New Orleans—Disruptions to supply chains and the impact on product mix. Ongoing challenges in recruiting, hiring and retention. Global conflicts with regional ramifications. And, of course, election-year jitters and the effect on the collective consumer psyche. These were just some of the hot-button topics discussed at the North American Association of Floor Covering Distributors and North American Building Material Distribution Association (NAFCD+NBMDA) show held here in October.
During the convention, FCNews caught up with several NAFCD executive board members and directors to get their take on some of these pressing issues as well as the overall state of the floor covering distribution industry.
Participants in the panel discussion included: Brian Green, incoming NAFCD president and chief sales and marketing officer for UCX; Dori Blitzstein, vice president of Roesel-Heck and immediate-past NAFCD president; AJ Warne, vice president of sales and marketing of Abraham Linc and past NAFCD president; Austin Starnes, VP of product at BPI and NAFCD vice president; and Drew Mittelstaedt, president of Hallmark Floors and NAFCD supplier director. Reginald Tucker, FCNews executive editor, served as moderator.
Following are excerpts of that discussion.
Let’s start off with some news that happened a few months ago—the longshoreman strike, which lasted only a few days but impacted several major ports around the country. I feel we may have dodged a bullet there, but I know there are still some unresolved issues, particularly around the subject of automation. Are we out of the woods on that?
AJ Warne: Realistically, I think we’ve dodged the first wave of a boomerang, not a bullet. In my role at Abraham Linc I’m involved in the procurement of ocean freight. It’s one of my core competencies and primary responsibilities being in charge of all of our import products and talking to the ocean freight forwarders and the people who work for ports and drayage companies. They absolutely believe we’ll see another work stoppage by mid-January. It doesn’t seem like we’ve resolved anything; we’ve just pushed off the time when we’re dealing with it.
Obviously, the threat of automation is a big issue. I see it more as a defensive measure in the contracts to make sure that they’re getting the pay increase that they’re looking for. Those guys are negotiating against some of the world’s largest companies and almost exclusively non-American companies in these negotiations. I’ve read that the largest U.S. steamship line is the 28th largest and they hold less than 1% of the market share. So they’re negotiating against these foreign companies and their real wages have gone down since their last contract negotiation. I really feel like the story’s not out there of what those people are saying and what their perspective is on this. All we hear is, “Oh, it’s all about anti-automation,” and those types of things are really common in labor negotiations.
My biggest fear is the government can use the [Sherman Act] to force them back to work for 80 days. But that’s likely to be 80 days of decreased productivity. I think that’s the biggest risk facing our supply chain here in the flooring industry. And the unfortunate thing is that with the deadline looming this month, we’re already out of time to prepare for it.
Brian Green: It was basically a week of interruption, but we had prepared for a period of eight to 10 weeks of not being able to efficiently get products through the port if it lasted longer. Obviously it was shorter than that. Since COVID-19, we looked at making inventory adjustments on imports through onshore opportunities. So we’ve got an import option and then we’ve got a domestic option. In case one of them gets interrupted, we’ve got consistent supply chain for our customers. But I do agree with AJ; I don’t think we’re out of the woods on this topic by any means.
Dori Blitzstein: We rely a lot on our manufacturer partners. When the port strike began, we sat back and waited to see how it was going to play out, and it played out a lot quicker than we thought. I think we’ve all learned from COVID-19, and we remember when the supply chain slowed and we experienced interruptions. We learned to get those containers out, ordered and on the water as quickly as possible. You always need to be planning ahead with multiple containers coming in. I think a lot of us didn’t expect that time would come when our material would not arrive for six or seven months. Now I think we’re all working a little bit more pro-actively to make sure that we’re prepared for the storm.
Drew Mittelestaedt: As a manufacturer, we’re already in the queue for production, so we don’t have the luxury of a stop and start. We’ve procured logs months in advance. We can’t really pivot. We can pick what port we ship to, but our stuff is on the water. The shipments are scheduled. We were delighted how quickly things were resolved; we didn’t really feel an interruption.
However, like AJ commented, I think there’s a storm brewing and it’s going to be further exasperated by the problems that we had with the weather in the Southeast. I’ve seen estimates that there’s $30 billion worth of damage in the region. Material supply is going to be tough this year—the second quarter for sure.
Dori, in your market specifically, and I think some other distributors in the room as well who service the Baltimore, Mid-Atlantic region, there were also disruptions caused by the Francis Scott Key bridge collapse back in March. Obviously, there were lives lost there—and that’s unfortunate. The accident also resulted in a setback in terms of disruption of business and commerce in the area. How did you weather that storm? What kind of adjustments did you have to make?
Blitzstein: For us, we happened to have been in a good position, stock-wise, at that time, so we knew that there were other alternatives. We started asking a lot of questions such as: Where can our containers go? Can we redirect them? We knew that it was going to cost us more freight inbound, and so we started thinking about alternatives. But they opened a lane rather quickly. We didn’t have anything coming in at the time, so we weren’t directly affected. That was just luck—we were in a good position. The experience for others may have been different because they probably had product on the water at that time.
Warne: Our biggest impact was related to traffic for our employees who live in the Baltimore region as well as our delivery drivers who needed to use the Key Bridge in order to make deliveries.
There was basically no freight that was detained for very long as a result of this because everything that was on the port side of the bridge—even shipments destined for future ports like Norfolk, Wilmington or Savannah—was able to be unloaded because of the ports there. Anything that had not made it to the port side of the bridge was able to just be deferred to Norfolk or on up around to New York or somewhere else.
So there wasn’t really any impact for our supply chain, except for the added cost of trucking the stuff further. We service three warehouses out of the Port of Baltimore, and they are all farther away from the Port of Norfolk or the Port of New York than they are from the Port of Baltimore. So there was increased costs related to that, but it wasn’t anything that affected our supply chain.
Starnes: If nothing else, through the supply chain issues we’ve had over the last few years, our internal team has learned to be more prepared. We’ve diversified our product mix and we have on-sourced as many products as we can to avoid any issues. But I do think the challenges continue to make us better as an industry—even though we can’t control what we can’t control.
During the ITR Economics presentation, Lauren Saidel-Baker suggested that nationalism might serve as a buffer, if you will, to alleviate some of these supply chain issues. Are you finding, post COVID-19, that you are more or less dependent on imported product?
Green: When you talk about nationalism, everything sounds fantastic. Do you remember the “green” story where the emphasis was on all these LEED buildings? It was great until somebody had to pay for it. The unfortunate aspect of production is there’s a point where container costs start to offset. Once you get to a certain point, the bridge and the delta between what that domestic product is, if you’re not at that point of, say, $7,500, $10,000 a can, and then it compresses back to call it $2,500 or three grand a can, the domestic alternative usually is no longer competitively priced.
Here’s the challenge for us: We want to support that as much as possible and we have options, but unfortunately it’s really hard for the domestic manufacturers to fight against the imports. I think everybody loves the idea of nationalism, and they see the flag and get really excited. But when it’s time to spend, consumers are going to put in 2,000 feet of whatever it is—and if it’s going to cost them 30% more for a domestic product, they’re probably going to go the other route.
Starnes: At BPI, if you go back and look at where we were 10 years ago versus where we are today, we’re in a healthier mix position when you look at our overall offering. Ten years ago, we were over 50% of imported supply and now 65% of products are domestically sourced. So we have figured out ways to onshore more of our products, and that has definitely helped.
In her presentation, the ITR economist also alluded to the tight labor market situation. I think it was a few years ago, during this roundtable, some of you had shared valuable tips in terms of what you’re doing to retain/hire workers—be they salespeople or truck drivers. Has that situation improved? Or is finding/recruiting/retaining workers still a big issue for you?
Blitzstein: I would say that it’s just kind of shifted, at least within my company. I’m not having as much difficulty finding the truckers or warehouse help, but we are challenged in terms of getting talent in sales and in specifications. In other words, we’re not having trouble getting people but the right people, and the people who bring the right kind of talent and maintaining them in the company. That’s been a challenge that we haven’t had for many years. I think that’s the case with any company where you have people in positions for many years but are now aging out and reaching retirement age at the same time. Now you have to go back out in this labor market where the millennials have their choice of where they want to go and the wages are going up. When you add everything into the mix along with the competitive landscape, the soft market, and the fact that wages are increasing.
Are you doing more poaching?
Blitzstein: As a rule, we don’t poach. That’s not something that I like to do because I know it doesn’t feel good when it’s done to you. But we have been looking outside the flooring industry. We tend to see people move around a lot, so we’ve just made a conscious effort to look outside and do our own training and try to bring new perspectives to the company. The industry is evolving, and we need fresh blood and new energy.
Any others dealing with labor challenges? Be it on the sales side or the logistics side?
Green: The labor market is still challenged, but it’s nothing like it was for us three or four years ago. When we talked about this issue last time, we were just trying to compete with other industries—especially warehousing and trucking. We have a lot of warehouse facilities that are very close to Amazon’s on the East Coast, so that’s one very challenged environment to try to compete against. If you go back in time, the incentives that were being offered to employees to make a change has died down.
Just looking at the general employment pool, the days of the 25-, 30-year employee in one organization are over. It’s a little different dealing with today’s employee; it used to be if you see somebody who changes jobs every two or three years, it’s a big alarm going off. It’s not very uncommon for the generation to move around a lot just because they like to try new things. So as an employer you do what you can to empower them and keep them in the organization and show them a path for development and hopefully keep them invested in the organization.
Warne: Our perspective at Abraham Linc is that you either have to invest in employer retention or in employee sourcing. You either have to spend the time making sure that you’re keeping employees engaged and happy in your organization or you’re going to have to spend time sourcing employees and finding new people to fill those roles. In our experience, it is a lot less expensive to focus on retention.
Another issue that we focus on is succession planning—not just in the ownership level of an organization, but succession planning in key roles as well. And that’s something that I find that we’re looking further and further out at because, like Brian was talking about with the emerging distribution leaders program, if you are not investing in training and getting experience to your future leaders today, when something happens (medical retirement or something that happens unexpectedly), you will be found with people who are inexperienced that you have to thrust into positions of great import for your organization. We try really hard to make sure that we’ve got people stacked up and ready to answer the call when that happens. It’s expensive, but it is less expensive than the errors that come from having somebody in a position who is not prepared to do it.
Blitzstein: One of the economist’s last slides talked about running lean and mean, making sure that you’re putting your money in the right place and being cautious about that. Exactly what you were saying, AJ.
A few months ago Transom purchased Tom Duffy Co. This latest acquisition further illustrates the interest that private equity has in the flooring distribution business. All of us at the table here know why you’re in distribution. But what about PE? 1) Why do you believe this segment of the industry—which is known for its slim margins—is so attractive for private equity? 2) Is this a sustainable model moving forward? 3) Where does that leave the independent flooring distributor?
Green: We’ve been involved in a lot of consolidation over the last 10–15 years. Just looking at UCX, it’s really about 12 to 14 companies when you go back 20 years ago. We are a privately held, family-owned organization, so we see others that are rolling up companies on the private-equity side. To PE, I think there’s an immediate attraction. When they look at the multiples in the EBITDA, it’s simple math. On paper they say, “Alright, let’s take these organizations, we’ll synergize the back office and then we can take this much cost out of it. We’ll hold it for three years and then we flip it, right?” What they really underestimate, though—and you can ask any- one who’s had to do that with multiple companies—is merging the cultures and keeping the key folks who understand floor covering.
Floor covering is a very interesting business. I’ve seen it from our perspective when we had leadership come into an organization that doesn’t understand it, and so you have a lot of challenges. From the periphery it is very attractive, but I think we’ve also seen where it hasn’t been successful, unfortunately, with some companies that have really struggled as they rolled up companies and now they’re saying, “What do we do?” And that’s because they’re probably not getting anywhere near the earnings that they expected and then they’re holding an asset longer than they normally would and are now looking for an exit plan.
You’re going to see a lot more of it unfortunately—or fortunately, depending on which side of that you’re on. With private equity, it’ll be interesting to see, how long and how patient they are with their money in this business. Because as we all know around this table, it’s hard on the profitability side; it’s a grind in distribution.
Blitzstein: I guess I’ll speak for the independent distributor. With consolidation going on around us, that means the midsize independents must work harder. The margins are tighter and the larger, more consolidated, acquired businesses tighten their margins at a quicker pace than the independent distributors who have to make sure that they are standing out and doing things in a different way to be able to sell themselves and to prove that they have just as much to offer. It challenges us to step up.
Starnes: BPI is an ESOP company, and being employee owned we have a little bit different strategy than private equity. We’re looking for ways internally and through our own footprint to figure out how to strengthen the business. We’re adding more warehousing and more locations to better service to the customers. It’s about being dependable. We see it as an opportunity for us to continue to grow and strengthen. Distribution plays an extremely important role in the flooring industry, and the stronger we all are together, the better the state of distribution is going to be.
It sounds like there’s an opportunity to coexist, even though certainly we’ll likely see consolidation continue.
Blitzstein: I really hope that we can all coexist. And honestly, just sitting at this table and having counterparts who are also running businesses in the same area, I think it speaks a lot about NAFCD and how membership allows us to get to know each other and be able to call on each other. And while we are competing pretty hard—and sometimes on the same products—at the end of the day we’re all trying to do the same thing. It helps to have the relationships where we can pick up the phone and call each other and ask, “How do you problem solve? Are you going through the same things that we’re going through?”
In the history of flooring and the generations before us, I do not believe that competitors had relationships like we have now. Back then competitors didn’t talk, they just competed. I think we have been able to change that dynamic, and I think that it’s been a good change and I think that it’s only going to make us all stronger. Whether we’re independent distributors, ESOPs or distributors who’ve gone through acquisitions and consolidations or even distributors who have changed their model of doing business, I think it’s a great way for us all to be able to work together and learn together by being at this table.
Warne: Capitalism is undefeated in terms of the ability to serve the market. And as PE changes the way that some distributors go to market, it will also spark opportunities for other distributors who bring a different value to the marketplace than what they do.
I don’t know the answer, but it would be interesting to know who are the PE-acquired distributors that in the past that have gone on to achieve great success. I would be interested in seeing the model of the history of the progression of when distributors are acquired by private equity. How has that gone and has it been something that the private equity firms have been happy with?
I do know that independent distribution is stronger today than it’s ever been. But it looks different than it’s ever been and it’s obviously changing. People are going to market in different ways, but I have a great amount of trust and optimism for distribution in the United States.
Green: From a position of NAFCD membership, I just want to make sure we’re very clear that we fully support a distributor regardless if they’re independent or owned by private equity. Regardless of what happens today, we know there’s going to be less distributors five to 10 years from now. It’s just simple math of consolidation.
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