Floorcovering Distribution Update: Changes in the business - Oct 2018

By Beth Miller

With so much potential volatility in the flooring industry-such as the tariffs on Chinese imports and instability in raw material prices as well as changes in leadership and technology-flooring distributors are working on ways to remain relevant to their customers.

To discuss the potential impact on these issues and how their companies are changing with the times, Floor Focus reached out to Torrey Jaeckle, vice president of Jaeckle Distributors, headquartered in Madison, Wisconsin; Bob Wagner, president and CEO of Fishman, headquartered in Baltimore, Maryland; Leah Ledoux, vice president of corporate commercial strategy for NRF Distributors, located in Augusta, Maine; and Jon Youngberg, vice president of sales and marketing with Tom Duffy Company, headquartered in Fairfield, California.

Q: What are the main challenges facing the distribution business right now?
Jaeckle: Finding talent and hiring qualified candidates is up there at the top of the list. The truck driver shortage is also a factor. Along with that comes escalating freight rates, so the cost we pay to ship product to customers and the cost we pay to bring product in from manufacturer partners has gone up. This continues to put pressure on the cost of product, and we have had to respond with price increases.

Delivering value and getting paid for it. It’s not always all about product; I think service matters, but if you’re going to pride yourself on service, there’s a cost to that, and you have to get paid for it. There are dealers out there who want you to match a price on a certain product, but maybe we’re providing additional services that the competing supplier isn’t supplying. Trying to stay on top of that and making sure you’re getting paid properly for the value you’re delivering and the products you’re delivering is always a challenge.

Wagner: We are in a rapidly changing environment in the flooring industry, and the struggle for distribution amid the selling channel, which is ever-changing, is to remain relevant and important to the users of our products. The main thing that distribution needs to be aware of is what the changes are and what we need to do to change and remain relevant in the eyes of our customers, because the rules of yesterday don’t necessarily apply today.

Ledoux: One challenge every distributor is facing is buying materials at the right price. That’s key right now, especially with the economy and with what’s going on with the Chinese imports. But that’s coupled with inventory control and also keeping operational expenses in check. Freight costs are a big factor. Within that arena, we have an advantage because we own our own trucks. I think the cookie-cutter concept for distribution is obsolete. Distributors have to be diverse, be a resource and have a portfolio that’s interesting.

Youngberg: An affordable workforce is a big issue on the West Coast. Living expenses are extremely high in some of our markets, like the Silicon Valley. Flooring distributors aren’t working on the same margins as Apple or HP. We need to keep our expenses in-line yet still be attractive to prospective employees.

Q: Please explain the impact the tariffs could have on flooring distributors.
Ledoux: This has been an interesting turn of events-how the tariffs were being proposed and how they could affect everyone. One perspective is that this could force manufacturing in China to move outside of China. If this becomes an issue, we have several manufacturers who are willing to move their factories outside of China, which is fascinating in the sense that it is so costly. I also think it’s going to force these smaller mills to lower their prices. If the manufacturer’s customer is going to have to pay a tariff, the manufacturer may have to reduce their asking price. I do believe it’s going to balance the quality of American-made versus Chinese-made. American products traditionally cost a little bit more. We don’t see it as problematic. We are concerned and are watching it. We are analyzing some of these mills in order to leverage American-made products.

Jaeckle: I am a free trader, so I’m not of the opinion that everything needs to be made and bought in America in order for us to succeed. I don’t think we have the capacity and the technology right now to take all that domestic production on. The tariffs aren’t going to necessarily shift production from overseas to the U.S. but rather raise the cost of the product coming in. That will make the price differential between some of those products-wood-look LVT versus a real wood product, for instance-lessen. That could shift some people to wood, if that’s really what they want and performance issues aren’t important, when they might have gone with LVT before. Any time you raise the cost of product, that has negative repercussions.

Conversely, it could cause the customer to trade down. If the product is too high in price, it could cause them to do only one room in their house when they were going to do two. In general, I’m just not a big fan of anything that’s going to be a disruption and adds no value for the consumer.

Wagner: We’ve seen what tariffs could do, and that is change the landscape of imported hard surface products and how competitive those imported products would be compared to domestically manufactured products. I believe we are in a process of negotiating government to government. I have no idea where it’s going to end up. The tariffs could level the playing field and change a lot of things. If there became parity, why would you wait 12 weeks for a container of LVT when you can get a truckload in days? There’s potential for great change. I just don’t think we’ve heard the end of what the tariffs are really going to mean.

Youngberg: If most competitive products in the market also face the same tariff, the impact might not be as bad. However, it could hurt growing segments like LVT if it becomes more expensive in relation to carpet or ceramic tile. Obviously, the goal is to find U.S.-manufactured products that can compete or to cut out much of the importing middle-man.

Q: How has your strategy changed over time with regard to using big brand manufacturers versus smaller suppliers and importers?
Jaeckle: I think there is less need for the big brand right now. You need to deliver on product quality and offer high service. Many years ago, I thought you had to have one of those flagship brands to be a top-notch distributor. I don’t think that’s the case anymore. It’s nice to have a big-name brand. I think it gives you credibility and gets your foot in the door at stores, but I would rather have a supplier that’s easy to work with, a supplier that gives the distributor control over the marketing and pricing of the line, and one that doesn’t impede your efficiency and profitability.

Our private-label lines have tripled over the past five years in terms of sales volume. They’re really doing well, and we have control over those. We control what products go in and where we get those products, and we can tailor them to our markets. That’s where I see a lot of distribution going in the future-favoring private label over a brand name.

Ledoux: It has changed. We offer both. Larger brands have more resources. At the same time, our customer-the flooring contractor-might be shopped out because larger brands are everywhere. The dealer loses their brand loyalty with some of the larger brands that are so prevalent-there’s no exclusivity to that contractor.

We see the smaller brands as having the ability to do a huge amount of private labeling that allows us to make customized programs for our customers. We offer in-house services that are unique to our private-labeling customization programs. We have our own print shop and marketing department where we make our own samples. So we are able to compete with those larger brands and offer more programs to our customers that are unique from what a standard distributor does. Overall, we are going to continue to see more change as consolidation happens with these larger mills.

Wagner: For Fishman, it really hasn’t changed. We have always had a brand strategy here of supporting certain major brands, and we’ve always had a brand strategy of an active private-label program. We are looking to present to our customers the highest value product that we can possibly present. Sometimes that means big brands and sometimes that means private label.

Youngberg: We’ve tried to find as many proprietary products as possible, private labeled them and created our own images to be shared over our website and social media.

Q: Many distributors are currently going through leadership restructuring. How is this shaping the distribution process?
Youngberg: In our case, it’s been positive to bring up younger people through the ranks that have a better understanding of social media and the buying habits of a new generation. We’ve also brought in people from outside the industry for management roles, and they have offered a much-needed fresh perspective on how to attract new business and also on how to manage and motivate employees.

Ledoux: We are a family-owned company with at least ten family members working in the company. Those family members are involved on the financial side, running different divisions such as a wood division or a resilient division, and they’re involved in the decision-making process. At the helm of our company is Norman Pomerleau. Moving forward, it would be his three children, who are all involved, and then his five grandchildren, who are also involved in the company. It’s a good testimony to succession. With this type of succession plan in place, there is no dramatic or substantial restructuring taking place as the younger generations take over. The distribution process for NRF is solidly in place and highly efficient, eliminating the need for any sort of restructuring.

Jaeckle: We’ve had a number of Baby Boomers retire over the past couple of years, and some of those guys weren’t very comfortable with our technology. They still wanted to do things the old way. That’s slowly changing as the Boomers leave the industry and retire. There’s a lot of knowledge that leaves when the Boomers retire, but business isn’t always done the same way it was 20 years ago.

Wagner: We are a 100% employee-owned firm. We owe it to the employees to be sure that the management of the firm will exist if someone has a catastrophic illness or accident. We have [a succession plan in place] where young people are in the process of being trained to accept bigger, broader jobs. That is ongoing for us.

Q: What are you doing in terms of marketing via social media, and is it a viable method for promoting flooring distributors?
Wagner: It is a viable method. The age demographic of our customers is changing. The Millennials who are interested in social media and accustomed to communicating via social media expect us to participate. They are becoming a more important part of the buying group in floorcovering, so we have taken a new turn. We are marketing directly through social media and have an active social media campaign on our website.

Ledoux: We have hired a third-party company that customizes a platform for our dealers, flooring contractors and our customers. There are two people on staff who do full-time social media marketing-Facebook, LinkedIn and Constant Contact. We do two large events each year that host approximately 400 to 500 people. It is a buying show, an educational show, so they’re able to look at product, buy materials and access an educational platform that we offer to help the dealer grow their business. Social media allows us to offer our customers access to these resources.

Jaeckle: We do a little promotion via Facebook. I don’t think it’s ever going to be more than minor importance in a distributor’s marketing arsenal, but I do think it’s going to be a necessity. We need to create a public profile to market our company not only to vendors but also to potential employees.

Youngberg: As a distributor of installation supplies, it’s important to monitor installer chat rooms. It’s amazing the amount of information they share about product viability and distributor strengths and weaknesses. Distributors need to have input in the conversations taking place out there.

Q: How do you market to the different segments? Do you target the end-user?
Jaeckle: It’s a little tricky because a lot of our customers play in all of the segments. We generally have one salesperson assigned to an account, though some of our accounts will do both surfacing products and flooring. In that case, we’ll have a surfacing rep assigned to them and a flooring rep. With a few select accounts, we have a commercial rep assigned to an account where one rep calls just for commercial and the other rep calls for residential. With the pure commercial accounts, we have a commercial rep calling on them. On the commercial side of things, we do have specification reps who call on the A&D community to get our products specified for commercial jobs.

We don’t target the end-user at all, with one exception-our private label brands do have a website. We realized that if a consumer goes into a store and sees our private label line and has interest in it, they’re probably going to look it up online. If they don’t see anything on the product, that would be a red flag. We’ve got our website out there showcasing the product and showing that we are a legitimate company.

Ledoux: We’ve built our commercial platform a little bit like a manufacturer. We have strategic people in the field that call on hospitals and corporate and education clients exclusively. We are forcing that sale so that we can pull it through to our customer-the flooring contractor. We don’t sell direct. We want to reinforce the relationship with the dealer. It’s a little bit different than most; a lot of people have specifiers only. We segment that into healthcare, corporate and education and have specialists in each of those divisions.

There’s a gentleman who works in my office who does a lot of customized brochures for healthcare. A number of different products in the brochure target that specific healthcare chain, whether it’s Novation or MedAssets or Martin’s Point or Maine Medical. We’ve done a lot of customized presentations for groups of hospitals.

Wagner: Fishman is primarily commercial. We sell a little bit to the residential remodel market; certain commercial products have application in the residential remodel market. We actively sell into mainstreet. We have a full-time staff of seven specification folks who are actively calling on architects, designers, specifiers as well as end-users, not to sell them product, but to get them interested in specifying the products we sell.

Q: Have you diversified beyond your core segments? How do you gain traction in these other segments?
Youngberg: We’ve entered the decorative concrete segment, and we work closely with key commercial accounts to get them up to speed on how they can participate. What once was VCT in a grocery store might be decorative concrete these days. Our commercial accounts don’t need to lose that business if they can be trained to do these installations. We’ve hired an experienced and specialized sales force just for decorative concrete.

Jaeckle: Our diversification is more on the product side of things; we play in countertop surfacing-outside of flooring. We took a hit to that business a couple of years ago, and we lost a major line. We’ve been growing it nicely since then. The only downside is they’re totally different products, so we do have two different sales forces.

Ledoux: NRF has entered the multi-family housing segment that is essentially a type of alternative living solution in our area. It could be described as communal living for the 55+ age group where condo-like homes are being built. Folks are downsizing from four-bedroom homes to upscale two-bedroom homes within these communities where residents have access to a pool and gym. As for gaining traction, we are constantly looking at projects that are $1 million or more in each of the seven states in which we are established. Right now, the market is saturated with new construction and renovations, and with four sales associates in each territory, we make a point to jump on a project that fits within our scope.

Q: How are distributors competing against direct sales from the big three: Shaw, Mohawk and Engineered Floors?
Wagner: Our strategy and the strategy of those in my network is that we do the best that we can with the products we sell, and we recognize that there are certain products [manufactured by the big three] with which we can never compete, so we don’t emphasize them. We may have them as an accommodation for our customers, who may or may not want to buy from the big three.

There is no sense in trying to compete with a manufacturer. They can take the business away from us any time they wish. Specifically, with Shaw and Mohawk, they have outstanding logistics. The customers get great service from them as well. So for us to think that we can compete head-on with their products, we would be deluding ourselves. But there are lots and lots of jobs where the user needs immediate service and technical expertise, and they know they can get that from us.

Jaeckle: I don’t think that we do it any differently than we do against other distributors. In the end, it’s all about product and price and service. We have those issues whether it’s against Mohawk or Shaw or against other distributors in our markets. No matter how you cut it, the distribution function needs to be performed. It’s a case of trying to be more efficient and tailoring our products and services to our customers since we are local; we only service the Midwest.

I think we can be a little bit more flexible than those companies. I don’t think we are ever going to be able to compete with those companies on the side of technology. They have more capital at their disposal that they leverage across the entire United States and beyond over a larger dealer base. That’s one area where they might have a slight advantage, but our advantage is that we are local, we’re family-owned, we’re flexible and reachable-any one of my customers can call me any day to talk about whatever business they want.

Ledoux: We sell products from the big three. I think the reason we can compete with them is that we’re able to package a project in its entirety from the subfloor prep to the mitigation all the way through to the transitions. That gives us a lot of leverage going up against these larger mills, who may not offer mitigation products or handle the transitions or offer tile. In our portfolio, we offer everything a flooring contractor needs.

Q: The economy is strong, but many fear a recession is overdue. What’s your take, and how is this impacting your decisions going forward?
Jaeckle: I’m expecting a slowdown later this year and into next year. We work with an economist every quarter. A minor slowdown is not going to affect our decision-making. We’re always going to be working towards things that are important to us, which is growing our business, increasing penetration with our customers, and ensuring we have the right products and the right vendor partners for our markets.

Wagner: The best guess for when the correction is coming is mid-2019 through mid-2020. We simply make corrections in our business; we slow the investment cycle; and we slow the expansion cycle. Our mission is to retain cash reserves through an economic correction. We know it’s coming-it always does. We want to get back to the other side and still remain relevant and important to our customers.

Ledoux: I think it’s on everyone’s minds, and we can’t be reactive. Our goal is to remain financially strong, look at our expenses, samples, overhead and hire the right people. We are constantly looking at ways to save money. Overall, [the threat of a recession] is not impacting a ton of our decisions, but we realize we have to create a balanced offering.

Youngberg: We are keeping inventory values in check. Streamlining manufacturers and doing more with less of them is important. We try and forge partnerships with our manufacturers.

Q: What new technologies are you leveraging to remain a valuable part of the supply chain?
Jaeckle: We use fcB2B-software that allows users to automatically send and receive documents between manufacturers, distributors, flooring retailers and contractors, in a fraction of the time-with customers who prefer that. We have our Enterprise Resource Planning (ERP) system that runs our core business, and every night we extract information out of it into our business intelligence system that we use to build dashboards and slice and dice the data. The visibility it has given us into our business has been huge. We have a cloud-based system for our salespeople on the road so that any documents are accessible via iPad or iPhone.

Wagner: We are investing heavily in data analysis software. We’ve never done that before. In the last 24 months, we are analyzing not just what our customers are buying but in what quantities and when. It allows us to sit down with our customers and make our relationship with them more efficient because we have information and data to share. It also helps us on the buying side with our manufacturers, where we become better predictors of what our inventory requirements are going to be. We can put that data into an analysis of lead times, and it helps us manage the business. The entire supply chain is better managed today than it ever has been due to the data analysis software.

Ledoux: Within our IT department, we’ve hired an application developer, who is able to customize apps to help with all aspects of the supply chain within the different departments such as the control of inventory, checking specifications and looking up pricing. We have custom programs that some of these dealers belong to, and through the use of the apps, they are now able to monitor everything, allowing them to save money. We are constantly looking at a better way to service our customer and for our customer to find out in real time what’s in stock, when they can get it, what the pricing is-all on their mobile phone. We are making it easier for our customer to buy from us.

Copyright 2018 Floor Focus

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