Hardwood Report: Raw material costs squeeze margins
By Jessica Chevalier
Hardwood was the fastest growing flooring category in 2013. In total, the hardwood industry’s sales were $1.921 billion, up over 13% from 2012, according to Market Insights LLC. In volume, the hardwood industry sold 817 million square feet of flooring, a year-over-year increase of almost 12%. However, by all accounts, profits didn’t experience the same rising trajectory due to the high and increasing cost of raw materials.
Lumber capacity issues continue to challenge the industry, a situation that has been building since the market came out of the recession. In response, hardwood flooring manufacturers have implemented price increases on their products, and, with no relief in sight on raw material costs, they anticipate additional increases to their finished product prices as well. The good news, however, is that manufacturers believe that the hardwood market’s upward progress will continue this year. In fact, Market Insights projects almost 18% industry-wide growth for 2014 by dollars and just over 16% by square footage.
In addition, it seems that, at least for now, consumers are willing to pay an increased price for the beauty and warmth of real hardwood. While the market is struggling with its new normal with regard to capacity, it can take a bit of comfort in knowing that, even with the many wood-look products on the market, many consumers are still willing to invest in real hardwood flooring and desire an attractive, quality product for their dollar.
For the hardwood flooring industry as a whole, 2013 was a good year, in large part because it seemed to reassure everyone that the upturn was indeed a sure thing. Says Milton Goodwin, vice president of product at Armstrong, “We saw the dam break from a growth and sales standpoint, and every segment of the market has been better.” Of course, no amount of growth is meaningful unless the supply chain is making a profit, and that’s where the challenge comes in.
Over the last few years, much has been said about the reasons for the current capacity issues. But in short, with low demand for timber during the downturn, many logging firms and sawmills were forced to close their doors. Today, a lot of the employees who worked in those shuttered businesses have moved on to other industries and, in some cases, are hesitant to return to the lumber business, which is notoriously difficult and risky. And so, as things stand, there is no clear resolution to this problem except to wait for the mills in existence to ramp up their output in response to consistent demand. Until that happens—and it will inevitably be slow because the tight lending market makes it harder to access funds for expansion—none of the manufacturers that we interviewed expects a respite from raw material increases. In addition, Luc Robitaille, vice president of marketing for Mirage, reports that the cold and wet weather has further tightened supply, as many lumberjacks are unwilling to log in poor weather due to the increased difficulty for both laborers and machinery.
The solid side of the hardwood business has been much more impacted by the sawmill closings, which, of course, is one reason that manufacturers are introducing so many engineered products to the market currently. Says Richard Quinlan, senior director hardwood products at Unilin, “A number of the smaller sawmills that focused on the solid side are not operating today. That creates a bit of a bottleneck on supply. We’re hoping to see smaller mills coming back. Now that demand is consistent, we’ll see what the lumber industry does.”
Until these expansions or reentries to the market come through, manufacturers will be forced to continue passing increases down the chain. “Many hardwood manufacturers are not making money at current raw material levels, and as an industry we are going to have to get a significant price increase to have a sustainable wood flooring manufacturing industry,” says Goodwin. “For all manufacturers, the cost of raw materials continues to rise at an extraordinary rate. There’s little likely to change in the supply of lumber…wood prices will continue to go up.”
Today’s styling runs the gamut; it has to. Customers want floors that reflect their unique style, not some run of the mill oak like every other house on the block. And so the key for manufacturers is variety: a diversity of species, colors, textures, widths and lengths. Says Richard Quinlan, senior director hardwood products at Mohawk, “Ten to 15 years ago, the market was very basic from a styling perspective. Now, it is much more diverse. Customers are coming into the marketplace looking for value but their value perceptions are shifting, from value as it relates to price to value as it relates to styling, design and performance.”
To a point, price increases are fairly invisible to the retail customer, who, at most, delves into the flooring world once every few years—often fairly blind to pricing at the outset—and is much more concerned about rising costs for products purchased on a more frequent basis, like milk (a half gallon of organic costs $4.00), gasoline and, with the wild weather patterns impacting much of the country, energy. When a consumer purchases a hardwood floor, they are expecting to make a substantial investment and, ultimately, whether the material costs $5,000 or $5,500 isn’t that much of a game changer.
However, retailers, well versed in pricing, aren’t always so willing to accept these increases without a fight. Paul Stringer, vice president of sales and marketing for Somerset, says, “We still see retailers fighting the new normal on pricing. They want $1.99/square foot strip, which soon won’t exist anymore. Pricing strategies will be an important aspect of the year.”
The investment in LVT by U.S. manufacturers has been well documented here in Floor Focus (see last month’s Resilient Report: Domestic LVT Production), and was wildly evident at Surfaces, where it seemed that almost every other exhibitor on the floor was rolling out a new LVT line, even Beaulieu, which, for the past decade, has focused solely on the soft side of the business. In addition, manufacturers are investing roughly $270 million in U.S. LVT capacity, and a portion of its success comes at the expense of hardwood. After all, many LVT visuals are quite realistic, and with LVT there is no inherent difference in cost between a common oak visual and an exotic look like ipe, for example, so the consumer can choose a unique “species” at a competitive price, complete with the character and scraping that is so popular in hardwood today. Interestingly, one of the companies with the most unique hardwoods on the market, DuChateau, introduced a line of LVT that mimics its own oil-finished visuals.
As hardwood manufacturers continue raising their prices to cope with raw materials costs, they are ever mindful of the point where consumers, comparing the growing price difference between hardwood and its lookalikes, determine that the real thing just isn’t worth the cost. Where that point lies, no one is sure. But in 2013, the average square foot price for LVT was an estimated $3.00/square foot at retail, and the average square foot price for hardwood was an estimated $3.75/square foot, which means that in an average-sized, 250 square foot living room hardwood would cost $187.50 more than LVT. That may not sound like much, until you consider that the installation of hardwood is likely to run $500 more than LVT. If the price of hardwood continues to rise and an abundance of domestic production drives the price of LVT lower, that difference could be enough to encourage buyers, at least low- and mid-range buyers, to look at LVT.
REFINISHING TEXTURED HARDWOOD
Many engineered hardwood floors have a veneer thick enough to be sanded and refinished later in life and, when engineered hardwood was a new product on the market, this fact—that engineered like solid could be refinished—offered a degree of comfort to customers who were wary of investing in the newfangled flooring. However, in most instances, the thickness of the veneer is a moot point with today’s textured hardwoods because sanding the product removes the texture, or at the very least, renders it considerably more subtle, a likely undesirable outcome for the customer who invested in textured product to begin with.
For hardwood manufacturers, the key to success in today’s market is determining their strengths in consideration of the current situation and moving forward. Somerset, for instance, developed its new lines for 2014 bearing in mind what raw materials were readily available, with the goal of creating products that it could deliver to its customers in a consistent and timely manner. Though the privately held company has grown at a fast clip—it is three times larger than it was 12 years ago—it remains nimble and that is a key to its success in the current market. Says Stringer, “I can talk to the president, walk out and talk to the guys on the finish line, and do something new the next day.”
For the Mohawk group of hardwood brands (Mohawk, Columbia and QWood), the key has been honing in on the diverse expectations of today’s consumers and creating products to fulfill these, and Mohawk believes that customers are looking for value with regard to style, design, performance and, of course, cost. No longer is the U.S. wood market a one-size-, one-style-fits-all scenario as it was a decade or so ago. Today, customers want a hardwood floor that fits with their style and stands up to their lifestyle, and manufacturers must optimize their inventories to match the demands of what customers want now and stay ahead of trends to predict what they will want in the future.
Of course, this diversification is in itself a challenge to manufacturers that now have to create and stock many more unique products than they did previously. Mirage, for example, launched 91 new SKUs in January alone, many of which catered to the wide width and grey tone preferences of the current market. In stands to reason that inventory was a more manageable beast when manufacturers had four different species of solid hardwood in a dozen colors each. Today’s manufacturers have a good deal of capital tied up in their expansive and varied product lines, and, therefore, are at a greater risk should they misinterpret the trends or should trends change quickly. The current trends in scraping are a good example of this. A few years ago, moderate to heavy scraping was hot. Today, those looks are pretty much relegated to Texas and softer, timeworn visuals are largely preferred across the rest of the country. In fact, the Carpet One buying group recently transitioned from a north-south hardwood assortment to a five-region assortment to more effectively cater to the variety of format and styling preferences in the U.S. market.
With all the wood-look LVTs currently on the market, it may be somewhat surprising that hardwood manufacturers are experiencing a bump in their commercial business, but that is the report coming from each of the players with whom we spoke. Says Robitaille, “Business is increasing at a good pace. A lot of projects that were put on hold prior to the downturn are coming back on line. With those old projects and the new ones, it’s a good channel in the market right now.”
In many cases, hardwood manufacturers don’t have a commercial-specific line, but instead offer the same engineered products that they sell through their dealer channels. A few, like Armstrong, offer acrylic impregnated hardwood for commercial applications.
The bulk of commercial hardwood sales are to the corporate, retail and hospitality sectors. According to Market Insights, 7% of 2013’s total hardwood sales were commercial, which amounts to about $134 million.
Mirage, headquartered in Saint-Georges, Quebec, won a Canadian Award for Excellence last year, in its first year of eligibility. The award is Canada’s highest in recognition of businesses that exhibit excellence in the areas of quality and a healthy workplace, improving the life of Canadians.
As was mentioned earlier, Mirage launched 91 new SKUs in its Imagine collection, which was introduced originally in January 2013 with 61 SKUs. These new SKUs cater to the design trends preferred in the current market, including timeworn textures.
Mirage offers all prefinished hardwood and its business is split fairly evenly between solid and engineered product. Its engineered hardwoods have a 4mm veneer, which means it is basically the same as solid with regard to appearance, durability and sandability.
Mirage has two plants in Saint-Georges and employs around 400 individuals. The company, which sells to specialized independent dealers through distribution, experienced double-digit growth in 2013 and anticipates a good year in 2014 as well. Mirage reports that the slow, steady growth of the market post-recession has been a benefit, allowing it to handle the increases gingerly, rather than forcing a rushed ramp up. The company serves the commercial market as well.
Until late 2012, Somerset Hardwood Flooring was a solid-only manufacturer, importing its engineered product, but today it manufactures all of the product that it sells. Currently, about 25% of its offering is engineered, and the company expects this figure to grow, in large part because of the cost of lumber—with engineered hardwood, raw materials go much further.
Somerset has three mills. Its newest, in Crossville, Tennessee, makes unfinished and prefinished engineered hardwood flooring. Its two additional mills are located in Burnside, Kentucky, which makes unfinished solid, and Somerset, Kentucky, which makes prefinished solid. It also has sawmills in Somerset and Munfordville, Kentucky and a biofuel plan that makes wood pellets.
Somerset began selling product to the commercial market in 2012. As of yet, it has no commercial specification reps but is pursuing the certifications and testing that make it more attractive to A&D. During the National Wood Flooring Association show in April, which will be held in Nashville, the company will bus 50 attending architects and designers to Crossville for a tour of its plant.
Citing the many cheap imported hardwoods in the market, Somerset Hardwood Flooring recently eliminated all 3/8” product and took its entire line to 1/2”. “We weren’t competitive there,” says Stringer of the 3/8” market. “We’re good at 1/2”. It’s the sweet spot for performance in a mid-range price. It performs wonderfully.” Somerset has been pleasantly surprised by the sales of its SolidPlus engineered line in the north, typically a solid market. The company believes that the fact that the product, like solid, can be stapled or nailed makes it more appealing to consumers and more familiar to northern installers.
Somerset, which Floor Focus estimates to be the fifth largest hardwood manufacturer in the country, reports that 2014 was a strong year as far as shipments and revenue. However, as with every mill, raw material costs pinched profits. Says Stringer, “As long as our distributors are growing year over year, whether it’s 1% or 10%, we’re happy.”
It seems reasonable to assume that the largest U.S. manufacturer of hardwood flooring, Armstrong Flooring, would have the size and strength to isolate itself from some of the difficulties due to raw material pricing; however, even it is not immune. Says Goodwin, “From a volume standpoint, we are a little ahead of our goals; from the profit standpoint the big story has been cost, so we have not grown business as profitably as we would have wanted.” However, the company reports that every segment of the market improved in 2013 and that it added work crews in just about every plant in the U.S. and around the world to accommodate demand, certainly a positive sign.
Most of Armstrong’s hardwood products are manufactured in the U.S. from domestic species. The company sells both solid and engineered hardwood, and the entirety of its product line is prefinished. Commercial hardwood is a small percentage of its business, though it does have an acrylic impregnated line specifically for that market called Performance Plus.
Of Armstrong’s future, Goodwin says, “We’ve done a lot on the product side. Our journey now is to bring it all together—how do we drive leads to our website and to the retailers’ door and provide opportunity to excite the customer; to educate them about choices and value? The march now will be to integrate products so retailers can talk to consumers about their project and lifestyle. A lot of it isn’t about economics; it’s more about what’s appropriate for the project.”
Shaw’s hardwood business goes to market under the Shaw and Anderson brands; the company is the second largest hardwood manufacturer in the U.S. Shaw has been adding capacity in its Clinton, South Carolina and South Pittsburg, Tennessee manufacturing plants, and five months ago it announced a $40 million expansion of its Epic engineered hardwood facility in South Pittsburg, to be completed this year. The firm also manufactures hardwood flooring in North Carolina and Virginia. Both arms of the company offer both solid and engineered product. Anderson’s product is all prefinished.
Anderson Hardwood is sold through independent distributors to the remodel/replacement and new construction channels. Shaw is sold through the builder, retail and home center channels. Both brands are active in the commercial market as well. Rick Knowles, vice president of sales, hard surfaces, believes that “wood is increasing faster than other flooring types on projects in the commercial market because developers have an appetite to put higher priced goods in as money is loosening up.”
Mohawk, the third largest hardwood manufacturer in the U.S., goes to market under the Mohawk, Columbia and QWood brands. QWood, with a total of 13 SKUs, is a new entity for the company, created as a fashion-forward companion to the company’s Quick-Step laminate business. QWood, launched at Surfaces 2014, is a collection of 3/8” thick engineered products, all outfitted with the Uniclic locking system, that offers a unique renewable finish called Opulux. Opulux offers the cleanability of urethane and the repairability of an oil finish. When the finish becomes dulled, a consumer can use the company’s aerosol renewal system to spray the dulled or damaged spot and after an hour’s time, the spot will be cured and the finish repaired.
Under the Mohawk brand, the company expanded both its ArmorMax and Artiquity product lines—both of which are middle to upper-middle price points. And in Columbia, the company introduced a new collection of solid wirebrushed hardwood. It is also expanding its 1/2” engineered products, as it is seeing strong growth for these in formerly solid markets like the north.
All Columbia and QWood products are domestically manufactured at present. Under the Mohawk brand, the company manufactures in Melbourne, Arkansas and Holden, West Virginia (solid); Danville, Virginia (engineered); Malaysia (Artiquity) and imports a small amount of product in from China. Mohawk’s hardwood business is evenly split between solid and engineered. Mohawk sells—all channel and to the commercial market.
The company reports that 2013 was a “reasonably good year” and notes that, for a company that entered the business only five years ago (with its purchase of Columbia), it believes that it is growing at a nice pace.
Mullican, the fourth largest hardwood supplier in the U.S. market, manufactures hardwood products in Ronceverte, West Virginia; Holland, New York; Norton, Virginia; and Johnson City, Tennessee. In 2013, Mullican made significant investments in these facilities, allowing it to increase production of prefinished solid flooring, expand finishing capacity and begin onshoring the manufacture of some of its engineered flooring from Asia. Initially the company moved its 3/8” product manufacturing to the States, and in January it moved its 1/2” RidgeCrest manufacturing as well. The specialty engineered products still manufactured in Asia are its more labor intensive handscraped ones.
Mullican had a good year in 2013, experiencing double-digit sales growth, though, like other firms, it reports that price increases are not enough to keep pace with the increases in raw material costs. The company saw strong gains in prefinished engineered products and continued growth in prefinished solid products. It has also experienced growth in prefinished handsculpted, wirebrushed and other texture products in both its solid and engineered lines. The company services the commercial market with its prefinished and exotics and hickory products.
Mannington, which sells prefinished engineered flooring, manufactures the majority of its hardwood flooring products in High Point, North Carolina. The company has been steadily working to move the balance of its hardwood manufacturing from Chinese to western contract manufacturers.
Mannington had a good year in 2013 and reports that it had several big wins on the product side. Its Hometown collection, launched early in the year, features birch and hickory products in 5” widths with subtle scraping. In addition, Meson, launched in the third quarter, has seen great success. The collection, a total of nine SKUs, is made up of North American species (white oak, black walnut, hickory and hard maple) with sawn face visuals, long boards and wide widths. The line is hand stained and hand distressed. In addition, the company has received a good response to its smaller, more focused displays.
Mannington sells its hardwood flooring through independent retailers and flooring contractors, and it has seen a good uptick on the commercial side of the business, which it serves with a commercially rated segment of its product line.
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