifically outdoor shopping facilities, as an area of strength in the Columbus, Ohio area.
As for the New York market, Karlin reports, “The commercial end of things is always very busy. People are always wanting to make a space look better. Because of the ability to do slabs in porcelain—especially wood and cement looks—hospitality is the biggest area of growth. There isn’t a restaurant or hotel not using porcelain now. Before it might have been simple white tile, but now, because the cost is so good, the sector chooses beautiful materials to make spaces look alive.”
Yarborough, Karlin and Sammons all report strong activity in the residential market, particularly on the remodeling side. “In our market, which is a very dense market, homes are in constant turnover,” says Yarborough. “If the economy is up, homeowners will want to enhance their homes. In the downturn, people were staying in their homes longer, so they wanted to make improvements if they had a little bit of extra money, which translated to new baths and kitchens. In both cases, the hard surfaces take advantage of that.” Sammons notes that homebuilding is picking up in the Ohio market, but he adds, “I think where we have seen the biggest growth is when homeowners are staying in their homes and looking to make upgrades. There is more usage of ceramic as they upgrade from LVT.”
While tile is gaining greater saturation in the home, moving beyond the areas of standard use such as kitchen and bath, the distributors with whom we spoke don’t expect that will ever gain the saturation that it has abroad, and, ultimately, they report that consumers are still driven by initial rather than lifecycle cost. “The American thought process is, ‘Let me get the least expensive.’ It’s not the consumer’s fault. They don’t know that all tile is not created equal. People are concerned about cost. That is the driving force, followed by aesthetics. Only 5% think about lifecycle, and when they see something for $2.95 from China, they go for that.”
Says Wallace, “It all comes down to value. The strength of the dollar has allowed the few things that we do import to be of great value to our customers. I don’t necessarily mean cheap, but a lot of value for the money spent. Ink-jet technology has allowed tile designers to have more fun and be more creative in their designs. This is a fashion business; creating emotional connections helps to drive excitement and additional business.”
Sammons reports that he sees installer challenges in his market as well. “Large formats have created a real challenge for installers around there. The Tile Council of North America now has training classes [in installing tile] that they offer, but it still seems like the only way for new people to get into the trade is to work as journeyman under someone who has done it for years.”
Karlin laments, “The busier it gets, the less qualified installers there are available. Because of this hole in the market, you end up with people who aren’t trained to install large-scale porcelains doing just that, and it makes tile look bad. Then we [distributors] have to explain why the tile doesn’t look good. And because the installer is our client, it is really a peculiar situation. There needs to be more training. People want trendier looks but shy away from them because the installer prices it higher. The installation on these often isn’t tougher; it’s just that the installer isn’t educated on how to do it.”
Either the good or bad news, depending on how you look at it, is that the installation problem is one that the ceramic tile business had faced—and managed—for years, according to Wallace. “Installation has been a challenge for the entire flooring industry during the 33 years that I’ve been doing this, and probably always will be,” he says. “Crossville has done a great job with installation clinics focusing on Laminam thin-tile applications. Large format tile and longer length tile has created installation challenges, but strong public demand has forced the installation industry to catch up.”
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