Executive Outlook 2023: Flexibility will be more important than ever next year, industry leaders say - December 2022
By Jennifer Bardoner
Following record-breaking sales in 2021, industry leaders looked ahead to 2022 with cautious optimism. And many of the challenges wrought by the pandemic did normalize this year-only to be replaced by new ones: historic inflation, an unprecedented war with growing geopolitical instability, and soaring energy costs. Having recently been reminded to expect the unexpected and be ready to pivot at a moment’s notice, leaders remain generally positive, but they agree 2023 will be challenging. Overall, they’re forecasting sales that are flat or down minimally, but they do see some tailwinds on the horizon.
president & CEO
“The business environment we’re in I would describe as more of a plateau than a downturn, a shifting.”
Q: What bright spots do you see in the market?
Baucom: Homeowners have a record amount of cash, and the feeling that their home is a place of value and equity is the highest it’s been since 2005, 2006. The commercial market has finally come back after a two-year hiatus. There is great demand in hospitality, education, healthcare. Corporate is going to be good in the short term because people are reconfiguring spaces for a new kind of corporate work. Our turf business is really good because of engineered solutions in sports and water restrictions in the West for landscape.
Q: What’s your strategy on the residential side?
Baucom: Interest rates are going to get people to “squat.” They’re going to see that their home with a 4% fixed-rate mortgage is a hedge against inflation. But we’re going to have to remind the consumer that our product is worthy of their dollars. Historically, they’d fix up their home before they were going to sell it; they’d fix it up after buying a new one. We need to be thinking differently. How do we get back to creating demand, creating interest that leads people to fix up their homes?
Q: Any insight on how to create that demand?
Baucom: I think the most effective way for demand to be created is closest to the customer, by the retailer-our customer. I think it’s our responsibility to have exciting, new, innovative products worthy of them getting the consumer excited. We’re very excited on the soft surface side about our new Pet Perfect and Pet Perfect Plus, and we’ll continue to roll that out. Within Coretec, which is the originator of its category, we’ll continue to be that authoritative source and expand that with innovations like our pressed bevel product and our Soft Step product-and continue to push that forward.
Q: What do you see as the industry’s biggest challenge?
Baucom: To recognize that we compete with everything. We do a pretty good job of this on the commercial side. In commercial design and construction, we have seen that they have prioritized flooring more because the design and sustainability punches over its weight. We’ve been seeing the spend on flooring taking share from windows, walls, fixtures, lighting. I think on the residential side, we need to recognize that we have real solutions that can delight the customer. How do we increase that priority?
Q: Do you foresee additional challenges in terms of labor?
Baucom: We need to continue to recognize, even as things get tighter, that there is still a talent war going on. We’re a partner in the Floor Covering Education Foundation. Making sure that we all, as an industry, attract people to our industry will be important. A portion of it is just the technology and making sure they’re confident at the craft. But I think a lot of it is trying to work with schools to get people interested in the craft at an earlier age. I would say one of the first things is sharing success stories and, as we see innovative things, trying to replicate them. I’m a big believer in what I call “test and learn”-try some things, and if they work, do more of them and publicize them; and if they don’t, what did you learn from that experience?
PAUL DE COCK
Mohawk Industries president of flooring for North America
“We are forecasting for a soft recession in 2023 and are optimistic we can reconnect with growth in 2024.”
Q: What do you foresee in the residential market?
De Cock: As the Fed continues to raise rates, we are observing that new-home prices, new-home construction and new-home sales are decreasing, which all impact our business. Additionally, inflation is affecting disposable income which, in turn, affects remodeling projects. In the short term, we have some challenges. However, we are optimistic about the long term. The demographic evolution in the U.S. is excellent for household formation, and that always results in more demand for new homes. In addition, the housing stock is more than 40 years old-older than it has ever been. At some point, consumers will choose to reinvest in their homes.
Q: Where do you see the biggest opportunities for the coming year?
De Cock: Our new intros not only satisfy the design and styling requirements of the consumer, but they are developed with performance characteristics that fit the consumer’s lifestyle. That intentionality combined with our sustainability benefits allows us to see opportunity everywhere-in every product, every category and every channel.
Q: What do you see as the biggest challenge facing the industry and what is your suggested remedy?
De Cock: The biggest challenge facing the industry is still labor availability and its impact on manufacturers that make and distribute the products, as well as the installers who install the products. We, as an industry, need to act progressively to reduce the labor content of our products with automation from a manufacturing point of view, and we need to innovate our products so that they can be installed more efficiently and effectively. A great example of innovation that came from the Mohawk research and development department is Uniclic. This technology has transformed the speed of floating hard flooring installation.
Q: Is there value in building a consumer brand in today’s market?
De Cock: In a very cluttered market that is flooded with low-quality and cheap products coming from all over the world, we think brands matter. Our family of brands, including Mohawk, Pergo and Karastan, are a tremendous asset to the company. These brands give shoppers the confidence that they are buying an excellent floor with the right design and performance characteristics from a company that will stand up for the quality of their purchase.
Q: What investments are you planning to make next year?
De Cock: We are continuously reinvesting in the business in all categories to increase our efficiencies given the labor shortage and to improve our capability to enhance the design and performance features within our products. We are also expanding capacity in our hard surface business with more domestic resilient and composite wood products.
Engineered Floors president and COO
“I think retail improves next year, and multifamily stays strong. The first quarter will be okay [for single-family builder], then I’m going to look for some slowdown. Commercial looks good for the next six months.”
Q: How would you describe your outlook for the coming year?
Lesslie: I’m optimistic about our company; I’m not necessarily optimistic about the U.S. economy next year, at least for the first six months. I do see some factors that say the second half may be better for residential retail. If you look at the last ten years of midterm elections, the stock market goes up an average of 12% the year after, so I’m looking for a little stock market recovery, which will probably soften up consumer sentiment.
Q: Why are you optimistic about Engineered Floors’ position?
Lesslie: We have go power; we have capacity. If this industry grows 10% to 15%, we can service it. I’m not sure everybody can.
Q: Are you adding capacity?
Lesslie: We are installing additional fiber capacity in our SAM plant as we speak and probably over the next two or three months. Our LVT plant will come online probably late second quarter, and our model is to build any facility as expandable. We want to have a 100% U.S. supply chain. It’s very hard when you’re doing 12-, 14-week supply chains to not run out of inventory at some point in time-nobody is that good at guessing. I think the service level of U.S. plants will be better and more sustainable day in and day out.
Q: Is labor still a challenge?
Lesslie: Business has softened a little bit, so labor is slightly better than it was. But just like with ocean freight, if you think labor is not going to be a problem next year, in my opinion, you’re dreaming. The fourth and first quarters are slower; the second and third are busier. So, is labor going to be a problem going forward into 2023? Absolutely.
Q: How are you addressing that?
Lesslie: Because everybody is in the same building, we can flex around our employees much easier than some of our competitors. And we’ve worked really hard on some programs to make sure we retain [new] employees during that very critical first 30 days, make them feel welcome and part of the team and show them all the good things we can do for employees.
Q: You will be an early adopter of direct digital print at your new LVT plant. Why?
Lesslie: We think it’s going to be game-changing technology. And from everything we’ve seen so far, it looks like it’s doing what we thought it would. It allows us to start with a much more natural wood look than anything we see with our current film product. To us, realism is everything, because people buy on looks.
Q: Do you see value in creating a consumer-recognized flooring brand?
Lesslie: We think that flooring is a difficult industry to produce a sustainable consumer brand because the delay in time between purchases is so long, so it’s hard to keep a memory of that brand. If our retail partners know what we stand for, I think we win our fair share of their business, because they control what consumers will buy.
“From a units perspective, we’re projecting that the residential market will be down in the mid-single digits, and we think the commercial market will be flat to down, low single digits.”
Q: What’s your overall outlook for 2023?
Pendley: We do think residential has some challenges, but at the end of the day, good product serviced well will find a home, so we’re focusing on what we can control: building great product that meets customers’ demands and servicing it very well. If we stay focused on those things, we feel good about 2023.
Q: What activity do you think will bring the most growth?
Pendley: We’re going to continue to look at how to attack the multifamily market. There are going to be opportunities within commercial-specifically, healthcare and education-and our teams every day are trying to target those segments and come up with a business plan that makes us more important in those segments. At the end of the day, we’re going to be focused across the board on executing excellence.
Q: How does your acquisition of AtlasMasland tie in?
Pendley: Increased marketshare in commercial carpet is the target. The last year has really been about consolidating that business into the Mannington footprint. We are on pace for where we had hoped to be. As we planned when we made that purchase, it was about assets-the people, some equipment and some products, not necessarily the brand. The other curveball that Mannington Commercial had during this window was Invista leaving the industry. We had to reset our entire carpet line. AtlasMasland was a godsend in the middle of that because of the existing products that were not Invista and the relationships and the orders that came with that business.
Q: Where will you invest next year?
Pendley: We have been in a very heavy acquisition mode for almost the last decade, but really for the last several years. In terms of what we’re looking at in 2023, I do not see that on our radar. Our investments will be into our existing products. We will also invest significantly into our internal operations and execution…really evaluate how we’re operating internally, how efficiently we’re operating within our systems, and on that overall customer experience.
Q: What challenges are on the horizon?
Pendley: The immediate challenges are going to be interest rates, the cost of capital and inflation. We will, like everybody, look at how we manage through those-how we manage pricing, how we manage our balance sheets with inventories. I don’t think there’s a fundamental challenge in our industry. I think flooring has a good future. I think there’s pent-up demand on the residential side, and there’s significant demand on the commercial side, maybe not new space but in reimagined old space. We’re excited about the demand that’s ultimately in the market. We’ll stay focused on being prepared for when that demand comes back around again.
Q: What about labor? Is that still a challenge?
Pendley: Short term, it’s better than it was, so we’re all breathing a little better now, but long term, labor for the manufacturing environment will continue to be a challenge. Inflation’s impact on labor will be a challenge for us all as we try to adjust and account for the true earnings of our workforce, and that will be something we’ll all continue to work through.
president & CEO
“I think we’re going to see a ‘V’ in residential remodel, where the second half of next year very well may be stronger than the second half of this year.”
Q: Why are you forecasting a rebound in residential remodel?
Carson: Single-family remodel has slowed this year, so the first half of next year will be down versus the first half of last year. But I think there’s a tailwind for the next five years in single-family remodel. The sweet spot for remodel is 20- to 40-year-old homes. Typically, in any given year, 20 million to 21 million homes sit in that age range in the U.S. Because of the boom in construction that happened 20 years ago, that number is going to increase to about 25 million homes.
Q: AHF paid to bring the Armstrong brand over. What value do you see there?
Carson: You may not be a car aficionado, but you know what a Cadillac is. There’s very few of those brands. It takes an enormous amount of money, and it takes decades to build a true consumer brand. If you’re counting on one hand, Armstrong would be one of those brands. We’re going to find ways to leverage the brand and the appeal. But we’re going to use the [former Armstrong] Lancaster, Kankakee and Beech Creek plants to produce not just under the Armstrong brand. We can reach the market and maximize the plants without oversaturating the brand by deploying it into some of the other brands.
Q: How do you plan to leverage your Armstrong acquisition in the coming year?
Carson: Over the next year, you will see SPC coming into the market under Armstrong, more commercial sheet and other commercial products coming into the market under Armstrong, and all kinds of products targeted for multifamily in both vinyl sheet and vinyl plank. We’re going to reintroduce StrataMax into the market; we’re reintroducing flexible LVT with Diamond 10 technology on multifamily products. Those are products we sell today, but not under the Armstrong brand.
Q: Where are you investing?
Carson: If you went to the [former Armstrong] factory in Lancaster, you’d see equipment going in there right now, so we’re already making investments in the Armstrong facilities we acquired. We just completed an investment in our Kentucky [engineered wood] plant, and we just approved investments in our West Virginia and Missouri [solid hardwood] plants. The sum total of that is $30 million. The folks who are making the right investments now that the stock market is down will do better when the market comes back. This is a cyclical business-the markets will come back. We want to put ourselves in a position to be stronger coming out than when we went in.
Q: Do you see more acquisitions on the horizon?
Carson: We’d like to grow the business through acquisition if we can find the right opportunities. I do think opportunities are going to present themselves over the next 12 months. Money is getting more expensive, and businesses are slowing in some cases.
TOM VAN POYER
“We are forecasting a similar year to 2022 in volumes but in a very different composition. We expect both the product mix and the source of origin to change drastically.”
Q: What do you see as the biggest opportunities looking ahead?
Van Poyer: We see two main centers of growth. With our USA plant, servicing our customers better and faster will help them grow without long lead times and the cash flow impact of having to stock deep. Secondly, due to the lower shipping costs, we see a stronger appetite for products that have a clear added value for customers. This includes visual improvements like long planks, and technical features like acoustics with Novocore Q or better coatings like the ultra-matte NaturTrend and/or the scratch-resistant Scratch Shield Max on our FirmFit lines. Overall, we believe that the sales of our main categories-waterproof laminate, SPC and acoustic engineered vinyl-will remain strong.
Q: Where are you seeing domestic capacity being added?
Van Poyer: Due to the cost change in shipping, the expensive U.S. dollar and the tight labor market, we believe many companies are slowing down their investment in the USA. CFL still sees it as a key part of its company strategy and is still fully committed.
Q: What investments are you planning to make next year?
Van Poyer: We are excited about our digital printing line that will ship in the coming months from Germany to Adairsville, Georgia. In Asia, we are investing in equipment for making an even bigger assortment of “Quiet” products, a category we strongly believe in.
Q: Any new technologies that may change the industry?
Van Poyer: We believe Be-Lite [an SPC embossing technology that makes the product lighter without creating any extra production offcuts] will change the industry. We believe that in five years, all customers will demand products that use technologies that reduce their environmental footprint. Secondly, acoustics. Finally, digital print.
Q: How do you think the push for sustainability will impact your category?
Van Poyer: We are a strong believer in sustainability and having a road map for improvement. We believe companies that jump on the wagon and actually make a difference will ultimately reap the benefits. We are well on track to make a difference. Product-wise, SPC already contains less PVC than flexible LVT products, which is a big improvement. Besides this, CFL is a strong believer in cork backing or recycled backing (Net Plus). Finally, a substantial part of our products now come with Be-Lite technology. Location-wise, with a factory in Adairsville, Georgia, we reduce the transport-related impact on the environment substantially.
Q: What do you see as the biggest challenge facing your category?
Van Poyer: As the biggest global manufacturer of SPC and engineered vinyl, CFL has become more involved in the Resilient Floor Covering Institute to help develop standards and guidelines to ensure the quality of the category is guaranteed. As in every fast-growing segment, there is a need for clear standards to avoid, due to price pressures, very low-quality products entering the market and damaging the category as a whole.
The Dixie Group chairman and CEO
“We were above normal levels for a while; we’re under normal levels right now. I think that will change in nine months or so. I think we will, so to speak, revert to the mean.”
Q: Which segments of your business are performing the best?
Frierson: Our Fabrica and Masland volumes have done much better than our Dixie Home. We’re seeing, and I think you see it in most downturns, that higher-end products tend to do better than more moderately priced and commodity products. By bringing out more higher-end and, by definition, higher-margin products for our customers, I think that’s the best thing we can do for them.
Q: Is your LVT plant still scheduled to come online in Q3 next year?
Frierson: It will be later than 2023. We’re looking at what’s happening to freight rates and raw material pricing to better understand where volumes will normalize. I also think there’s a buildup of inventory that’s got to work its way out of the system. It will take a while for that bulge to work its way through, probably six to nine months. You have so many different companies investing in hard surface, and you have to plan three to six months ahead of time. Consequently, as business slowed down, product kept coming. We didn’t see it as much on soft surface because not as many people carry inventory today.
Q: What’s your outlook for soft surface?
Frierson: I think soft surface will reach a level in the next year or two that is sustainable. Soft surface was extremely strong during Covid. It won’t stay at that level, but I think it will not be declining like it was pre-Covid.
Q: Are you exploring direct digital print for your LVT operations?
Frierson: We have some sourced direct digital print products in the marketplace today. They’re not doing as well as we thought they would, but I think over time they will. Consumers have to get used to it, like anything new. It does provide a lot more flexibility-it makes for shorter runs; it allows you not to have as much inventory. Also, the looks and lack of repetition [are better than with the printed product]. With all that, I can’t help but believe it’s going to be a major impact over time.
Q: What strategic moves have you made this year?
Frierson: We will end the year with about 20% fewer people than we started the year with. We have also restructured our East Coast operations and eliminated one tufting plant in Atmore, Alabama and concentrated all our East Coast tufting in North Georgia.
Q: Are you planning any investments for next year?
Frierson: Our 1866 collection from Masland and Décor by Fabrica products did not get into the marketplace this year until late third quarter, early fourth quarter, so we’re just now beginning to see customers’ reaction-which is very good. We will be adding significant investment there, as well as in hard surface. Our hard surface offerings introduced this year were also later in the year due to freight issues. So, we’ll have a lot of new products in the marketplace in the fourth quarter and the first and second quarter of next year. We will be introducing additional polyester products, as well, to meet certain price points, and we will be offering a broader array of price points by doing that.
Q: Do you think there’s value in having a consumer-recognized brand?
Frierson: I think there’s tremendous value, but there’s also tremendous cost. When the industry was growing, obviously Stainmaster did that, but at a huge cost back then, which would be much more costly today. I don’t think in a segment that is not growing that you’re going to see that kind of investment.
“We’re looking at moderate growth for 2023. … Higher interest rates are definitely impacting [the residential market] and could start affecting the commercial industry, not in 2023 but in 2024.”
Q: What are your goals for the coming year?
Stone: Our number one goal is to bring our Pittston, Pennsylvania facility fully online in 2023. I expect it to be fully up and running during the first quarter. We also need to work on rebalancing our inventories. And we will work on continually driving the design process to be faster, more efficient and more responsive. I think all these things will create a much better and stronger customer experience.
Q: Is labor an issue at your new plant?
Stone: We’re able to grow without having to build a much larger workforce…by innovating and using automation effectively to be less reliant on the unnecessary touches, and to some extent, our company’s culture. We have a very high retention rate and a reasonably easy time recruiting.
Q: What do you foresee in terms of all the domestic LVT capacity coming online?
Stone: Because of high interest rates, there is a potential that investment may slow down. But there’s been a lot of investment in domestic capacity of LVT, particularly in rigid core, and I anticipate that will continue. However, based on the speed with which it can come online and the investment dollars available, it will not take over the import business; it will simply supplement that business and help spur growth. The speed to market and the ability to have a less complex and more reliable supply chain will get more people to want to buy the category. We are just using our new U.S. plant for growth.
Q: How are you planning to differentiate your offerings?
Stone: Growth opportunities are always in innovation in the design process. We believe this is something the digital transformation will lead, and we expect to really help set a path for the LVT industry to become much more responsive to the customer’s needs much faster. We want to take six months and turn it into six days. We hope to continue to drive innovation in sustainability, in supply chain and for the end user-whether it’s sound, warmth, cleanability, realism. That’s where we try to focus innovation, and with that, we think we can capture marketshare.
Q: How does sustainability tie in?
Stone: We believe there is huge opportunity for advancement in creating circular floors. Material science is an underexplored category for flooring. That’s one of the areas where we expect to be able to differentiate ourselves: what we make our material out of and where it goes at the end of its useful life.
Q: What do you see as the industry’s main challenge?
Stone: Our industry goes back and forth like a metronome-sometimes we’re in a high innovation phase, then people aren’t sure what to do, and they go to commoditization. The challenge is to overcome that fear and remember the need to manufacture products that make the consumer excited, not products that are cheaper so you can have an easier path to market. Innovation is the answer to commoditization.
Novalis Innovative Flooring CEO
“I think we are seeing a transition from people moving to new homes…because of interest rates and inflation. That would mean most people who have equity will spend money on fixing their homes.”
Q: What new opportunities are you seeing?
Wu: We’re beginning to see more healthcare and education migrating from sheet vinyl to LVT. Sheet vinyl typically is a little harder to maintain, especially when you have repair and replacement. The other aspect is the design element of LVT-anything to look more homey than a hospital. In education, we’re grabbing a lot of share from VCT. VCT costs haven’t come back down, and with all the mergers and acquisitions going on, the bankruptcy of Armstrong, there is some concern whether VCT will always be around. In addition, VCT has a higher lifecycle cost. The first-time installation cost may be lower than LVT, but over the lifespan of five to ten years, you have exceeded the cost, and more facility managers are beginning to understand that.
Q: What new challenges have arisen?
Wu: We’re still cautiously optimistic about where we are and where we’re going. The fortunate thing is we are in the business of LVT, and that remains the favorite product in flooring. The new challenge has been the laminate category playing in the waterproof arena and making claims that it’s waterproof. That has affected the total marketshare for LVT, because WPC/SPC has been the known waterproof product. The industry needs to come up with a way to define what is waterproof-resilient and laminate are not talking the same language. It is creating confusion for the consumer.
Q: How do you think the growing domestic LVT capacity will impact the category?
Wu: Right now, the U.S. cost of making product is still higher than imports. But I think every retailer, distributor and end user would like to have a different mix in terms of country of origin to balance the game and be a little more nimble and flexible when it comes to buying. China remains a big part of that supply chain. I think the data now is 76% of LVT imports are still from China. China makes the most complex, unique products, while simpler and easily automated products are made in the U.S.-that’s the product you see coming online right now. I think that mix will not change.
Q: How are you managing labor at your U.S. plants?
Wu: Work/life balance is more important than ever. We are evaluating, not a fixed schedule, but allowing operators to pick and choose their hours-working six hours of a shift, eight hours of a shift, 12 hours of a shift-because they have a different family life. We haven’t gone to that, but it’s something I’ve heard people in the industry talking about and we might have to offer just to be competitive.
Q: What is your outlook on direct digital print for LVT?
Wu: Digital printing is a new technology to try to make the same product. Is it a better-looking product? No, you’re not going to be able to match traditional printing technology. I think it will be good to understand the cost perspective-we’ve been studying it as well. The cost is still higher than the traditional product. If you can’t offer anything new and better, then it’s just a different way of printing. There’s not going to be that much of a difference to the consumer. I think that’s the challenge-how do you translate this new technology into something that the consumer recognizes as better?
Copyright 2022 Floor Focus
Related Topics:Armstrong Flooring, Novalis Innovative Flooring, Masland Carpets & Rugs, Mannington Mills, Mohawk Industries, Engineered Floors, LLC, Shaw Industries Group, Inc., The Dixie Group, HMTX, AHF Products, Karastan