Last year was a case of déjà vu all over again for the U.S. hardwood flooring market. Ongoing competition from competing “wood-look” segments such as SPC/WPC in resilient and, to a lesser extent, laminate, further nipped market share from genuine hardwood flooring. To make matters worse, diminished activity in the new home construction market—a key end-use sector for hardwood flooring—negatively impacted category sales in 2023.
When the smoke cleared, hardwood flooring emerged at $2.05 billion at the first point of distribution—a 15% decrease in sales—with volume tumbling 17.3% to 757 million square feet, FCNews research shows. That’s the second consecutive year in which volume fell by double digits. By comparison, in 2022, hardwood volume dropped 11.2% to 915 million square feet while sales fell 9.8%.
Naturally, hardwood saw its share of hard surface dollars decrease to 13.4% in 2023, with volume representing 7.7% of hard surface square footage sold. This is down from 16% and 10%, respectively, compared to five years ago. Looking further back to 2013, hardwood flooring represented 9.8% and 4.2% of total industry sales and volume, respectively, but 18.4% and 11.5% of hard surface sales and volume, respectively.
With the softness seen in residential building in the U.S. in 2023, wood’s share remained flat at 19.8% of new home construction. Likewise, as consumers opted for less expensive hard surface options in their remodeling projects, the category’s share of residential replacement sales fell several percentage points to 65.4% of the market—down from nearly 68% in 2022.
The impact of slower activity on the builder side of the business in 2023 is even more pronounced when looking at sales by end use just five years ago. Back in 2018, the new home construction sector represented 33.5% of category sales compared to just under 20% last year. The solid hardwood segment of the business in particular felt the impact more acutely compared to engineered, given diminished new home construction in the territories that typically show a preference for solid wood. “That’s kind of logical because you’re not building a lot of homes anymore in the Northeast and Midwest, which is where the solid wood is sold,” said Brian Carson, president and CEO of AHF Products. One bright spot, though, is the residential replacement sector, which accounted for 66% of category sales. Back in 2018, that number was roughly 58%.
The shift in hardwood’s percentage as it pertains to commercial consumption was not as pronounced over a five-year timespan. In 2018, for instance, specified commercial contract accounted for roughly 10% of hardwood activity; last year that number was approximately 11.6%.
The silver lining in all this, though, is the fact that hardwood still managed to maintain its historically high profit margins—particularly on wide/long plank engineered products. FCNews research showed the average wholesale price of hardwood flooring rose to $2.70 per square foot—the highest price in a decade. “Solid wood largely held its pricing because lumber was going up throughout last year, while some of the freight costs associated with imported engineered came down,” Carson noted.
Sales by channel
The well-documented decrease in sales generated by the nation’s largest home centers—Home Depot and Lowe’s—also impacted hardwood sales opportunities in 2023. Home centers’ share of the total hardwood pie fell slightly to 35% versus 39% the year prior, FCNews research shows. Five years ago, the major big boxes accounted for approximately 33% of hardwood flooring revenues. The good news, for specialty floor covering retailers, anyway, is the portion of hardwood flooring sales attributed to the specialty retailer segment inched up slightly to 40%. Five years ago, that percentage was 34%.
Sales by construction
The proliferation of the engineered segment of the hardwood market continued apace in 2023. FCNews research showed the segment grew its share of the market from 68% in 2022 to 70% last year. That’s primarily because the ratio of engineered hardwood going into the new home construction sector is higher than its solid counterpart. As AHF’s Carson explained: “If you look at the percentage of wood that’s going into new home construction right now, it would be in the 20%, 25% range—and it’s higher for engineered than it is for solid. That’s one of the reasons why engineered volume is holding up because the builder market is holding up better than the remodel market.”
Within the engineered segment of hardwood is the hybrid category—a real hardwood veneer bonded to a rigid core versus a traditional plywood core. In years past, suppliers have estimated this subsegment of the wood flooring industry accounts for anywhere from 3%-5% of overall wood sales. Executives estimate this segment of the business took a bit of a hit last year—not because it’s less desirable than traditional wood products, but rather because it’s so heavy. And that makes it more expensive to ship. “The wood-veneer-on vinyl probably went down a little last year, mainly due to freight,” Carson stated. (AHF Products’ Raintree and Hydropel brands are built on this platform.) “Last year freight was about 22 grand a can; it’s just so much heavier than a foot of regular engineered. That adds about $1 per square foot on freight. As a result, the value proposition got out of whack with the wood on vinyl products. I think it can move back up again now that the freight normalized, but that will be this year’s news.”
Import picture
Changing supply chain dynamics, geopolitical issues and even large-scale reshoring initiatives impacted the way hardwood flooring was sourced in 2023. Standing tariffs on Chinese imports in recent years coupled with the sourcing challenges created by Russia’s invasion of Ukraine shifting market dynamics. For instance, those domestic hardwood flooring suppliers who previously relied heavily on finished Chinese products looked for alternatives across Southeast Asia. At the same time, shortages of Baltic birch from Russia and the Ukraine forced suppliers to explore different core materials for many of their engineered products.
These dynamics caused a dramatic shift in the ratio of hardwood flooring products imported into the U.S. For instance, five years ago, shipments from China accounted for nearly 60% of all hardwood flooring sold in the U.S. at the first point of sale. In 2022 that number plummeted to 26% before dropping 2 more percentage points in 2023. Meanwhile, hardwood imports from Southeast Asia (i.e., Vietnam, Cambodia, Thailand, Malaysia, etc.) ballooned from roughly 9% in 2018 to 43% in 2022 and 47% in 2023. “We definitely saw hardwood production rise in Southeast Asia—a region that has been the beneficiary of the decline in hardwood production from China,” said Milton Goodwin, vice president, AHF Products. “I saw a data point that said China’s hardwood production has gone down 5% or 6% over last year.”
Shift in product mix
The growing popularity of European white oak as well as domestic red oak and hickory was reflected in the shifting product mix seen in 2023. FCNews research found that hickory—a species regarded for its durability and unique aesthetic attributes—grew its share of the market to 10%, up from 8% in 2022; in 2018 it was less than 6%. White oak reigned supreme, representing nearly half the business while domestic red oak—a species suppliers have been modifying to take on the appearance of white oak—saw its share increase from roughly 30% of the market in 2022 to 36% last year. Meanwhile, maple’s share of the domestic hardwood market fell slightly to roughly 6%.
Exotics—or imported “tropical” species—by most accounts represented less than 5% of the domestic hardwood business, according to FCNews research. But that’s not due to lack of availability and/or end-user interest, suppliers say. “When I talk to retailers, some them tell us, ‘Hey, we don’t sell exotics anymore,’” said Murilo Granemann, president and CEO of Triangulo, a vertically integrated hardwood flooring supplier based in Brazil. “But of course you’re not going to sell exotics if you are not showing exotics. So it begins with re-educating retailers on how they can benefit.”
Part of that “re-education” process, according to Granemann, hinges on dispelling misperceptions about the category—the mistaken belief that exotic species are not available in the colors today’s consumers demand. “When you talk about exotics, the first thing that comes to mind are those red, dark red colors,” he explained. “However, over the past five years, that has changed a lot. For example, we offer a Brazilian oak species [tauri] that can compete head-to-head with white oak but it’s a much cleaner look. Our retail customers who get their hands on that product are doing great with it.”
Other brands specializing in unique, imported exotic species report similar findings when it comes to getting at the root cause of why some retailers and distributors have not full embraced the category. The most common mistake RSAs make, experts say, is taking the same sales approach with exotics as they do with domestic species.
“You can’t be comparing exotics with domestic species or even European oaks—we are talking about two different animals here,” said Pedro Tavares, president of Ribadao Wood Boutique, a Portugal-based wood flooring manufacturer that gleans products from around the globe. “Exotics are very different, unique. With many of the domestic species you can stain them in white gray, etc. But the colors that come naturally with exotics are not easy to replicate. Plus, many exotic species are much harder than domestic woods, making them much more durable.”
Proof that exotics are growing in popularity are evident in not only the number of specialty suppliers showing at industry conferences such as NWFA and Surfaces, but also in sales to U.S. accounts. Triangulo’s Granemann, for instance, said sales of Brazilian oak floors now represent more than 30% of company sales—that’s up from zero just five years ago.
Ultimately, exotic hardwood flooring might not elevate to the status of “mainstream” despite their growing appeal. In fact, it might not ever grow to 25% or 30% of the market, observers say. But that’s not the long-term objective. “We definitely think interest in exotics is coming back up,” Granemann said. “The major suppliers, including ourselves and others, are doing our part to promote the category. It’s definitely coming back.”
Outlook for remainder of 2024
Heading into 2024, hardwood industry executives were rightly concerned about high interest rates and the subsequent impact on new home construction, a bellwether sector for the wood flooring industry. Three-and-half months into the new year—with still no movement by the Fed in either direction on interest rates—the prognosis largely remains the same. The current view is one best defined by cautious optimism that the market will stabilize until such time that lower interest rates kick in and give a slumbering housing market a much-needed wake-up slap.
“High interest rates and high home pricing is serving as a bit of a wet blanket on the overall
housing market—both new construction and existing home turn- over,” said Dan Natkin, CEO of Essex Finishing, based in Avenel, N.J. “We are also seeing some trade down as builders look to control costs as well as smaller home sizing, thereby limiting total floor area for hardwood flooring. Consumers with low interest rate mortgages are generally stuck in their homes, leading to low home turnover. In the long run we believe this will spark increased remodel demand, but as of right now we are not seeing it.”
For some hardwood flooring industry executives, it’s a “good news/bad news” situation. “Quite frankly, I thought we would be looking at our first interest rate lowering in the April timeframe, but that clearly didn’t happen— that’s the bad news,” AHF Products’ Carson said.
The “good” news, he said, is the Fed is likely to enact a rate cut prior to the end of the year, which will jump start new building. “The builder business for AHF Products is strong, we can see it in the home sales,” he explained. “And I think it’s strong in part because of the lack of availability of existing homes, so people are building new. That’s a bright spot for the hardwood business, as we all know there’s a fair amount of wood used in new construction.”
Kyle McAllister, director of hardwood, Shaw, said he is seeing new home starts begin to pick up again, following a slow start to the new year. Like many industry observers, he expects the wood flooring segment will ultimately benefit in the back half of the year depending on typical movements seen in housing cycles. But, again, much depends on rates. “By this time of the year, we thought we’d see maybe stronger signals from the Fed that interest rates would start ticking down, but it looks like we’re going to have to wait a little bit longer on that,” he said. “Rates might go down a little bit, but I don’t think we’ll ever see that 2.9%, 2.8% rate of inflation anytime soon. If you have a mortgage at 3.25% and you’re looking to move, nobody wants to go from 3.25% to a 7%-7.5%.”
Regardless of how the overall market performs, McAllister said you’re going to continue to see upscale customers who are still willing to buy wood flooring—“which has always been the case,” he said.
It’s not only stubbornly high interest rates that stand to impact the hardwood market this year. Executives cite a number of other mitigating factors. “We are also in a very interesting election year, and we have also seen a large number of layoffs from major companies in Q1,” explained Sean Brennan, president, Kährs Americas. “This, coupled with high rates, will continue to prove to be a challenge for not only new home construction but the economy as a whole.”
While all this plays out, suppliers are waiting with anticipation of what’s to come. “We’re sitting on pins and needles,” Mohawk’s Moore stated. “The interest rate movement is going to be such a critical, important piece to unlocking what’s going on in builder. We’re all anticipating some positivity in Q3 and Q4 based on anticipated changes, but we really just have to see what the Fed is going to do. Even just a couple of percentage points down is really going to unlock the builder market.”
One of the main challenges facing hardwood in the builder market right now, according to Moore, is the fact that many builders are looking to take costs out of the equation. Problem is, hardwood is one of the more expensive options that can go into a new build. “In new home construction, especially single-family, it’s such a competitive landscape right now with the rates we’re seeing,” he explained. “That’s creating headwinds for hardwood, since it is one of the more premium and high average selling price per square foot products in the market. However, if the market unlocks and we start seeing a ton of building and new construction, that’s obviously going to carry engineered hardwood with it and create more of a tailwind.”
That’s precisely what many suppliers are banking on. For Paul Rezuke, vice president of sales, U.S., Wickham Hardwood, the outlook is still promising despite some uncertainty. In anticipation of an eventual upswing down the road, the company is planning accordingly so it might reap the benefits when the market rebounds. “We have aligned our products with some new customers,” he said.
Others, including David Lauzon Jr., director of sales, Lauzon Hardwood, are equally optimistic about the prospects of a projected turnaround. “The first part of the year was slower than we initially forecast, largely due to high interest rates,” he told FCNews. “However, since the end of February, we have observed some positive developments and increased activity across most of the USA. Our products, primarily installed in single-family residences, have experienced a more optimistic outlook in terms of new home starts compared to the multifamily sector. We are hopeful that a continued decrease in interest rates will further encourage growth in new home construction.”
For Mirage Hardwood, another major Canadian player with strong ties to the U.S. market, the mood is upbeat but measured. “We, like many others, anticipate that the current interest rate situation will not persist excessively, fostering increased market activity in Q3 and Q4,” said Jerome Goulet, director of marketing. “Looking further ahead, the market’s historical ebbs and flows remind us of the enduring nature of real estate, where patience inevitably yields results.”
Others are also playing the long game. “At Kährs, we are not slowing down,” Brennan noted. “We are continuing to invest in our sales teams, new products and ongoing innovation.”
By and large, the majority of hardwood executives are optimistic about the category’s prospects for the current year. They cite factors such as wood’s enduring appeal coupled with an overall trend that supports consumption of hard surface flooring. “From a channel perspective, it’s going to be the residential replacement segment that prevails,” Mohawk’s Moore added. “From a product perspective, it’s high-styled visuals but on more economical manufacturing platforms to try to capture a segment of the customer base that perhaps doesn’t have the budget for a super high-end engineered wood floor.”
A lot will depend, suppliers agree, on how the Fed handles interest rates by year’s end. “The market is not going to be our friend in 2024, but it’s important to remember that everything is cyclical,” AHF Products’ Carson said. “Interest rates will eventually come down; they might not fall to 3%, but they won’t be 8%.”
Ultimately, Carson is optimistic that wood’s fortunes will improve when all is said and done. “The unwinding of inventory that was going on in the imported engineered side of the business will continue, so I think you’re going to see a better story in wood this coming year. In 2023 we invested $30 million in our North American hardwood facilities, we’re adding people as fast as we can right now and today we have literally doubled capacity at the factory. Have heart—it’s going to get better.”
The post STATS 2024: Hardwood cedes share but holds profit margins appeared first on Floor Covering News.
STATS 2024: Hardwood cedes share but holds profit margins Posted First on https://fcnews.net
No comments:
Post a Comment