Hardwood Update: Might the upheaval of the pandemic shift hardwood’s fortunes? Oct 2020
By Jessica Chevalier
The dominance of LVT in the flooring marketplace drastically impacted the hardwood category and for a time, the category has struggled to find its footing. However, North America’s hardwood manufacturers now seem buoyed by something of a path forward, illuminated, to some degree, by the challenges of 2020. The quarantine-fueled boom in home building and renovation, the reinstated tariffs on Chinese-made LVT and a renewed preference for North American-made products, both patriotically and practically motivated, have come together to create a roadmap of sorts for the hardwood business.
In the last few years, the landscape of North American hardwood production has altered drastically. Armstrong, once the U.S. hardwood giant, fully divested of all its hardwood operations in late 2018; these were purchased by private equity firm American Industrial Partners, and the business was named AHF Products, a hardwood flooring-focused firm housing a host of brands with varied offerings and channel strategies. And the two largest flooring players in the U.S., Mohawk and Shaw, each sold off hardwood operations to Beasley Flooring Products, a lumber company new to flooring production. As part of their sales agreements, both Shaw and Mohawk currently source product from Beasley. Shaw has four remaining hardwood facilities producing engineered products: two in Tennessee and two in South Carolina. Mohawk has no remaining in-house hardwood production in the U.S. In addition, just this year, Mannington Mills shuttered its High Point, North Carolina hardwood operation and will now source hardwood products. It should be noted that Armstrong, Shaw, Mohawk and Mannington are all heavily invested in vinyl flooring.
When LVT took its bite from hardwood, it primarily ate away at the lower to mid-range of the market, and a portion of that offering was imported from China. That leaves better-quality products at the heart of hardwood’s offering. At the same time, LVT pushed the flooring conversation toward features and benefits, especially with regard to water resistance, and to some extent, despite the fact that hardwood offers a number of inherently beneficial qualities, including a sustainable profile that lasts decades, it has now been forced to play the features-and-benefits game.
But, ultimately, hardwood has found one of its best defenses against LVT is simply being itself. Gone are the heavy glosses and dark tones. Today’s buyers want wood floors that are unmistakably hardwood, replete with character and knots and natural, varied tones. These aren’t the rugged, heavily scraped products of the early teens, but softer, more refined and natural iterations.
“We feel like hardwood will have a resurgence, and we have felt that for a year or two now,” says Adam Ward, senior product director of hardwood and laminate for Mohawk. “People maybe went too far over to LVT when hardwood offered many benefits. The tariffs on LVT and the push for more U.S.-made products will help the hardwood category.”
Adds Brian Carson, CEO of AHF Products, “Over the long haul, LVT had a distorted value proposition in the market versus other products. At some points, economics do govern in certain channels, and as tariffs come back in, it puts the product back on equal footing. In addition, the consumer doesn’t wake up and say that they want to buy a plastic floor. They want a look and, based on the value and features and benefits, they make a choice, but as economics get more in balance, I think we’ll see a shift back to wood. How big? We don’t know, but I think the remodeling homeowner who isn’t going abroad on vacation anymore may want something more enduring in their home. We have never been more bullish on wood or our investments.”
Poland: I hear from distributors that they have to work harder to make the same profit [with LVT], and if they are sensible, they realize it.
Finkell: If you’re creating a lookalike, you have to be aware of the repeat. You want to mute a knot, to dumb down the look, so that markings aren’t so identifiable that they highlight the repeat.
Thabet: Wood isn’t an expense; it’s an investment.
Finkell: The National Association of Realtors reports that homeowners can recover 106% of the cost of installing a hardwood floor when they sell their home.
PANDEMIC POPULATION SHIFT
As has been well-documented, COVID-19 spurred population movement within the U.S. as both renters and homeowners sought residences to suit their new quarantine and work-from-home lifestyles. This sent some from the apartments and townhouses of downtown toward the suburbs, and that was a great boon for the homebuilding business. While housing starts slid 30.2% in April at the start of the pandemic, they rose 4.3% in May, 17.3% in June and 22.6% in July-the biggest gain since October 2016.
As hard surface has been continually taking share in the home, it has stood to gain from all this activity. However, while builders are generally slow to adopt new products-as a failure impacts not one but potentially hundreds of homes-many have now accepted LVT into their product fold, and as such, LVT has taken a good share of new home square footage in the low and middle segment of the market.
The upper end of the homebuilding market, however, is very much hardwood’s domain, even though it hasn’t been particularly strong for the last handful of years. But in mid-August, Builder Online reported, “While in the early months of the coronavirus pandemic, sales of second and vacation homes effectively ceased, builders of these high-end homes are now seeing a surge in demand, though the impact varies widely by market.” In fact, New Jersey-based Ziman Development reported a “two- to three-time surge in interest and demand” for homes.
The existing-home market has seen similar fortunes amid COVID, with sales of homes sliding in March (8.5%), April (17.8%) and May (9.7%), then rebounding to rise by 20.7% in June and 24.7% in July. Of course, relocations equal renovations on both sides of the sale, both before as the seller readies their home to put on the market and after as the buyer makes the home to their liking.
All told, NPR reports, “According to a new Pew Research Center survey, 3% of U.S. adults moved permanently or temporarily due to the pandemic,” which amounts to around 7.7 million individuals.
Poland: From a design trend, what has hurt us is that producers of LVT can create new looks so quickly, and it has been hard for hardwood to keep up. I know people who have considered LVT because it is trendier.
D’Amours: Expectations for hardwood aesthetics are higher because the lookalikes have gotten better.
Carson: There was a shortage of labor prior to COVID, and it’s hard to imagine that there are more installers now.
Stringer: As an industry, we aren’t out there advertising. We aren’t doing podcasts. Consumers go online and see companies like Floor & Décor and LL Flooring [formerly Lumber Liquidators] selling the cheapest stuff, and that’s all they ever see. In the old days when a larger manufacturer had, say 60% of marketshare, they would educate the market, but we don’t have that presence in the industry like we used to. It’s a lot more segmented.
THE SHIFTING SUPPLY CHAIN
During the Great Recession of 2008, there was significant chatter and concern in the hardwood business about the status of lumber mills, which are often small, privately owned operations that aren’t financially fortified to withstand great upheaval. And it should be noted that there were markedly fewer sawmills after the last recession than existed before it.
In early July 2020, mid-quarantine, the shortage of treated lumber in the U.S. made headlines. However, that scarcity, like the great toilet paper shortage of May, was largely driven not by disruption in the supply chain but by increased demand, with so many consumers improving their yards and outdoor spaces.
Similar challenges have impacted the flooring supply chain, both downstream of flooring manufacturers and up.
On the sawmill side, the fact that the drop in demand for milled lumber to be used for flooring was relatively short-lived certainly proved beneficial for the operations; however, Neil Poland, president of Mullican, explains that the dynamics impacting sawmills stretch far outside the flooring industry.
“Certainly there is less sawmill production today than there was at the end of last year,” Poland reports. “A lot of that is related to spotty demand from markets other than flooring. The industrial timber market for oil and gas wells and drilling platforms has weakened tremendously from a year or so ago, and demand from Asia is much lower than a year or two ago. Sawmills need these to run production of lumber outside of what’s used in flooring. While we [in the flooring industry] are all headed upward with production, when you cut dry lumber volume, you just can’t flip a switch and turn it back on. On the unfinished side of the business, there is an imbalance-not a shortage, but demand exceeding supply. On the prefinished side, while supply is meeting demand because of the large number of SKUs, it is a more challenging market. Certain widths and species are in short supply. The engineered business is supply meets demand, even though the domestic engineered market has improved somewhat since June due to U.S.-made products being favored.”
It’s important to remember that while the bulk of sawmills may have weathered the initial and relatively brief COVID storm, a second or longer wave could be a different story. Francois D’Amours, marketing manager for Preverco, notes, “We may see more casualties the further we get from the government-sponsored programs established to help businesses stay afloat. I believe that fall could be hard on a lot of players, especially the smaller ones.”
In addition, Paul Stringer, vice president of sales and marketing for Somerset Hardwood Flooring, reports that the hardwood supply chain dealt with the same challenges in the pandemic that everyone in the industry has faced, including working to eliminate outbreaks, abbreviated hours and the struggles of social distancing on a job. And, as such, there have been delays getting all kinds of things needed in the production of wood, not just lumber but necessary items such as machine parts.
As for how flooring manufacturers handled this unprecedented event, most found themselves scrambling to manage the slowdown, then the unexpected surge.
“This has been a real learning experience for us,” says Stringer. “We had a good first quarter, then April hit and boom. We didn’t know how bad it might be. One of the strongest markets for solid hardwood is the Northeast, and that got hit the hardest; it really just went quiet. So we cut production back to four days a week in April. But then May picked up, and June picked up even more. All of the sudden, orders were coming in faster than we anticipated. There was no way we could bring our employees back full time while, in some cases, they were making more with the increased unemployment benefits than they were working, so we were forced to stay on reduced hours through July 31. Now, we are heavily backordered, and we can’t take advantage of the current situation like we might have. Had we known what was to come, we could have worked steadily through the pandemic and built inventory. But instead we will spend this quarter trying to catch up.” He notes that the pockets of outbreak and how they affect demand has made it particularly hard to plan, and, while Stringer believes that the current demand is primarily pent-up from the pandemic months, Somerset is currently looking to hire even more employees to maximize production.
“During COVID, there was an unwinding of inventory in the supply chain as everyone was trying to preserve cash,” explains Carson. “So some of the activity now is loading pipelines that were depleted. But in some areas, where we have good visibility on sales to the consumer, we can see a strengthening is going on that varies by region. Some regions have been slower to come back; some are extraordinarily strong. On average, the market has certainly come back faster than predicted.”
“Business is good now-unprecedented,” reports Pierre Thabet, president of Quebec-based Mirage. “When the pandemic began in March, we made three scenarios: pessimistic, conservative and optimistic. We have been above our optimistic scenario since mid-May. But there is a lot that depends on whether there is a second wave, the U.S. election; there are so many unknowns.” It should be noted that Mirage does not sell to the big boxes but attributes its success to the fact that the team rolled up it sleeves and got to work introducing such things as sample programs and new promotions when the virus started to surge.
Similarly, when the pandemic hit, Mullican took an aggressive approach toward investment and launched a program offering free samples shipped directly to consumers. “We had a huge surge in requests when we kicked off the program in April, and that lasted through June,” says Poland. “It’s tough to measure the impact, but we think we got a direct lift in business from that.”
D’Amours reports, “We certainly were surprised by sales figures right after stores were reopened. We were expecting a very slow return, but the business came back strong. Lots of people confined to their homes recognized the importance of having quality products. The comeback was fueled by remodeling, and those that have travel money they won’t use who wanted to make their interior environment better.”
“Mercier is 100% vertically integrated,” reports Wade Bondrowski, director of sales USA for Mercier, “and we always pay our [materials] suppliers well, so they give us what we need. We have reduced some of our hours, but production has actually increased a bit. There has been some disruption due to the virus in major Canadian cities, but when you are in the country, where our plants are, there is much less. In addition, Canada was ahead of the game in handling the virus, and the country has fewer people.”
John Hammel, director of hardwood and laminate for Shaw Industries, is hopeful that the future will bring easier days for the industry. He notes, “When you look at 2020 as a whole, you had COVID hitting Asia, so there was definitely interruption there early on, then the virus came to the U.S., and you saw disruption here as well. I do feel like, for the most part, a lot of that is behind us.”
Mirage’s Thabet isn’t shy about how he feels some within the hardwood industry have actually hurt the greater cause: “When you look at the big guys-Shaw, Mohawk, Mannington-they are largely out of the wood production business, but they are still distributing it. They aren’t manufacturing anymore because they weren’t good at it. You don’t print hardwood; you transform trees. The reason there is so much hype around LVT is because it was driven by them-not by the public.”
THE DIY DRIVE
As the nation was homebound in an attempt to control spread of the coronavirus, the remodel market also saw a flurry of activity. But, as we all know by now, much of that business went to the home centers, which were deemed essential based on particular necessities that they sell. In total, according to the Wall Street Journal, Walmart, Amazon, Target, Home Depot, Lowe’s and Costco accounted for 29.1% of all U.S. retail sales in Q2.
There were some independent flooring retailers that were deemed essential and allowed to stay open, in whole or in part, however. Many of these operations had builder or commercial arms that enabled this, and others utilized strategic loopholes that allowed them to keep their doors open. As one manufacturer put it, “The retailers who were entrepreneurial found ways to stay open. They called in favors; pushed schedules forward; found new work; had a file in their mind of what jobs had a second entrance or an addition project that wouldn’t require them to go into a customer’s space. But the 9-to-5 retail showrooms got burned in a big way.”
There is no doubt that less residential flooring was professionally installed at the peak of the slowdown, as Americans were simply reticent to invite those outside their quaran-team into their private space and thereby risk exposure. As such, much of the flooring that was installed was DIY.
All of this, of course, impacts what types of flooring won out amid the crisis. Flooring products that homeowners felt more comfortable installing themselves were the clear winners, and some hardwood products fall within that category, particularly engineered profiles with locking systems. Of course, home centers generally sell more DIY-friendly type products, while many independent retailers, which are more service-oriented, focus on products that require professional installation, so, in a sense, the stars aligned to some degree, with the available products being the ones that were also in demand. “Everything we have seen indicates that DIY-focused retailers have been strong throughout the pandemic, and, therefore, DIY products have definitely been strong,” says Hammel. “Some of the click products introduced in the last 18 months, such as our Floorté hardwood, have definitely been strong.”
Ward adds, “We don’t have a huge mix of click or glueless locking hardwood, but we feel that that DIY material has picked up.”
As the country reopens, however, Don Finkell, founder and CEO of American OEM, reports that he is seeing the channels regulate again. He notes, “We are seeing the independent retail business, which was nonexistent in March, April and May, come back to life as stores have opened up, but it’s not fully where it needs to be-or was.”
Bondrowski sees opportunity in the current marketplace. He says, “The high-end of the hardwood market is doing well in the pandemic because the person who is looking for hardwood wants a quality product. There is volume to be had.”
Manufacturers note that it will be interesting to see what happens with the DIY trend once the world normalizes. Did homeowners who went the DIY route in the quarantine get a taste for the handiwork and cost savings, and will they take that newfound confidence into other projects or revert to professional installation as life gets busy again?
Reports Carson, “The demand for AHF hardwood, no matter the brand, has been off the rails. There are a variety of reasons for that. People quarantined in their homes were saying, ‘Gee whiz, we have been eating too many fancy dinners and haven’t been investing in our homes like we should have been.’ Also, people had time on their hands, and we saw a marked increase in DIY activity for our products. And while the pro and builder business are back now, DIY remains strong.”
WILL THE TARIFF ON LVT BENEFIT HARDWOOD?
Amid the coronavirus pandemic, which President Trump has frequently referred to as “the China virus,” the yearlong exemption on Chinese-made LVT expired. With U.S. relations with China unpredictable, to say the least, there wasn’t a great deal of clarity about what might transpire. Ultimately, a few exemptions on some China-made products were extended, but vinyl flooring was not among them.
While the reinstatement of the tariff is unmistakably a bad thing for the LVT business, which is not yet mature enough in the rest of the world to fill demand, it may ultimately prove to be a good thing for other flooring categories, especially hardwood, as it narrows the delta in pricing between the low end of the hardwood offering and the high end of LVT, making
hardwood more competitive in comparison. however, the hardwood leaders with whom we spoke have varied opinions about what that means for hardwood.
Thabet asserts that while the tariffs on LVT are a good thing for hardwood, competing manufacturers have to keep their focus on their own business, “We applaud the tariffs, but we don’t bank on them. It doesn’t change anything for us, and we don’t let it drive our business.” He notes that, as we have already seen, these sorts of factors can change on a dime.
Poland isn’t convinced that the tariff on LVT has any direct correlation to hardwood’s success, but notes, “What it does do is create second thoughts about investing in those products-no one wants to be in a situation where there is a tariff threat. Does Trump get in an argument with China and increase the tariff to 50%? Distributors and retailers will be more cautious with Chinese LVT, and that will open doors for products from other countries.”
Bondrowski, on the other hand, is bullish about the impacts, believing that it may further challenge a category already under stress. “Is the tariff on Chinese-made LVT good for hardwood?” he asks. “Absolutely. It’s 100% good for wood. The retailer who has invested heavily in LVT/SPC has seen their revenue dollars diminish, and they are training their salespeople to sell more real wood, which is a better return on the sale and the customer’s investment. They love that LVT/SPC is an easy sale, but they realize that they are working twice as hard to create the same profit, and expenditures are going up. Plus, there is no return on plastic floors for the homeowner.”
D’Amours adds, “People want low risk as far as logistics and lead time.” However, he points out that the impact will be less discernible at the high end of the market, where Preverco plays, as those products aren’t generally competing with LVT.
Hammel believes that the market is less likely to see consumers shifting from one category, such as LVT, to another, such as hardwood, but rather that they will be more likely to shift down to a lower-quality product of the same category, though “you will see some category shifting,” he notes.
Ultimately, all things being equal, it certainly seems logical that a portion of customers would opt for the “real thing” versus the lookalike as the cost delta narrows. Of course, whether customers truly understand the dynamics of that decision depends heavily on the RSA leading them through the purchase process. While many hardwood players are keen on referring to LVT as a “plastic floor,” manufacturers of vinyl flooring products do a good job obscuring that fact behind a discussion of features and benefits, particularly waterproofing.
RENEWED PREFERENCE FOR NORTH AMERICAN-MADE PRODUCTS
The selection of American-made products certainly has patriotic appeal, though in spite of their best intentions, consumers are often lured by lower cost foreign-made products. Currently, however, perhaps due to the fact that the coronavirus originated in China or the view Americans got during the pandemic at the volatility of supply chains, there is increased interest on the part of consumers in buying U.S.-made products-not just in flooring but across the consumer marketplace.
Finkell reports, “I recently had a company that makes cabinets ask for my help to find them machinery because the demand for U.S.-made cabinets had increased so much that they had to expand their plant, so I believe there is a shift taking place. Is the consumer willing to pay more for U.S.-made? I don’t know, but they will choose U.S.-made over China-made if they have a choice.”
“There are distinctly more inquiries on if products are U.S-made now,” says Carson. “Some of that is U.S. sentiment, but, in addition, people are going to stores, finding that they can’t get what they need and understanding the fragility of supply chains. That is why we are adding additional capacity here.”
“I’m not saying that people won’t buy a Chinese product, but they are beginning to ask more questions,” notes Poland. “In new construction, buyers may say ‘Let’s get made in the U.S. hardwood’ because they can roll it into the mortgage.”
In Canada, D’Amours has attributed some of the current preference for North American products to the country’s promotion of domestically made goods. He notes, “In Canada, we see a government push for people to buy local and stimulate the economy. It’s not against imports but pro domestics. We are surfing that wave.”
Of course, equally important is where distributors and retailers choose to source products from and with the political upheaval related to China and the uncertainty surrounding tariffs, there is a sentiment toward keeping those supply chains closer to home and thereby protecting supply.
THE CHANGING HARDWOOD BUYER
As we all well know, consumers generally begin their shopping process online, and in the current pandemic, in which lengthy face-to-face interaction is to be avoided, it only makes sense that consumers may spend more of their research time online in an effort to abbreviate in-person interaction.
Does that mean the hardwood buyer is still reliant on the RSA? Says Ward, “We have been seeing a move towards online being the first stop for consumers for a while now, and the pandemic has only accelerated that. However, given that hardwood is so permanent and expensive, they want to be in the showroom and making the final decision with an RSA.”
Since the introduction of LVT to the marketplace, the hardwood category’s relationship with the RSA has become complicated. Due to its more affordable price, features and always-improving aesthetics, LVT can be an easier sale than hardwood, which is more costly and a longer-term commitment. As such, an RSA will often trade down buyers who come in seeking hardwood to LVT.
“The majority of consumers will get their information about hardwood through their own research,” says Thabet. “But when they go to the store, the RSA can turn them on a dime if they are motivated, so 80% of the decision, in my opinion, is the RSA. If they are a second-time buyer, they may impose their preference for hardwood, but a first-time buyer may be lured by the LVT look and think that it is real wood.”
There is also evidence that RSAs, often operating on the perception that all consumers want a deal, will sometimes sell hardwood-seeking consumers down to lower-priced wood products-an equally frustrating problem. “Six months ago,” recalls Stringer, “I had a woman call and say, ‘My mother went out and bought one of your floors. The retailer told her it was the best thing she could buy, but I’m looking at your website now and seeing all the higher-end stuff you have there. My mother spent $10,000 on a floor, and she would have spent $30,000 if she’d been shown the better products.’ If retailers sold up like they should, wood would be doing so much better.”
While this is a problem across the flooring world-would a car salesman ever sell a consumer down from a Toyota Avalon to a Yaris?-it seems to be accentuated in hardwood, both because LVT most frequently mimics hardwood’s look and because customers buy hardwood so infrequently that they are, perhaps, more reliant on the RSA.
“We don’t have that qualified hardwood buyer,” says Bondrowski. “Hardwood is something that people only purchase one to 1.2 times in a lifetime.” As such, buyers don’t generally enter the retail marketplace with as much inherent knowledge as they may have about flooring that is purchased and replaced more frequently, such as carpet.
Hammel agrees that the RSA plays a key role in guiding consumers through the floor-buying process. He adds, “From them, we have heard that consumers are coming in more educated, looking at manufacturer websites and sourcing information, but I do think that RSAs have a lot of influence. That’s why we spend a lot of time educating and training them to understand the ins and outs of hardwood, because it’s a more involved sale than other flooring categories.”
Therefore, the key to selling hardwood lies in RSA education, but there are challenges with that, as well. First and foremost, RSAs come and go with frequency, so hardwood manufacturers struggle to keep educating a revolving staff. In addition, hardwood is a more complicated sale than some flooring types, which may encourage some RSAs to shy away from it and sell products they feel are more in their wheelhouse. As Poland puts it, “Too often, people take the path of least resistance in sales.”
Several of the hardwood manufacturers with whom we spoke report that business cranked up at an unexpectedly fast rate, in some cases leaving them unequipped to handle the demand. This is compounded by the fact that, with social distancing requirements still in place, factories simply cannot run at their standard rate. In some cases, it is also a struggle to get employees back to work, both because they fear exposure to the virus and because they may be making more money on unemployment.
All of the hardwood manufactures with whom we spoke pulled back on production during the pandemic, but none of them put things on a complete standstill. Says Carson, “We throttled back production to a degree, but we kept our workers going through rolling furloughs: one week on, one off. We ran reduced schedules, but by running every day, we were able to create sawdust, which allows us to run our kilns and dry lumber. Right now, all of our plants are back to pre-COVID crewing with the exception of two, which will be in the first week of September.” AHF used the downturn to aggressively expand its Cambodian plant, which now has an additional two lines and three buildings-triple the size of what it was pre-COVID. In addition, the company distributed 70,000 samples during the pandemic.
Copyright 2020 Floor Focus