With few exceptions, flooring distributors will close out 2024 on a down note as a confluence of events—inflation, high interest rates, international turmoil and presidential election jitters—combined to suppress business for many top wholesalers.
“It’s not overly complex,” Scott Rozmus, president and CEO of FlorStar Sales said of the current situation. “The higher interest rates have impacted business directly and indirectly. Housing is more expensive, which is creating headwinds for sales of floor covering. People are waiting on the sidelines for rates to come down, either so housing is actually affordable for them, or because they perceive that a better deal is on the horizon and have no need to accelerate such a large ticket purchase when rates are likely to come down within a year or less.”
Overall, inflation appears to have been successfully tamed. The current U.S. inflation rate is 2.5%, the lowest it has been since February 2021. Despite the positive direction, inflation has not come down as quickly as distributors would have preferred. As a result, it has squeezed consumers and negatively impacted larger discretionary purchases like flooring.
For perspective, inflation peaked at 9.1% in June 2022—a four-decade high—as the economy rebounded from the pandemic recession. More recent months have seen a cooling labor market, with hiring and wage increases slowing, and with the U.S. economy seemingly on a path toward a so-called “soft landing” whereby a recession is averted.
Housing challenges continue
Where the rubber meets the road for the flooring industry is housing. According to distributors, higher interest rates have not only slowed home sales but, more importantly, it has frozen existing home sales, which have had a substantial impact on replacement flooring sales.
Consider this: nearly 60% of current mortgages are below 4% and 22% of that 60 is below 3%, according to Redfin Investor Relations. Homeowners are handcuffed to their homes as they can’t afford to switch into a 6+% mortgage rate for a 30-year fixed loan. “While there is a record level of home equity from rising home prices, no one seems too interested in taking home equity loans for major remodeling projects,” said Jeff Striegel, president of Elias Wilf.
Here’s the breakdown of where homeowners fall on the mortgage-rate spectrum, as per Redfin.
- Below 6%: 85.7% of U.S. mortgaged homeowners have a rate below 6%, down from a record high of 92.8% in the second quarter of 2022.
- Below 5%: 76.1% have a rate below 5%. That’s down from a peak of 85.6% in the first quarter of 2022.
- Below 4%: 57.4% have a rate below 4%, also down from a record high (65.3%) hit in the first quarter of 2022.
- Below 3%: 22% have an interest rate below 3%, near the highest share on record. The highest was 24.7% in the first quarter of 2022.
Along with these lower rates, U.S. household wealth has risen In Q2 ’24, for example, it hit a record $163.8 trillion, driven by gains in real estate values as well as a rise in the stock market, data from the Federal Reserve showed.
Despite this unprecedented wealth, homeowners remain trapped, with Striegel calling it “a real quagmire. People don’t want to invest in their homes if they are going to move soon. So, we’re at a stalemate. As of now, I don’t see the impetus for meaningful change; it’s like Groundhog Day.”
Shipping woes
Adding to the uncertain business climate are shipping disruptions that have added to product delays and increased freight costs.
Attacks on ships in the Red Sea by Houthi militants have led to significant changes in global shipping routes, with traffic through the Suez Canal (the primary passage between Europe and Asia) down more than 40% at the beginning of 2024. Alternate routes require circumnavigating Africa, meaning increased delays and costs for companies with global supply chains, as 90% of international trade is transported by sea. Rerouting along the Cape of Good Hope adds over 3,000 nautical miles and at least 10 days of sailing time for any vessel, while also increasing exposure to storms and rough seas that are harder on smaller ships that usually stick to coastal waters. This has led to a spike in container prices.
“Over a three-month period, you are taking 25% of capacity out of shipping,” Striegel said. “Then there is the cost. A $2,000 container in January 2024 is now $10,000, up 400%. International turmoil is a factor; people are not numb to it.”
Then there is the matter of a presidential election, which is expected to be very close and has been extremely contentious. In times like these, consumers often delay or pull back on purchases well in advance, preferring to wait until the dust settles.
Consolidation, share gains
In a down market, about the only way to maintain or increase business is to take market share, expand into new territories or acquire other distributors.
Two wholesalers took advantage in 2024. Santa Fe Springs, Calif.-based Galleher jumped into the No. 2 position ($550 million) after joining forces with Virginia Tile through an acquisition spearheaded by Transom Capital Group, its private equity partner. Together Galleher with Virginia Tile creates a flooring and tile products distributor of national scale with unique product development, merchandising and fulfillment capabilities. Virginia Tile is the leading tile distributor in its core Midwest markets, with 19 showrooms across 12 states, offering tile and decorative surfaces products.
Meanwhile, Phoenix-based Big D Flooring Supplies moved up seven spots in the top 20 after acquiring Diamond W earlier this year. “In my 42 years at Big D we have never purchased another company; Diamond W is a perfect fit for us,” explained Steve Kleinhans, president of Big D. “Diamond W has a very experienced, product-knowledgeable team of employees that complements our equally wonderful team of employees. Both companies bring something different to the table. Diamond W specializes in finished floor products. Big D specializes in installation products. Together we will serve customers with all the products they need. Both companies carry the best products in the marketplace, and we will always provide the best service.”
In the past year Big D has added two new points of distribution to serve its customers—a 135,000-square-foot distribution center in Tracy, Calif., for Northern California customers; and a 100,000-square-foot distribution center in Garden Grove, Calif., for its Southern California customers.
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