Distribution Evolution - January 2008

By Frank O'Neill

The fallout from the housing downturn is having a big impact on the floorcovering industry these days. All along the distribution chain, companies are struggling. Some, like the Ohio retail chain Best Floors, the distributors Hoboken Wood and Superior, the importer Wood Flooring International, and the laminate/ceramic manufacturer Edge Flooring, have closed their doors. The ceramic tile distributor IWT Tesoro has filed for Chapter 11 bankruptcy. Home Depot has cut 950 jobs and closed three call centers. Carpet industry supplier Dow Chemical has shut down a number of plants and eliminated a number of jobs.

Those are just a handful of the trouble spots in our industry, and there’s little doubt others will follow before the housing downturn is over. As We’ve said before, though, companies that have their business spread between the residential and commercial markets are going to come out of this slump in much better shape than most. Most sectors of the commercial market continue to perform well.

Here’s a closer look at some of the current trouble spots:

• Earlier this year, Buddy’s Carpet, the struggling Ohio retail chain, sold five of its stores in northeast Ohio to Best Floors, a four-store operation. Then in September, all nine stores closed abruptly and Andre Cory, the owner, disappeared.

Fortunately, the remaining 21 Buddy’s Carpet stores won’t face such a bizarre fate. Carpetland Carpet One, the 11 store Cincinnati chain, has acquired 12 of them. Five more in Columbus were bought by Carpet One of Columbus, and four by Carpet One of Hilliard.

Ken Weisbacher, president of Carpetland Carpet One, renamed the 12 Buddy’s stores Buddy’s Flooring America. He’s also forming a new corporation called KW Flooring to encompass his entire 23 store chain. Carpetland ranked 66th on the Focus Top 100 Retail list in 2007, with sales of $36 million. The acquisition will add nearly $20 million to the chain’s sales.

• Meanwhile, the Hoboken debacle continues. That company’s problems dragged Superior, the business Hoboken’s owners acquired a year ago, to its own demise. The fall of the nation’s largest distributor has sent a lot of hardwood manufacturers scrambling to find new distributors, and a lot of retailers waiting for product Hoboken used to deliver. Many manufacturers have already found new distributors to fill the void, so the backlog to retailers isn’t expected to create serious problems.

• While Wood Flooring International has closed its doors, a group of its executives have barely skipped a beat. President John Himes and a dozen other former WFI employees have already launched a new firm called Brandywine International Hardwood. That firm has acquired the brands and websites of WFI to keep supply to its distributor customers flowing. That distributor network includes Butler-Johnson, CMH, Derr, Galleher, Golden State, Herregan, T&L and Wheeler.

The new company, by the way, plans to take WFI’s space at Surfaces.

• Edge Flooring, the Dalton, Georgia supplier of laminated ceramic tile floors, had a unique do-it-yourself ceramic tile that went on the floor like a laminate. The product had some major initial problems, which it later corrected.

Edge was acquired in 2005 by Hunt Special Situations Group, a unit of Hunt Oil. That company decided to stop financing Edge in mid November.

HARDWOOD’S CHANGING FACE
Even if Hoboken, Superior and Wood Flooring International hadn’t closed their doors, last year would still have been a year of big change for the U.S. hardwood business—most of it positive.

There were three major acquisitions during the year—all among top five players. First Mohawk bought the assets of struggling Columbia last summer. Then Berkshire Hathaway subsidiary Shaw Industries bought Anderson Hardwood, the nation’s largest privately owned hardwood manufacturer. Then two months ago, a private investment company bought Tarkett Wood.

Canada’s hardwood suppliers, which have always accounted for a large part of U.S. sales, began to feel the impact of a strengthening Canadian dollar and a weakening U.S. dollar as far back as late 2006. U.S. hardwood manufacturers, meanwhile, were able to take advantage of the weak dollar. The use of American hardwood floors grew 56% in 2006, according to the Hardwood Manufacturers Association. And that figure almost certainly rose in 2007, as the dollar weakened even further, making the U.S. market less profitable not only for Canadians, but also for all the major hardwood importing countries, particularly China.

The latest change came in late November, when Tarkett sold Tarkett Hardwood to New Stream Capital, a Ridgefield, Connecticut investment banker. The new owners, who are changing the name to ArborCraft, get two manufacturing plants in Johnson City, Tennessee and another in Montepelier, Indiana.

Just a few years ago, Tarkett Wood was the second largest hardwood manufacturer in the U.S., but at the height of the housing boom, when other North American hardwood manufacturers’ sales were soaring, Tarkett Wood was spinning its wheels. Sales were in the $125 million range at the beginning of this decade. They’re about the same now.

Even though the new owners take over the company at a tough time for all hardwood flooring manufacturers, it is obviously time for new blood, and the new owners will certainly bring that to the company. New Stream’s Matt Galvez will take over as CEO and Scott Fullerton, also from New Stream, will be the COO.

Tarkett Wood currently does a big business with Home Depot, but the new owners are eager to build sales with flooring retailers and direct to contractors. They’re going to put renewed emphasis on the Harris Wood brand that was so strong in the marketplace before Tarkett bought Harris Floors back in 1983. The company’s roots go all the way back to 1898, when Allen Harris Sr. began making handcrafted golf club shafts before moving into flooring.

THE CASE AGAINST ETHANOL
Consumer Reports recently tested the fuel consumption of E-85 (that’s a mix of 85% ethanol and 15% gasoline) on a Chevy Tahoe. The result was a 25% decrease in fuel economy. That means you go as far on three fourths of a tank of gas as you do on a full tank of E-85. Hmmm.

Also, making a gallon of ethanol consumes almost as much energy as burning a gallon of gasoline. Not only that, but oil pipelines will corrode if you try to use them for ethanol. So you have to put it on trains or in trucks, and that’s much too expensive.

So, why in the name of common sense are so many politicians pushing ethanol? Mostly because it gives us regular folks the illusion that our politicians are actually doing something to promote energy independence.

Ethanol doesn’t make any sense at all to people like you and me, unless you happen to own a few thousand acres of corn, which I don’t. So don’t expect your transportation costs to go down anytime soon. In fact, now that the Fed has lowered interest rates again, oil prices are going to start going up even higher.

If you have any comments about this month’s column, you can email me at foneill898@aol.com.

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