Industry Panel on the Builder Market - Dec 2009

No flooring market has been hit harder than the builder sector, especially the single-family segment. Not surprisingly, the contractors who provide the flooring for the new residences, both single-family and multi-family, have had to get creative and cut expenses.

We invited a panel of flooring contractors, all members of FEI Group (formerly FloorExpo), the leading group of flooring contractors serving the residential builder market, to answer a series of questions about the state of the industry and how they are adapting. The contractors include two from FEI’s Multifamily Solutions—Denny Thostrud, president of American Drapery, Blind & Carpet of Renton, Washington; and Ken Hilton, president of GB Sales of San Diego, California—and two from the Home Solution’s side—Larry Barr, president and CEO of Floors Inc. of Southlake, Texas; and Greg Kenith, president of Flooring Design Group of Atlanta, Georgia.

Q: What is the general state of the single-family market compared to the multi-family market?
Thostrud: Like the single-family market, the multi-family segment has been hard hit by rising unemployment and the credit crunch. Occupancy rates are at 23 year lows and rent rolls continue to drop. We are seeing more rent concessions, to both incentivize new prospects and to increase lease renewals with existing residents. In addition, the anticipated “second wave” of commercial mortgage defaults is resulting in a significant tightening of the belt by owners. We are seeing a significant decrease in replacements, more partial units, reuse of existing cushion, and very few rehab and capital projects.

Kenith: The single-family market is almost through three years of the recession with, I believe, six to 12 months to go. However, the multi-family market, in my opinion, is not nearly through and will have tougher times ahead. Multi-family lagged behind single-family, but as the recovery starts for single-family I believe multi-family will face a similar challenge of over-supply and lower demand.

Hilton: We are starting to see a few new starts, but most of the action is in rehabbing the foreclosures. As far as multi-family, we are feeling the impact of the economy, but to a much lesser degree. Property management companies are trying to save dollars by replacing partial units in carpet, rather than whole units, and are holding off replacing carpet as needed until they have a tenant lined up.

Q: In terms of the different flooring surfaces used in the home, are you seeing any shift from some materials toward others? Is the economy driving these changes? Are there other performance related factors?
Barr: We are selling more entry level products of each category than any time I can remember. Higher end products are not being selected. In the entry level homes, resilient is now more standard than in the past, with fewer upgrade options available. This product is less expensive to the builders, and the manufacturers make entry level products virtually bullet proof with strong warranties and performance guarantees, as well as many colors for the homebuyer to choose from, so consumers have no reason to upgrade.

Kenith: In 2006, vinyl was less than 1% of our business. And while the overall market has shrunk, the percentage of vinyl installed by us and others has grown dramatically, approaching 5% in 2009.

Thostrud: We are seeing more owners moving back to resilient sheet goods in place of the vinyl planking and laminate upgrades they have used in the past.

Hilton: We are definitely seeing an emergence of luxury vinyl tile being used in the home instead of laminate and as an upgrade to sheet vinyl. I don’t think this is entirely driven by the economy/cost but by product performance and styling.

Q: Is there a movement toward buying all of your flooring from a single supplier? If so, what is driving that shift?
Kenith: Yes. Our philosophy has been to become a larger fish in a smaller pond. We truly believe in aligning with the best strategic partners when it comes to where we buy our products. So much of what we buy is dictated by our customers (more on a national builder basis), but when we have choices, we try to align with those that value us as a partner and not as a number on their customer list. Supporting the FloorExpo core suppliers is also a huge factor for us.

Thostrud: Quite the opposite, we rely more today on our core FloorExpo suppliers who we have built great relationships with over the years. However, we have spread our product mix and spend across those suppliers more than ever in order to be more cost competitive for our customers and maintain acceptable profit margins.

Barr: No, although the two largest carpet manufacturers are becoming more integral in our development. They now manufacture and/or distribute all flooring product categories and have very competitive prices. These companies still have a way to go in understanding the packaging of all these products to us.

Q: What’s happening with price points compared to a couple of years ago?
Kenith: Our builder customers have not allowed any price increases at all. In fact, we have reduced our prices many times in order to “help” our customers and embody the partnership model. We have had to switch vendors, become more efficient in our service, reduce costs through employee compensation, number of employees, and subcontractor labor, all to maintain what we have. While some of our material suppliers have been incredibly supportive of us in this effort, most have unfortunately not been so cooperative.

Thostrud: Price points and margins have decreased rapidly as a result of a more competitive marketplace. We have the same amount of competitors today all trying to get their piece of a much smaller pie. This has required us to be much more aggressive in our pricing models, product negotiation and expense control. Account retention is our number one priority.

Barr: Price points have remained relatively flat. Until the manufacturers can hold the line with the national builders with any consistency, I do not see much changing in prices.

Hilton: Competition in the multi-family segment is greater now than in the previous three years I have been in the industry. This is also true in the commercial arena. Not only from the historical competitors, but from new entrants that have primarily come from the new residential segment. I do not believe they truly understand the nature of the multi-family segment, including the challenges of having to carry a large amount of inventory and the necessity to support next day installations.

Q: Are you generally getting your flooring from the same sources? Is more of your flooring imported?
Kenith: Most of our purchases have still been through the traditional sources. The manufacturers and distributors we buy from, however, are importing their products to help in their cost reductions. We still do not import anything directly.

Barr: We are always trying to consolidate our supply side to as few as possible, while focusing on the FloorExpo core supply partners. Our habits have not changed much. We import very little, and nothing for the builder side.

Hilton: We are still buying most everything domestically, with the exception of window covering material, but we have experienced a shift between suppliers in some categories.

Q: Are there differences in the use of flooring between big builders and small builders?
Kenith: Yes, we have seen that the bigger builders are putting tremendous pressure on the manufactures to reduce cost, and the manufacturers, in turn, give huge rebates to these builders in efforts to secure volume and commitment of purchase. This is one of those areas that, in my opinion, is still very short sighted. The concept of paying the builders a fee to have them dictate to the contractors to use their products is fraught with numerous pitfalls. It tends to alienate the very people that write the checks to the suppliers. It causes builders to make decisions based on rebate dollars and not on finding the best product for the best price in their markets.

Barr: We see product selection based on the type of house the builder builds as opposed to the size of the builder. All builders in the entry level model use a large proportion of base product, regardless of the size of the builder. Mid and upper builders do custom-buy entry level products, but far less than production builders.

Q: Do multi-family builders approach product differently from single-family builders?
Hilton: In new multi-family projects the unit carpet and sheet vinyl flooring, I believe, is a lower grade than the single-family builder. In a multi-family project all the high dollar flooring goes into the clubhouse, leasing office, etc. There, we are installing Karastan and Durkan quality carpets, but also high dollar imported Italian stone, mosaic tile, glass block walls, rubber tiles in workout rooms, luxury vinyl plank, etc.

Thostrud: We are still seeing vinyl plank and laminate specifications on project bids today. However, by the time we begin the projects, we expect many to utilize more price competitive products. Alternates are being selected more frequently.

Q: How have consumer preferences changed during the recession?
Hilton: Actually, we haven’t seen a big difference in preferences. Those that have money are still opting for the high quality selections. Those that don’t are holding back and aren’t doing anything. Without the home equity loans supporting the home improvement market, people are just not doing the refurbishment.

Kenith: We are still seeing a consumer looking for “steals” and not deals. The preferences haven’t really changed; however, their willingness to pay for them has.

Thostrud: Our consumers, apartment owners, are doing more shopping than ever before. There is more interest in short-term budget friendly options like sub-FHA carpet and lower end resilient products.

Barr: With the uncertainty of the economy and tight credit lending policies, consumers are not upgrading as in past years. In our retail stores, we see our customers buying better products than the builder sales, although these tickets are smaller than in the past.

Q: Has the recession changed the way you work with installers?
Barr: We have had to go to our installation base for concessions on labor prices. For the most part, they understand the dynamics of the recession and are willing to work with us to stay competitive.

Hilton: It has actually benefited us. We are finding higher quality installers that were doing new home construction who are willing to take less for doing multi-family work.

Kenith: We have always tried to treat our installer/providers as partners. Most of these craftsmen live week to week and are in the same position we are as the contractors. The weak ones have gone away and the better ones are still here. I have seen that our quality has really improved over the past three years as a direct result of this.

Thostrud: We have always discussed the importance of staying price competitive with our sub-contract labor crews, but never more so than today. We have negotiated labor reductions for certain accounts, and have sent larger projects out to bid to our subs for them to compete for the work as well.

Q: How has the recession affected your margins? Are builders demanding lower prices?
Barr: Our margins suck. The builders, big and small, are playing us, the flooring contractors, against each other for lower prices—and getting them. It’s all about the prices in all flooring categories. We have too many flooring companies competing in a dismal market. The suppliers continue to sell to everyone at virtually the same price, regardless of size, strength and ability to pay. Good service does not guarantee you will keep the business, but with bad service you will lose it.

Kenith: Our margins have been pressured due to both the increased costs from our suppliers and our builders demanding lower prices. The only way we have been able to maintain a semblance of our margins is once again through reducing our expenses, realigning our supply partners, and becoming more efficient.

Q: Have you had to change the way you do business with builders/property managers? For example, have credit issues caused problems?
Thostrud: Cash is king today. We have revamped our credit application process, and are calling on references and checking Dunn & Bradstreet ratings more today. We have also tightened and formalized our collections policies to eliminate some of the more discretionary elements. This has had a significant impact on our cash flow.

Kenith: To a large extent we have been able to navigate well through these waters. While we have had our share of issues with bad debt, we have been very fortunate to not have had any that could have forced us to cease operations. Maintaining strong balance sheets and lines of credit with our bankers has helped tremendously, but no one is completely immune to these issues. We have had to really re-evaluate who we choose to open up new credit lines with. We have always watched who we extend credit to very closely, but now are now forced to watch with even more scrutiny.

Barr: Credit is the key to staying alive in any market condition but more so in today’s economy. We can deal with low margins but we must be paid and paid on time to survive. You can’t spend enough time on receivables. We are filing liens quicker than in the past, although I do not see this as a deterrent to doing business.

Hilton: In the commercial space it is very important to adequately prepare a good Schedule of Values upon which to bill and get paid to ensure you don’t have a large exposure.

Q: Is there interest in sustainable flooring and green homes?
Kenith: We have not seen a tremendous interest in any product or concept that costs more money. While everyone I speak to really believes in the green story and reducing the environmental footprint, I have not seen many who are willing to pay more for this.

Barr: Our market has not embraced the green movement. Our builder community is only concerned with the cost.

Hilton: It is very big for new construction projects. All the architects, designers, etc. are focused on the LEED value for all flooring types and they will switch from one to another solely based on LEED.

Q: Have you diversified your business during the downturn?
Hilton: We have actually ramped up our commercial department a bit and are focusing on public work. With the stimulus package there are a number of public bid opportunities out there and we are targeting that segment. I’m also currently looking at acquiring a carpet cleaning company.

Kenith: Yes. As the number of houses built and the number of customers we sell to have shrunk, we have been fortunate to sell more products. While we used to be the traditional flooring providers, we have added blinds, plantation shutters, countertops, custom closet organizers, remodeling, and much more. No job is turned away in today’s market.

Thostrud: Our company does a significant amount of multi-family, commercial and residential window covering sales in addition to flooring. We are currently expanding the markets to which we provide flooring, and are exploring five or six exciting new product offerings.

Barr: We have been heavily involved in the retail business for over 25 years. We have also diversified into blinds, both for builders and retail sales.

Q: What will be the challenges as business ramps up?
Thostrud: I see two challenges, which are related. The first is we must minimize the urge to grow overhead to accommodate revenue growth. We have learned to do more with less and that lesson must be carried forward when times get better. The second difficulty will be growing margins. While we have become more efficient as an organization, we will still need to get margins back up to more profitable levels.

Kenith: There are so many challenges ahead. As the market starts to turn, I believe we will see more businesses fail due to the inability to fund the growth, internal conflict, and lack of skilled installation trades. Many have gone into other industries and no one has the time or resources to retrain and retool their businesses. The builders will not increase their staffing and thus more of their workload will be shifted to the subcontractors, who may not be able to respond. We have tried to utilize technology better in an effort to do more with less, but there is only so much that can be done.

Barr: As the economy grows, the biggest challenge will be having enough resources to accommodate the growth. However, I do not foresee a large month to month surge in our business any time soon.

Hilton: I don’t see a big challenge. That will be the time to reap the rewards of timely investment and acquisition of new employees.

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