U.S. WOOD FLOORING 2020 OUTLOOK: AN UNCERTAIN MARKET ENVIRONMENT

Wood flooring manufacturers and marketers face another challenging year in 2020. Some of the same factors causing wood flooring demand to decline during 2019 will continue into 2020. Manufacturers and marketers continue to see rising competition from waterproof rigid core luxury vinyl tile (LVT). Increased tariff charges on Chinese-made wood flooring is also putting pressure on prices.

These trends contributed to declining U.S. wood flooring sales (shipments minus exports plus imports) during 2019. However, green shoots are beginning to emerge. The most important trend has been the decline in interest rates. Lower interest rates have already given a boost to the U.S. housing market. Lumber costs are also declining, which could reduce pricing pressures and make wood flooring more price-competitive to other flooring products. In addition, wood flooring manufacturers have introduced more water-resistant products to compete with rigid core LVT.These positive trends, however, may not be enough to pull wood flooring sales out of their current funk. During 2019, wood flooring sales, in manufacturer dollars, could decline by 5.7 percent to $3.6 billion. Square foot sales could drop by 10 percent to 1.6 billion. Average selling prices are expected to increase by 4.6 percent. The increased tariffs on Chinese-made flooring could have accounted for about half of the price gain and the other half from the impact of rising lumber costs in 2018. The 2019 price increase was also double the rate for all floor coverings, which cut into the price-competitiveness of wood flooring.

Declining sales and increasing prices resulted in wood flooring losing considerable share of the U.S. floor coverings market. During 2019, wood flooring could decline to 12.9 percent of total U.S. floor coverings dollar sales, and 6.7 percent of total square foot sales. This is down from 17.2 percent in dollars and 8.9 percent in square feet in 2015. Wood flooring primarily lost share to rigid core LVT as LVT manufacturers introduced innovative W PC and SPS flooring with wood looks. During 2019, LVT sales could increase by 28 percent in dollars and 23.2 percent in square feet. These gains will push LVT’s share to 16.4 percent in dollars and 13.3 percent in square feet. This is up from a 5.5 percent to 6 percent share of total floor coverings dollar and square feet sales in 2015.

The share lost to LVT is especially steep in the residential replacement market. This is important since wood flooring has above-average dependence on this market. Residential replacement sales account for about 50 percent of total wood flooring sales. The heav y dependence on residential replacement sales hurt sales in 2019 since rising interest rates in 2018 resulted in a decline in existing home sales. Existing home sales are the primary driver of residential replacement sales.

However, the drop in interest rates during 2019 is laying the groundwork for a housing recovery in the second half of 2019 and into 2020. Current interest rates are down to 3.75 percentfrom about 5 percent a year earlier. Interest rates could decline further due to the Federal Reserve rate cut in October. So far, the decline in interest rates during 2019 resulted in a 2.8 percent increase in existing home sales by the third quarter of the year. This compares to a 3.8 percent decline in existing home sales in the first half of 2019. The increase rose to 7.4 percent in September. Existing home sales are expected to increase in the fourth quarter reflecting the increase in pending home sales in August and September. These positive trends will give a boost to residential replacement sales since a turnover of an existing home is likely to result in the undertaking of a home remodeling project by the homeowner six to 12 months after the home purchase.

Lower interest rates are also giving a boost to the builder market. Housing starts increased by 4.1 percent in the third quarter of 2019 after declining by 3.9 percent in the first half. Starts could strengthen further in coming quarters due to the 9.6 percent increase in new residential permits in the third quarter. Permit gains were 13.8 percent in September. These increases are extremely important to wood flooring manufacturers and marketers since wood flooring has the highest dependence on the builder market than any flooring sector. Lower lumber costs could also improve wood flooring’s price-competitiveness in 2020. Hardwood flooring prices could decline by some 20 percent during 2019 due to sluggish home building. However, so far U.S. wood flooring manufacturers have used this decline to improve profit margins, not cut prices.

Prices have also stayed elevated due to rising tariffs on Chinese-made flooring. Rising tariffs on Chinese-made flooring have caused prices to rise since Chinese-made wood flooring accounts for some 20 percent of total U.S. wood flooring sales. Chinese manufacturers, however, are losing share in the U.S. market due to the higher tariffs imposed by the Trump administration and the anti-dumping tariffs imposed by the U.S. International Trade Commission. The nearly 17 percent drop in dollar shipments from China during 2019 has been partially made up from manufacturers located in Vietnam and Malaysia, Poland and Ukraine, and Brazil and Paraguay, as well as others. The shift to these sources of supply could reduce price pressures in 2020.

Wood flooring manufacturers are also making efforts to counter the inroads made by LVT by introducing water-resistant products. To make wood flooring water resistant and even claim waterproof properties, manufacturers are introducing engineered products with rigid cores such as solid polymer and mineral. Manufacturers also add coatings to seal the edges. These positive trends still have significant headwinds as we approach 2020. The overall economy is slowing and the gains in housing demand remain below the rates experienced between 2012 and 2017. Wood flooring manufacturers and marketers will also see additional inroads by LVT. In addition, trade policy is still in flux and so far an agreement has not been finalized with the Chinese. A non-economic factor could be how the 2020 presidential election will affect consumer confidence.

These headwinds could keep wood flooring gains at about 1 percent in dollars and square feet in 2020. Wood flooring sales growth is forecast to increase close to these rates through 2024 and lose additional share in the U.S. floor coverings market.

Catalina Research tracks wood flooring industry trends, including an analysis of U.S. manufactured versus foreign-sourced products, customer demographics and distribution channels, factors driving demand, and the outlook for 2019 and beyond. This data and information is part of the Catalina Report on Wood Flooring released in July 2019.

Stuart Hirschhorn is Director of Research for Catalina Research Inc. in Highland Beach, Florida. He can be reached at 561.988.0853 or shirschhorn@catalinareports.com.

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