Wood Cuts - February 2010

By Ed Korczak

American consumers are a contradictory bunch. For decades, mass consumerism has been rampant and unchecked, but the recent economic turmoil that has affected most U.S. families has changed all that. Recent studies show that American spending habits have changed considerably, with more people prone to saving their money these days as opposed to spending it unnecessarily. At the same time, while they might be postponing large purchases like cars and home remodeling, they think nothing of spending $5 each morning on a cup of coffee. Fickle indeed.

Despite this change, one thing remains clear: Americans want—and expect—luxury. The power windows and doors that were options on our cars a few decades ago are now standard features. The washer and dryer our grandmothers could only dream about when they were raising their families are now necessities for ours. The letters our parents used to wait weeks for the postal carrier to deliver from their loved ones now arrive instantly in the palms of our hands via our cell phones. Luxury is no longer out of reach for most of us. The truth is, there are very few homes in the U.S. that do not have the benefits of televisions, dishwashers, microwaves…and the bigger truth is that we expect them.

Flooring is no different. During the past few decades, flooring has become a significant focal point in many homes, and the trend toward purchasing luxury flooring is thriving. Market research shows that of all the flooring options available, the more luxurious options—hardwood, ceramic and carpet—are the fastest-growing flooring types. The less luxurious flooring options—laminates and vinyl—are growing at a much slower rate.

Hardwood has the added advantage of being desirable because of the growing trend in the U.S. toward green building products. It is the only flooring material that is entirely renewable, making it a hands-down choice among eco-conscious consumers.

Despite this desire, The U.S. FLOOReport (2009) produced by Market Insights and Floor Focus reports market research that shows that a body of consumers equal to one-fourth of the current market is turned away from hardwood flooring each year because of the price. The bottom line is that hardwood flooring, like other luxury items, is not a cheap product. At the same time, U.S. consumers do not hesitate to spend on luxury, as long as they also feel like they are getting value, which is where hardwood flooring delivers.

Since hardwood flooring is manufactured using wood, it only makes sense that the largest impact on hardwood flooring pricing is lumber. Lumber prices are affected by a number of things. These include weather, demand and political conditions.

Weather affects lumber pricing in a number of ways—most significantly, the ability of loggers to harvest the material. Excessively wet conditions make it difficult to get trucks and other heavy equipment into the forests where the trees are growing. The dirt roads leading into the forests often become impassable during wet conditions, causing supply to diminish. This raises prices.

Demand has an impact on lumber prices as well. Wood flooring is only one industry utilizing our nation’s trees. Others include the furniture industry, the construction industry, and the pallet industry. As demand for these industries affect the supply of lumber available, the availability for wood flooring is affected as well.

In addition, political conditions can affect price. As countries work to maintain a healthy supply of hardwood for generations to come, certain species can become less readily available. As the supply of these species diminishes, the prices will rise. The U.S. Lacey Act will have an impact on political conditions as well as on the import of illegally logged materials into the U.S. Any company importing lumber into the U.S. now has to provide documentation stating that the materials were legally harvested according to the laws of the country of origin. This means that many exotic species that were readily available in the U.S. just a few years ago may not be any longer. This will drive prices up as well.

Taking all these conditions into consideration, lumber costs make up about three-fourths of the materials cost of hardwood flooring. Materials then account for about 60% of wood flooring manufacturing costs. The remaining costs include things like labor and energy.

Historical data from the U.S. FLOOReport on the price of hardwood flooring reflects these issues. Note that 2008 figures are preliminary, 2009 figures are estimated, and 2010 figures are forecasted.

As the figures show, current prices are roughly what they were in 2003, yet overall sales are down at a greater rate. Figures from the U.S. FLOOReport reflect this trend, and show that current sales have reverted to the rates that were in effect well before 2003. Note again that 2008 figures are preliminary, 2009 figures are estimated, and 2010 figures are forecasted.

This drop in sales is impacted significantly by volume, which has decreased in each of the last three years.

It is important to note that wood flooring still represents a $1.6 billion industry. This shows that no matter what the economic situation is, there are still buyers out there willing to spend, who simply need to be shown the value that the product offers. Yes, it is one of the more expensive—luxurious—flooring options available, but it also offers the best long-term value.

A report published by the National Association of Home Builders rates the life of items used in a typical home. Wood floors were rated in excess of 100 years, meaning that they will have fewer replacement costs than other flooring options. In other words, wood floors will last for the life of the home, representing a real financial value.

Another report sponsored by DuPont and Mohawk Industries shows that nearly seven out of ten U.S. consumers (65%) are willing to pay more for products that are made with renewable materials. Because wood floors are made from trees, which are renewable materials, this suggests that consumers are willing to pay more for wood floors. The survey goes on to say that the majority of the respondents to the survey (again, 65%) indicated they would pay up to 5% more. Once again, this supports the data that shows that Americans will pay more for items that are environmentally friendly, like wood flooring.

Finally, a report published in September 2009 by American Express Spending & Saving Tracker states that spending on home expenses is on the rise, even while consumers are spending less on other items like vacations and dining out. This report shows that U.S. consumers currently are in a phase of weighing wants versus needs in their lives, and that even for basic needs like food, clothing and shelter, they are demanding real value.

Current economic conditions definitely have had an effect on the wood flooring industry. As the previous figures show, after two decades of steady growth, we have experienced four years of declining sales, but some interesting trends are evolving. Sales are steady at the high end, and at the low end. It makes sense that high end sales will always thrive as the affluent have more discretionary funds at their disposal and are not as impacted by economic downturns.

The financially struggling U.S. consumer is not in the market for wood floors, or any other flooring for that matter. Cautious buyers tend to be middle class people who may feel comfortable about their current financial situation but are cautious about spending as they have experienced job loss either directly, or indirectly through friends, family and coworkers. These people may be in a position to buy wood floors, but may put off the purchase until it becomes a necessity rather than a want. When that happens, they are likely to gravitate toward lower cost options to fill that need.

Economists also predict a rebound in the U.S. economy toward the second half of this year. Existing home sales already began a modest rebound in the latter part of 2009, which will lead to an upturn in the residential remodeling and replacement market. Typically, there is a lag of six months to one year from the sale of an existing home to consumers taking on a major remodeling project. Flooring is one of the items that’s often included in a major remodeling project, which means that wood flooring sales could experience an increase as early as this summer. In addition, the builder market is expected to show some life by the end of this year, which will have a positive impact on wood flooring sales as well.

The bottom line is that wood flooring remains a strong product category that consumers continue to desire because it has a lot going for it: beauty, style, durability, and—most of all—luxury.