The Bluestone Market, Part II

TRENDS
   Like other decorative natural stones in the industry, bluestone from New York and Pennsylvania may be going through changes in distribution channels and quality standards.  In the survey of the bluestone industry, I noted seven trends from concerned distributors and retailers:
   • Quarry operators are selling more and more bluestone direct to large high-end-type customers through manufacturer’s reps and other intermediaries, rather than selling primarily through local-area stone distributors. In addition, certain operators are known to be selling direct to fabricators, building contractors, landscapers and even masons. Distribution channels for bluestone are not as well-defined as they used to be.
   • “Gypsy” truckers are selling certain types of  (possibly lower-quality) bluestone at large discounts all along the East Coast and possibly other areas, with the help of cooperating quarriers.
   • There is not a universally accepted definition of good- or bad-quality bluestone as well as firm guidelines for proper installation. Quality standards apparently vary substantially, and this affects customer satisfaction and the “prestige” image of bluestone. 
   • Not everybody delivers the type and quality of bluestone that they claim they’re supplying. Industry comments suggest that those paying top-dollar and/or ordering the higher volumes receive the better-quality stone.
   • With less emphasis on distributors and retailers in the supply channel, the industry apparently loses the distributor expertise to help customers choose the right stone, evaluate it upon arrival, and do quality checks in conjunction with its installation – so that customers get what they expected.
   • The sale of certain grades of bluestone (possibly of lesser quality) to retailers like Home Depot may have cheapened the image of bluestone with walk-in customers and contractors, and underlines the trend that certain types of this stone is at, or approaching, commodity status.
   • Technical and installation problems occur in certain bluestone applications, depending on stone selection, local weather conditions and masonry procedures. This hurts bluestone’s image in the eyes of some distributors and masons (not to mention end-user customers), thereby creating customer and industry disappointment – and an opportunity for the sale of a competing type of stone.
  
COMPETITION
   Because bluestone is unique in terms of its identity, legendary prestige, historical significance and the features and benefits related to beauty, durability and versatility, it has been somewhat immune from much of the competition affecting other natural decorative stones. 
   This is particularly true at the high end of residential and commercial building and remodeling in certain regions, where the stone has had a following for more than a century. A certain segment of the market will continue to associate price, historical authenticity and uniqueness with a high level of unambiguous quality. As a result, customers are willing to pay the price for the additional freight when shipping bluestone to destinations as far away as California.
   However, in the near future, the biggest potential threats to the future of bluestone (as well as other quality stone) sales growth appear to be a combination of growing sales of artificial stone – coupled with the next wave of low-cost imports of natural look-alike stone from China and elsewhere. 
   At some point, the intensity of price competition could affect bluestone’s market growth into other (but possibly less-affluent) sectors of residential and commercial construction, where price is now, or will become, an issue to the intermediate and end-user customer.
   With quarry costs rising, the pressure for the quarry to raise prices to offset such costs will likely impact future growth of bluestone.  In my opinion, the bluestone segment of the decorative natural-stone industry will have to develop a robust marketing response to threats from competitive functional substitute products and lower-priced imports, if it wants to grow in a continuously profitable manner.
  
PRICING
   What’s ultimately important in the natural-stone pricing world is the delivered price of a stone shipment to a project site with a given level of “meets-the-spec” quality expected by the customer, plus the cost of installation.  Prices for bluestone continue to rise in certain regions, reflecting (as mentioned earlier) cost increases at the quarries and the varying freight costs depending on where, and how, a load of stone is transported. 
   Data from my survey shows markups at the distributor level vary from 20 percent to 100 percent, with possible additional markups of up to 25 percent for walk-in retail customers.  Pricing, of course, varies by locale depending on local competitive conditions.
   With additional fabrication, final bluestone markups can be as much as 200 percent to 300 percent. As with other dimensional stone, pricing reflects quantity purchased, freight method, how it’s stacked and packaged, color, weight, relative scarcity, etc.
   The generic ability to raise prices depends largely on the bargaining power of suppliers vs. their customers, the threat of potential substitutes and new entrants into the industry, as well as the nature of competition. Since, with bluestone, price has not historically been a critical buying criterion, the uniqueness and quality of the stone, as well as customer service seems to outweigh all other considerations within its served market niches. Quarriers have had the lion’s share of bargaining power with its customers, and could raise prices when the need arose.
   The idea of new entrants with major new capacity coming into the industry seemed remote, with functional substitutes never being the “real thing.” This added up to a pretty comfortable pricing platform for quarry executives and managers to operate from.
   With quality and installation issues remaining (in my opinion) the primary factors affecting customer satisfaction with bluestone. I believe that pricing will continue to be a secondary issue for their defined niche, high-end customers in their served markets.
   Pricing does, however, come into play with different or new customer groups (reflecting a retail distribution channel), where non-price considerations are not as predominant and “non-informed” retail customers are involved. This may or may not lead to discounting, depending on who is distributing the stone, who is buying the stone, what type of quality of bluestone is being sold, where it is to be delivered, and for what applications.
   The typical homeowner (or even a small contractor), for example, may not know about the quality of a particular stone as long as a load for their driveway is available from Home Depot at an affordable price. In this part of the market, the pricing and merchandising of bluestone becomes somewhat important.
   However, there’s not much, if any, outright discounting to the “do-it-yourself” customers of bluestone at Home Depot (at least in my area of New Jersey) during the primary selling season. It’s still used for non-price-sensitive applications with customers who don’t mind investing in their home’s landscape, which positively influences the long term value of their homes.
   Bluestone discounting comes into play, from the quarrier or distributor’s perspective, when they have to give hefty incentives and special packaging to make it profitable enough to get “big-box” stores to sell the stone.
   The conventional wisdom heard in my survey of the industry is that the bluestone sold at “big- box” stores is of much-lower quality than might otherwise be marketed to other customer groups through other channels.  “Walk-in” customers really do not understand the issue of technical quality when it comes to stone, although they do know and want a high-quality appearance.
   It is difficult to know how much bluestone is sold to “big-box” stores, as well as their pricing policies, since the data is not easy to assemble from hundreds of such retail stores around the country.
   Discount pricing for bluestone seems to predominate with a variety of gypsy truckers who sell the stone directly to nurseries, small landscapers and whomever else the truckers can contact during their travels. Here again, it is believed by many that these loads of bluestone are of much lower quality.
   There is no way to generalize about bluestone pricing trends, except to say that cost and pricing pressures at the quarry operation level seem to be in conflict relative to the market pricing seen for lower-priced artificial stone and continuing low-cost imports from a variety of countries. How this will play out in the future is difficult to estimate.
  
FUNCTIONAL SUBSTITUTES
   Although bluestone from New York and Pennsylvania is unique in its identity and historical significance, a number of competitive products are seen as challenges to future bluestone sales.
   Some originate from states where locally quarried stones have a significant foothold in their respective locales. These include (just to mention a few) granite from Florida; Tennessee flagstone, Silver Mist Schist and Crab Orchard sandstone; Sunrise sandstone from Utah; Coral limestone from Texas; Virginia’s Buckingham slate; Lannon stone from Wisconsin; and many more products from smaller quarries.
   Others come from overseas, such as pre-fab tabletops from China. And we haven’t even mentioned the impact from artificial stone that, by some estimates, reaches $750 million in sales annually.
   There is an ongoing trend for smaller customers to buy a locally quarried stone, and for larger customers to heed the recommendations of architects who also tend to recommend a local area stone unless a stone like bluestone is specifically requested. Competitive or functional substitute stones are frequently used, due to local building traditions of a region or locale as reflected in the preferences of the end-use customer.
   Therefore, the growth of bluestone sales will be difficult in areas where customers are unfamiliar with the stone, or haven’t moved from a region where bluestone is frequently used. Competitive or functional substitute stones will continue to predominate in several states.
  
THREAT OF POTENTIAL ENTRANTS
   There appears to be little threat of major new “greenfield” entrants into the bluestone-quarrying business since this is a complicated business that rests on the integrity of a quarry area’s geology and the know-how of starting up and conducting a professional quarrying operation. Dealing with regulatory issues and the recruitment of qualified operators are other daunting issues.
   New investors into the industry typically enter by purchasing existing or dormant quarries with known bluestone reserves, or by purchasing a stone distributor or retail franchise. And, there has been, from time to time, some consolidation in the decorative-stone industry among known U.S. and foreign suppliers. I think that this is easier to accomplish for industry insiders than for investors from outside the industry who need to deal with a steep learning curve.
   Market entries have been seen with small roadside retailers and nurseries, where investment and sourcing risks are minimized with a low level of required capital and multiple sources and channels for purchasing stone. In addition, it is not difficult to enter the trucking business to haul stone from the quarries to a variety of stone-channel customers, since capital requirements are minimal.
   Moreover, truckers who purchase stone from quarries on their own account (who do not deliver stone to quarrier customers per se) can discount their stone heavily as long as they get a hefty freight fee for getting their stone to a customer destination. Interestingly, many truckers effectively have entered the decorative-stone industry on the cheap with little downside risk, by simple becoming a reliable trucker.
   Entering the fabrication side of the bluestone industry is not as easy, however, since a combination of operation skills and real know-how, ready capital and management skills are required. Again, if experience is a teacher, purchasing an existing business or adding this function onto an existing quarrying type business makes more sense to investors and managers from a risk-and-return point of view.
   Overall, those considering entry into the bluestone segment of the decorative-stone industry – at the quarry, fabrication or distributor/retail levels – need to have seasoned people with solid knowledge of the peculiarities of decorative stone; a stone’s uses and applications; how to size up and test out a stone’s features and benefits; where to seek the best quarry sites and how to size up the quality of reserves; prerequisites and standards for quality; the cost and price of a load of delivered stone; how interest rates and other macroeconomic factors affect their business; how and where to compete with rising imports and functional substitute products; and, most important, the required sensitivity toward customer satisfaction requirements on a customer and project-specific basis.
   This is a tall order from anyone’s perspective. Just as the owners and/or operators of bluestone quarries, their distributors and other market participants who deal with the many fine people from Pennsylvania and New York!
   Thomas H. Kieren is president of the Manhattan Consulting Group, based in New York and Oak Ridge, N.J.  The firm specializes in market, competitive and industry research for executives and private-equity investors of commercial and industrial companies.  He can be reached at 973-697-6975 or manconsgroup@earthlink.net.

This article first appeared in the May 2004 print edition of Stone Business.