Hardwood Report - April 2009

By Brian Hamilton

Hardwood makers have hit their stride in recent years and today they offer more innovative products at a wider range of price points than most anyone would have imagined ten years ago.

Engineered hardwoods, which now account for a little more than half of hardwood revenues, are being produced in nearly every species, finish, color and width imaginable, giving homeowners and businesses an almost limitless array of design possibilities. Manufacturers have invented ways to color the entire thickness of the veneer using heat and other non caustic processes, which help hide wear in high traffic areas. They’ve taken a page from laminate manufacturers and have incorporated click systems, making them fairly easy to install. Solid flooring has also become much more varied, especially as prefinished flooring has grown in popularity. The sustainability story is also becoming more compelling as adhesives and finishes become completely or nearly VOC free and the industry finds ways to ensure that wood comes from responsible sources.

But the current story for hardwood can largely be explained by one statistic. Overall housing starts, which drive so much of wood sales, fell 33% last year, with single family home starts falling 40%, according to the Commerce Department.

Of all the people we talked to for this story, Ed Korczak, executive director of the National Wood Flooring Association, offered the only glimmer of light at the end of the tunnel. He said that some of his members in the Northeast and Midwest are starting to see a little activity after months of virtually nothing. These are areas where the housing bubble wasn’t so severe.

Activity at the high and low ends
Despite everything the hardwood industry has going for it, last year was probably its worst year ever in terms of sales decline—down about 20%, according to Santo Torcivia of Market Insights—and 2009 could be down again, unless the economy takes an upturn. Manufacturers and retailers are trying to stay upbeat about their prospects but they remain realistic. What’s happening, they say, is there are some higher margin sales at the high end in distressed, handscraped and character looks (which according to Mohawk research now account for about 30% of industry sales), along with relatively brisk sales in the home centers at entry-level price points for basic red oak, and not much activity in the middle, partly because the middle doesn’t provide enough value to customers. In some cases, manufacturers have dropped prices on the low end just so they can keep their production lines running.

The high end buyers, those looking at $12 flooring, are, for the most part, people who don’t really care how much wood costs, but they are fewer in number. And retailers say even this group of buyers is taking far longer to make a decision than they have in the past, and are often doing web research and visiting several stores, because they want to buy exactly the right floor. And brand recognition is starting to become a greater factor in hardwood sales as customers become more finicky. Today’s customer is also becoming more inclined to buy American products, which favors companies with a strong brand presence in the market.

“We’re writing good tickets with high quality items, but just not as many of them,” said Jamie Hodge of Hodge Carpet in Spartanburg, South Carolina. “People think wood is more expensive than it is. High end laminate is not that far away.”

Hodge said it is still possible to upsell in this market. “From a sales point of view, the real challenge is that people come in and think they want a traditional floor that they saw in their grandparents’ house, which is probably an oak floor. More than anything else it takes education. We’ve got to do a good job of hand holding and romancing the product. About 80% of our showroom is hardwood or ceramic, and I think I can show them something that will make it an easy sell. I also always have a no interest offer going. I had a customer come in with a $10,000 budget but after falling in love with a Mirage floor, they spent $22,000.” He also emphasizes that wood adds value to a home, unlike most other floorcoverings.

Jon McLellan, owner of Broadway Carpet in Knoxville, Tennessee, said 80% of his retail customers are looking for value, and 20% don’t care what flooring costs, which is a complete reversal of what he’s seen in past years. He does some commercial work and has seen a trend of restaurants replacing polished concrete with wood, especially as the rustic looks, which can hide traffic wear, have proliferated. He likes Shaw, Anderson and Mannington products, in particular, and believes that with the addition of Zickgraf, Shaw has the most complete line in the industry. However, he says of wood in general, “I would like to see a few more products be classified as commercial quality. I think the market is weak there.” He said builders of entry level homes are cutting costs as much as they can and are often opting for vinyl for areas where they would have used wood before. High end builders, he said, are using just as much wood as before, but there just aren’t many homes under construction.

For the most part, both manufacturers and retailers say that the sustainability story of wood flooring is only useful today in the commercial sector and sometimes the builder sector if a company is focused on green homes. In the home renovation sector, at best it might be a tiebreaker in the case where two beautiful floors are equal in price. No one wants to pay more for a green product and very few customers are even asking to see them.

Nevertheless, manufacturers know those attitudes will change eventually and they are positioning themselves to take advantage of that. As one manufacturer said, in five years it won’t be possible to sell flooring that doesn’t have a good sustainability story.

The Canadian manufacturers generally report that business is better for them than U.S. manufacturers, primarily because the Canadian economy is in better shape and housing construction hasn’t fallen off as sharply, although it is slowing. In addition, in January the Canadian government passed a Home Renovation Tax Credit, which helps offset the cost of home improvements of at least $10,000 and could provide an additional boost to the industry. Some individual provinces, such as Quebec, have added their own tax incentives on top of it. The wood firms say it’s too early to tell just how effective the credits will be, but they’re keeping their collective fingers crossed. A similar proposal in the U.S. backed by the American Home Furnishing Coalition was not included in the federal stimulus package, to the dismay of just about everyone in the floorcovering industry.

One good piece of news for domestic manufacturers is that the economy and other factors seem to be taking their toll on imports, especially from China. Until recently, some Chinese manufacturers were selling entire containers direct to retailers, cutting out distribution costs. However, in this slow sales environment, retailers are balking at maintaining so much inventory, which can also make customer service a problem for foreign producers, and, today, consumers don’t want uncertainty. In addition, tax breaks from the Chinese government have also lessened, making prices less competitive.

Also, last year, for the first time since 2005, wholesale prices stopped falling and stabilized, according to Market Insights.

Lacey Act impact unknown
The industry is also preparing for the enforcement of the new amendment to the Lacey Act, which bans the importing of illegally cut plant products, in this case wood. Enforcement is scheduled to begin this year. The International Trade Commission has estimated that roughly half of all hardwood sold here is imported, and that illegally harvested wood has depressed world prices about 8%. If the enforcement is effective, prices on low end flooring should rise about 8%, partly because illegal Russian oak looks a lot like U.S. oak and is a substantial problem. It tends to be sold in large stores and be used for base grade products. In addition, the amount of exotic imports is likely to fall, which could lead to higher prices. There will no doubt be importers who slap on a label, hoping that there won’t be adequate enforcement by U.S. Customs.

Partly in response to this issue, the National Wood Flooring Association has begun its Responsible Procurement Program, a three tiered progressive certification. Members can get an audit showing that their imported products come from legal areas, and that their domestic products come from states with renewing forests. This is meant to be an entry level certification program, with the ultimate goal of receiving certification from the Forest Stewardship Council, the gold standard for wood sustainability.

While there are many supporters of the Lacey Act amendment, critics are skeptical that U.S. Customs will have enough resources to enforce the new laws adequately. However, as one floorcovering executive said, it won’t be long before an environmental group wants to embarrass a prominent player to make a point, and that’s when things will really begin to change.

The hardwood players
ArborCraft is spending its time these days focusing on new retail programs for distributors, as well as building its lines of distribution. The previous owners of its Harris Wood line had lost a lot of distribution, effectively only covering about half of the country. Last year it added three new distributors and placed product in more than 700 new retail outlets. It’s been a huge expense for the firm, which was purchased by investment firm New Stream Capital in 2007, as a 12’ display can cost roughly $3,000 and retailers are reluctant to pay for them anymore.

Despite backing out of the Surfaces trade show this year, ArborCraft did release new products, including an opening price point engineered product with a Välinge click system called New Traditions Springloc Collection as it sees consumers moving down in the market. It also introduced a new handscraped, Trailhouse Hickory.

ArborCraft is also seeing a lot of interest, but not many sales, at the high end, in products like its Hamptons Colorcraft old paint look introduced last year.

ArborCraft, which sells a unique and more basic brand with limited selection in the big box channels, added another 500 Home Depot stores in the West last year and the brand is now sold throughout the chain. ArborCraft is also targeting the multi-family market and one of its distributors, CMH, is active in that arena.

Although all its end user segments have declined recently, Mohawk is making the most of its fairly recent purchases of Columbia Flooring and Century Flooring. Based on its market research on consumer preferences, Mohawk completely changed Columbia Flooring into a specialist in character and texture woods and it now has 98 offerings across multiple species and colors, in both solid and engineered. Columbia is still a standalone brand. It’s part of the company’s strategy to use the three brands to give retailers virtually everything they need, with the Mohawk brand the workhorse, while Columbia and Century, sold through separate distribution, fulfill other needs. Century offers domestic species in traditional designs.

Mohawk believes it is in a good position in a poor market because of its depth of products and its huge distribution and retail networks. In addition, it believes branded products are seeing greater demand than private label products because shoppers are doing their homework before making a purchase and prefer to deal with companies that are likely to make it through the recession. It’s also seeing some potential from the decline in imports. Retailers don’t want to carry as much inventory, so getting timely service from overseas manufacturers can be a problem and Mohawk can turn orders quickly.

The Mohawk, Columbia and Century engineered products became the first on the market to become compliant with phase 2 of the California Air Resource Board requirements, almost a year before the deadline. It accomplished this by replacing the formaldehyde used in plywood construction with a formaldehyde free product from Columbia Forest Products called Purebond.

Shaw has remade its hardwood business in the last couple of years with the purchase of high end engineered specialist Anderson and solid specialist Zickgraf. It’s using the technology and skills from both firms to improve its Shaw branded offerings, although Anderson remains relatively independent and sells under its own name, while the relationship with Zickgraf is more complicated. Zickgraf is being distributed by Anderson, and its manufacturing facilities are making products for both the Anderson and Shaw brands. Zickgraf is also selling its own Zickgraf branded products through its own distribution. It’s possible to find all three names in the same showroom. The only overlap among the brands is in the entry level commodity part of the market.

With its new capabilities—one of the most comprehensive in the industry—Shaw recently had its biggest product launch ever. It sees a chance to gain marketshare with its product breadth and styling, operating on the belief that there will likely be some falling out in the industry because there’s too much capacity for most players to make any profit. The firm could still be in the market for another acquisition.

Shaw believes that while the trend is still toward wider planks—last year it came out with Grand Canyon, an engineered 8” plank—it has also introduced some 3” handscraped products with a more traditional look, and Shaw is surprised at how well they’ve sold. It’s also seeing a trend toward more subtle scraped looks, which can help hide scratches, such as in its Rosedown Hickory and Pebble Hill Epic engineered products (similar visuals are available in solid as well.) In addition, the next couple of years should bring creativity in exotics as U.S. manufacturers move toward using American species to create the look and avoid the hazards of importing exotic woods.

The high end of the market is also growing for Shaw as it churns out new products using its new capabilities. Shaw hasn’t had the builder exposure so its business hasn’t been hurt as badly as some other players.

Shaw’s retail price offerings range from about $3.39 to $17.

Mannington struck a significant agreement with Chinese manufacturer Elegant Living to both manufacture products for China bearing the Elegant Living/Mannington name, as well as distribute Mannington’s U.S. made products through its 500 retail locations in China, which should give it access to a huge market. Anderson has a similar arrangement with Power Dekor in China. It’s the first time Mannington will ship a U.S. made product to China. It’s unclear to Mannington just how big the Chinese opportunity is, but Elegant Living is very bullish on the prospects.

Mannington also became the second engineered hardwood maker to pass the California Air Resources Board Phase 2 requirements, nearly a year ahead of schedule. It uses no-added-formaldehyde adhesive in the products, and has been for 15 years at its High Point, North Carolina manufacturing facility.

Rustics and distressed products are still in fairly high demand and its Inverness line, which debuted in 2007 and was expanded last year, continues to be a top seller in the remodeling market. Mannington has seen a lot of price compression in the last few years in handscraped woods. Three years ago there was a lot of handscraped in the $6 to $7 range that today is around $4, partly due to imports from China, where labor costs are significantly cheaper.

Mannington, which sells only engineered flooring, also saw its costs rise last year as many of the small sawmills in the southeastern U.S. shut down due to falling demand for traditional timber.

In general, Mannington isn’t optimistic about recovery in the wood market until the homebuilding industry turns around.

Mullican is high on its new Green Haven line, a domestic solid which has FSC certification. It’s another feather in the firm’s sustainability cap. Last summer Mullican’s entire line of prefinished solid flooring was verified as sustainable by the Appalachian Hardwood Manufacturers Inc.

Mullican, for many years a solid flooring specialist, has been importing engineered products from China for the past three years, and now the firm has struck partnerships with some home centers to carry its products, both Mullican branded and private label. That is causing its remodeling business to pick up.

Overall, business was down last year but Mullican has grown a little more optimistic about this year based on an uptick in March sales. That may, in part, be due to the expanding breadth of its offering. It now has products ranging from about $2.25 to $12 to the retailer, which allows Mullican to compete at any price point. Mullican has also gotten high marks for styling in Floor Focus surveys.

Armstrong, still the hardwood sales leader by a factor of four, is staying aggressive in terms of product introductions. Mid year it plans to launch about 300 SKUs in its Armstrong brand—sold exclusively through independent retailers—many of them new handscraped and distressed looks. Previously Armstrong had a few handscrapes in its Bruce Wentworth Estates collection, but now is jumping in with both feet with a significant expansion. Many of the new Armstrong distressed looks, which are labor intensive to manufacture, will be produced at the company’s plant in China, and shipped directly to distributors to cut costs.

Also, like some other firms, Armstrong’s Robbins brand has introduced a line of exotic looks, called Urban Exotics, made from North American species. The look is produced using a thermal infusion process that bakes the veneer to change its color. The company decided to take that route, rather than use real exotic wood, because it wasn’t sure it could get a large enough supply of quality exotic wood from a trustworthy supplier.

Armstrong has also decided to offer a new line of products designed specifically for the West Coast, part of a new emphasis that focuses on satisfying regional preferences.

For Armstrong, most of its business continues to be in the old reliables, traditional oak, maple and hickory, both solid and engineered. Late last year, in its Bruce Dundee line, Armstrong went to manufacturing wide solid versions of those species which they debuted in January, in keeping with a general industry trend toward wider planks. Early sales have been encouraging. Sales of its lock and fold engineered products, sold largely under the Hartco brand in big box stores, are holding up reasonably well.

Armstrong is also finding that its residential customers are far less interested in sustainable products these days. Although sustainability is having some impact on the builder business, homeowners aren’t interested in paying more for a greener product.

Armstrong’s price points to the retailer run from about $2 to $13. The company says that while its strong suits continue to be consistency of quality and its policy of standing behind its products, it hopes that with the new product launch it will be seen widely as having the best products in the industry.

Engineered specialist Anderson, which is now owned by Shaw but independently operated, is starting to sell more into the commercial market and its Permacolor products are becoming increasingly important in that channel. What commercial business it has had in the past has been done primarily under labels other than Anderson.

Anderson believes that the economy is in a deflationary period and that profitability this year will hinge on cutting costs. It has been aided by the fact that it uses prison labor for finishing some of its products, so it has been able to reduce prison hours in order to keep its civilian workforce busy. It has also been working to get material costs down. Anderson believes there will be further consolidation in the industry through the entire supply chain.

Anderson’s higher end products are doing reasonably well but its base grade for home construction has been difficult to sell. The firm hasn’t changed its prices but is using targeted promotions on some products. It is letting distributors pick a couple of products in their markets to discount and promote heavily.

A year ago Anderson implemented a minimum advertised price policy in an attempt to protect retailers and distributors from being undercut by Internet businesses and other outlets that use bait and switch tactics. The company said its enforcement has been successful and that now there are few problems.

Anderson’s competitive advantage lies in its high quality craftsmanship, style and design, as well as its innovation. It led the trend of using solve

Its retail price points range from a little more than $5 up to $12.

Canadian firm PG Model says its recently launched E Collection is going to be its best product introduction ever, based on sending out more than twice the usual number of samples. The E, which stands for Earth, emphasizes the green aspects of the collection, which includes using 80% of each log, which it claims is 15% better than a typical yield. The collection features different shades of brown, created by using two different stains. Model says its advantage lies in the look and quality of its finish, as well as its milling. The company believes it produces the flattest floors in the industry.

Model has also added engineered versions of all its solid products, and this should be a significant growth area as it expands its mainstreet commercial business. The firm believes that in five years engineered products will have the same dominance in the market as prefinished has over unfinished products.

Model is benefiting from cost cutting that it began two years ago, which has enabled the firm to keep prices lower.

Model’s products are sold through independent high end retailers, with retail price points ranging from $3.79 to $10. Financing programs, such as six month deferred payment plans, have helped move product, but credit is getting tighter and retailers are offering fewer of these promotions.

Lumber Liquidators is the one clear exception to the industry trend. The firm, which became publicly traded in late 2007, doubled its profit last year as it opened nearly three dozen new stores, although its comparable store sales have started to decline. It offers prefinished premium domestic and exotic hardwoods, engineered hardwoods, unfinished hardwoods, bamboo, cork and laminates, mostly proprietary brands, led by its Bellawood brand, as well as an assortment of accessories. It does sell to contractors but that is a small proportion of its sales, as it generally appeals to homeowners. Most of its products are imported from China, but the company handles all its own distribution and sales. Its top ten suppliers accounted for 67% of Lumber Liquidators’ purchases. It also buys inventory from defunct distributors and retailers, and each store carries stock, so purchases can be completed immediately in many cases, as opposed to many independent retailers, who have to place orders with distributors. The firm spent 9.5% of revenues on advertising last year, or $45.8 million.

Canadian manufacturer Mirage is seeing increasing interest in its Sweet Memories rustic 5” engineered products, which have dark, urban colors such as Black Jelly Bean, with a matte finish. Canadian consumers are moving away from exotics toward North American oak, maple and birch. Heat treated birch is being used in its new Local Exotics line, which so far has one color, Bali Coco. The firm has been working on the heat treating process for two years and has just started to create product. Mirage believes the Local Exotics will become increasingly popular and help boost sales as the company expands its product offering.

Mirage is seeing a trend of more consumers shopping specifically for its products rather than just any hardwood floor. What it has discovered is that high end consumers who are interested in sustainability are doing their homework from websites, online reviews and surveys, and even chat rooms, and are finding that Mirage has a good reputation. The firm believes that as more people do research online, branding will become more important to the general public.

Mirage products are sold through independent retailers and its price points range from $6 to $12.

Hardwood consumers in the U.S. and Canada have different tastes, although both markets are gravitating toward engineered woods and stained floors. Mercier develops its products with lighter tones for Canada and darker colors for the U.S. and the firm is getting increasingly involved in textured products, such as handscraped and wirebrushed products. However, its natural red oak and maple products continue to be its best sellers.

Mercier hasn’t made the jump to click products in its engineered offering, which includes both exotic and North American species.
Unlike some other manufacturers, Mercier believes the trend is moving toward narrower planks, and it is seeing plenty of interest in 2 ” antique yellow birch.

Mercier sells its Mercier Generations woods in independent retail stores and so far it has managed to maintain its price points, at roughly $5 to $8 retail in the U.S. and $4 to $7.50 in Canada. It also markets a separate Mercier Pro line for professionals and contractors. Mercier Pro is all prefinished North American species. Its distributors don’t keep much product in stock, with the exception of some generics. Mercier handles that by turning around most orders within ten days.

As with other Canadian manufacturers, business is comparatively strong north of the border, both in the builder and renovation markets.

Home Legend, which will move its corporate office from Chino, California to Calhoun, Georgia later this year, does 95% of its business with Home Depot. It sells engineered oak, bamboo and piano finish mahogany with a click system at retail prices points of $3.50 to $4 depending on the width. Home Legend anticipates that sales will be up this year, due almost entirely to the click system, which appeals to homeowners who want to install the products themselves. It also enables Home Depot to lower its installation prices considerably. The firm is also in the early stages of developing sales at independent dealers.

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