Hardwood Update 2012 - October 2012

By Brian Hamilton

Hardwood flooring sales appear to be making a comeback this year as the home builder market is showing signs of life and more homeowners are interested in remodeling with wood.

Analyst Santo Torcivia of Market Insights/Torcivia expects wood sales to rise about 12% to 13% over last year, both in sales and volume, to $1.85 billion based on an anticipated 25% rebound in home building, which appears to have gotten started earlier this year. As of July, housing starts were up 21.5% from a year ago to 746,000 annual units, including 502,000 single family homes, according to the Commerce Department.

Existing home sales also affect new construction as well as the replacement market, and those are also on the rise. In July sales hit an annual rate of 4.47 million, which was up 10.4% over the same month in 2011.

Hardwood imports are up 11.7% year to date, according to the Bureau of Labor Statistics, with Chinese imports about 25% higher than a year ago. China accounts for about 60% of all imports.

Hardwood prices appear flat so far, Torcivia says. He believes that’s due to a warmer than usual winter, which allowed increased logging. In addition, he said, the furniture business is down and there’s plenty of competition in wood, all of which conspire to keep prices low. That could change quickly if a dramatic turnaround in the home building market creates a huge demand for wood. As Michael Martin, executive director of the National Wood Flooring Association, wrote in Floor Focus last month, the recession forced a lot of small sawmills out of business and it will be difficult to increase output quickly should demand spike. That would naturally force prices higher, perhaps substantially.

The increased retail sales this year are largely a reflection of the success of Lumber Liquidators, which is up about 18% across all categories, and the bulk of its sales are hardwood. The firm is continuing its aggressive expansion and as of June 30 had 277 stores in the U.S. and Canada. And Lumber Liquidators imports products, which would help account for the rising import figures. Lumber Liquidators is also now widely seen as the largest retailer of wood flooring in the country, with about a 15% to 20% share overall sales. The firm is just ahead or running neck and neck with Home Depot for the top spot.

One factor for manufacturers who supply Lowe’s is that the major retailer has been eliminating store inventory, Torcivia said, and moving toward special orders, but it’s not clear how that strategy is working. That’s a big break from its traditional role as an easy place for a homeowner to buy flooring and take it home on the same day. Home Depot hasn’t followed Lowe’s lead. Domestic manufacturers aren’t supplying as much product to Lowe’s as they have in the past and that’s likely holding back sales this year for some of the major suppliers.

There’s also good news for the industry in that new houses may start trending larger and wood flooring remains a dream choice for homeowners. According to the American Dream Survey this summer by real estate information firm Trulia, 27% of Americans say their ideal home size is over 2,600 square feet, up 17% from last year. In addition, the number of people wanting a “super-sized” house of at least 3,200 square feet nearly doubled this year to 11% from 6% last year. The survey also indicated that 47% percent of renters would like hardwood in their next home, and 35% of first-time homeowners said that they actually had it. So it would seem that consumer sentiment about the category is high and housing trends are moving in the right direction for increased sales.

Anecdotally, Jeff Striegel, president of Maryland-based distributor Elias Wilf, says he recently attended a focus group featuring hardwood owners. They referred to hardwood floors as “flooring” while they referred to carpet and vinyl as “floorcovering.” “They look at it differently than any other category,” he says. “It’s an investment in the home and increases its value. People aspire to have a wood floor.”

There is also some evidence that enforcement of the Lacey Act, to keep illegally harvested wood out of the country, is starting to have an impact. Everyone took notice of the recent enforcement against Gibson Guitar Corp. in Nashville, which was fined $300,000 for using ebony wood from Madagascar and rosewood and ebony from India. Domestic manufacturers say that the law has forced everyone to be more careful about wood sourcing, and that some of the more questionable Chinese suppliers have stopped sending product here.

Imports from Brazil are down 17%, also in part due to Lacey. Manufacturers say they’ve seen a real decline in exotic imports, and the number of Brazilian firms selling here has declined. They say a number of Brazilian firms shut down when the Brazilian government changed its export rules in response to the U.S. law. The falling dollar also made those products more expensive.

However, Lacey’s greatest impact may be yet to come. A major issue to be addressed is illegal wood from eastern Russia and southeast Asia that is used in products manufactured in China. The wood appears to be oak or maple and is labeled as such and exporters go to great lengths to conceal the origin.

It’s hard to say what impact the enforcement will have on further attempts to water it down. Last year three members of Congress, Tennessee Representatives Jim Cooper and Marsha Blackburn and California Representative Mary Bono Mack, introduced legislation to completely exempt pulp and paper from the Lacey Act requirements and minimize the fines for first infractions to just $250, which would have gutted the act.

In addition, this May the National Association of Home Builders lobbied Congress to amend the act so that individuals and businesses that unknowingly purchase illegal wood from overseas don’t have their property seized and aren’t exposed to civil and criminal liability.

It’s also not clear how last year’s International Trade Commission imposition of tariffs on Chinese exporters who were accused of dumping products has impacted the market. The vast majority of affected companies were hit with tariffs of less than 4%, but a few faced nearly 60% tariffs and they have exited the market. However, those few companies had little impact on the overall market. Domestic manufacturers say that many of the companies facing the smaller tariffs have simply lowered their prices to make up the difference. In addition, American companies in general are becoming more demanding about their suppliers and insisting they meet certain certifications.

The green story has largely been forgotten by consumers as they remain price conscious. Manufacturers, distributors and retailers all say sustainability comes into play when all other factors are equal. In other words, they won’t pay more for a more sustainable product.

However, manufacturers also say that Made in the USA is a bigger selling point these days as the recession has made consumers more aware of the benefits of buying an American-made product.

DISTRIBUTORS
It’s probably not surprising that hardwood preferences differ across the country. Today’s manufacturers have provided such a huge selection of solid and engineered species, colors, and looks that it’s not hard to appeal to every hardwood shopper. Generally speaking, solids dominate in the northern areas, of the country, where there are more basements and crawl spaces, while engineered products sell better in southern areas, where there is more slab construction and generally more problems with moisture and humidity, which can cause problems with stability. Oak is still the biggest seller nationally, with at least a 50% share, manufacturers say, and three-quarters of that has a natural look. But every region seems to have its own preferences outside those general attributes. European styling is generally becoming more popular.

Distributors have a little different vantage point on the market from other participants. Striegel of Elias Wilf, whose firm covers from southern Connecticut to North Carolina, says that in the mid-Atlantic area there are some differences but they often revolve around income. “Higher incomes go for higher priced wood,” he says.

“There’s not a big variance in consumer taste, except socio-economic.” His market is about 60% solid. Ten years ago, he says, he saw mahogany, cherries, and cyprus but those looks have faded in favor of so-called “domestic exotics,” like walnut, hickory and ash. He says newer technology allows, for example, the grain in hickory to “pop” and make it more appealing.

“More than 40% of hardwood is wider than four inches,” Striegel says. “This year or next, half the business will be wider.”

Striegel has a little different take than others in that he believes there has been a permanent shift in the hardwood market over the last decade or so and new construction won’t necessarily be the driving factor in wood’s resurgence. That’s largely because products have gone from predominately unfinished to easy-to-maintain prefinished, and there are more distinctive products available than ever.

Last year, he says, 58% of wood sales was for replacement, 17% for new construction, and 25% for commercial uses. Ten years ago that number was 59% for new construction, 28% for residential replacement, and 13% for commercial.

He notes that the wood business fell 20% from the peak of the housing market, while the house construction market itself fell 75%. He doesn’t think home building will approach its peak anytime soon, and he says more builders are using carpet and vinyl than they were just a few years ago when hardwood was standard in a new home. Nevertheless, he says, “There’s a real wood business without the builder, and commercial sales have doubled in the last ten years. We no longer need the builder business to be the driving force. It’s a fully mature category.”

Striegel takes it all even a step further and says that the driving force in hard surface flooring is “wood and things that look like wood.” He says wood grain LVT planks are the fastest growing category and “today we have 12 mm laminate that I could put next to a piece of wood and challenge an expert to tell them apart.” He adds that the hottest Daltile porcelain tile introductions in his area last year featured wood visuals.

Distributor Galleher, based in Santa Fe Springs, California, has 18 locations in California, Nevada and Arizona. Co-owner Jeff Hamar says he’s seeing good business in homes $5 million and up in the plush northern California area, doing about 15 deliveries per week of 4,000 square feet or more. These are generally 10,000 to 15,000 square foot homes. There’s still plenty of money in the technology business community.

“The hottest thing is the European oak look in wider widths, eight to ten inch widths with a rustic look,” Hamar says. Handscraped visuals aren’t common in these products; instead they’ve gone to the wire-brushed look.

Colors, he says, are trending lighter, with greys and soft whites especially popular. Multi-tone products provide more dimension and a deeper look. Fumed products are also growing in popularity.

“Foreign buyers and wealthier buyers who aren’t tied to a mortgage are driving the upgrade business,” he says. “That’s a lot different than six years ago.”

Hamar says the builder business is starting to come back but until new home construction dramatically increases and homeowners build equity, it’s going to be a tepid market for wood.

Distributor J.J. Haines serves the East Coast from New Jersey to the Florida Keys. According to Rosana Chaidez, vice president of sales, marketing and procurement, her southern markets prefer wider products, with five inches predominating. In general, widths are expanding across her entire market.

While solids are still pervasive in the north, much of Haines’ southern territory suffers from humidity problems, making more dimensionally stable engineered products the dominate choice.

There’s also a big shift in color preferences, Chaidez says. Greys are making inroads, as are blond and brown colors. “We didn’t see grey anywhere ten years ago,” she says. Many of the exotics are shifting to lighter stains to move more toward brown and away from red. In addition, domestic species that look exotic, such as hickory and maple, are more popular as a less costly alternative to imported exotics. European wire-brushed looks are especially prevalent in southern markets.

“We see black floors and dark greys throughout our footprint but they will never be primary products,” Chaidez says.

Growth in Haines’ territory is coming from a combination of retail and new construction, with a higher percentage of retail in the south, but in the north it’s a combination of property management, new construction and retail remodeling.

“We’re doing better than low single digits, probably high single digits,” Chaidez says about growth. She’s seeing growth at all price points, from commodity flooring on up. “We’ve seen nice growth on the high end, and part of that is people are buying their dream home, there are great interest rates, and they’re looking to put the floor they love into that home.”

Customers who want the wood look but not necessarily wood are opting for LVT, she notes.

“All the new species we’re starting to see from different parts of the world, combined with new finishing and color trends, are creating looks that we haven’t seen in the past. It’s affordable flooring with a rich look.”

MANUFACTURERS
Shaw says it still seems like a difficult market, although it has seen some increase in new home construction to offset a tough dealer market. It doesn’t see much pick-up in the next year. Shaw still expects its wood business to grow this year, although not dramatically. The company continues to develop new products that emphasize style and design for both the Shaw and Anderson brands. Its Epic and Pebble Hill products are its biggest sellers. The firm has also continued to add domestic capacity.

In general, Shaw sees great interest in more refined looks, and less interest in rustic, on both coasts. In the Northeast along the Canadian border, and the Northwest and Vancouver, wider, sawn-face looks are popular. Handscraped hickory is popular in Texas. Engineered products are becoming more popular in traditional solid areas in the Midwest and Northeast. Wider is the trend everywhere.

Canadian firm Mirage is now predominately an engineered wood company, with about 60% of its skus in that category. Two years ago engineered surpassed solid among its offerings. The firm specializes in higher priced products and it sells all over the U.S.

On the West Coast, 5” to 7” widths in maple are popular, especially in darker colors. The Midwest generally favors oak with light colored stains and orange hues.

In the South, most sales are engineered, with growing interest in maples and some exotics. Widths of 5” to 61/2” are more common, with a trend toward golden colors, as well as whiter and pastel colors.

Birch is selling well in the Pacific Northwest, and is also popular in the eastern part of Canada.

Mirage says its builder business is poor, with more sales for remodeling projects, although it works almost entirely with smaller custom builders who do only a few homes per year. The firm is also supplying more flooring for offices, restaurants and boutique hotels, which can justify using higher priced products. Those projects are largely coming through the A&D community and flooring contractors.

The Canadian economy has been more stable than the U.S. economy over the last few years, so there it has seen some growth in the builder market, with sales up about 2% to 4%.

Mirage just launched its first white oak rift and quartered product, which is seeing a lot dealer and distributor interest. A new species for Mirage is hickory, both clean and rustic grades, with three different stains.

Armstrong, the largest wood manufacturer, says sales were off slightly in the first half, due mostly to an inventory reduction with one major retailer. However, business elsewhere is up, including its builder business, which bottomed out in the latter part of last year. The firm sees some inflation on the horizon but says it will do everything it can to offset those costs.

Armstrong says California consumers are interested in softer handscraped products, while homeowners in Texas and the Southwest prefer a cleaner scrape. There’s less interest in general in the rustic scrape.

Oak still makes up the lion’s share of Armstrong’s business, with darker colors in vogue. Hickory and maple are also popular, but walnut, cherry and birch are niche products. Birch and cherry are both soft woods and not suitable for a lot of projects, while walnut is expensive.

Five inches has become a popular width but Armstrong’s HomerWood products can go up to 7” and wider. Widths rarely goes over 4” in the builder market.

Exotics, both solid and engineered, are a tougher category because of lack of supply and higher prices. Those problems are somewhat related to the Lacey Act, but wood that is typically used for flooring in Brazil is getting higher prices from the manufacturers of non-flooring wood products.

This year Armstrong rolled out its higher-priced 30 sku Performance Plus line, which features 5” engineered birch, hickory, cherry, maple, oak and walnut.

Mohawk, maker of the Columbia, Century, and Mohawk brands, has seen slow growth recently in its replacement/remodeling business, and its builder business is coming back in steps. More upscale multi-family construction is underway, which is a decent market for its locking floating floors. That segment is growing faster than single-family construction. Mohawk expects that a pickup in single family construction will help both its solid and engineered businesses.

Mohawk has eliminated some exotic species due to the Lacey Act, thinking that even a slight risk wasn’t worth it. Specifically, anything out of Burma was considered to be too risky. Generally, Mohawk has seen tropical exotics become a fading trend, while domestic exotics like cherry and walnut are taking up the slack.

In the Southwest, the company is seeing customers gravitate toward textured, handscraped and distressed looks, with growth in hickory, walnut and maple floors (oak still has a 63% share). These looks, in fact, are growing more popular in the South in general. Mohawk said it made some significant investments in its plants to achieve these looks and has recently been granted two patents on scraping and embossing technology to achieve random looks that previously could only be achieved by hand. It has rolled out three new textured and scraped product lines.

The North still prefers traditional solid flooring, with smooth visuals. In addition, Mohawk sees more customers there seeking value, with durability and easy maintenance key considerations.

Mullican’s biggest market is the Northeast, where traditional prefinished and unfinished looks, in 3” to 5” oak, ,predominate. Other species are the exception. On the West Coast, there’s more hickory, maple and other species sold, but oak still makes up 80% of the market. The Northeast is still a 90% solid market while the ratio to engineered on the West Coast is closer to 50-50, with the Southern California market about 90% engineered. Builders prefer 3/4” products to stabilize their flooring systems. The one exception in the Northeast is in New York City high rises, which use about 80% engineered flooring. Its hottest products are prefinished red oak in natural colors and handsculpted hickory in 4” to 5” widths.

Mullican says that since 2009, solid has taken back some share. That’s because the hardest hit areas of the builder market were in the Sunbelt, which is predominately an engineered market. In general, Mullican doesn’t expect much lift from the builder market until late next year because the home-completion rate hasn’t started to rise yet.

Three years ago Mullican began working extensively on procurement because it expected there would be shortages of lumber once the economy started to heat up. It says the number of saw mills that ship on a regular basis has fallen from 700 to about 200 today.

Mullican this year introduced its first domestically produced engineered line as it shifted part of its production out of Asia. In addition, the company recently announced that it is expanding production of solid products at its Norton, Virginia plant.

RETAIL
Lumber Liquidators operates in 46 states and Canada and offers a variety of its own proprietary branded products, notably Bellawood. The company had net sales of $398 million through the first half of the year, up 19% over the first six months of 2011, with an average sale of $1,695. It’s a one-stop shop for anyone who wants a wood floor. It offers installation as well as tools for handy homeowners.

Most of the differences in preferences the firm sees are from North to South rather than East to West. In the North, where solid is dominate, its customers prefer lighter colors, and more traditional looks, such as 21/4” ash, maple and red oak. In Florida, exotic species are still hot. In the Texas area, darker colors, such as browns, are popular and customers are interested in Brazilian redwood and jatoba. Texans also like the harder, more rustic scrapes, while in other areas, softer, more pillowed scrapes are preferred.

Lumber Liquidators, perhaps more than some other retailers, has seen a push toward lower cost products among its customers. While it still has customers that are buying $9 per square foot wood, there are fewer of them. But the trend toward cheaper products has also fueled its laminate business, and the firm says that many purchasers of laminate would have purchased wood if the economy was better. Generally, though, the firm says its laminate business has likely grown at the expense of carpet.

Lumber Liquidators believes the trend of boomers “aging in place” is likely to fuel hard surface sales as homeowners anticipate eventually using a wheelchair.

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