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.