State of Distribution 2020: Success for distributors means adapting to change - Oct 2020
By Meg Scarbrough
Evolution in the business world is essential and inevitable, and floorcovering distribution is no exception. Since its origination pre-World War II, the industry has been in a constant state of change, adapting as manufacturers have consolidated-with some of the bigger brands opting to go direct to the dealer. Technological advancements have also allowed e-commerce to flourish, threatening to flatten the layers in the channel further. This year’s COVID-19 pandemic has only increased the speed and urgency at which the industry must adapt in an Amazon world.
There are fewer distributors than ever in the market these days, and the gap between the winners and losers continues to grow. But sales for those who remain have been healthy in recent years, and distributors say they have more value now than ever before.
THE DISTRIBUTION SHIFT
Success for distributors has rested on the ability to be reactive to change, and quickly. Those who are swift to pivot can maintain their foothold, while those who cannot get left behind. It’s been an evolution decades in the making.
Distribution has always held a crucial position in the flooring industry, moving products from coast to coast and every place in between. There was a time when flooring products were regional due to the lack of an established transportation network. But as World War II came to a close in 1945, the Federal-Aid Highway Act of 1944 under President Franklin D. Roosevelt, which aimed at creating a national highway system that would boost the economy and the country’s defense, went into effect as well as put people to work. At the same time, the country’s rail system was also exploding with new potential, buoyed by increased wartime demand and the introduction of faster locomotives.
With an ever-expanding system of transport in place, no longer did manufacturers need to remain confined to their regions of origin. In fact, factories could operate in multiple locations as well as ship to new areas of the country. It was a perfect scenario for flooring manufacturers and distributors in a country that was experiencing a post-war housing boom that created demand for flooring. And by the 1960s, there were hundreds of flooring mills scattered across the country.
Distributors began sourcing product lines-mainly carpet and vinyl-from factories, which at the time were primarily coming from Georgia and the East Coast, according to Jeff Hamar, CEO of Galleher, a California-based distributor. “[Flooring distribution] came to be a fairly robust industry in the 1960s,” he says.
But beginning in the ’70 and ’80s, carpet manufacturers began to consolidate, leading to fewer of them, and some of those began going direct to market, including Shaw Industries and Mohawk, bypassing traditional distribution and launching their own programs.
And over time, with the ascent of big box stores, new channels emerged and distributors’ margins began to erode amid the increased competition. Says Hamar, “There’s a lot of business that these guys are selling that used to come through independent distribution. Our share of the flooring market has deteriorated over the last 20 to 25 years,” most significantly when it comes to residential replacement flooring.
The shift has led some to establish their own proprietary brands and private label programs, as well as assess their sourcing options.
Distributors also began looking outside the U.S. for sourcing. Over the years, California-based MS International has built an international network that includes Turkey, Brazil, India, Italy and Spain. Others, like Maryland-based J.J. Haines, source products from Vietnam, Cambodia or Taiwan. The shift to offshore gave distributors access to products that were seeing significant growth, like European white oak wood or China-made luxury vinyl tile, and presented new revenue growth opportunities. As a result, Hamar says, “the U.S. suppliers largely lost some power over the years because distributors aren’t as willing to do exactly what they want them to do anymore. It also meant distributors could change their product mix and become more competitive.”
But even sourcing overseas is not without its challenges. In 2018, a 25% tariff was imposed on U.S. imports of floorcovering from China, primarily LVT. It led many distributors using China-made goods to shift their international partnerships to other countries. With the tariff re-enacted this year, distributors say they are ready this time and don’t foresee major impacts.
Tariffs aside, Hamar says the changes in recent years signal a major shift, “Historically, distributors have been known by the brands they represent. But I think in the future, the distributor will become the brand. And I think that has significant implications for the floorcovering industry: the distributor is going to emerge in the middle of the supply chain as an entity with increased power and control.”
WINNER & LOSERS
However, not everyone has kept up, and as a result, there’s been a bifurcation in the distribution industry. Hamar says the gap today is as wide as he’s even seen it, and it comes down to those strategies that distributors put into place a decade ago. “It’s starting to play out in terms of whether you made the right decision or the wrong decision and whether you had the financial balance sheet and the local market to support it,” he says. These days, the channel consists of major distributors-albeit fewer than in years past-on one end, and smaller, more specialized ones that focus on products like tile or wood on the other end.
With fewer major players in the market, distributors say it has given them the ability to create regional distribution that can recognize trends specific to that area, and it also allows them to cover a greater area. Raj Shah, president of MS International, says, “Ultimately, it provides the benefits of scale to many retailers and ultimately the consumer. Due to the increased competition, independent retailers as well as consumers are seeing many benefits, which include improvement of service, lower costs, better freight, etc. That said, retailers do need to be careful with whom they partner and understand if their vendor is really complementary to their offering or a competitor. For MSI, which now has annual revenues at more than $1 billion, the best way to respond to consolidation within the supply chain is to continually improve our overall product offering, service levels to retailers and pricing. Also, providing state-of-the-art tools like our visualizers, website embeds, B2B access and dealer locator helps the retailers compete with manufacturers.”
There’s no doubt distributors and manufacturers will keep consolidating; that’s just what happens in a mature industry, according to Hoy Lanning, president of J.J. Haines. “But I think that distributors have a great place,” he adds. “We’re a channel within business that is very important and touches a lot of customers. We have great relationships with a lot of people in the industry, and with the products we sell and all the knowledge we have, I think it’s good. The one thing we have to work at is being better at being able to change with the times quickly.”
COVID & E-COMMERCE
A new force this year has been the ongoing effects from COVID and subsequent shutdowns that have slowed the economy for some months now. With states issuing uneven mandates, some distributors were more impacted that others.
Among them was J.J. Haines, which serves markets from Florida to New Jersey. Lanning says, “Many of our customers were closed in certain states like Pennsylvania,” adding that real estate couldn’t be shown or sold during that time. “If you could get new houses built, they just sat there because you weren’t allowed to show them.”
To keep engaged with retailers, Lanning says they had to adjust previous strategies that involve traveling and visiting with customers, noting that there were “a lot of phone calls, emails and texts.”
He adds, “It was tough on us, and we had double-digit decreases.” As a result, he says, Haines was forced to make some hard decisions, including furloughing employees, minimizing other expenses and re-negotiating contracts for things they were buying.
While the early stage of the pandemic saw flooring sales dip, retailers and distributors have reported positive signs that business is bouncing back. Those in the industry point to a number of factors. Under stay-at-home orders, consumers’ priorities began to shift. With more time spent in the home, many began to see a greater need to update rooms that were being utilized as working or teaching spaces for out-of-school children. There was also a change in discretionary spending habits. Summer vacations were canceled, and that money could be reallocated into investments in the home. As a result, some retailers across the country have reported record numbers for the later summer months.
Says Shah, “Fortunately, the American consumer has demanded home improvement products. The work-from-home and learn-from-home movements have put additional emphasis on the home. In addition, the lack of vacation choices, eating out, going to the gym, etc. has improved the disposable income of many, also increasing the demand for flooring products.”
Distributors, like retailers, say there was another silver lining amid the shutdown. “With adversity, there’s always a blessing in it in some form or fashion,” Lanning says. “And I think the blessing was we made some changes we probably needed to make anyway.”
Hamar agrees. “I think what COVID did was rapidly accelerate these changes that were inevitable,” he says. “And we’re going to wake up in 2021, and the world is going to look much like the world in 2025, we just did it four years faster.”
Moving forward, Haines will take a closer look at real estate and more flexible leases. If more people continue working from home, Lanning says, Haines might not need office buildings as big as they are currently occupying.
Galleher, on the other hand, is taking a look at its product knowledge training sessions. Most distributors spend a lot of time using salespeople to do product knowledge training sessions. Hamar says the challenge is getting RSAs in one room at the same time for meetings-some might have to leave to take phone calls or others can’t attend. So Galleher’s team has started developing a library of educational resources that includes short videos accessible 24/7, which will allow those same salespeople to access the information when they want. The program will also reward dealers who participate.
But arguably one of the biggest areas of change has been the adoption or re-evaluation of e-commerce and digital platforms for conducting business.
Says Shah, “E-commerce is changing virtually every aspect of the world we live in. Flooring is no exception to this. To understand the role of e-commerce when it comes to flooring, we have to expand the definition. Today, it relates to delivering inspiration, providing information, conversing with customers and ultimately fulfillment of orders. We are seeing the players who use e-commerce for all of the above and integrate into a brick-and-mortar system are the ones who are succeeding. With the pandemic, we have seen an acceleration of a trend that was already underway. And as the customer base increasingly includes Millennials, digital is only going to increase.”
Prior to COVID, Haines was already implementing a program it calls Haines Connect, which allows customers to do their own ordering anytime they want. With the help of an outside group, Haines’ retail partners are being set up with software that allows them to access Haines Connect. Lanning says, “If you go back several years, the number of phone-called orders we got was probably 85% to 90% of what we did. Today, 35-plus% of our orders are on Haines Connect. That’s become a bigger piece of our business-it’s one we’ve been focusing on-but we focused on it a whole lot more through COVID.”
He notes that there’s also been increased efforts on improving Haines’ website to boost business. “The challenge is always how do we do that and tie it in with our retailers?” Lanning says. “That’s what we have to do because they are the ones selling the consumer and servicing the consumer. We’re working on all that together. And then how do we share information about the products we have, the installations and everything associated with that?”
As far as what effects COVID will have long term on the flooring industry, Shah says, “We believe that flooring will remain an important commodity. The pandemic has forced businesses to re-evaluate how and where their employees work. We are seeing Millennials start leaving urban areas, which increases the overall square foot per home that can be sold. We see flooring remaining affordable especially as interest rates look to remain low over the long term.”
And if faced with the need for quick change to business operations again in the future, Lanning says, “I think now we are better prepared.”
VALUE & SERVICE
Ultimately, the goal for players all along the chain is to increase sales and give end users the best prices and experiences, and to do that, distributors and retailers need to have strong relationships. “It is the job of distributors and retailers to partner together to inspire consumers to increase their usage of flooring products,” Shah says. “This means having deeper meetings beyond that of the vendor or customer and finding ways to truly partner together. This means improving merchandising, marketing, fulfillment, service levels.”
As the model continues to evolve, it has meant adapting to technological advancements in all kinds of ways. Hamar says, “We’re getting better at being able to identify what local markets really need and want and appreciate. We’re using technology more effectively in terms of how we purchase, operate our warehouses, schedule deliveries.” And it’s changed how Galleher’s salespeople have evolved over time. They’ve gone “from this good ole guy, ‘Hi, how ya doing? What can I help you with?’ Now they’re using data and information more effectively to understand buying behaviors and working with dealers to become more successful.”
Shah says the evolution has also been about listening to the customer, “It has forced us to continually update our product offering. Although we were traditionally a natural stone company, over the past few years, we have evolved to be a full-service surfacing provider that can deliver luxury vinyl tile, ceramic tile, mosaics, pavers, quartz and natural stone to retailers. We continue to look at many new product lines, as well.”
Distributors are on the hook to make sure they remain relevant; Lanning says. “We have to make sure as distributors that we know the local market, that we know the pricing and products that we sell and how they are installed. We have to be really good with the retailers at training them on installation, on product knowledge, so that they can talk to consumers and do a better job with selling our products.”
Hamar says the value of the distributor to retail partners has perhaps strengthened over time. He says, “The function of distribution is really critically important because there are a bunch of channels of business that the big box stores and the direct-to-consumer retailers probably can’t do very well.” They will still take the fall when there’s a problem.
Shah agrees, saying that quality and products are among the key things that make traditional distribution a better option for retailers. “Manufacturers will generally not have the same breadth of products,” he says. “They make what they make, and they make a lot of it. This forces retailers to purchase only that size or look. In addition, retailers have to commit to large quantities of the narrow set of products. Distributors generally have better tools available for resellers, whether it’s merchandising, marketing or digital marketing.”
But distributors say change for them won’t be effective unless retailers, too, are willing to move ahead. “There’s not that much more share that big boxes are going to take,” according to Hamar. He says retailers have to examine their flooring business-residential replacement, residential new construction, mainstreet commercial, property management, heavy bid commercial-and assess whether they are participating in as many of the various channels as possible, noting that some channels will be more insulated from big box competition than others. Hamar adds, “The losers are going to be really small retailers unless they can offer really unique services or creative design. It’s how do you take share in that space from your competitors and make sure you’re relevant? I think your distributor partners can be very helpful in supporting your efforts as you try to broaden your business.”
William M. Bird, a 155-year-old flooring distributor servicing the Southeast, has launched an online showroom called Twenty & Oak, which is a consumer-facing platform built to attract consumers to its customer base of independent flooring retailers.
The site offers a dealer locator and a flooring quiz that helps narrow products to fit consumers’ preferences and features private labels as well as some brands names. Understanding that touch can be critical in choosing the right flooring, the business ships flooring samples to interested consumers.
With the internet shifting traditional business models, Twenty & Oak President Robert Hagood says, “We thought it was a compelling opportunity as well as a problem to solve to help our independent retailers have a really wonderful digital presence as well as consumer experience.”
Copyright 2020 Floor Focus