Stone Distribution: Trim Tomorrow

   Talk with some of those bringing stone into the country for the industry, and they’ll tell you that not everything is gloom-and-doom. For one thing distributors say for every spot in the map where things are slow, there’s another geographic area where they’re holding their own.
   Some of them are also feeling more upbeat as they see fewer fabricators taking the risks of doing their own importing. And, if they feel their distribution business isn’t in a good place now, they’re working to strengthen operations.
   Most don’t see a real upturn in the industry at least through next year – but, when it does boom again, they’re confident it’ll be stronger and better than ever.

SHADES OF GRAY
   It’s not the best of times, but it’s certainly not the worst of times, either. Most are quick to qualify just what is happening to distributors these days as being a bit in the middle.
   David Havens of St. Louis-based Global Granite and Marble says in the Midwest, at least, things are remaining solid, thanks to a tendency of homeowners to remodel – and incorporate natural stone in their projects.
   “Instead of moving, people are remodeling homes that were built 10 or 15 years ago, and they need stone,” he says. “It takes awhile for us to catch up with the East Coast and the West Coast, and right now your home isn’t updated unless you have granite.”
   He’s quick to add that he knows his area hasn’t been as severely impacted as other parts of the country, such as California and the Southeast.
   That’s the bad news for Rupesh Shah, whose Orange, Calif.-based MS International (MSI) distributes in both markets, among others. Regardless of market, though, he says recent months have required distributors to become more-competitive.
   “For the first time in probably 15 years, the industry has contracted,” Shah says. “A lot of our competitors are going out of business, and what concerns us is they’re dumping inventory to convert it to cash.
   “We have to have a competitive-priced product, and offer great service just to maintain our sales. The most-efficient and -innovative companies will succeed in the current market environment.”
   However, if there’s one thing everyone agrees on, it’s that – while lower-end projects with less-expensive stone may be suffering – projects at the top end of the scale, either in price or materials, remain strong.
   “The market for $3 million homes is still doing well,” says Havens.
   Industry consultant Jeff Matthews, who operates Trade International in Atlanta, agrees. He’s currently working on a hotel project with individually owned condos, and he says those buyers don’t flinch at paying $50 ft² for the natural stones they select.
   “They’re saying, ‘We want what we want,’” he explains. “And, the reality is that the cost of the stone, as an overall percentage of the building, is pretty minor.”
   On the other hand, Matthews adds that when it comes to commercial projects, job prices are a factor “if they use stone at all.”
   That refrain is echoed by Havens, who observes that while there’s still commercial construction going on in the    Midwest, it’s slowing, “and the amount of new stone going into office buildings is minimal.”
   Melanie Antunes, branch manager for the Lawrenceville, Ga.-based branch of AGM Imports, says she’s not seeing a lot of positive impact from the rebuilding Gulf Coast, where stone is being used heavily in numerous high-end projects, such as casinos.
   “It’s difficult to get involved in them because a lot of them are going directly to China to get their materials precut and pre-fabricated,” she says. “There are a lot of large projects going on, but all of it has been off-sourced.”

A LITTLE SHAKY
   In places such as Atlanta, that’s bad news for fabricators and – to some extent – distributors. All of these distributors say they’re seeing fabricators go out of their markets.
   “Some of them are quitting,” says Jonathan Mitnick of the Moonachie, N.J.-based CCS Stone. “Some of the newest ones seem to be going out of business. The better shops are hanging in there, but I’ve seen some of the larger ones scaling back on production and cutting employees.”
   Across the country in California, Shah says he’s observing much the same.
   “We’ve seen more bankruptcy filings and fabricators just shutting down than ever before,” Shah says. “The biggest issue is cash-flow planning. We’ve seen a lot of projects where they order the materials, start the installation and then things stop for lack of funding.
   “It’s the builders who have scaled back, but the fabricators are especially hurt by that.”
   That, in turn, is encouraging everyone to tighten their own credit policies. Most have already added surcharges to their delivery costs to offset the higher price of fuel.
   “We’re definitely cracking down,” says Antunes. “You get worried when you extend credit to somebody, no matter how long they’re been a client. You never know what will happen tomorrow.”
   Mitnick says CCS has always had a strict credit policy, and the firm is being extra-careful now.
   “If anything seems suspicious, we pay attention,” he says. “We get a few of those, even when the economy is good, but we’re continually paying attention to our accounts, and in some cases we’ve made people go back to ordering COD (collect on delivery).”
   That may be the down side for these distributors, but they’re seeing a ray of sunshine mixed in with the clouds, thanks to the economy. After a growing trend among many large fabricators to do at least some of their own importing, many are now back working with their distributors.
   MSI’s Shah says he’s definitely seeing many of his customers holding less inventory and relying more on their suppliers to provide them with as-needed service.
   As they look to improve their own cash-flow situations, they’re moving to just-in-time inventory,” he says. “People who historically would import at least a portion of their inventory directly are now saying, ‘I want to go back to doing what I’m good at and sourcing from a distributor.’”
   While Shah says that’s good news from his company’s perspective, it’s also pressuring distributors to maintain large and diverse selections of materials.
   Closely related to that is less motivation for his customers to have broad selections of materials on-hand.
   “Today, they’re saying, ‘I know you have it; let me sample it, and if I get an order I’ll pick it up,’” Shah says.
   Mitnick agrees. He says when the economy was good fabricators were willing to import a wide range of products. Now, while some of them may still bring in the stable, less-expensive granite colors, that’s as far as they’re going.
   “They always want to buy materials that are desirable and for which there’s a demand in the market, but those aren’t necessarily easy to do,” says Mitnick. “A fabricator who needs good quality Crema Marfil is calling now, because he’s not going to buy a whole container for a couple slabs of Crema Marfil. He may have had a bad experience in the past, and now that the price has gone up, he’s not going to take the risk.”

SOME SURPRISES
   In this slowing market, what’s happening to the people worldwide that are quarrying and cutting those granites and marbles depends on where they’re located and who you talk with.
   Certainly, prices for higher-quality materials are up. Mitnick, for example, observes that a lot of stones that were selling in the $6-$8 ft² range are now double that. However, he says he’s pleasantly surprised by the quality of the stone that is available.
   “There seems to be more material available in the quality I’d like to see available,” he says. “Of course, that means there’s less steady demand for select material.”
   That would seem to go hand-in-hand with Shah’s observation that while the demand for premium stones remains high, much of the rest of the activity he’s seeing is toward the more value-priced grades of stone MSI offers.
   “Everybody’s focusing on price, price, price,” he says.
   Consequently, there’s been a continued softening of the European market as Italian, Spanish and French producers have gone to China for their fabrication.
   “We’re still able to get these stones at a lower per-square-foot cost because China is buying the blocks,” says Trade International’s Matthews. “Those countries are jumping for joy because they keep selling as many blocks as they can, so their sales are up.”
   That may be especially true with large projects, but many suppliers who once bought through Europe have now changed their focus.
   “We used to buy a tremendous amount of stone from Italy,” says AGM’s Antunes. “Now, we go to India. They have the factories, they’ve grown tremendously in the market, and their quality has gotten a lot better. Today, we try to go directly to the countries we buy from.”
   Matthews adds that China’s own bubble may burst as domestic demand falls following the 2008 Summer Olympic Games, and that country deals with some of the same issues the rest of the world is facing, led by fuel prices.
   In the meantime, Europe is not the only supplier of natural stone that’s feeling some hurt because of today’s economy. Both Shah and Global’s Havens cite Brazil as a stone source that’s seeing problems.
   “The dollar plays a role in this, depending on how it’s weakened against other currencies,” Shah says. “The dollar has declined in value against the Brazilian rial more than it has against the Indian rupee, so Indian material has become more-price-attractive than materials from Brazil.”
   Not that the Brazilians aren’t fighting back. Havens says Brazilian suppliers are heavily discounting their materials in an effort to keep busy.
   “I’m getting calls from people I’ve never dealt with, and the people I dealt with a few years ago are calling and saying, ‘Look what I have,’” he says. “They’re offering discounts, and if we pay cash, they’ll give bigger discounts. They’re really hurting.”
   Still another area that may be hurt by rising fuel prices is some of the man-made products. Mitnick, for instance, offers Crystal White Glassos, a type of crystallized glass panel, and he says that, because of the energy consumed making the product, he’s had to more-closely coordinate his orders with the manufacturer.
   “It’s much better if we can coordinate 10 or 15 loads while the oven is active, rather than stopping and starting up again,” he says.
   Antunes says those in the industry may get a much better sense of where the marketplace is and isn’t strong by observing who attends this year’s Marmomacc trade fair in Verona, Italy, in early October.
   In the meantime, suppliers expect to continue doing what they’ve always done – seeking out the stones buyers want at prices they care to pay. It’s just that those sources may be somewhat different in the future.
   Mitnick, for one, says he’s been traveling to some of the more-remote parts of the world to find substitutes for stones now on the market, and Matthews says there are numerous countries that have lower labor rates and would like to beef up their exports.
   “Malaysia and Indonesia have been in the market for some years, but not at the volumes it could be,” Matthews says. “The Chinese are already taking advantage of some very interesting stones from Vietnam. Several countries in South America have beautiful stones but don’t have the money to develop it. The same is true with some countries in Africa. Afghanistan has some very beautiful marbles.
   “We’re going to see more stone from these countries, but in some we have to address political issues before they come into play.”

THROUGH THE LOOKING GLASS
   So besides selling Chilean granite and Afghani marble, how will the industry appear in the future? For those who come out on the other side of today’s stormy weather, things look fairly bright.
   For one thing, suppliers see a market where natural stone is once again seen as a luxury, rather than a commodity.
   “We’re trying to get back to where it’s a luxury to have stone in your home and to have something that’s different from your next-door neighbor or the spec home for your development,” says Antunes. “However, I don’t think a lot of consumers are as educated as they could be on what to ask a fabricator and about the quality of our materials.”
   Trade International’s Matthews agrees.
   “We need to make people more aware of why stone is better,” he says. “We’re not doing enough to promote stone for the general welfare of the industry. We don’t tout that it’s better, or explain why it lasts longer, or why it’s green. We need to promote all its good attributes.”
   Although much has been said about the entry of the big-box stores into the natural-stone market, suppliers don’t see them moving away from the product, and where price is the biggest concern of buyers, they’ll still fill a niche, they say.
   “Granite is becoming a known entity in the Midwest,” says Global Granite’s Havens. “When people look at a home and see Formica®, they’re not buying. People want granite, but a lot of them don’t want to pay more for it. That’s why the box stores are doing well.”
   MSI’s Shah agrees, although he thinks their strength will be more in stone flooring than in countertops.
   “They’re being very aggressive with promotions and pricing, but they make their money on things like the installation,” he says. “They’ve all allocated more shelf space to natural stone, and they’ve been gaining market share. With flooring, natural stone is continuing to perform well and I see them moving into more niche parts, such as mosaics and moldings, as well as stone for landscaping.”
   Matthews doesn’t think the big-box stores have begun to understand the potential stone offers – he, too, mentions landscape stone – but he says it’s possible they may soon face a run for their money from a new marketing model.
   “I think you’ll see a growth in retail sales of stone, but also at the level of tiles and stone cut-to-size by major producers coming into this market, opening showrooms and selling direct,” he says. “That’s how they do it in Europe, and they cut out the middleman.”
   In the meantime, suppliers are doing their best to hang in there with their clients and are making changes to their own businesses to put themselves on a more-solid footing. For instance, Global Granite added glass, tile and porcelain lines to its natural -tone offerings; AGM added a marketing director and is putting out a catalog.
   “We’re definitely trying to tap into the renovation market,” says Antunes. “Before, we were so busy we didn’t have to search for business. Now, we’re trying to tap into the designer market.”
   Unfortunately, no one’s crystal ball is showing much of a recovery before 2010, but they’re all confident that, over time, business will return to the level where good word-of-mouth was about all anyone in the stone industry needed.
   “We may not see the high double-digit growth years we saw in the ‘80s or at the turn of this century, but we should see steady growth of seven percent to 12 percent starting around 2011,” predicts Matthews. “There’s so much potential with stone a company just needs to stick with the market and it will turn around.”
   He adds that the companies that do best will be those that not only do good work in their particular field, but also diversify, whether it’s adding tile work to their countertop business or doing both residential and commercial projects.
   “I think people who stay in the business and get through this recession will have work to spare,” agrees CCS’s Mitnick. “When the business returns, there’s going to be a relative shortage of qualified fabricators. There should be a nice growth period for anyone who sticks it out.
   “As long as people have an admiration and love for natural stone, the business will be there.”

This article first appeared in the August 2008 print edition of Stone Business. ©2008 Western Business Media Inc.