Distribution Report: Challenges remain and there are more on the horizon, but distribution is strong - October 2022
By Jennifer Bardoner
Jeff Hamar has managed Galleher, one of the nation’s largest flooring distributors, through four economic downturns and believes “we’re in the first or second act of a four- or five-act play.” He is among those forecasting a slowdown soon, a challenge for distributors who are struggling to manage inventory levels amid ongoing price fluctuations. But coming off of banner years and with an evolving business model that gives distributors more flexibility than they had in the past, many should be in better shape this time around, says the 40-year industry veteran, who now sits on Galleher’s board after retiring from his CEO role last year.
SUPPLY AND DEMAND
“Last year was a spectacular sales growth year for our industry, as many homeowners upgraded and replaced the flooring in their homes and new housing starts increased,” new Galleher CEO Ted Kozikowski says, adding, “Last year was the highest sales level in Galleher’s 85-year history.”
Instead of an anticipated slowdown when the world went into lockdown, 2020 ended up kicking off a frenzied shopping spree that has continued into 2022. But the onslaught of orders introduced a chain reaction of instability to the global supply chain, the repercussions of which are still being felt. Shipping and logistics capacity was stretched beyond the max; bottlenecks led to inventory delays and unpredictable delivery windows; health-related restrictions hampered production; prices and availability fluctuated almost daily, often to distributors’ and dealers’ detriment. While things have largely begun to stabilize, there is still some volatility, and the trend toward the positive has created new challenges for distributors.
“For any distributor, the pressure will be the cost of inventory you purchased and how long you have had that inventory versus the price customers are willing to pay,” says E.J. Welch president Kavita McCarthy. “Navigating this with effective inventory management is critical to manage through these pricing fluctuations.”
Faced with the uncertainty of product availability and pricing over the past two and a half years, many suppliers began stocking up and are now faced with the opposite problem as demand begins to slow. “The supply chain pressures are easing, but the industry is suffering from excess inventory brought on by the Covid surge,” Kozikowski says. “We like to call it the sugar high of 2021.” Even conservative approaches ran the risk of elevated inventory levels as once-routine shipments came at irregular intervals. “We had purchase orders that were staggered, and unfortunately, the way the supply chain was, they tended to come in gluts as opposed to staggered,” says Dunn Rasbury, director of business development for A&M Supply, a major countertop and cabinet distributor with a small but growing flooring division. “We ended up with more inventory than we needed, and it came in at a higher cost basis than what we’re seeing for new orders.”
To help move that inventory, many distributors are reducing some of their pricing. “Like many distributors and manufacturers, E.J. Welch is experiencing an overstock of inventory due to shipping or labor bottlenecks with our suppliers in 2021,” McCarthy says. “We are responding with promotions and retailer SPIFF programs on our excess inventory.” This is also helping to temper the impacts of inflation on distributors’ customers, who have been faced with countless price increases. “We want to do our part to support our dealers in being profitable at the same time and help them win more jobs,” she adds.
Forecasting demand has become more important than ever but remains somewhat unpredictable. Greg Vale, vice president of sales and marketing for Fishman Flooring Solutions, says he’s trying to look further and further ahead-“We’re looking not only 60 days ahead, but 90 and 120 days ahead”-but unknowns are surfacing more regularly than in the past. “Thirteen minutes ago, I would’ve said yes, I think we’re getting back to normal,” says Vale, alluding to China’s unexpected lockdown in mid-September. And while freight costs have diminished from their peak, albeit at elevated rates compared to pre-pandemic, they are susceptible to fluctuations in gas prices and the global situation caused by the war in Ukraine. “You think you’re not going to have any more challenges, and then you read the blogs on the supply chain,” he quips.
To help keep track of and “right-size” their inventory, as Kozikowski puts it, distributors have been implementing new programs and technology. “One of the things that is definitely a new norm for distributors is updated technology,” Rasbury says. “You have to be able to find a way to be more efficient in this new environment.”
A&M recently updated its warehousing software, logistics platform, e-commerce sites and customer relationship management program. E.J. Welch launched a new portal so the sales team can see real-time inventory, order products directly, manage customers’ open and closed orders, and download price lists, offering greater autonomy in the field, McCarthy says, adding that the internal communication portal was also updated to support the company’s 28-state footprint and large employee base. A new B2B e-commerce site is targeted to come online by the end of this year. Similarly, Galleher’s new enterprise resource planning software allows users to manage and track product, pricing, orders, inventory and more, and in addition to transparency and efficiency, “This system will also allow us to seamlessly continue our expansion plans,” Kozikowski says.
“Technology will be a game changer, and the distributors that adopt better technology to help their customers will ensure long relationships with their customer base,” says Vale, referencing Fishman’s B2B platforms and new delivery tracking program that offers customers real-time updates. “What I don’t think you can replace is that sales rep who shows up and tries to add value to your business. We sell solutions, not products, and you can’t digitally enhance that.”
With supply chain vulnerabilities and fragility exposed, Vale says that “one of the things we learned from the pandemic is how we can try, whenever possible, to source domestic product.” With a heavy focus on commercial, he counts Tarkett and NovaFloor among his branded product lines, which make up the bulk of his business, though he says he believes in a two-pronged approach. “We recently launched and branded our Landmark Interiors line, which we consolidated to one brand so customers can identify all the sub and private brands we carry under one umbrella,” he says, noting that visualizer and dealer locator tools were just added. “The more private labels we got, the more we saw the importance of having an umbrella brand customers could look for and identify as Fishman’s.”
Hamar believes dealers and consumers are becoming more and more “brand agnostic,” playing to the distributor’s favor, and related strategies seem to be growing. “Carpet One proves you can just have a bunch of Carpet One racks and do great,” he says. “The power of the brand is diminishing pretty rapidly in the U.S. There’s a thousand brands out there now, so the consumer doesn’t know.”
A&M counts Shaw among its suppliers, but when it added flooring to its offerings about 12 years ago, Rasbury says the company struggled to find manufacturer partners. More and more manufacturers and some dealers are going direct. Economist Santo Torcivia of Market Insights estimates that direct and mill-owned shipments account for roughly 60% of the business, direct-import by retailers is 15% and distributors are getting the remaining 25% of business.
“Coming right out of the gate, we weren’t able to attract major brands, so we had to create our private label more or less out of necessity,” Rasbury says. “We found it to be a strong blessing,” he adds, listing versatility in product selection, the opportunity to curate products for distinct markets and the ability to also carry any product across his footprint as important growth strategies. Partnering with major brands often requires a distributor to carry a full complement of products that may or not be applicable to their markets’ distinct preferences, while some branded products come with geographic exclusivity for different partners. “I have help from vendors that are sourcing product, warehousing product and marketing product,” he adds. “I’m not over there [in Asia] sourcing it all myself and arranging freight. With tariffs and freight going up and down, having somebody take care of that for me has really been beneficial.”
As more brands go direct, Hamar believes those not personally sourcing products could be at a detriment. Galleher’s three proprietary brands, Monarch Plank, Reward Flooring and Gemcore, help provide a level of autonomy, and the last few years have proven that flexibility is key. “We were lucky early on in that we’ve diversified our manufacturing partners from different parts of the world, so we were able to stay ahead of the shortages and the excess-inventory challenges faced by some of our competitors,” Kozikowski says. “We’ve evolved our relationship with our manufacturers to much more of a partnership, rather than simply a supplier/vendor type relationship. This has allowed us to work closely with our manufacturers to manage inventory and stay ahead of the supply chain challenges facing the industry.”
Counting major labels including Tarkett, Somerset, Boen, Amorim, Indusparquet and more among its offerings, Galleher also imports from Asian countries, including Vietnam, Cambodia, Thailand and Malaysia. “Our policy is to work with manufacturers that can provide the highest quality products, designs and textures, at a price that allows us to be competitive in the marketplace,” he says. “We’ve moved all but a select line of SPC flooring away from China because of tariffs.”
E.J. Welch also has a diverse sourcing model across Asian and European countries, and McCarthy believes it is the best approach for her company, which gained “a winning private label brand,” Hill Country Innovations, when E.J. Welch acquired T&L Distributing two years ago. “Having these strong [supplier] partnerships affords us the ability to leverage their resources and diversification of factories across many countries,” she says, adding that E.J. Welch completely refreshed the Hill Country wood and resilient offerings in the past year. “This presents an exciting opportunity to have a universal product line that we can take across our entire E.J. Welch footprint,” she notes.
Due to the continued demand for housing-which is critically underbuilt-and the preceding current market conditions, Hamar does not expect another economic tragedy like the Great Recession of 15 years ago. “I don’t think you’re going to see as much blood in the streets as we’ve seen in the past,” he says. “I think it’s more like the 2001 recession.” He notes that distributors are operating on higher margins than in the past, and he doesn’t expect this downturn to last as long. “What I think is different this time is a lot of distributors have been able to materially change their business model by having more private label products that offer higher margins,” he says, “so you can absorb a bit more sales decline before it becomes really a critical issue.”
With the pandemic-related surge in consumer spending having pulled projects forward, he believes renovation activity may now be tapering off, especially as home sales stall. In August, the National Association of Realtors reported a seventh straight drop in existing-home sales, which comprise roughly 90% of the homebuying market and generate a wealth of renovation opportunities. “Since flooring is one of the later things to go in a renovation project, I think we’re just now starting to see the impact from sales that started to slow three, four, five, six months ago,” Hamar says.
Amid rising interest rates and inflation levels, Kozikowski is forecasting a flat year in 2022 versus 2021, with modest growth in 2023 as outside economic factors stabilize. “Inflation is a pain point for consumers and has had a negative impact on industry demand,” he says. “At the same time, though, the tight labor market works to consumers’ advantage, and real personal incomes are actually rising. We believe that while this trend bodes well for the industry long term, markets that experienced a boom due to Covid-19, like ours, may be subject to normalization trends that pull them back to pre-pandemic trajectories.” Based in California, Galleher serves a seven-state region comprising the West Coast and most of the Southwest from its roughly 30 locations.
“We’re probably not being as aggressive with some launches and things like that going into the middle of next year,” Rasbury says, noting, “I don’t know that I’m as worried about people being priced out as people getting uncertain. Flooring is not something that you have to necessarily do right now. Any time there is uncertainty out there, it’s always easier to put off something like flooring.”
Referencing current sales, Rasbury says his company is seeing a shift in mix versus a slowdown. A&M operates 12 locations along the East Coast stretching from Florida to Maryland. “Our residential flooring sales may have slowed a bit, but our commercial business seems to have picked up, and some of our higher-end products have started to move a little better than some of our lower-end vinyl,” he explains. Though acknowledging the seasonality of demand, which tends to slack off in the summer as people take their vacations-long overdue this year-he reports that “August will have been one of our best months of the year, and we’ve had a good year.”
Vale also spotlights current activity in the commercial sector, where the 103-year-old distributor does a lot of business across the Northeast and Southeast. “When you look at the U.S. construction market in 2022, so far it’s delivered about a 14% increase, and it increased in the second quarter at about 22%, but as we look toward the future, we expect the GDP to dip to 1% or so but the labor market is going to remain strong,” he says. “We’re still planning for some growth in residential, but really it’s the commercial segment where we see opportunities, especially in the healthcare and education markets.” Citing “substantial growth” in those sectors, the Architecture Billings Index’s forward-looking indicators and Fishman having exceeded its 2021 sales figures this year, he says, “We’re preparing and looking for acquisition and expansion opportunities really through 2028.”
Though Vale says he’s seen more price increases in the last 24 months than in his previous 22 years in the business, which are no doubt contributing to top-line growth, demand is the main reason for his and Rasbury’s optimistic outlooks. “We look at unit growth, and that is what we are basing our success on,” says Vale, attributing 12% to 15% of Fishman’s recent growth to price increases.
“Our fiscal year ends next month [October], and we will be significantly up year-over-year; we’re definitely up pre-Covid,” Rasbury says of A&M. “Some of it has not necessarily been price increases but selling higher-priced products. We probably lost a little ground in click vinyl units, but our units in wood, commercial and some other categories have gone up.”
A wave of expansion and consolidation has swept the industry in recent years, and the companies we spoke with are in a growth mode. Hamar expects that trend to accelerate as the benefits of the pandemic surge in activity wear off and expose inefficiencies, forcing those not well-positioned for long-term success to sell to private equity-which is gaining a larger and larger stake in the business-or to seek merger opportunities. “I think the dynamic has clearly been in place for years: you have to be of a certain size and scale to be competitive going forward,” he says.
Kozikowski notes Galleher’s acquisitions of Trinity Hardwood in Texas and West Valley Hardwood in the Pacific Northwest, along with new branches in Phoenix, Arizona and Portland, Oregon, all of which helped secure the company’s spot as one of the country’s three largest distributors. And Vale says Fishman has a five-year strategic plan that includes geographic expansion and exploring acquisition opportunities. With its branch-based model, he says the company “can grow about two hours out at a time” and will soon have 39 locations across 18 states. “Fast-track construction taught us a lot, and that’s that you’re successful if you have inventory closer to the point of use,” he says.
However, Vale believes it’s important to balance expansion with personal touch. On its website, Fishman highlights the number of phone calls its employees have personally fielded. “We try to pick up on the third ring, so our partners can talk to people who know the inventory and local customers,” he says, noting that the company’s employees have a personal stake in the business through its employee stock ownership plan. “When our customers buy from Fishman, they’re buying from that local branch that they talk to every day, they’re buying from that local driver who’s at their door every day.”
A&M recently expanded into the Charlotte, North Carolina market, and Rasbury expects to be in two neighboring markets by the first quarter of next year. Referring to this regional approach as “staying in our lane,” he says it “allows us to really be masters of our product, masters of our supply chain and the way we do things logistically. It also allows us to create really good relationships with a specific customer base because we’re really tied into that geographic area.”
Many believe the latter is the key benefit of distributors. “Regional tastes are what drive distributors’ success,” Hamar says. The challenge, then, is to grow without losing the personal connection and hyper-focus on the distinct markets served, where tastes can differ between zip codes. “We find that customers, product mix and trends all differ; therefore, we value the regional approach and have found an effective way to organize our various regional territories,” says McCarthy, explaining that local teams hold decision-making power.
Kozikowski acknowledges that there is no one-size-fits-all, but, he says, “There are macro trends that do apply across markets, and a good distributor will recognize how to apply those in the most effective way possible. The key is to leverage the learning they’ve obtained within their current geography and apply that to new geographies while incorporating unique insights about the new market.”
The current economic uncertainty and high interest rates have slowed Galleher’s plans for expansion, but Kozikowski expects an “aggressive” return once the situation levels out.
“Use this next year as an opportunity to clean up your business and get your resources aligned with your opportunities and your realities,” Hamar advises. “Then start getting ready, because within a relatively short period of time, we’re going to see growth. There’s a lot of hope and a lot of opportunity for those who use this next year to really get their businesses ready-the play ends well, there’s just a couple of people that get murdered in the second and third acts.”
Copyright 2022 Floor Focus
Related Topics:Tarkett, Shaw Industries Group, Inc., Carpet One