Hardwood: Flooring contractor perspective - Oct 2018
By Jessica Chevalier
Hardwood is beloved by U.S. consumers, so it should come as no surprise that the material has an important place in the homebuilder channel, as builders seek to appeal to buyers’ tastes. However, the hardwood category does face challenges in the channel, which is highly price conscious, requires significant efficiency in installation, and necessitates that flooring products have the ability to withstand the wear and tear of the homebuilding process. In spite of this, flooring contractors report that hardwood’s position in the channel is largely a positive one, especially as manufacturers innovate products to make them more suited to builder budgets, timelines and site conditions.
A HISTORY OF HARDWOOD IN THE BUILDER CHANNEL
In the mid 20th century, hardwood was a requirement in new homes as part of a Federal Housing Administration (FHA) loan, so the majority of homes built during that time included hardwood flooring. In 1965, the FHA agreed to provide FHA loans to homes built with a plywood subfloor covered with carpet, explains Neil Poland, president of Mullican Flooring, and this devastated the industry for 20 years.
“During the mid 1980s, the demand for hardwood began to slowly gain momentum,” Poland notes. And the trend has continued, though it has, in a sense, broadened from simply a preference for hardwood to a penchant for wood looks in a variety of hard surface materials.
Last year, according to Market Insight’s U.S. FlooReport, and per the chart below, hardwood accounted for 31% of flooring use in the builder market. That number was up from 2012, when it was 25%, but down from a decade before (2007), when it was 43%.
Those figures lend themselves to some interesting conclusions. First, 2007 was just prior to the recession, and 2012 marks the early days of emergence from it. Following that significant economic event, it would make sense that builders were less inclined to invest in premium materials, such as hardwood, as both they and consumers were feeling wary about investing in upgraded finishes.
In addition, while housing starts in 2017 are 8.6% lower than in 2007, the 13% comparative decrease in hardwood use between the two years may speak to the square footage that the material has lost to wood-look LVT, ceramic and laminate products.
Another means of interpreting hardwood’s share loss in the builder market is by considering the shift in mix for housing starts post recession. In the years following the recession, there was a surge in affordable multifamily housing-such as apartments and condominiums-which is not a strong market for premium products like hardwood. It’s also significant that the multifamily unit’s average floor area is only 46% of the average for a single-family unit (according to Market Insights) so a higher percentage of multifamily starts among flooring completions yield less total square footage-and therefore less flooring.
Interestingly, the 2017 data confirms what has been expected across the market: multifamily starts are slowing and single-family starts are increasing. This is likely to be a positive sign for hardwood use.
However, as research commissioned by the National Wood Flooring Association (NWFA) and conducted by research firm Public Opinion Strategies reveals, “Americans love wood floors, and those who don’t have them want them.… When homeowners are asked what kind of flooring they would have in their ‘dream home,’ two-thirds (66%) say wood floors, including 81% of those who already have them in their homes and half (50%) of those who don’t have wood floors.” Hardwood desirability relates to its visual and tactile warmth, natural qualities and long lifecycle/renewability-not to mention the association of quality inherent within it, which impacts resale value. That combination of factors is unique to the category alone, and, though lookalikes offer their own sets of benefits, none can claim the same line-up of desirable features that hardwood possesses.
CREATING PRODUCTS THAT CHECK BUILDERS’ BOXES
To find successful specification in today’s builder market, hardwood products must be suited to both the homebuilding process and the current style of the homes. Similar to what we see in the commercial market, today’s homebuilders are eager to get projects finished quickly, turning their investment into capital so that they can move on to the next project and do it all over again. Says Andy Hogan, executive vice president and chief product officer of the FEI Group, “The trend in homebuilding today is for speed and efficiency with labor.”
For that reason, to succeed in the builder market, flooring products must have the ability to:
• be installed quickly, both with regard to acclimation before installation and in the actual installation process;
• be installed in less than ideal conditions at times, like atop a fresh slab with high moisture emissions;
• withstand the wear and tear of the trades that follow, which, according to Jim Gunckel of Residential Design Services, typically includes paint touch-ups as well as installation of appliances, final plumbing fixtures and electrical options.
In several of these areas, hardwood faces challenges. It is a product that traditionally requires acclimation, and it cannot typically endure high-moisture environments. What’s more, it is susceptible to scratching and denting. And good hardwood isn’t cheap. Hardwood isn’t fundamentally the product of a factory but of a forest. Its growth and early-stage production are subject to the whims of Mother Nature. The product has variation, which is both its appeal and its downfall, contributing to its great beauty as well as its higher price tag, and this high cost comes into play not only with the cost of material but when repairing or replacing damaged hardwood flooring.
Of course, hardwood has many benefits to offer long-term with regard to its stature as a natural product and long lifecycle, but, according to the experts we interviewed, those benefits don’t impact the builder’s business directly, so they aren’t of much importance to them. In fact, though builders use hardwood to comply with consumer preferences, they would not likely choose the material at all, given their druthers, because it adds more variables to the process than materials such as LVT and ceramic. “If builders never put wood in a home again, it would be too soon for them,” Gunckel reports. “We’re always pulling out scratched planks. It’s a challenge for builders to get a home constructed and closed without damage to the hardwood.”
However, while these inconveniences certainly cost the builder with regard to hours lost, they do not typically impact their bottom line directly. Flooring failures fall wholly under the purview of the flooring contractor, who must repair or replace faulty flooring on their dime. In fact, in California, where RDS primarily operates, there is a ten-year defect law that applies to both product and labor failure. Though Gunckel reports that this is “not as big of a deal as it sounds,” it does impact what products the contractor feels confident enough to include in their offering. “We are very cautious about what we put in our design studio,” says Gunckel. “We do accept some Chinese imports but only if we know the companies very well. Because of this, we rarely have an issue.”
In addition to its performance, for hardwood to find success in the builder market today it must look the part, befitting of the style of homes being built, which is largely more open and less formal than in past decades. For that reason, wider and longer looks are preferred, as traditional solid strip flooring, typically 21/4” to 31/4” wide and around 4’ long, creates something of a choppy look across the floorscape. In addition, consumer tastes have also gravitated toward wider and longer looks. (For the record, solid hardwood has also sized up from its traditional dimensions but not to the extreme formats that engineered can achieve.)
These preferences support the rise of engineered hardwood, which can be made in these larger sizes with great stability due to its multi-ply or HDF core. In addition, engineered wood is not as susceptible to moisture and, therefore, doesn’t require the same degree of acclimation. And engineered woods typically feature factory finishes, which are harder than site-finished woods, and several companies today are rolling out engineered wood with advanced finishes that promote durability, such as Armstrong’s Diamond 10.
According to Doug Davis, vice president of sales for Artisan Design Group, “Solid hardwood has really taken a back seat to engineered due to issues of acclimation and performance in new construction. Flooring in a new home is susceptible to temperature and humidity during the building process as well as a lot of trade damage when it is first installed. In addition, another big reason we see the pull away from solid is due to the preference for wider and longer. Solid is typically 21/4” and 31/4”-anything longer than that is much more susceptible to environmental impacts.” Solid makes its appearance today almost exclusively in high-end custom work.
As for what qualities in hardwood are most important to builders, Brian Givens, owner of Capital Carpets, reports, “Price is always at the top of everything for builders.” Don’t overlook the fact that the builder wants to make a margin on the flooring as well. Behind pricing, says Givens, are current styling and product performance.
Gunckel believes that “builders want products that drive sales. They are looking for aesthetics and products that wow the consumers into the upgrade.” Davis adds, “The fewer call-backs, the better.”
Jim Gunckel started his flooring contractor business, originally called J&S Floors but today known as RDS, in Los Angeles in 1978. The business went through many significant changes over the years-including ownership and partnership changes-before launching its IPO (under Select Interior Concepts, Inc.) on Nasdaq on August 16. The company is currently working to expand across the nation through acquisitions. Earlier this year, the company purchased Greencraft of Phoenix, Arizona. RDS serves both high-end builders, such as Toll Brothers, and entry-level builders with a range of products in addition to flooring, such as cabinetry, finish carpentry, hardware, shower doors and mirrors, and walls and counters.
Capital Carpets, owned by Brian Givens, was started by Givens’ father-in-law Bob Raver in 1973. Capital Carpets serves Washington, D.C., Maryland and Virginia with a full range of flooring products. The price point of homes in Capital Carpets’ market is at the upper end. During the recession, the company diversified into multifamily work.
Artisan Design Group is a consolidation of ten large regional flooring contractors across the U.S. The operation includes companies with decades of experience. The consolidation started with the merger of Floors Inc., owned by Larry Barr, and Malibu Floors, owned by Wayne Joseph, in late 2016. Artisan Design Group serves the single-family market primarily, accounting for 75% of sales; the multifamily new construction accounts for 15% of sales and apartment replacement makes up the remaining 10%. The company reports that it is still in “extreme growth mode”-internally, through acquisitions, and through diversification into cabinets and countertops.
All of the flooring contractors we spoke with for this piece are FloorExpo members. FloorExpo, a part of the FEI Group, is comprised of two segments-Home Solutions and Multi-Family Solutions-with membership divided evenly between the two. Hogan reports that, statistically, for the single-family and multifamily operations combined, the group’s members install approximately one quarter of the flooring in those segments.
INNOVATIONS IN HARDWOOD THAT BUILDERS APPRECIATE
As the market has seen with the proliferation of the engineered format, innovations in hardwood have the power to invigorate the category and promote use in the builder market.
One innovation that has offered such possibilities is the replacement of wood plies with HDF core in engineered wood. “In the last few years, a couple of manufacturers have gone to HDF core with engineered wood: the bottom veneer and top are wood; the middle is a core, similar to laminate,” Davis explains. “This has been received okay. There were concerns two years ago with the product not performing well, but we haven’t been hearing a whole lot of chatter about that anymore. The product is much more dense than a ply product, which helps minimize denting and scratching.” Another interviewee reports that the problems Davis mentions still exist in some HDF-core hardwood products. In spite of that, the interviewees agree that this category of hardwood products offers a great deal of promise for builder market use.
Gunckel points to an advancement outside hardwood as the biggest boon the category has seen in years. “Urethane adhesive and sealers for concrete were a big deal for the builder community,” he explains, “where we’re often installing flooring 60 days after the concrete slab has been poured. Hardwood manufacturers include acceptable moisture levels with their products, but urethane adhesives with moisture guard virtually guarantee that there won’t be problems.”
Competing directly against the strengths of lookalike products, innovations such as these have the power to help gain a stronger hold in the builder market by helping to make it as appealing to homebuilders as it is to homebuyers. “I think hardwood will always have a strong position in the builder market,” says Gunckel. “It’s so warm and inviting. It’s easy on the feet and helps maintain the temperature in a room.”
While product innovation is of great importance, Davis believes that its success hinges on manufacturers who are willing to both listen to their customers and share information. “We need more openness in the market,” he says. “Manufacturers must provide flooring contractors with honest information about differences between products and the advantages and disadvantages of moving from one product type to another; we need full transparency. Similarly, manufacturers must understand that acclimation is very important to flooring contractors and share the burden of building awareness about products to homebuilders. Our customers [homebuilders] need more awareness about how products will perform-good or bad.
THE BUILDER CHANNEL PROCESS
Though residential replacement and builder channel flooring products ultimately live similar lives, their entry into the home is under fairly different circumstances.
In residential replacement, a homeowner typically chooses the product that best suits their tastes, performance requirements, budget and subfloor needs from the literal thousands of options available across the flooring categories. The installer then comes into their inhabited home, moves the furniture, installs the floor, makes sure it’s up to the customer’s standards, replaces the furniture, then leaves. The customer is living on the floor almost immediately.
Builder work, on the other hand, operates much differently. The builder reaches out to the flooring contractor for a bid on a specified group of products that it has decided to use for the project and issues an invitation to bid. The bids often apply to a specific number of homes inside a certain community, say 100 homes and 30 townhouses in a project. Subsequent phases in that community will necessitate another set of bidding.
Following that, there are a variety of ways in which the process can proceed.
Brian Gunckel explains the different routes through which flooring products make their way into new homes:
• The builder decides what they want to spend, and the materials are pre-selected without the consultation of the buyer or potential buyer. The home is sold as is.
• The flooring contractor sets up a design studio at the project or off site where homebuyers go to make their selections. Usually there is a standard selection already decided as part of the purchase price of the home, and the cost to install the standard selection is billed to the builder. However, should the homebuyer want to upgrade to something different, the buyer is given a credit for the standard, which gets billed to the builder. The homebuyer pays the difference in cost from the standard and the upgrade.
• The builders have their own design studio. They meet the buyer and go through the same process. In this case, they provide a purchase order to their chosen flooring subcontractor to purchase and install the flooring.
• The builders offer the standard flooring selection through their sales office. They will sometimes offer upgrade packages pre-priced by floor plan so the buyer can choose from options. This, says Gunckel, “almost never works out, and once again the buyer just pays the difference from the standard package and the upgrade package.”
FLOORING CONTRACTING: AN EVOLVING BUSINESS
There is significant consolidation in the homebuilding channel today, and the same trend can be seen among flooring contractors, who, in creating partnerships, are seeking to form or reinforce their relationships with builders by offering expanded range, ease and consistency. Explains Davis, “Consolidation among flooring contractors has been going on for a while. We believe that the way we [at Artisan Design Group] are consolidating is suited for a long-term strategy and long-term growth. As we look to acquire businesses, we are looking for those with leaders who are interested in staying and running the business. For our builder customers, we want to be a single point of contact in more than one geography.”
In addition to consolidating various unrelated operations into a single multi-pronged organization, flooring contractors are also diversifying, both into multifamily work, as Capital Carpets has, and into other materials, such as countertops and cabinets, as RDS has.
RDS, for example, has 15 design studio locations (in California, Nevada and Arizona) handling the full interior specification process where builder customers collaborate with professional designers, who help guide them through the selection process, and ensuring that they stay within their budget and building timeframe.
Hogan explains that, with the labor shortage currently impacting the market right now, flooring contractors are often cross-training their installation teams. For instance, four guys will be sent to a home. Two will specialize in flooring installation, and the other two in cabinet installation. The flooring installers will lead the flooring process and rely on the cabinet guys for help and likewise for the cabinet crews-an organic and efficient cross-training process.
In addition, Hogan reports that a few FEI members are dabbling in retail.
These diversification strategies also come as a result of some industry trends that have, to some extent, threatened the way flooring contractors do business. With builders gaining in size and strength, some have started trying to bully flooring contractors to a degree, demanding that builders break down their pricing in detail, revealing the product cost from the manufacturer and expenses associated with adding to that cost.
Because flooring contractors resist providing this information, some builders have formed relationships directly with floorcovering manufacturers, which reveal wholesale pricing to the builders (and often offer rebates) in order to ensure specification of their products. This exposure of pricing is a significant frustration for the flooring contractor.
Says Gunckel, “We try not to have exposed pricing. We’re not trying to hide our pricing, but it’s our business. We have to control our ability to make a profit. Some builders demand exposed pricing, and we stay away from bidding those types of projects.”
Exposed pricing doesn’t mean that the flooring contractor can’t make money on flooring product sales, only that all their cards are on the table, per se, and that gives the builder the upper hand in negotiations. The bids that flooring contractors provide builders typically offer one figure that covers both product cost and labor.
Hogan notes, “For some of the top production homebuilders, there is exposed pricing, but the flooring contractor still has to make their margin. Overall, the gross margins are still workable with builders, even though there is pressure. However, if flooring contractors are to make it work, they have to manage their internal costs.”
As for the outlook for the flooring contractor market, Hogan reports, “Business is pretty good now. It’s tough to get lots permitted and approved as fast as builders would probably like, but that’s probably not bad because labor is still very tight, so we are actually at a good pace with lot development.”
Make no mistake, LVT is taking share in the builder market just as it is in residential replacement. Givens reports that in his higher-end market, he mainly sees it being used in basements, where it is often taking share from what would have been carpet rather than what would have been hardwood. In these applications, Givens reports, “LVT is a big win because it’s waterproof.”
In other areas of the country and at other price points, however, the story is different. Davis reports that he sees LVT taking share in entry-level to mid-tier price point homes.
Regarding the material, Gunckel reports, “We are most pleased with the strength of the LVT product. It’s not likely to scratch. The cost of repair and replacement has gone down extensively, so it’s a friendly product for builders.”
Givens points out one significant, yet ironic, negative that LVT faces in the builder market: its rapid pace of change. “Manufacturers keep improving and changing the LVT category,” says Givens, “but the builder market demands consistency. The homes they’re planning won’t be built for six to nine months or more. If builders select a product today, it has to be viable when they’re finally building.”
Copyright 2018 Floor Focus