By Louis Iannaco
After enjoying strong growth the last several years continuing through much of 2006, the hardwood category has taken a downturn in recent months. Executives who spoke to FCNews for this annual hardwood flooring report saw 2006 closing at about a 3% increase over last year for various reasons, the main one of which was the second-half slowdown in the housing market.

While the market was relatively stable over the first three quarters of the year, noted Frank Ready, president and CEO of Armstrong Floor Products, North Amercia, “we have seen a noticeable decline in buyer activity, particularly in the new home construction segment. There are a few bright spots out there, however.

“We continue to see commercial activity keeping pace with last year and strength at retail in some areas of the country, “ he added. In addition, engineered products seem to be outpacing solid product sales again, continuing a trend that we have seen over the past several years.

“The first half of 2006 was outstanding both in solids and engineered,” Ready explained. “The second half has been much tougher given the slowdown of new construction. Overall, though, we feel good about our performance relative to the competition.”

As Armstrong is responsible for approximately half of the hardwood sales for the industry, there’s no doubt its numbers mean quite a lot to the segment as a whole. Mannington’s Kim Holm, who believes the New Jersey-based manufacturer will finish the year with an increase of about 5%, said Armstrong plays such a large role in the business, the way it has fared in recent months means overall hardwood sales will wind up being lower than had been anticipated earlier in the year.

“Earlier I would’ve said the segment would finish with better than a 6% increase, but business has slowed dramatically over the last two to three months, primarily driven by the slow housing market. Armstrong represents almost half the business, and if half the business shows a 3% increase through three quarters, I would say [the final overall numbers] would be closer to 2% to 3%.”

Don Finkell, president and CEO of Anderson Hardwood Floors, concurred with Ready and Holm. “We anticipated a 20% increase in 2006 over 2005 and the first quarter started off that way, but orders softened dramatically over the summer and we will finish the year about even with 2005. The housing bubble burst in areas where home prices had gone up the most over the last few years, so the decline in sales was really a decline in prices which caused new home construction to slow dramatically along the coasts. Fortunately, remodeling has stayed strong and our business is benefiting from increased activity in this particular area.”

David Wilkerson, Shaw’s vice president of marketing, hard surfaces division, said, “We’ve been most fortunate this year as our hardwood growth has been very strong. In fact, it’s the fastest growing part of our hard surface business.”

For BR-111, times are good as its exotic lines continue to do very well. “As a manufacturer specializing in exotic species,” said Jason Strong, vice president of sales, “BR-111’s growth continues to substantially outpace the overall hardwood category. For the year, our sales have been up in the 40% to 45% range, with no slow down currently on the horizon.

“The overall hardwood category continues to introduce interesting products, ranging from wide plank flooring, thinner solids, and hand-scraped offerings, to a variety of engineered products,” he added. “BR-111 products have largely paralleled recent industry trends, while offering these options in a wide range of exotic species.”

Wood flooring producers faced a myriad of challenges in 2006, including raw material shortages, import companies going directly to the retailer and, of course, the second half housing downturn. “Shipment delays on imported products which were primarily caused by raw material shortages was one major challenge,” said Wilkerson. “We dealt with this situation by finding alternative supply sources to supplement our needs, but this is a very time consuming process.”

Holm said one challenge was the slowing market conditions and, especially in the wood category, the builder business. “Wood’s share of the business is generally considered to be at least 50%, which is builder business. That has been a huge challenge for us. We’ve tried to deal with it by adding new products to our product line that have met the new needs, whether it be from a styling or a price standpoint for both builders and contractors who service the market.

“Another challenge we faced is what I call ‘direct import disruption,’ meaning many of the import companies are going directly to the retailer or contractor,” he explained. “I call it a disruption because it’s creating a lot of confusion in the market. I don’t believe, in the long term, long term it is going to sustain itself but in the meantime it is causing a lot of disruption. To meet that challenge we’ve just, quite frankly, tried to stay the course with our own products and programs. We’ve begun to offer services like direct shipment from our factory to retailers and contractors so they can [be prepared] in the more competitive environment.”

Ready noted, 2006 was a busy year for Armstrong. “We completed and integrated the acquisitions of Capella and HomerWood. Capella provides additional capacity as well as the differentiated 3/4-in. engineered product. HomerWood provides Armstrong access to the premium segment with character-grade solid products. In addition, as part of a joint venture in China, we’re currently building an engineered facility outside Shanghai. We continued our aggressive product strategy in terms of expansion of an assortment of species/colors. While challenging to the organization, it will position us for continued growth in hardwood in the years ahead.

“The other obvious challenge was the market fall-off in the second half,” he added. “The drop-off was quicker and more dramatic than anticipated. Having said that, we feel we are well positioned to do well in a down market. Our investment in products and displays, combined with our acquisitions, allows us to outperform the market. On the cost side, we’ve focused on productivity improvements that will also help us through during tough business environment.”

Strong agreed with Ready on the housing slowdown as he noted, unexpected or not, the economy has slowed and with it housing starts are also down. “As a result, competition for a shrinking builder market will heat up. Anticipating the slow-down, BR-111 is concentrating its efforts on the architectural and interior design community through continuing education classes (CEU) that are targeted at AIA and ASID membership, for example.”

In discussing unanticipated hits on the category, Ready noted, market conditions were tougher in the second half, particularly in new home construction. “That being said, we continued our strategy with aggressive new product launches and display placements.

“The ongoing challenge for the industry is the continued commoditizing of the hardwood category, he explained.” “The consumer is willing to pay a premium for a differentiated product. A focus on selling 2-1/4-in. strip is not a winning strategy for anyone long term. Our aggressive new product strategy has been geared toward mix improvement and providing the retailers with value-add products that they can profitably sell to their customers.”

Regarding the direction products are going, Holm uses the terms diversification or variety. “Everybody is going after different looks and the consumers are accepting them. Under that umbrella, texture is certainly huge, along with handscraped and rustics. Even smooth is now becoming a new texture with some of the exotics. Right now, as the species are coming in faster and faster, you not only just take it in, but try to determine the best texture to put on that species.

“In some cases,” he noted, “it’s the smooth finish with a variety of glosses. In other cases, handscraped or rustics is best. I’d say texture is a huge trend in hardwood the last couple of years that will continue and, certainly wider from a size standpoint, is becoming more prominent as 5-in. is becoming more the standard today. Some are even venturing into the 7-in. category as well.

“I’d say right now the term exotics would be in front of the term handscraped or rustics,” Holm critiqued. “Rustics were two generations ago, handscraped was one generation ago, exotics is the current trend but again, the finish on those exotics is becoming a big factor.”

Ready stated, exotic species such as Brazilian Cherry, Santos Mahogany and Kempas are very popular today among consumers. They’re seen as unique and are adding international flair to a home. There is a movement from South American species (e.g. Brazilian Cherry) into species from Africa, India and Asia-Pacific regions. Additionally, consumers continue to look for specialty visuals in wood floors. A key industry trend is the continued growth of engineered versus solid.

“Armstrong is well positioned to address these trends,” he added. “For example, new SKUs in Armstrong Hardwood’s Valenz collection, including Tigerwood, Tauari and Pangali Ironwood, are sure to generate additional consumer interest, as well as increased sales for retailers. Many retail customers already describe Valenza as ‘one of the best quality exotic products in the wood flooring industry.’”

Imports from China have played an increasingly large part in the domestic hardwood business during the last few years. But several executives noted, due to new tariff and tax laws, the Asian influence may start to go in another direction. As Finkell stated, “we’ve seen more competition from China this year but that seems to be lessening as prices there have gone up due to currency revaluation and changes in tax rebates in China.

“I believe China will be less a factor in the future because of these issues and the general difficulty in dealing with people so far away who really have a very different culture and way of doing business. As money tightens up it will be less attractive to have so much money tied up on the water and in inventory whose sale is uncertain.”

Holm agreed with Finkell, as he surmised, the Asians and, in particular, the Chinese have really strengthened themselves in the market in 2006. “I don’t believe they’ve peaked out but I believe they’re close to peaking out, meaning I believe in the future things will start going the other way. Recently, there has been some changes in the Chinese duty, tariff and tax laws that go against the profitability of exporting wood out of China, so I think they will begin to lose some steam.

“I’ve heard some dialogue recently about some products that are no longer going to be available because of the changes in the taxes and tariffs. I believe long term, over the next few years, that domestic capabilities will win out.”

Wilkerson said the Asian influence appears to be getting stronger in the engineered categories. In solid, however, “demand seems to have stabilized and prices are trending up because of the duties being increased on exported solid hardwood products.”

In summing up the current state of the industry, he noted, it’s very competitive and “especially price sensitive in the entry level categories. The upcoming year will be a challenging year as the industry deals with a slower housing market and potentially sluggish retail conditions. Some of the keys to success will involve expense control, reliable service and mix improvement.”