Distribution: Changes in the Channel

   Further up the chain, though, things haven’t been quite so rosy. While more-exotic stones remained the product of choice for higher-end customers, certain stones became commodities, claiming a growing segment of middle-class projects.
   Helping drive the commodity side of the business is a marked increase in worldwide production capacity. With more factories producing slabs from blocks of varying quality, importers have to shop more carefully to make sure they’re getting choice stone, while investing more time in developing relationships with those producers.
   As with the fabrication side of the industry, the sheer numbers of people importing and distributing stone have grown, increasing competition for good materials and often destabilizing apparent market prices.
   Throw in other challenges, such as the presence of an ever-growing color palette, overseas fabrication and the presence of the big-box stores in the retail market, and it’s no wonder that those in the distribution channel say they’re working hard to keep up as their role evolves within the industry.
  
A COMMODITY
   Perhaps the easiest way to relate what’s happened in the industry over the past decade is to define a large slice of natural-stone output as a commodity. Previously an exclusive product, stone now accounts for 31 percent of interior hard surfaces, replacing ceramic tile in bathrooms and laminate in kitchens all over America, says Kentfield, Calif.-based consultant Kevin Murphy.
   While there’s certainly still a demand for higher-end stones – marble, less-common granites, onyx – Scott Primmer of the Cedar Grove, N.J.-based Dente Trading Co., says there are probably about 20 common colors that today serve the same purpose as eggs and milk at the supermarket: They’re staples that bring customers through the door.
   “They’ve become commodities in terms of pricing,” he says. “The cost is very low from the importation through the distribution and on to fabrication. The customer is consequently getting a very good product at a very competitive price.”
   Primmer adds that one of Dente’s challenges these days is to keep the commodity-type stones on hand, while at the same time steering clients toward the more-exotic materials that translate into higher profits.
   Gerald Gilligan of the San Leandro, Calif., outlet for Dallas-based Daltile Corp., echoes Primmer’s sentiments. He relates a conversation he had with a fabricator who was buying Tropic Brown at $6.50 a square foot from one of his competitors, despite the fact that Gilligan’s cost to get the same stone in his showroom is $6.01.
   “I believe with the amount of material being sold and with so much demand, there’s no way that they’re getting first choice stone,” he says. “My competitors aren’t buying first-choice, good polish, selected materials. They don’t understand the value of the stone, and they sell on price, and now I have to compete on a price basis, rather than a value-added basis.”
   As with Primmer, Gilligan says he does sell common colors, such as Uba Tuba and Tropic Brown, with low margins to serve the contractors looking to be able to offer an inexpensive granite option in the kitchens of their multi-home developments.
   “However, my true focus is searching for premium materials from reliable and established factories that deliver first choice material on time,” he says. “Certainly, I’m concerned about price, but it’s not the first thing I’m concerned with.”
  
CAVEAT EMPTOR
   The burgeoning number of factories cutting blocks into slabs has created good reasons for wholesalers such as Gilligan to be concerned. There are several issues that importers have to consider, starting with politics.
   “What has changed is the political issues we might encounter in parts of Africa,” says Alexandra Niedbalski, a Media, Pa.-based representative of Levantina de Granitos. “We’ve had some pretty big problems in Zimbabwe and Angola. We had to stop quarrying some colors there and focus more on our Indian and Brazilian colors.”
   Even where the governments are more stable, importers don’t necessarily have firm relationships with the people they’re buying from, or confidence in the quality of stone they’re selling.
   While some European companies have opened factories in other parts of the world to put their operations closer to the quarries, they’re facing broader competition than ever before.
   “There used to be a few companies in the game, but now we’re seeing smaller companies in Brazil, China and India that have one gang saw and cut one block at a time,” says Niedbalski. “We see a lot of smaller companies with lower costs cutting the same material we do, but with a 10-percent to 15-percent price difference. It’s tough.”
   Again, the question arises of whether it really is the same material. Gilligan says even within a short period of time, the production quality of those new factories has improved. However, whether it’s of the same caliber as stone from more-established producers isn’t always easy to determine.
   “The importer has to sort through many aspects in bringing in the right type, look and quality of each material,” he says. “It’s become more difficult to determine what each factory does best with their production and selection processes.”
   A good case in point, Gilligan says, is natural-stone tile. One factory may put light, medium and dark tiles in a single box, some with broken corners. Another may sort by color, but then there’s usually additional cost involved.
   And, as in the United States, some factories are now also subcontracting out parts of the job, such as polishing, to others. Or, they may rely on other factories to help fill a particular container.
   Simply because it’s so difficult for importers to inspect products at each factory and for each order, consultant Murphy says he foresees the evolution of independent overseas inspection agencies.
   “These would provide buyers with unbiased and reliable information about the quality and character of a factory’s production,” he says. “It would also provide indisputable documentation for the factory to enforce their claim for payment. I think it has great potential for both buyers and producers.”
   Until such a system is firmly in place, many fabricators may find it doesn’t make much sense to do their own importing of natural stone. With everyone importing commodity colors, fabricators are drawn by the promise of bundles at low prices, unaware that they may face poor quality with no way to inspect or resolve problems upon arrival.
   Murphy says one of the prime roles of an importer is the ability to generate client interest in stone and identify how a particular stone is superior to a more-common one.
   “That is a value-added service which may depend more on hiring sales talent and creating market awareness than just clever buying,” he says. “If you’re specializing in service to the custom-home crowd where designers, architects and high-end buyers come to select materials and you’re importing your own specialties, people may choose you because of the combined efforts of what you have in stock and what you can do with it.”
   Regardless of whether fabricators are doing their own importing or buying from suppliers, Murphy warns that stone prices will probably be going up. Not only is China utilizing more of its capacity internally, but factories that were once willing to cut at no profit just to keep their equipment busy have noticed that demand remains high, regardless of price hikes.
   “The factories can’t operate for long when their capacity is committed to no-profit production,” the consultant says. “Factories had to raise their prices to survive and the buyers kept buying. Additionally, the buyers have increased their range of products to include more unique stones and those processed with specialty finishes.”
  
CHANGING FACES
   Distributors mention the demand for more-unique stones and for specialty finishes almost as much as the commodity pricing of industry standbys. While Uba Tuba may be gracing the kitchens in many a subdivision, higher-end projects and higher-end customers still demand something a cut above the rest.
   “One of the things that continues to amaze me is the number of colors that are available,” says Jim Janochoski, national sales manager for Cold Spring, Minn.-based Cold Spring Granite Co. “Every week there are additional colors available from Brazil and India and that puts additional pressure on the distributor market. It’s hard to have as full a line as five years ago.”
   Janochoski says he’s heard that as many as 800 different colors may be available worldwide. Levantina’s Niedbalski says it’s really become a part of the fashion business.
   “An important factor for us right now is to find new colors,” she says. “We have to have a color that other people don’t have, because once it gets into the mass market everybody is quarrying it and cutting slabs. We have to be a year or two ahead of other people.”
   And, she adds that deposits of some colors are so small they may only be available commercially for a year or two.
   While that applies on the highest of higher-end jobs, on the commercial side some distributors are also running up against contractors who are importing fabricated products, rather than just slabs.
   It’s a trend that actually began in the late 1990s, says Daltile’s Gilligan, and has forced some importers – such as his employer – to do the same.
   Dente Trading is another company importing some fabricated items, says Primmer, although it’s done on a case-by-case basis.
   “It depends on the market,” he says. “If you’re in a market where tract homes are standard, there are certain niches where prefabricated blanks or tops sell well.”
   At least those customers are working with Dente; that isn’t always the case.
   “We’ve noticed that people from India and China are coming in and selling factory-direct, if you will,” says Janochoski. “They’re not going through distributors, and that’s probably going to continue to increase.”
   Contractors buying prefabricated pieces from overseas may be more of a headache to domestic fabricators than to those selling stone blanks, and the same probably could be said for the presence of the big-box stores – such as Home Depot and Lowe’s – in the marketplace.
   It’s not necessarily that they’re selling the slabs used in the projects sold by these stores, but the stone importers like the way the big boxes spend their advertising dollars. Primmer notes that surveys have shown for every four people who go into a big-box store to buy a granite countertop, only one will buy it there.
   “It gives the customer an education and an awareness of natural stone,” says Primmer. “We’re finding that fabricators located in close proximity to box stores have seen an increase in their business, rather than a decrease.”
   However, Gilligan and Murphy say they also expect the big-box stores to be agents of change for the industry, as well. A case in point: the move toward more 3cm material, which is the thickness preferred by those stores.
   Ultimately, they may also encourage stone wholesalers to do more of their own advertising, as well.
   Murphy believes more advertising will have to be done, or current importers will be left behind as more people enter the field from related areas such as carpets or cabinetry.
   “They’re not constrained by traditions and inertia,” Murphy says. “Their energetic promotional efforts will challenge the established importers. While they’re taking market share, they’ll also be reaching new areas not served by the existing suppliers.”

This article first appeared in the February 2006 print edition of Stone Business. © Western Business Media Inc.