The state of distribution: To find success today, distributors must analyze, act and evolve – Oct 2019
By Jessica Chevalier
The floorcovering distribution business has seen significant change in the last decade. According to Leah Ledoux, NRF’s vice president of commercial corporate strategy, this has been due to a trifecta of changes that altered the business irrevocably: manufacturers going direct on national accounts; the consolidation of brands, which has turned manufacturing specialists into generalists, offering full-service packages of materials; and e-commerce, which has eaten into independent retailers sales.
In essence, these changes have turned distribution from a fairly static business model into a dynamic one in which players must continually watch, analyze and evolve. Those with a nimble nature and ample resources have survived. Inflexible and underfunded ones have not or will not.
“The gap between the winners and losers has increased significantly,” says Jeff Hamar, CEO of Galleher, “largely driven by products and marketing decisions that companies embraced a decade ago. If you went the path of establishing proprietary brands, direct sourcing and shifting to offshore supply chains, you are in a good position today, but if you continued to be largely dependent on large U.S. suppliers, you have missed much of the growth because it has been in products produced outside of the U.S., such as European oak hardwood and vinyl. On the vinyl side, we’ve seen the demise of sheet vinyl, which has been replaced by LVT, largely sourced from Southeast Asia and China.”
Hamar believes that the distribution channel is shrinking at the expense of the direct-to-consumer channel and characterizes the current market as “the last days of a 60-year business model.”
“Coming out of WWII and the completion of the interstate highway system and the development of a robust train system, we saw the establishment of factories in the South and East that were able to support nationwide sales through distribution,” he explains. “This continued between the 1960s and 1990s. The housing industry exploded. Carpet manufacturers could ship their products everywhere, and two-step distribution was established to support that.”
In the past few years, however, there has been evidence of change. Though the industry experienced strong sales increases between 2016 and 2018, the increases that flooring-only big boxes chalked up actually exceeded that of the industry, says Hamar. These firms, along with the other mega-retailers, virtually consumed all profit in residential replacement, and that has greatly changed the channel and the role that distributors play within it. That led distributors to expand their focus beyond serving independent retailers exclusively, adding builders, commercial contractors and even sometimes specifiers to their customer rolls as well.
All these changes alter power structures in the to-market channel. “U.S. manufacturers are losing control of the channel,” Hamar continues. “Through the 2000s, they were the backbone of distribution but are now becoming less important. Distributors have to ask themselves, what happens when the business model is changing? How do you sustain business when your leading retailers aren’t as relevant as they once were? That has been hard for some people to figure out. Some companies may have survived the recession. They may have been able to get by, but the margins of profitability may now be too low to sustain operations going forward in a meaningful way.”
As the number of distributors in the market has shrunk, technology has enabled the stronger distributors to serve wider customer bases more efficiently. Says Maybank Hagood, CEO of William M. Bird, “If you look at the big trends that have impacted distribution, innovation via technology has been staggering: process technologies, like the ones that create productivity and service improvements; warehouse management systems, such as automated handling systems; and transportation management systems, which provide visibility on where things are, time of delivery, optimization of truck routes. One technology emerging now is the concept of sales territory management optimization, understanding the most effective way for territory managers to cover accounts. All this has allowed for distributors to evolve to being truly regional. Those distributors that are thriving today are those in multiple states.”
He continues, “Distributors have transitioned. Ten years ago, we were sales and logistics service providers for branded manufacturers-an extension of them. We still are that today-it’s a critical role that we play-but have evolved to also build capabilities from a marketing, sales and product intel standpoint, from being a sales and logistics provider to being closer to our market, understanding its needs and developing capabilities internally as well as growing here and offshore to find products that our market is truly looking for.”
Dave White, vice president of sales and marketing for Tri-West Flooring, which covers the western third of the U.S., adds, “In distribution today, you win with scale and scope. The larger you are, the more efficient you can run. We aren’t the low price in any of our markets. We need to make enough to reinvest.”
As the landscape shifts, distributors must change not only what they are doing but how they are doing it. “The distribution model has to act like the manufacturer, not just as a service arm,” says Ledoux. “They have to take the manufacturer model and replicate it.” As an example of that, NRF has developed a help desk that serves as the be-all and end-all of client problems and questions. The company does not pass the inquiries or complaints down the chain to the manufacturer but takes full responsibility for answering the query or fixing the problem. “This expedites problem-solving and makes us the go-to resource,” adds Ledoux. Based in Maine, NRF serves New Hampshire, Vermont, Maine, Rhode Island, Connecticut, New York, northern New Jersey, and eastern and northern Pennsylvania.
Santa Fe Springs, California-based Tri-West emphasizes why this service-model is such an advantage for independent retailers. “We try to remind our retailers that if they are buying directly from importers, those importers may not take responsibility for problems,” says White. “If a retailer wants to be sure they are covered, they should do business with a reputable distributor. We get involved with claims that have nothing to do with product. We are always there to assist. You don’t get that kind of service from importers. With us, it’s not about price, but partnership. We look at our retailers as our partners.” Tri-West serves Washington, Oregon, California, Idaho, Montana, Wyoming, Arizona, Alaska, Hawaii, New Mexico, Utah, Colorado and Nevada with two product divisions, one for resilient and another for wood, which includes laminate.
In today’s fast-track market, availability is of high importance, and that is another strength for the regional distributor. For example, NRF, which has 300,000 square feet of live inventory in its warehouse, operates its own trucking and logistics operations, delivering to every retailer in its territory twice weekly. In addition, the company offers online capability for its retail partners to see exactly what’s in stock at any given moment.
Ledoux believes these efficiencies are critical with increased volatility in the market due to online flooring sales and notes that these capabilities also make distributors crucial partners for large manufacturers with offerings too broad to be effectively distributed direct. “Customers can’t wait two weeks for an order,” she says. “It boils down to what’s in stock.”
Hagood adds, “[Retail] customers don’t want to think about an order after they place it. They want the assurance that it will arrive on time.”
Staying ahead of style is another way that distributors leverage their value in the market. Today’s distributors aren’t just relying on manufacturers to create products that are on trend. They are chasing data, analyzing the market and pinpointing what the buyers in their region desire. And then, in many cases, they are going out into the market, forming partnerships with suppliers and importers, and collaboratively creating products that suit the tastes and needs of their market.
Hamar believes that distributors offer their retail partners an important strategy in surviving against big box competition. The market is increasingly bifurcated, with the home centers taking the lower end of the market, which means that independent retailers must be equipped to differentiate themselves with products at the high end of the market. “Those distributors who can provide that are the key to the retailer surviving,” says Hamar, “and distributors will become more important to the retailer than the manufacturer is. I believe those who make it will see profits better than they have for 25 years.”
Ultimately, Ledoux notes that the cross distribution must bear is its relative invisibility to many parts of the market and the fact that its expertise is often overlooked. Distributors have long prided themselves on their ability to sell not just a solution but the best solution, as they aren’t simply pulling from the limited portfolio of products that they produce but from the portfolios of all they represent.
In many distributors’ views, an important component in establishing and maintaining a position of dominance in the market today is through the establishment of house brands, which have become a key tool for distributors and, in fact, often account for the bulk of a distributor’s product offering. Galleher, for instance, estimates that 77% of its flooring sales are in house brands.
Many distributors initially began establishing house products or brands as a means to round out or complement the offering from their manufacturer partners. Tri-West launched in 1981 as an Armstrong distributor and eventually took on other U.S. manufacturer lines but couldn’t find products to suit its style-forward market. “Some manufacturers were flexible and welcomed our input,” remembers White, “but eventually we decided to take matters into our own hands. We began looking for importers and companies that let us design for our marketplace. When the scraped hardwood trend started here, that really opened the floodgates of us designing our own products. We don’t rely on manufacturers to tell us what the trends are. At least 80% to 90% of the products that we introduce company-wide today are created with some or all input from us.” White adds that at Tri-West, which is heavily involved in the builder market, “it’s not all about price point, but bringing what the customer wants.”
Hagood notes that one of William Bird’s strategies in establishing house brands has been to raise the bar a bit, though that wasn’t always the case. “Ten years ago,” reports Hagood, “the typical distributor private label was an entry-level price point that allowed us to be competitive. Today, what we and others have is a brand that is thought through.” Essentially, today’s distributors aren’t just looking for products to fill gaps in their offering and then slapping a label on them. Instead, they are creating lines with unique, well-developed identities. William M. Bird’s Palmetto Road, for instance, offers unique, high-quality products in hardwood, laminate and LVT-at competitive prices. “We may be in the middle to upper end of the category in price, but the perceived value for what the retailer and consumer are getting is significant,” says Hagood.
Crucial to this endeavor, from White’s perspective, is the establishment of relationship-based partnerships. Tri-West seeks a small group of supply partners to which it is highly loyal. One of the company’s key partners is Provenza, which it has been working with for two decades. Tri-West and Provenza partner to develop products for Tri-West’s territory, and Provenza then has the option to sell these in areas outside Tri-West’s geography, as long as they are under a different name. White is cognizant that the key to successful supply partnerships is about meeting the needs of both parties. “We need to do enough volume to keep them satisfied,” he notes.
Galleher began establishing private label partnerships in the early 2000s, and that effort accelerated in 2009 and 2010. The company has a team of employees traveling constantly to visit factories and nurture relationships. Galleher reports that it has very high standards for its supply partners and does a comprehensive evaluation before forming alliances. The company has three showrooms in California and reports that this allows it to keep a sharp eye on trends. “Three or four years ago, we could see that designers wanted cleaner looks in wood, narrower planks, so we started talking with factories that have that in their sweet spot,” explains Hamar.
THE MANUFACTURER RELATIONSHIP
While it may seem that distributors and manufacturers are now diametrically opposed, chasing the same customers, that isn’t necessarily the case. Many distributors believe that the parties still have value to each other.
Ledoux points out that as manufacturers have merged, their product lines have become large and, in a sense, unwieldy, and for a mill with 10,000 SKUs, like Tarkett, going direct isn’t just inefficient, it’s impossible. “Distributors with major brands have the leverage that is needed now, as the retail model is becoming more volatile due to e-commerce,” says Ledoux.
In addition, White believes that distributors play an important role as the watchdog of the manufacturer lines that they represent, particularly those where they have exclusivity, making sure the products are selling only through ordained channels.
It is important to recognize, however, that manufacturers that are sourcing products from abroad, importing them and selling them in the U.S. are basically playing the same role as distributors.
When the first round of U.S. tariffs on Chinese imports was announced in September 2018, Galleher made the decision to move its supply partnerships out of China completely, and the company has nearly met its goal. Hamar is keenly aware of the fact that his strategic move was a roll of the dice and notes, “We could have lost big if the U.S. and China had cut a deal because it was a massive expense for us to get out.” But, with all that’s ensued now, the company feels that the decision was the right move.
To achieve its exodus, the company both sought new partnerships in other areas and retained partnerships with suppliers that were moving their own operations abroad, typically to other areas of Asia.
Tri-West is also making some changes with regard to its sourcing, though not as dramatically as Galleher has. White reports, “Ninety-five percent of our SPC and WPC are sourced from China. We have absorbed some of the increase, and our suppliers have too. But much of it has been passed along with price increases.” Over time, the company plans to move its supply chain out of China but notes that this will be both challenging and expensive. As for the supply side, White reports that some China-based suppliers are hoping to “wait it out,” as relocation is tremendously costly, but that if “tariffs don’t go away or, in fact, increase, that might change. The cost of labor had already gotten higher in China, so there was a shift already taking place.”
NRF has a bit of a different story. Though its LVT and ceramic businesses have been impacted by the trade war, the company largely sources from the U.S. and that strategy has paid off. “We don’t have all our eggs in one basket,” reports Ledoux.
Hagood points out that he has been very impressed with the effort that Metroflor, one of William M. Bird’s supply partners, and its CEO, Harlan Stone, have taken in response to the tariffs. Stone formed The American Consumers & Workers Justice Coalition to fight the tariffs on the basis of the fact that nearly all production of LVT, WPC and SPC is China-based; therefore, sales of China-made LVT do not typically come at the expense of U.S.-made material, meaning it should be exempted from the tariff list.
E-COMMERCE & TECHNOLOGY
With the channels increasingly jumbled, distributors are now interfacing with the end-user in ways that they haven’t previously. Typically, this manifests with distributors creating consumer-facing online resources to educate the consumer about an offering and then drive them toward a brick-and-mortar retailer. Though this effort may seem more like one that falls under the retailer’s responsibility list, it’s important to consider their competition.
The big boxes, both general and flooring-specific, have dynamic websites powered by ample funding and resources. Independent flooring retailers rarely have the ability to compete with these capabilities, so distributors have stepped in to, in essence, level the playing field.
In this effort, William M. Bird rolled out its Twenty & Oak website in July. The consumer-facing site features products by Beauflor, Somerset, Metroflor, Hearthwood, Tarkett and UltraCeramic, as well as Bird’s house brands, Palmetto Road and Azalea Lane. Explains Hagood, “In our estimate, the greatest challenge for the independent dealer, multifamily builders and commercial contractors, is how to compete online with big boxes and large, national do-it-yourself chains. All of those players have a significant web presence.” Twenty & Oak, which the company began developing more than three years ago, offers education, enables sample ordering and connects consumers with their local dealer via a zip code search.
William M. Bird offers subscriptions to the site, which enables dealers to raise their status in the search feature, and Hagood reports that consumers who utilize and find a dealer through the site “have a much higher level of consumer commitment” than those who simply use a “find a dealer” feature.
Similarly, Galleher’s website for house brand Monarch Plank Hardwood Flooring includes education, a dealer locator and a visualizer. The visualizer is supported with a high-resolution scanner that the company invested in last year. The company also offers the visualizer and other digital tools to its customers for use on their own sites.
Like William M. Bird, Galleher does not sell from its site, though the visibility does give the company more control over getting its own name out in the marketplace and, thereby, creating more demand for the products that it sells. Hamar reports that Galleher is very active in marketing products through social media, and he increases the budget for digital development every quarter.
White notes that, in addition to offering an online program designed to drive business into its retail partners’ stores, the company also monitors online activity surrounding its products. “We struggle with battles where one dealer is selling a product for a better price,” explains White. “When this happens, we have discussions with them, emphasize margins. If they keep abusing it, we will raise their pricing to the point that they won’t be a hindrance to the business. We do everything we can to support our retailers.”
THE VINYL CRAZE
LVT has taken share from every category, but, for the distributor, that really comes into play when it is taking share from those categories with higher price points, particularly hardwood. “When you sell a product at $2.50 versus $5.00, you have to see twice as much,” says White.
Hamar says the disparity in price points between his LVT and hardwood sales is even greater, $1.73 and $5.11, respectively, a difference of nearly three times. LVT’s eating into hardwood business has been a bit of a surprise to some, as LVT is going into places where vinyl hasn’t made much headway before. On the residential side, that includes high-end homes, sometimes replacing both hardwood and ceramic to create a unified visual across the entire first floor. The fact is, vinyl products simply look better than they used to, and that has increased their reach.
It is important to remember, however, that LVT isn’t only taking share from higher priced goods like hardwood but also from similarly or lower-priced goods like sheet vinyl, vinyl tile and laminate. Says Ledoux, “LVT dug into the hardwood business, but it also dug into the FHA (Federal Housing Administration) business on the low end. We’re currently providing product for 300 units that would have been sheet or fiber floor previously. Now, it’s LVT, which is quicker to put in, easier to replace and more expensive.”
That being said, Ledoux does not believe that LVT offers a one-size-fits-all solution by any means. “I look at every job to find the best option. I am not naive to the fact that you have to be really smart about what LVT types will and won’t do. I don’t want to have a job where I oversell someone on the product.”
Like many distributors, Galleher offers both manufacturer-branded and house-branded LVT and reports that house-branded is an enormous part of business. The distributor believes, however, that LVT’s gobbling of other categories’ share is slowing. “We will get to a point where it will be done taking share, but we’re still a few years from that,” he notes.
And Hagood is aware of the dangers associated with buying too heavily into the enthusiasm-high of LVT. “William M. Bird dates back to 1865,” he notes, “and the primary product we sold in the 1870s and ’80s was whale oil, which was used as a primary ingredient in paint, lighting, heating and as a lubricant, so here we like to say, ‘We don’t bet the farm on whale oil,’ meaning that you always have to be careful to understand what is happening. When I started in this business 30 years ago, 30% of our business was carpet, and hardwood was 1%. Twenty years ago, hardwood was 40%, and carpet was 1%. In the last ten years, we have certainly really benefited from what has happened with LVT, waterproof and solid core product, but that doesn’t mean things will be the same in a decade.”
MERGERS & ACQUISITIONS
In late 2017, private equity firm Quad-C Management took a controlling interest in Galleher. Similarly, distributors Gilford Flooring and Johnson Wholesale Floors merged in 2016 to form Gilford Johnson; the merger was facilitated by Blue Equity, majority stakeholder in Gilford Johnson. In 2017, Gilford Johnson purchased Mastercraft Flooring Distributors.
The players with whom we spoke expect the continuation of merger and acquisition activity, as small, less well-funded distributors find it harder to compete and are gobbled up by larger ones looking to extend their territories farther or by private equity groups looking to make sound investments in growing businesses. In addition, they expect more private equity activity in the channel; there is concern, however, about the impacts of that private equity activity, as the model for these organizations isn’t generally a commitment to long-term investment and measured growth but to buy, harvest and flip.
Hamar reports that one of the elements that made Galleher so appealing to Quad-C was its house brand offering and the fact that it wasn’t closely aligned with one single manufacturer. However, the leader cautions, “I see acquisition opportunity today, but there is a gap between expectation and what companies are actually worth.” He notes that private equity investors are looking for “super well-run companies with above-average margins and high profitability.”
Hamar believes it’s important for everyone in the industry to recognize what the extended lifecycle of today’s popular hard surface products means for sales in upcoming years: there will be fewer of them.
“I’m really concerned about the time when we don’t have a million houses a year getting new floors because they have to, because the homeowner can’t live with what they’ve got,” he says. “I’m not sure that we, as an industry, have come to grips with what we have done to the replacement cycle.”
He points not only to the durability of today’s floorcoverings as the problem but also to the greatly improved aesthetics that are less likely to become outdated or ugly out. And he notes that, for many consumers today, new flooring is a matter of choice, not of need, and as a choice, it is competing for the consumer dollar with all the other offerings in the market, including those 80” TVs with their crisp graphics and saturated colors, experience-based investments like travel and concerts, and pricey, private education of the next generation.
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