Strategic Exchange: Fluctuating tariffs make choosing where to source LVT a difficult decision - Dec 2019

By Kemp Harr

As we look back on the big stories for 2019, the Chinese tariff roller coaster is probably the most significant news. Certainly, the continued and remarkable decline in the use of carpet, which we estimate to be down almost 7% in units for 2019, is a big story as well. And both stories will have a significant impact on future manufacturing investment decisions as well as the balance of import versus domestic supply within the flooring industry.

Back when carpet was king, most of the carpet being consumed was produced in and around Dalton, Georgia or in Southern California. Certainly, you could import carpet if you wanted to, but you’d be hard pressed to find better styling at an affordable price from offshore. It was U.S.-made, and most of the innovation that affected performance was American as well. Brands like DuPont, Monsanto, Amoco and Honeywell were in the mix on the fiber side, and the tufting equipment was made in Chattanooga, Tennessee.

Today, the rising star in the flooring industry is LVT. And while the concept of PVC flooring isn’t novel, the recent innovations that make it look and feel realistic at an affordable price were refined in Asia. And much of the equipment used to manufacture the product is made there as well. Much like carpet, the LVT that is so popular today has a matrix or multilayered construction, with each layer contributing to its overall performance. This complexity of construction is part of what makes it difficult to shift production from China to the U.S.

In 2009, the LVT business was around $450 million (wholesale). This year, we estimate sales to be close to $4 billion. That’s almost ten times bigger in as many years. We also estimate that roughly 80% of the LVT sold in the U.S. is made in China. So, the wide swings in landed cost based on fluctuating Chinese tariff rates-that have shifted from 10% to 25% and now back to zero (for click construction)-have created a volatile marketplace from both a pricing perspective and a sourcing perspective.

A 25% tariff is enough of a hit to force the key brands in the business to either seek alternative countries to source from or invest in their own domestic manufacturing capability. But now, thanks to the recently announced exclusion, that 25% tax has been removed until August 7, 2020. And it’s anybody’s guess where the broader-reaching Section 301 tariffs will be when this LVT exclusion expires next year. Many armchair quarterbacks are thinking the trade war with China will ease during a presidential election year, but let’s not forget that China has a stake in this as well, and they may choose to drive a hard bargain.

It’s important to factor in the ramifications these fluctuating tariffs are having on the entire flooring market. You’ve got to think the brands that focus on the ceramic, hardwood and carpet business-which have lost marketshare at the expense of LVT-were hoping this tariff would never go away.

When I wrote that last sentence, I debated including carpet since nearly everybody in the carpet business has added LVT, but there are a few purists left, like Stanton, for example.

RECORD ATTENDANCE AT FLOORCOVERING DISTRIBUTION MEETING
In this age of Amazon, where the business trends seem to favor a flatter channel with fewer layers, I was intrigued to see the crowd at the National Association of Floor Covering Distributors (NAFCD) meeting last month in New Orleans, Louisiana. In fact, this year’s meeting had a record number of attendees, and the trade show had 30 first-time exhibitors. According to Dunn Rasbury, the group’s incoming president, membership grew in 2019 to a total of 85 members. “Distribution is vibrant and alive and well,” he said. “As a group, we’re seeing double-digit growth this year thanks to our unique offering, proximity to customers and enhanced logistics models.”

Floorcovering distribution here in the U.S. has evolved, and many no longer serve as an extension or service arm of the large domestic manufacturers. Manufacturers have lost brand power with the consumer, which makes them less important to distributors. The more successful distributors establish proprietary brands with products sourced directly from offshore sources. Hoy Lanning, CEO with Haines, told me that his firm’s strategy is to “use a mix of private label and national brands.” Distributors are also finding success by diversifying their customer base beyond a pure retail focus and adding builders, commercial contractors and even specifiers.

Another key factor in determining the growth potential for a distributor is its service area, which, based on the nature of the service being provided, can be hard to change. At this meeting, Alan Beaulieu with ITR displayed a migration map of the U.S., showing which states are growing and which are shrinking. The growth states were Tennessee, the Carolinas, Georgia, Florida, Texas, Colorado, Arizona, Nevada, Oregon and Washington. The shrinking states were California, Louisiana, Illinois, New York and Massachusetts.

Certainly servicing a growing region can help, but distributors in a shrinking region can still do well if they know how to segment the market and focus in the areas that are in need of the type of services they provide.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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