Anchor Peabody sponsored and attended the annual National Association of Floor Covering Distributors / National Building Material Distributors Association (NACFD/NBMDA) Conference in Chicago this month. After a successful conference, we summarize our thoughts and outlook below
This year began with high hopes of a robust recovery in the building industry, with inflation trending down and a business and tax-friendly administration incoming. However, persistently high interest rates, trade policy volatility and declining consumer confidence have presented significant headwinds to a sector that has already endured several rough years. While demand did not materialize the way many had hoped, many operators used this time to focus on the mission, rationalize their organizations, and fortify their businesses to best position them for the inevitable recovery. Ultimately, most companies have had to work extremely hard to stay flat and avoid contraction, but have laid significant groundwork to capitalize on a future expansion.
As a trusted advisor to owners and executives in the Flooring and Interior Finishes space, Anchor Peabody leverages its unmatched industry knowledge and M&A expertise to achieve best-in-class outcomes for founders and owners. We welcome a confidential conversation to discuss your options and strategy in this rapidly consolidating market.
• Rates, prices and uncertainty put damper on demand. Interest rates and mortgage costs have remained stubbornly high, stunting demand for homebuilding and home sales. Existing home sales are the number one driver of residential repair and remodel spend, and with the vast majority of homeowners sitting in sub 5% mortgages, most are happy to stay put rather than trade into higher cost financing. In addition, inflation, which was trending downward at the end of last year and early 2025, has remained elevated, increasing costs to consumers and hampering the Fed’s willingness to lower rates. This has resulted in a decline in demand for R&R projects, including flooring, kitchen & bath, and siding & exteriors. Former Audax portfolio company Renovo, who specialized in residential remodeling projects, shut its doors and filed for Chapter 7 bankruptcy protection in early November.
December will bring the final Fed meeting of the year, and markets are betting on an additional rate decline, supported by falling jobs numbers and an uncertain macroeconomic picture. Any rate decline will be welcome news to builders and remodelers, but rates likely need to come down a full percentage point or more to really light the market on fire again.
• Tariff policy and ongoing uncertainty make decision making difficult. In April, the administration announced sweeping reciprocal tariffs on nearly every US trade partner. This was followed by a number of delays, exceptions and exclusions and ongoing negotiations. The moving target of tariffs has made it difficult for distributors and manufacturers to make long-term sourcing and investment decisions for where their product is produced. Now, the Supreme Court has heard oral arguments in a case brought by small business owners and certain states, arguing that the April reciprocal tariffs are a violation of International Emergency Economic Powers Act (IEEPA) and an unconstitutional usurping of Congress’ power of taxation. Should the plaintiffs prevail, the tariffs will be found unenforceable and removed going forward.
While this would bring immediate relief to consumers on prices for imported building products, the follow-on effects will be disruptive. Similar to the freight induced price run-up in 2022 and 2023, parts of the channel (largely distribution) will be left with significant high cost inventory, with new product hitting shores at lower prices. This will squeeze margins for those distributors most exposed to price and inventory risk. Further, if ruled invalid, the tariff money collected to date will likely need to be refunded, but how that money is delivered to tariff-payers and allocated down the value chain is an open question.
• Industry participants focus on what they can control. Multiple challenges facing the industry does not mean that companies have been quietly biding time waiting for a rebound. Instead, top operators are focusing on ways to win in tough environment: emphasizing private label brands to drive margin, competing on service to gain share, rationalizing costs to preserve profitability, and going upstream for direct product sourcing.
The companies we have met that are outperforming the market (in these days that is any growth at all or even flat from last year) are working overtime to eek out these results: Driving demand for private label products that command better pricing and lead to market share gains; focusing on profitable customers where they can offer the most differentiated service; taking out redundant costs and streamlining processes with software deployment; eliminating middle-men importers and line curators to go direct-to-factory and capture margin.
- Consolidation continues. Despite the volatility of the past year, consolidation in the building materials industry, and in distribution particularly, continues although at a perhaps more modest pace than previous years. Artivo, the holding company behind Viginia Tile and Galleher, completed acquisitions of Tom Duffy/B.R. Funsten and Walker Zanger/Anthology. Home Depot completed the acquisitions of roofing distributor SRS and wallboard wholesaler GMS this year. Lowe’s purchased flooring installer Artisan Design Group and drywall distributor Foundation Building Materials. Scale and access to capital are even more important drivers of value in a challenging market, and some smaller distributors are seeing the value of combining with larger operations. Many top businesses however are reluctant to come to market during a middling period in the industry and are looking forward to a better 2026 before pulling the trigger.
- Advice for potential sellers. The M&A market for flooring and interiors businesses remains accessible, with multiple large acquirers still looking to expand through acquisition. While valuations are generally more cautious and conservate than they were a couple of years ago, top performing businesses still command a premium and buyers will pay up for companies that buck the trend.
Potential sellers should continue to focus on things that will drive value and certainty of close. This includes a) Customer and end-market diversification if the current business is highly concentrated in one market; b) Strengthening the organization and back office and ensuring the business has a strong team of leaders in sales, finance and accounting, and marketing; c) Considering deployment of software and systems that can help across the business in both marketing and operations (e.g., CRM systems, job tracking, KPI monitoring, etc.).
- Preparation remains paramount. It takes approximately 6 months from start to finish to complete a private sale in the industry, but at Anchor Peabody our work often starts much earlier. The more preparation time, the better the outcome. Understanding the company strategy, the management team and bench, the strength of the finance and accounting team, the growth plan and its defensibility are all key to achieving a successful transaction. We work with potential sellers months and sometimes years before they the ultimately plan to go to market.
The International Surfaces Show: If you are in the flooring & interiors business, we’d love to see you at TISE 2025 in Las Vegas in January. If you’re interested in an on or off-site meeting, please reach out to me at [email protected] or call at 917.520.2256.