Consumer demand for custom-look products -- such as Mullican Flooring's Chatelaine collection of hand-sculpted 3/4-inch solid wood -- is contributing to the growth of the overall wood segment and allowing dealers to command higher average prices.

During the past decade, wood flooring has been one of the strongest-growing sectors of the U.S. floor covering market. Homeowners' growing preference for high-end hard-surface flooring has driven demand. Growth has been strongest in the residential-remodeling and new-construction markets. Sales gains benefited from low mortgage-interest rates, record levels of existing-home sales, and the growing size and value of the average newly constructed single-family home.

These are just some of the findings revealed in one of the wood flooring industry's most comprehensive studies. Every other year, the NWFA partners with Catalina Research to conduct this research. The most recent report was completed in the final quarter of 2003. It revealed a number of interesting trends.

According to the study, consumer preferences are shifting to prefinished and engineered wood products. These wood flooring products are easier and less costly to install than unfinished solid-wood alternatives. They also allow wood flooring to be marketed and sold similarly to other hard-surface flooring products. This has stimulated the distribution of wood flooring through specialty floor covering retailers and home centers.

Strong wood flooring market growth has attracted new competitors to this relatively concentrated market. New entrants include companies specializing (with 50 percent or more of their total revenues) in wood flooring manufacturing, wood product manufacturers extending their lines to flooring, major floor covering manufacturers and marketers, as well as foreign-based manufacturers.

The increasingly competitive environment, however, has dampened industry profit margins. Margins also have come under pressure over the past year because of rising material costs. However, manufacturers have been able to pass through these cost increases due to growing domestic demand and the introduction of higher-value prefinished and engineered products.

The estimated value of U.S. wood flooring market sales in 2003 tops $2.2 billion, an increase of 11.7 percent over the previous year. Estimated volume market sales for 2003 is 986 million square feet, a 6.7 percent gain compared to 2002. Dollar market sales are estimated to have increased at a 9.9 percent compound annual rate between 1997 and 2002, while volume market sales increased 5.4 percent annually.

Market trends have benefited from strengthening domestic housing demand as mortgage interest rates declined. Demand also has responded positively to the growing size and value of the average new construction single-family home.

Declining mortgage rates resulted in record existing home sales. Existing home sales for 2003 were estimated to reach a record 6 million units, up from 5 million units in 1998. This has given a boost to the residential remodeling market because buyers of existing homes usually plan some sort of remodeling project after the purchase.

Declining mortgage interest rates also stimulated the demand for new single-family homes. New housing starts rose to an estimated 1.8 million units during 2003, the highest level since 1986. The increase in recent years was centered in single-family housing starts, which increased by an estimated 7.6 percent during 2003 to 1.5 million units. Lower interest rates also prompted many homeowners to refinance their mortgages and redirect the resulting extra cash to remodeling and other home improvement efforts.

Market growth trends in wood floors also benefited from strengthening price increases, with manufacturers passing through higher material costs and adding value to the final product. The average per square foot of wood flooring supplied is estimated to be $2.24 during 2003, a 4.7 percent increase over 2002. This compares to a 4.3 percent compound annual growth rate for the average value per square foot supplied between 1997 and 2002, and 3.6 percent annually over the previous five-year period.

One way to increase sales of wood flooring is to offer engineered floors, which require less lumber to produce and can be installed in any room, including basements. Engineered floors are estimated to account for about one-third, or 330 million square feet, of the total U.S. wood flooring market during 2003.

Solid-wood flooring manufacturers are responding to this trend by increasing their emphasis on prefinished products. A number of manufacturers also have developed proprietary finishes to create a competitive edge in marketing their prefinished product lines. And the introduction of glueless technology is another way to add value and receive higher selling prices. Consumers also are driving growth by demanding a wider range of species, colors and custom installations -- such as hand scraping -- which results in higher average prices.

During 2003, wood flooring accounted for an estimated 10.5 percent of total U.S. floor covering sales. In terms of square footage, wood flooring reached an estimated 3.9 percent of the total quantity U.S. flooring market sales in 2003.

Wood flooring also is making substantial inroads in the growing hard-surface flooring market. Wood flooring was estimated to represent 30.3 percent of total dollar hard-surface flooring sales during 2003, and 12.4 percent on a quantity basis.

During 2003, average gross hardwood flooring plant profit margins were an estimated 24.3 percent. This figure is down from 27.9 percent in 1992. Margins also are below the 29.8 percent level for the overall U.S. floor covering industry. This decline reflects a rise in material cost/shipment ratios.

Going forward, wood flooring is expected to remain a growing sector of the U.S. floor covering industry during the next five years. U.S. wood floor sales are forecast to climb to $3.4 billion in 2008 and account for 12.8 percent of total floor covering sales. Quantity market sales are projected to reach 1.3 billion square feet, or 4.3 percent of total U.S. floor covering demand. Dollar wood sales are forecast to increase at a 9 percent compound annual rate between 2003 and 2008, and quantity market sales by 5.6 percent annually.

The full report provides considerable detail that will be valuable as those in the industry develop their business plans. The report is available directly from Catalina Research, at (212) 685-7876, for $2,495. NWFA members receive a 15 percent discount, and can receive an Executive Summary of the report for free. To request the summary, telephone NWFA at (800) 422-4556.