Trend lines converge in Las Vegas
About 30,000 members of the home improvement retail community are expected to flock to Las Vegas May 6 to 8 for the 2008 National Hardware Show, which will feature about 3,500 exhibitors and includes Lawn & Garden World, the Homewares Show and expanded green product and new product sections.
This early figures suggest a 7 percent to 10 percent jump in show attendance from last year. Several factors have converged to create what some are describing as a “perfect storm” for the industry, which may translate into more expensive home improvement products for consumers in the months to come.
Higher fuel and raw material costs, as well as the growth of the Chinese economy and rising labor costs there, are playing against the backdrop of a U.S. economy that National Association of Home Builders (NAHB) chief economist Dave Seiders last month said had slipped into a “mild recession,” the result of a deepening housing slump that has “seriously eroded” consumer sentiment.
These issues are sure to be weighing on peoples’ minds as they participate in the hardware industry’s premiere event at the Las Vegas Convention Center. For the manufacturers exhibiting there, it’s a question of how much they can hand off their own rising costs to the retail community. In turn, retailers must decide how much of this increased pricing can be absorbed and how much they must pass on to the already beleaguered American consumer.
“I think it’s obvious that economic conditions are difficult right now and they’re going to get a bit more difficult because of the rising cost of raw materials, the housing crisis and the tighter credit markets,” said Dean Russo, group vp for Reed Exhibitions and head of this year’s National Hardware Show. “It’s no secret that all industries are experiencing this, and it’s affecting the home improvement industry especially.”
“Overall, the industry is faced with inflationary pressures on virtually all fronts, including energy, raw materials, labor, transportation, etc.,” said Ed Detgen, vp-marketing for Danze, which makes faucets, accessories and shower-heads and will be one of about 3,500 exhibitors at this show. “The lower value of the dollar also has complex impact, depending on the company and products involved.”
Meanwhile, bad news continues to hit the headlines, including oil prices that hit an all-time high of more than $115 a barrel on April 17 and gas that is expected to climb to more than $4 a gallon by Memorial Day. In addition, the Labor Department reported last month that prices paid to U.S. producers rose 1.1 percent in March—almost twice as much as was forecast—further reflecting rises in raw material, fuel and food costs.
“I’ve been in procurement for 30 years, and I can’t recall over that span of time ever seeing such a difficult economy as this one,” said Brian Reap, head of purchasing for Scranton, Pa.-based United Gilsonite Laboratories (UGL), which makes more than 80 paint specialty and home maintenance products.
According to Reap, rising oil prices have affected all phases of the business—including the purchase of chemicals and packaging materials—and there’s little relief in sight. “Even if petroleum eases in the composition of what I’m buying, it’s still going to be involved in getting it from the point of manufacturing to my point of receiving,” he said. “Petroleum and energy costs come into play in just about everything you touch, and there’s no way of getting around that.”
Reap also pointed out that fuel surcharging on inbound and outbound freight has shown a 41 percent increase from a year ago, and the skyrocketing costs don’t end there. In terms of buying chemicals, some of the “low end” materials have increased 15 percent to 20 percent, while others have shown more than a 200 percent increase in one year. Mergers and acquisitions among suppliers have made the market even tighter, giving suppliers the advantage of higher demand for product and fewer competitors to buy from.
“There is no way UGL can go to the marketplace and expect that our customer is going to absorb these kinds of increases. There’s only a certain amount of pricing you can pass along and not price yourself off the shelf,” Reap said. “It’s astonishing when I think of years past in negotiations when I used to chase a dime on an item. Today I’m chasing pennies, and you know what? It’s hard to get the pennies.”
Caterpillar Inc., a Peoria, Ill.-based producer of bulldozers and excavators, said in April it will raise prices as much as 5 percent worldwide in July because of hikes in the cost of steel, copper and crude oil. Meanwhile, Glendale, Calif.-based Atlas Homewares, a decorative hardware company that imports product from Asia, has seen 35 percent to 45 percent increases in its own costs over the last two years. According to president Adrienne Morea, prices have gone up significantly in many of the materials the company uses to make its hardware, including zinc alloy, brass, stainless, ceramic, and polyresins.
“Basically, the Chinese need the metal themselves to build housing and commercial developments now that the American money has created a middle class,” she said. “Additionally, oil is up so dramatically, and there is nothing that does not utilize oil in production.”
As far as passing these costs on to consumers, Morea says, “Sadly, there is only so much that a consumer can pay. But I do believe that if martinis are going for $15 a pop in Los Angeles, then a cabinet handle—something that remains in a home for 10 or more years—can certainly bear a $10 retail price point.”
Buyers attending the Hardware Show will not see any price increases from UCP Paint, a Canada-based coatings manufacturer that will showcase its newest line of Jeep branded performance coatings. These coatings, divided into two categories for exterior wood and concrete floors, were introduced to the industry at last year’s show, and Greg Yule, key account manager for UCP, said his company believes it’s important to keep pricing flat, despite the increase in raw materials the company has experienced.
“We’re seen 15 to 20 percent increases in certain materials, but we couldn’t do that to our customers, especially as we’re trying to establish the brand,” Yule said. “Obviously, if things continue like this, that might change. We’ll have to see how it plays out.”
Rob Scoble, vp-sales and marketing for Hyde Tools, zeroes in on the last three quarters as the time when U.S. manufacturers have seen increased pressure from Chinese factories, and the escalating cost of doing business in Asia has eroded some of the advantages of manufacturing overseas. “We no longer see mass merchants going to China to find goods for much less than they cost in the U.S. The cost delta is eroding,” he said. “Some are predicting we will start seeing price increases as much as 10 percent in the coming months.”
According to Janice Westlund, vp-Bob’s Ace Hardware in Rockford, Ill., it’s inevitable that such increases will be passed along to consumers by later this year. “You read the news lately about price increases, fuel surcharges, it’s overwhelming,” she said. “I don’t have a crystal ball, but you see the price of fuel going up and other costs rising, and it doesn’t show any signs of letting up.”
Still, the show offers several messages of growth and innovation. The numbers of exhibitors and pre-registrants that are expected to attend the Hardware Show, as well as the number of new products that will be seen there, are up over last year.
Russo believes vendors are taking a long-term view, realizing they must continue to innovate, address consumer demands and tastes and introduce new products into the market if they want to survive and even thrive in these difficult times. In addition, he said the fact that show attendance is expected be up by about 10 percent over 2007 is a good sign that retailers are refusing to go into bunker mentality but are taking the opportunity to invest back into their businesses and go into new categories to differentiate themselves in the market place.
“I think they understand that when market conditions are tough, it’s time to get more aggressive, not only to get through the bad times in the next 12 to 18 months, but to put themselves in a good position for when we come out of it,” Russo added.
Going to the show
Every year, thousands of home improvement retailers attend the National Hardware Show to meet with vendors, take a look at the latest product innovations and get an idea of where industry trends are heading. This year, we asked a handful of those planning to attend the Las Vegas event for their thoughts about the show and the industry.
HCN asked each attendee the same questions:
Mindset—What’s on your mind as you attend the show this year?
Goals—What are the goals you hope to accomplish in Las Vegas?
Key areas—In what part or parts of the trade show do you think you’ll be spending most of your time?
Market trends—What is the most important market trend you’re seeing as we head into the show?
Interestingly, 100 percent of the responses below described environmental friendliness and the green movement as a closely watched trend. Of course, the economy and energy prices registered concern with attendees, and retailers pointed to value of new products that can help differentiate their stores.
Here’s what our show attendees had to say as the show date approaches.
Mindset: I’ll be thinking about my customers and what they’re looking for.
Goals: I’ll be looking for something different, something that stands out. I want to get an idea of what’s new in the marketplace. This year, I’ll specifically be looking at cabinet and door hardware, which seems to be a hot trend.
Key areas: Probably hardware, plumbing and electrical.
Market trends: It has to be the green trend. Everything is going green this year, and I’m having more response with my customers than I thought it would.
Mindset: New, unique items, possible secondary suppliers that could provide products we would need in case of supply problems, and new vendors and products that would provide our members with additional sales opportunities.
Goals: To strengthen a few product areas that have been affected by vendors discontinuing operations or vendor consolidations, meeting a number of our suppliers’ new senior management personnel and continuing to prepare for the 2009 spring and summer season.
Key areas: The lawn and garden main exhibit floor, along with the new item area.
Market trends: Environmentally friendly products, and possibly more regional suppliers.
Mindset: The economy is definitely on my mind. It’s been a long and tough winter. Going into spring, the weather has been up and down. Consumers are apprehensive and concerned with the price of gas and groceries. It’s a challenging time at retail.
Goals: One is definitely to look for new products. As an independent retailer, we can turn on a dime and bring in something new and showcase it quickly, which separates us from the big boxes. It energizes the employees as well. The other goal is networking. There are so many other people out there doing the same thing. I use it as a time to meet with other retailers—both formally and informally—to pick their brains and see what’s working for them.
Key areas: Housewares and the Gourmet Show. Other than that, just walking through the aisles and seeing what’s there, what the market trends are.
Market trends: I think because of the economy, people are looking for ways to save money, do it themselves. That will be part of it. Also, the whole green movement, looking for ways to reduce the carbon footprint.
Mindset: I wonder how the increasing fuel prices are going to affect our bottom line this year and in years to come. Also, what new energy saving products are being introduced that will help our customers fight these increasing price increases.
Goals: We are looking to expand our lawn and garden center and outdoor furniture offerings. We’re also looking for new innovations in the plumbing and electrical markets.
Key areas: Lawn and garden, plumbing and electrical.
Market trends: Thinking green. We have already started to incorporate quite a bit of green things in our stores.
Mindset: Through the years, I’ve gotten to know fellow business people at the show, and it’s always good to see what the trends are in their businesses and to tell them what’s going on in ours. Maintaining those relationships is so important.
Goals: One thing we did last year that we’re going to do again this year is spend time looking for green products. I’m interested in what’s going on in lawn and garden, hardware and building materials with regard to eco-friendly products.
Key areas: Probably hardware, plumbing and electrical, and lawn and garden. The show is so large, though, that it’s almost impossible to spend time in too many areas, so I might just concentrate on lawn and garden.
Market trends: The trend on everyone’s mind is the economy and what’s going on with sales. I want to talk to my fellow business people about whether they’re able to control their costs and how they’re dealing with the economic difficulties.
Home Depot to close 15 stores
Home Depot will close 15 underperforming stores, the company has announced, and remove 50 future openings from the new store pipeline. The closings will include layoffs of about 1,300 employees.
The closings, at locations in the Midwest and Northeast, will generate approximately $547 million in pre-tax charges in the company’s first quarter. The company will release first-quarter results on May 20.
The stores to be closed are as follows:
• Store no. 2015 in East Fort Wayne, Ind.
• Store no. 2032 in Marion, Ind.
• Store no. 2310 in Frankfort, Ky.
• Store no. 379 Opelousas, La.
• Store no. 2819 Cottage Grove, Minn.
• Store no. 6901 East Brunswick, N.J.
• Store no. 6904 Saddle Brook, N.J.
• Store no. 6171 Rome, N.Y.
• Store no. 3702 Bismarck, N.D.
• Store no. 3874 Findlay, Ohio
• Store no. 3865 Lima, Ohio
• Store no. 4552 Brattleboro, Vt.
• Store no. 4932 Beaver Dam, Wis.
• Store no. 4933 Fond du Lac, Wis.
• Store no. 4913 Milwaukee, Wis.
Home Depot said in a statement it still intends to build 55 new stores this fiscal year, including 36 new stores in the United States.
As for other stores in the works, the company said it has “determined that it will no longer pursue the opening of approximately 50 U.S. stores that have been in its new store pipeline, in some cases for more than 10 years. Accordingly, the company will record a charge of approximately $400 million related to capitalized development costs and ongoing obligations associated with those future store locations.”
“This is a continuation of our disciplined approach to capital allocation that we outlined last year,” said Frank Blake, Home Depot chairman and CEO, in a statement. “We will invest in our core retail business, in this case our existing stores, which drive our most profitable sales. Our capital efficiency model will also provide improved returns for our shareholders through dividends and share repurchase.”
Home Depot added that investments in existing retail stores will continue to include “maintenance, merchandising resets and other initiatives to improve all elements of the customer’s shopping experience.”
The company reiterated that its total capital spending for the current fiscal year is projected to be approximately $2.3 billion, down from $3.6 billion last year.
Sherwin-Williams earnings fall in the first quarter
Sherwin-Williams saw earnings fall in the first quarter of 2008, but the worldwide paint and coatings giant is still seeing strength in international sales.
Earnings fell 30.3 percent in the first quarter to $77.9 million from $111.8 million in the same period last year. Net sales grew just over 1 percent to $1.78 billion from $1.76 billion in the same period last year.
The stronger net sales were in large part due to strong Global Group sales, as was the case last quarter. Favorable currency rates and eight acquisitions since last year’s first quarter helped aid international sales, according to the paint company.
In the company’s retail Paint Stores Group, net sales were $1.031 billion in the quarter, 1.9 percent lower than in last year’s first quarter. Sales were weak due to “soft architectural paint sales and weak sales in non-paint categories partially offset by improved industrial maintenance product sales.”
Same-store sales decreased 6.5 percent compared with last year, and earnings decreased 31.9 percent. Earnings were weaker because of increased product and freight costs, the company noted.
The company’s Consumer Group, which includes paint products like Dutch Boy, saw sales decrease 4.8 percent in the quarter to $286.9 million. The sales decline was due primarily “to soft DIY demand at most of the segment’s retail customers.” Earnings in the Consumer Group were down 23.7 percent due to higher raw material costs, as well as a lower volume of movement at the company’s distribution centers.
The Global Group’s net sales increased 14.8 percent to $461.9 million due to market share gains, selling price increases, favorable currency translation and acquisitions. Earnings for the Global Group increased 21.7 percent to $7.7 million.
“Paint demand in the domestic new residential, residential repaint, DIY and commercial markets was weaker during the first quarter than we had anticipated at the start of the year,” said Christopher Connor, chairman and CEO of Sherwin-Williams. “We continue to be pleased with the strong sales improvements of the foreign business units in our Global Group and the continued growth they have been achieving in the architectural, industrial maintenance, OEM and automotive finishes product lines.”
Connor also noted that the Paint Stores Group opened 17 new stores in the first quarter and closed 23 “redundant stores.”