Round the World

Adam Smith and Milton Friedman might have a little trouble explaining the current price of flooring.  Demand for raw wood in the United States is down so much that many sawmills, Weyerhaeuser’s Washington plant is the largest, are closing or on the verge of bankruptcy.   The cost of softwood logs has dropped to half of what it was two years ago.  Tree farmers can not make a profit harvesting their inventory so it is wiser for them to leave lumber standing in hope it will appreciate when the market recovers. 

Demand fell so, just like Smith and Friedman would have predicted, prices of softwood have fallen.  Now, enter the “Green Zone”: waste management and laminate.  Laminate HDF and MDF core board is mainly composed of sawdust, a byproduct of the lumber industry.  Fewer logs being sawn into flooring and widgets results in less sawdust.  Lower supply of sawdust means prices go up.  Higher energy costs to manufacturer and transport goods, raises the cost further.  Increased cost means higher prices until they diminish demand to meet the supply. 

But wait, didn’t this all start with lower demand?  What’s a flooring guy to do when demand is down and costs are up?  Complaining to the manufacturer will not help considering that they are scrambling to cover fixed overhead with lower sales.  The only answer is to capitalize on business that exists. 

Advertise to get customers into your store, increase close rates and, most important, make certain they don’t walk out of your store with your money still in their pocket.  That is exactly what happens when a lower priced, inferior product is sold because the retailer is afraid to sell the higher priced product; let the home centers sell to the “lowest price only” customer.  The profitable retailer will educate the consumer differentiating quality differences and sell the product that is right for the project.  Did it cost $3.98 instead of $2.99?  Perhaps, but she will tell everyone why her new floor was worth every penny and you will have enough money to keep your business open until the next customer comes in the door.

Amid the turmoil and global concerns about illegal logging and its negative environmental impact, North America continues to shine as the world's best steward of native forests.  The NWFA recently issued an independant report explaining their Green side through their Life Cycle Analysis of Solid Wood Flooring.  The USA plants 1.6 new trees for every old tree harvested, assuring us of a steady stream of raw material long into the future.  In fact, the USA supplies wood to the world.  We are the second largest supplier of sawn wood to China, supplying over 16% of that country's imports. Only Russia exports more sawn wood to China and they have a common border.

At the same time, the US wood market has been hit hard by the depressed construction industry.  In Oregon, the price of softwood (lumber used to make 2X4's) has dropped from $900 per thousand board feet to the grower's breakeven price of $450 per thousand.  Weyerhaeuser is scheduled to close their Green Mountain Sawmill in Toutle, WA on May 1, 2008, due to the weakened demand.  Most growers are leaving their logs in the ground waiting for their inventory's value to return.

So what does this mean and how does it impact us?  The weak dollar makes American wood more attractively priced than ever.  Prices of domestic species could soften in the near future and another export opportunity is becoming reality.

Shanghai - The Floor Covering Institue organized a luncheon seminar at Domotex Asia China Floor in which a panel of experts discussed the issues of Quality Control when doing business in China.  Americans often say, "The first container from China is always perfect but that is where the fun begins."

Thomas Baert, president of China Floors and founder of the current Domotex exhibition, explained why the unknowing buyer runs into so many problems doing business in Asia. 

• Asians are taught to say "YES" but often don't understand what is needed
• Don't equate large stands or fancy marketing material with size, financial strength or reliability of a company.
• Be careful when negotiating a price.  Often a company will quote a low price forcing them to supply material that is unacceptable.  When "the bottom price" is demanded by the buyer, the seller assumes that they are willing to accept the bottom quality.

Bottom line is that there are tremendous values in China but one must know what they are doing.

• Pick a partner who has exported product to North America and who that knows what is expected of them.  Don't assume that they will put wood flooring in a box or shrinkwrap the pallet if they have never been asked to do so before.
• Write detailed specifications explaining everything that is expected of the vendor no matter how obvious it appears to a veteran buyer in the USA.
• Hire or have someone from you company Inspect product as it is being produced.  Waiting until the product arrives in North America and realizing it is not what one wanted, is a very costly problem and a lesson in how not to buy from other countries.

Baert emphasized the point by stating, "You get what you INSPECT not what you EXPECT".  There are many opportunities sourcing from overseas but unless one follows these basic suggestions it can be a very costly educational experience.

  Bruce Wholesale just Merged into Gilford.  Hoboken is history.  Has the Judgment Day finally come for independent floor covering distribution?  I don't think so; it is just a continuation of the consolidation our industry has been experiencing since the glory days of 400 carpet manufacturers and 500 independent carpet wholesalers back in the 1960's.

  Hoboken did not come out of the blue unless you skipped your History of Distribution 101 class.  LD Brinkman, William Volker and others have tried to take a regional business into a national goliath and, in the process, created dinosaurs.  Very simply, distributors are only as good as their suppliers and products.  Hot products = successful distributor, even if the distributor is mediocre.  Let their suppliers fall off and even the best distributor struggles to survive.  Distributors who expand into a new territory without their loyal supplier partners and either they starve, not able to cover the additional overhead, or they take on other products and become competitors to their dependant suppliers.

  There not only is a place for independent distributors, but those still standing are needed more than ever.  Does that mean they can not grow geographically?  Not at all.  It just means that the growth needs to come at the pace their major suppliers support and facilitate.  Can they sit back and bask in their survival?  Absolutely not.  Every supplier is willing to look at alternatives to independent distribution.  The pressure is on and only those who do the job more effectively and efficiently than the alternatives have a right to exist.

Domotex ended on January 17 and marked another outstanding International Fair.  Traffic was reported up slightly from last year although there seemed to be fewer American than in previous years.  This may have been caused by the US economy or weakness of the dollar.  Underscoring that the show is international, German attendance has dropped to 30% while the rest of the world represented the remaining 70%.

American exhibitors reported mixed results.  The NWFA (National Wood Flooring Association) and the American Hardwood Export Council sponsored an area in Hall 7 that was shared by a range of vendors including Mullican and Arbor Craft, the recently purchased Tarkett Wood division.  In Hall 5, another area featured a group of American vendors that was supported by the Georgia Department of Economic Development and the American Floorcovering Alliance.  Long time exhibitors Beaulieu of America, Milliken, Invista, Mohawk and Unilin had large stand alone booths and reported good sales during the show.  The largest orders came from Eastern Europe and Russia while the markets in the Middle East, Asia and Europe remain stronger than the USA.  Home Depot, CCA Global, the Bravo Group, PS America, Swiff Train and Torlys buyers actively worked the show but there appeared to be fewer American distributors and large retailers than in previous years.  While the weak dollar worked in favor of US manufacturers who wanted to export, American buyers found that the exchange rate had priced some foreign products out of the market.

As always, new innovations, concepts and products were shown openly and “privately in the back rooms”  of many show spaces.  Interesting new laminate products included direct print technology where designs are printed directly onto the core board eliminating the need for large inventories of décor paper and balance backer paper.  Also a laminate base on which a thin layer of real slate is adhered.  Unilin introduced an innovative and unique three strip product in which the individual slats can be moved to give the authentic look of a strip wood floor; it also has an attached back.  They also had an interesting new laminate wall base that allows one sku to be used in multiple configurations from quarter round to full height wall base.

Trends in wood and laminate continue toward wider and longer, full face as opposed to 3-strip and 2-strip.  Click joints in new wood products are being licensed by Unilin, Välinge and Classen with agreements between the three not to sue each other over joint intellectual property rights.  Two Chinese stands showing unlicensed glueless products were closed shortly after the opening of the show which, with a little less fanfare, was deja vu from last year’s closing of Faus by Unilin.  Several companies (Classen, Kronotex, Allsun and Witex) followed Armstrong’s lead and introduced high gloss wood and laminate products although they employed several different technologies to achieve the look.  The most wear resistance any carried was AC3 while Armstrong's technology qualifies their product for an AC4 rating.

Contract World, a commercial area focused on innovative, high end, design and color trends, continues to grow.  An interesting opportunity for designers and architects from the US to view international trends in floor covering.  The fair expressed an interest in growing this area with the addition of more North American commercial manufacturers that are interested in increasing their export business.

I continue to urge anyone involved in the floor covering industry who has not attended one of these international shows to do so.  They give an expanded perspective of the global market and the products which really does affect business in the USA.

A weak dollar combined with rising energy costs and a soft builder market has created a unique dynamic significantly impacting our floor covering industry. For over a decade, flooring has been sourced globally but recently the tables have turned. Some foreign products are less competitively priced than one year ago and more flooring is being made domestically in the US. At the same time, US manufacturers who had been focused exclusively on the North American market are looking for new opportunities abroad to fill their capacity and replace lost business due to weak housing. Change is constant.

What is the solution? Stay aware of what is happening globally to understand how it impacts your domestic business. Retailers, wholesalers and manufacturers need to keep abreast of product innovations and consumer trends to forecast how they will need to change their businesses. This means more than listening to the local supplier representative or reading an occasional trade paper; this means becoming a student of the industry.

Thankfully, we have international shows that expose us to manufacturers from around the world. Domotex Germany (January 12), Surfaces (January 29) and Domotex Asia / China Floor (March 11) are excellent starting places. Take advantage of these great opportunities. Maybe you will be the first to discover the next Pergo or Durastone or hand-scraped wood.

“In the absence of information, a consumer will buy based on price since that is the only differentiator she knows. “