Changes in Distribution: Floorcovering distributors see opportunities amid unprecedented challenges - Nov 2021
By Jennifer Bardoner
Many in the floorcovering distribution business are experiencing double-digit gains, along with a wealth of challenges. Despite supply chain issues, uncertain lead times and exponential increases in expenses, those leading the pack say the future has never been brighter-for those who make it out alive. The current complications only further the distributor’s role, they say, but the next few months could have long-lasting impacts on both the players and the playing field.
CHALLENGES TO DISTRIBUTION
Distribution has always been a game of slim numbers: just enough stock; short delivery windows; thin profit margins. Those numbers are now being tested as cargo ships clog ports, laden with goods from Asia, a critical point in the U.S.’ supply chain for floorcoverings and just about everything else. The congestion is driving up prices, while making it harder and harder to get inventory.
According to Dave White, vice president of sales and marketing for Tri-West, freight has historically cost from $1,500 to $2,000 per container, and it worked like clockwork. “You could give the customer an ETA exactly,” he says. “Now it’s a best guess, and it’s sometimes over $20,000 to get a container here. The importers, factories, distribution-nobody has got this kind of margin in their product to not pass it on.”
Inflation doesn’t end at the port. Driver and warehouse employee shortages are further kinking up the supply chain, leading to jumps in wages or sign-on bonuses to help attract workers and keep goods flowing, though a critical gap remains.
This has led some distributors to hold off or slow down on bringing in product. But you’ve got to have product to sell it, as White points out. “We made the decision from day one that we were not going to stop buying inventory,” he says, adding that many of his suppliers are large and therefore have good relationships with logistics companies. “At any cost we were going to keep buying and buying and getting inventory here. We have the largest volume of inventory in the company that we’ve ever had in our history. It’s just inflated due to the shipping costs.”
White says his company is very well-capitalized and would operate on “a very low margin structure” if freight costs suddenly shifted the other way, though that’s not necessarily a concern of his. “It takes a while to flush that stuff out,” he says, adding that he anticipates a gradual decline.
While no one has a crystal ball, many of the sources we talked to don’t expect costs to normalize until well into 2022 if not later, though any number of factors could impact that timeline. In the meantime, having inventory-just about anything in stock-will be key. “It’s almost like, ‘If you’ve got a grey in stock, or show me the five greys you have, I’ll just go with whatever you’ve got in stock,’” says J.J. Haines CEO Hoy Lanning.
Maybank Hagood, CEO of Southern Diversified Distributors and William M. Bird, says the federal Paycheck Protection Program “stood right in the middle of a very difficult second quarter [in 2020] and it allowed us to not let anybody go, not change anybody’s pay and to stay the course on our inventory strategies,” which is paying off now.
“One thing that is sort of a double-edged sword for distribution is we are not making the product, so we don’t have control over that,” he says. “But we do have control over our purchasing philosophy and what type of safety stock, what type of inventory strategy we want to operate under. I think the companies that stayed the course last year are reaping the benefits.”
With many distribution companies historically small owner-operator businesses, the consensus is that consolidation, a trend over the past 30 years, will likely accelerate. White says Tri-West is already “taking a lot of marketshare because we have inventory and a broad line of products that we source.”
“We’ll see more consolidation,” says Jeff Hamar, executive chairman of Galleher. “Demand is covering up how Covid is going to play out. We’re all getting drunk on the Kool-Aid right now because business is good.”
Lanning estimates the overall industry’s top line growth is up “10% to 20% depending on who you’re talking to.” A normal growth rate is around 3%, he adds, though he tempers the current year-over-year increase by noting the 40% dive his company took in 2019. And Hamar points out that sales dollars, which are currently inflated due to rising costs, do not equal sales units.
“For the first time in 40 years, we have more demand than supply,” says Hagood, but distributors are also paying more for everything from the materials or products that make up their inventory to the fuel to get it where it needs to go to the employees who handle it on the back end, and these increases often come with zero to little notice. Bruce Zwicker, who now works as a consultant after retiring as president and CEO of J.J. Haines in 2017, says the flooring industry has been dealt “four or five waves of price increases in the last nine months.”
Each of those price increases is a drain on distributors’ manpower, as someone has to take on the task of keeping everything updated, Zwicker notes, and it obviously complicates distributors’ bottom line. “You’ve got producers throwing out price increases like crazy and distributors running around like maniacs trying to get their prices up,” he says. “Sometimes it’s a surcharge, sometimes it’s the price of a product. Preserving your margins when you’re getting all these price increases is difficult.”
These increases have caused Tri-West to raise its prices three times over the past year-with a 30-day notice so customers can prepare or finalize deals-while other distributors have resorted to a tactic of “call today and I’ll give you today’s price,” White says. “Generally, we will have one price increase a year or no price increase a year. I know of competitors that have had six or seven this year.”
Hamar worries that the continued increases will start to take a toll on the market, and many foresee a dip in retail sales. “My biggest concern is that business is booming because of decisions made a year ago,” he says in reference to many homeowners’ decisions to update their spaces while sequestered at home or when they were unable to find a new home they could afford. Price increases on the builder side could compound the issue. “When you look forward to 2022, are these projects going to get green-lighted or not? It makes you question whether you’re going to price yourself out of the market.”
While many costs will decrease as the market stabilizes, some, like wages, may never return to pre-pandemic levels, especially as companies across multiple sectors compete to attract and retain workers.
“When demand slows, which sooner or later it does, you’ll have the loss in pricing power, but you’ll have costs that are higher than they were previously,” Zwicker says. “The future for distributors will be, what do you do when demand does return to normal growth rates? I don’t know if it’s late 2022 or 2023, but it’s coming.”
The distributors with whom we spoke feel success will come down to some of the tools they’ve always relied on, even if things won’t necessarily look the same. “Covid put in motion changes that are going to be permanent,” Hamar says. “You will have more separation between the winners and the losers, and it will happen very quickly.”
Says Zwicker, “When you look at the future, the issue is going to be the margin squeeze, and the answer is going to be efficiency. The other answer is growth; you’ve got to look at geographic expansion, you’ve got to look at product diversification, you’ve got to look at tools and methods to increase share. The other one is acquisition.”
On a Tuesday afternoon in early October, a time of year when retailers of all kinds are typically gearing up for the holiday rush, the Marine Exchange of Southern California’s daily update listed 61 container ships at anchor or in drift areas, compared with only 25 at berth, at the Port of Los Angeles and the Port of Long Beach, collectively the largest entry point for seafaring cargo in the country. A Business Insider article from early October put the pre-pandemic norm at one ship-at most-anchored while waiting for space on the dock. Lag times before anchored ships can be unloaded recently topped out at one month.
Amid growing pressure, the Port of Los Angeles announced in mid-October that it would join the Port of Long Beach in shifting its operations to 24/7, though it was unclear how many terminals that would impact and when the change would go into effect. Following the announcement, the Long Beach Post News reported that no terminals at the Port of Long Beach were yet operating 24/7, despite it having announced the move a month earlier. And in any case, port congestion is only part of the problem.
A Washington Post article reported a “record” 490,000 warehouse and transportation industry job openings in July, and said that experts predict the gap will only grow. A Bloomberg article from early August said the situation is so bad, some are taking on immigration hurdles to try to bring in qualified drivers from other countries. American Trucking Associations’ chief economist and senior vice president Bob Costello warns that the driver shortage could hit 100,000 by 2023, up from 60,000 at the end of 2018.
One of distributors’ greatest challenges at the moment is also their greatest opportunity, both in the short and long term. Lanning says, only half-jokingly, “I used to get phone calls, ‘Hey, you delivered to me at 10:00 this morning, and I’d really like you to start delivering at 8:00.’ Today, people will call me and say, ‘I ordered something in February and they say it’ll be here in July. Can you make sure it’s here by August 1?’”
With the ever-changing challenges of late, White says he’s seen retailers who previously imported their own goods turn to distributors for greater ease of access, and while goods may cost more at every point along the supply chain, they too recognize the need for product outweighs the cost.
“You may say, gosh, it’s 40% more than what we were paying a year ago, but you have to have something to sell,” says Rick Knowles, vice president of sales and marketing for PanTim Wood Products, a Maine-based supplier of hardwood, adding, “I think the customer has gotten to the point where they’re seeing it in their entire supply chain, and whereas there was a lot of angst and disbelief at the start of this, they’re a lot more understanding now. I think most of our distributors have seen a real explosion of business this year, and it could be even better if they could get enough goods to fill orders.”
Getting those goods comes down to purchasing strategies, capital and efficiency, though no one we spoke with offered specifics in the latter category. However, Lanning hinted at an overall strategy: “A lot of distributors are talking amongst each other and doing things to consolidate-consolidate freight, the cost of displays, material, whatever. You’ve got a really tight group in distribution. I think guys that are still in business in distribution more and more will either consolidate literally or consolidate certain things.”
White and Lanning agree that, these days, simply having inventory is a winning business strategy, but that will not be the case forever. “Capitalism works,” Hamar points out, and when the system rights itself or demand stabilizes, distributors’ intimate knowledge of local markets will again be the main selling point, they say. “We find that larger nationwide manufacturers/distributors will often create products for the whole country,” says White. “With 90% of what we sell, we have the ability to get involved in the design stage, from the specification to the color to the price point to the locking systems. We run detailed reports on all our SKUs; we can see where the trends are going for colors and price and species and looks. We have eight or so product managers, and we spend hundreds of hours designing our own products. If you don’t have that team to keep coming out with innovative products and the right colors, having the right inventory, the right trim available…you’re basically going to fade away. It takes a lot of work. It takes capital.”
All of the sources with whom we spoke see distributors continuing to develop their own brands or products as a way of not only leveraging their knowledge of the markets they serve, but also controlling their own destinies a bit more, especially as large manufacturers go direct to market and big box stores create or acquire their own house brands. “If you go to Europe, the distributors over there are the brand,” Lanning says. “They might have 20 different manufacturers in a display, and they are the brand. I feel like that’s begun to happen here, and with some of the manufacturers doing their own distribution or doing it through third-party logistics, it’s going to drive it more that direction. How could it not?”
Tri-West is set to launch new products in December, after recently adding four, says White, noting the niche in terms of availability and consumer preference customization as a selling point. But it also comes down to relationships, another benefit distributors have over large-scale manufacturers, he says. “The retailer has got a lot of power over what the consumer purchases. They tend to promote things that they like and have good experience with,” he says, noting responsive customer service and ease of installation as driving factors.
Whereas in other industries branding has become synonymous with success, that’s not the case when it comes to flooring, Hamar says, adding that distributors can take a lead in creating “brand equity” and demand through social media. Thanks to efforts including paid influencers, he says Galleher’s two private label brands-which account for half of business-are up 37% this year in dollars.
“When I started in this business, the brand was a huge piece,” says Lanning. “You carry one brand and another guy carries another brand. That’s shifting in a lot of ways. Today, there’s no real dominant brand that distributors can hang a hat on.”
Hagood points to the proliferation of microbreweries as evidence of a wider trend away from institutionalized products in favor of niche ones, customized brands with more of a local or regional relationship, and says that social identity may include a brand’s values as well.
While the current challenges of importing products will not last forever, the pandemic has proven the dangers of putting all your eggs in one basket. Beyond expanding their product lines, distributors are interested in diversifying the places from which they source products or materials. Even without supply chain disruptions, there are drawbacks on the import side, including tariffs and longer lead times. “I think some of these guys that have built LVT plants in the Dalton, Georgia area have much better vision than me, because why would you have done that?” Lanning muses. “One was probably to avoid tariffs, but certainly to control having something in this country was a big thing.”
While there is not enough domestic flooring production capacity to support demand, there is an appetite among distributors for a greater focus on U.S.-made products. “There’s a tremendous amount of interest in finding the right domestic sources if they’re available,” Hagood says, though he adds, “I believe there’s going to be, for a long time to come, a healthy mix of sourcing domestically and from an import standpoint.” Popular products like LVT and European white oak are not readily available domestically, he points out, though that could change if more Chinese manufacturers follow Huali and Creative Flooring Solutions in establishing plants here-or if consumer preferences start to shift. Lanning and White both anticipate a growing demand for laminate, which is largely produced in North America. Lanning says laminate has grown “at a much bigger percentage than other things,” which he attributes to availability as well as strides in water resistance and consumers spending more time on the Internet researching the various product options.
“One thing that’s in the asset column for distributors is we can be nimble and be flexible,” Hagood says. “What we’re trying to do is understand our customers well enough to know what’s going to sell in our region of the country, so we find out what customers want and then source both domestically and globally to go find those products. I would always prefer to buy domestic, just from a lead time standpoint, but there have been a number of products over the last five years that you couldn’t source domestically. Some of that is evolving pretty quickly, with more options coming.”
After more than a year of product and employee shortages and dismal headlines, expectations have, for the most part, adjusted, which is to say they are low. “I hear the saying ‘It is what it is’ these days,” says Knowles.
But it is not a time to rest on one’s laurels, Lanning says. “What are we not offering that would really benefit the consumer, the retailer?” he asks. “Now is a great time to figure it out.”
The ability to bundle tailored products at a reduced or competitive cost is a perennial benefit, Lanning and Hamar say, but opportunity remains in helping their customers market those products, whether through stocked store displays or robust e-commerce offerings. Knowles says he didn’t see a surge in online sales during the pandemic, but he believes it’s important for manufacturers and distributors to create a place for the consumer to find information about their products, even if the purchase happens at a brick-and-mortar store.
“I think people will be mistaken if they think flooring is immune to the broader trends in e-commerce,” says Hamar, whose company has a new AI system scheduled to go online November 1.
Hagood points to the days when having an 800 number was considered a value-added service. “Today’s value-added service is tomorrow’s commodity,” he says. “Now, the value-added service is the Internet.” To help independent retailers capture consumers online, where they often start their purchase decisions, his company has spent years developing a sister company called Twenty & Oak that acts as a consumer-facing portal to help channel buyers to aligned retailers, while also serving as an interactive information hub for all kinds of flooring choices. Visitors can take a quiz to help them decide which flooring material may be right for them, order samples, browse the virtual showroom and shopping guide, or connect with a dealer for measurements, a quote and, ultimately, installation.
Haines Connect, meanwhile, is a resource for retailers that allows them to check and order inventory in real time 24/7, access deals and promotions to help them grow their sales, pay invoices or get a price quote. Lanning says the 400 member retailers who have access through the Haines Loyalty Club report that “they see the need growing every day,” and while his company doesn’t offer a direct consumer site, he sees bundling installation as a way for retailers to drive business back to their stores.
Ultimately, says Lanning, the road to success looks much the same no matter which side of the distribution avenue you’re on: “What can we do to make life easier for somebody? If we’re easier, and we solve a problem, [people will say,] ‘Man I want to do business with them.’ And I think that’s the secret.”
HITTING DIFFERENT MARKETS
While not all distributors sell to each of the various channels served by the industry, White says Tri-West supplies retail, commercial, property management and residential builder clients, with each typically accounting for an equal part of overall sales. Some sectors, like retail, saw exponential growth last year, while others, namely commercial, lagged, making a diversified sales portfolio a possible path to longevity.
With the surge in retail as consumers have funneled their disposable income into home renovations, residential replacement has grown to over 50% of Tri-West’s business, he says, but many fear a drop in such sales as projects get completed or prices make consumers less likely to undertake them.
Meanwhile, after a year of stalled commercial and property management sectors, commercial is starting to come back online, White says. And the property management side, which hasn’t seen the typical refresh activity due to eviction moratoriums, is being jumpstarted by new construction. The statewide eviction moratorium in California, where Tri-West is based, ended September 30.
Single-family home building has remained a fairly consistent source of sales, he says-though based on September’s U.S. Census Bureau figures, the sector may be in for a dip in activity. After several months of modest gains, home building slipped in terms of housing starts (-1.6%) and permits pulled (-7.7%), a forward-looking indicator. However, construction activity is still up over last year.
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