Photos: ©2016 Paul Wedlake Photography. www.wedlakephoto.com

Roger Oxford is facing a few major hurdles in selling hearth products into new construction. As senior vice president of Strategic Accounts for Hearth & Home Technologies (HHT), he runs a team that calls on the company’s installing distributors, and another team that calls on National Builders.  

His problems, by the way, are also your problems if you’re a hearth retailer, distributor or another manufacturer selling to builders.  

Roger Oxford, senior vice president of Strategic Accounts for Hearth & Home Technologies.

First, the incidence rate of fireplaces in new residential construction – i.e., the percent of new homes with at least one fireplace – is among the lowest it has been in five decades. The highest percent was 66, and that was in 1990; that year two-thirds of all new homes had at least one fireplace. The lowest percentage was way back in 1973, at 44 percent.

Today it’s at 49 percent, 15 percent below the peak, and that’s a lot of lost fireplace sales (see Figure 1).

Second, while a large majority of fireplaces going into new construction are fueled by gas, those units are still mainly at entry price-points. The word “still” is appropriate, because that always has been the case.

While those two problems may be the greatest that Oxford faces, by no means are they the only ones. For instance, the nation’s homeownership rate fell to 63.7 percent in 2015, which was down from the peak of 69.0 in 2004; that’s a 5.3 percent decline.

According to Cheryl Russell, Editorial director of New Strategist Press, “The long-term decline in homeownership, now in its second decade, shows no sign of stopping. Between 2014 and 2015, every age group experienced a decline in homeownership (see Figure 2).” Other factors include the following:

New Household Formations: Americans are getting married later and later. The average age of first marriage in the United States is 27 for women and 29 for men, up from 23 for women and 26 for men in 1990, and 20 and 22 in 1960.

To that, add the fact that, for the first time, more than 50 percent of the U.S. adult population is single, and the instances of people living alone are increasing (see article Single & Lovin' It!).

Affordability: We’ve all heard about the burden of student debt being carried by the younger generations. Interest rates may be low (see Figure 3), but many still have trouble qualifying for a loan. The large increase in home prices over the past few years is also having an affect (if you haven’t recently, just take a look at the price of homes – both new and previously owned – in your area).

But Oxford remains optimistic about the future for hearth products in new construction. He cites factors such as the continuing growth of the new-home construction industry; the fact that home prices are going up, and the size of homes increasing; the gap between where we are and the 30-year run-rate (which represents a growth opportunity); and the continuing low level of interest rates.

Regarding the low incidence of fireplaces in new construction, and the aggravating fact that builders have been choosing entry-level fireplaces, Oxford believes that the correction requires a sales effort and education of builders.

Builders, he says, choose the lower-cost products mainly because they remain unaware of options available and the profit that comes with them, and a general lack of understanding regarding how their homes will sell faster if they have a quality fireplace. To that end, HHT has set up a training program for their installing distributors to show them how to sell builders a better product.

Figure 1

Hearth & Home: Please explain exactly what your job entails.

Roger Oxford: “My focus is on Installing Distributors in the top 100 markets, and then on the top National Builders. At HHT we define customers by their business model: If you build your business model primarily around selling to builders, then you’re an installing distributor; if you build your business primarily around selling to consumers, you’re a dealer. There are a few exceptions to the rule with those who do both, but our data shows that around 20-25 percent of the average dealer’s business goes to builders.

“When we come out with a new product, we determine whether it’s primarily a dealer or new construction product. But when it comes to actually selling specific accounts, my focus is more on the installing distributors, and (senior vice president of Dealer Sales) Jeni Forman’s focus is more on selling to dealers and wholesalers.”

How large is your team?

Oxford: “I have 13 people who call on installing distributors and national builders across the country.”

Those numbers sound very small to me, given the size of the area you have to cover.

Oxford: “Well, we have Fireside Hearth & Home, which is our installing distributor arm, that covers about 25 percent of the permits in the country. My team is calling on the rest of the major markets.”

So the dealers who fly the flag of Fireside Hearth & Home function as installing distributors in their own right?

Oxford: “That’s correct, except in Minneapolis and Madison where we have retail stores that are basically dealers. We also have locations in New Jersey, Pennsylvania, Maryland, Delaware, North Carolina, South Carolina, Tennessee and Virginia that are owned by Hearth & Home Technologies; they are Fireside Hearth & Home installing distributors and focus on the builder side of the business.

“In Minnesota and Madison, Wisconsin, we have an installing distributor that is wholly-owned, and we have our six retail stores that are wholly-owned. Other than that, everything is independent, whether it’s an installing distributor or a dealer.

“We have six locations that are primarily retail, and 26 locations that are installing distributors. Our primary business at Fireside Hearth & Home is in installing distributors, with the exception of Minneapolis.”

Finally, consumer confidence seems to be stabilizing a bit, but there does seem to be regular fluctuation.

Oxford: “Yes. I think the same is true for the builder world. Things are at least leveling off where we’re not getting those incredible swings. Look at the graph that goes back to 1960 (see Figure 4); you can see that we peaked in 2006. If you take either a 30-year run-rate or a 50-year run-rate, the numbers are almost exactly the same. We have a long way to go to get back to just a 30- or 50-year historic run-rate.

“At least internally, and I think in the industry as a whole, everybody believes that single-family housing permits will get back to 30- to 50-year run-rates. Nobody believes it’s going to get back to the 2006 level.

“Now, the question is, how long will it take us to get there? Is that a three-year, four-year or five-year wait? If we had a 15 percent increase for four years in a row, we would get there, but it’s probably going to be more like seven percent. But, in my estimation, there is no reason to believe that we won’t get back there.

“The new-construction channel is on an upward momentum that has at least three to five years where we will see continued, progressive growth. That growth could be anywhere from five percent to 25 percent each of those years, depending on what else is going on in the economy.

“One factor is that the Millennials are moving into buying homes much later in life than did Gen Xers or the Baby Boomers before them. If you look at the demographics and put it on a historic run-rate, we should have been up 25 percent in 2015, and also in 2014 for that matter. People are prioritizing where they want to make their investments, and housing is moving down; we are at a 50-year low on homeownership rates.

Figure 2

Source: Census Bureau, Housing vacancies and Homeownership

“So that tells us two things. One is the positive news that more people will be buying homes in the near future – or is it a signal that people don’t want to own their home any more? I don’t think that’s the case, and there is no data out there to support that’s the case. It just seems as though people are waiting until a little later before they buy their home.”

Let’s talk a bit about the Millennials. Starting about four or five years ago, common knowledge was that these young people wanted to be in urban areas, or in outlying locations equipped with light-rail systems up to a 20-mile distance or so from an urban area.

But now it’s said that the minute they decide to settle down, get married and have kids, they don’t want to be in an urban area with their kids going to inner-city schools. They want to be outside of a city, with easy access to its amenities. That bodes well for people owning their own home, doesn’t it?

Oxford: “It does, and I agree with everything you just said. Subdivisions that Millennials do want have a sense of community and access to amenities. They don’t want to live in the suburbs and have to drive to the city for entertainment.

“They want restaurants nearby, bars nearby, entertainment venues nearby, shopping nearby. We’re starting to see more planned communities that embrace the commercial aspects of living, in addition to just having a sprawl of houses everywhere. They are putting in small city centers with drive-up malls, restaurants and some entertainment.”

Figure 3

Source: Federal Reserve Economic Data.

The other thing we’ve read consistently about Millennials is that they have a love affair with the outdoors that’s even stronger than the Baby Boomers. They’re not just thinking in terms of something in the backyard. They’re thinking of being outside everywhere around the house, be it a front porch, a side porch, or a patio somewhere. They just want to be outside.

Oxford: “Absolutely. It’s part of why outdoor fireplaces are doing so well. Outdoor living space is one of the most highly regarded amenities that homebuyers want in their house. What these subdivisions are doing involves bicycle trails, hiking trails, outdoor activities like that.

“No one wants to get on a bike and have to fight traffic. They would much rather get on a trail and go 20 miles, as opposed to having to deal with downtown traffic. But you’re right. The outdoor lifestyle, outdoor living, is very important to the younger generation, partly because outdoor space costs about 50 percent of what indoor space does.”

Figure 4

Following a dramatic plunge during the Great Recession, single-family starts are struggling to get back to a 25-year average.

Buying a little chunk of the outdoors and developing it is fine, but all of a sudden you start putting in an outdoor kitchen and a beautiful Outdoor Room, and the price goes up incredibly fast. Toll Brothers has said that their Outdoor Rooms can end up being 30 percent of the cost of the home. Considering that many of the Toll Brothers’ homes are over a million dollars, that’s one heck of an Outdoor Room.

Oxford: “Absolutely, and we’re seeing it especially in Colorado, where they have as many outdoor fireplaces as indoor. In some houses, I’m seeing two and three outdoor fireplaces compared to one to two indoor fireplaces. Outdoor space is becoming big.

“Also, the California Room is huge, and we now have approval, in certain situations, for our indoor fireplaces to be installed outdoors in those covered areas. We’re seeing our top-end products being installed outdoors. We’re selling $7,000 to $10,000 fireplaces in outdoor spaces, see-through fireplaces for the outdoors. That’s not just happening in warm markets. It’s happening in warm markets, cool markets, cold markets, everywhere that people live outdoors.”

It’s interesting you mentioned that, because that’s been one of my pet peeves for about 15 years. The Outdoor Room trend was made possible by the efforts of the patio furniture industry. They came out with incredible fabrics, such as Sunbrella, that can be left outside year ’round and stand up under the sun; it’s just phenomenal technology. Plus manufacturers of furniture expanded into a great variety of frame materials, styles and designs.

The barbecue manufacturers did a great job by expanding from a basic grill up to an outdoor kitchen, with island, sideburners, warming drawers, etc. But I always felt the hearth industry was lagging way behind. A hearth manufacturer might just tweak his indoor unit a bit so it would hold up outside, but few made the effort to create exciting new designs for the outdoors.

Oxford: “I think that’s a very fair criticism.”

Now that’s starting to change, with hearth manufacturers finally upping their game.

Oxford: “I think it’s going to change. I don’t think there’s any question about it. To your point, National Builders are as much on that trend as anybody else; they’re buying into it. When you go into model home communities, you’re going to see Outdoor Rooms. Even if they don’t buy a new house, visitors are going to see it, and they’re going to say, ‘Hey, I want that Outdoor Room at my house.’

“In my estimation, the large national builders, the publicly-traded builders in the country, are going to continue to consolidate. Their share of the market is continuing to grow; I don’t see any reason that is going to change in the near future.

“It’s easy for our industry, our distributors, to point fingers at builders and say, ‘They just don’t get it; they’re not putting the right fireplaces in.’ But it’s not the builders’ fault. When somebody says, ‘Builders just care about price; all they’re interested in is price and they don’t want to look at upgraded fireplaces.’ That’s absolute BS, they are business people who want to make money and make their homebuyers happy. We have to help them understand the important role fireplaces play in that equation.

“What happens is that builders, in the absence of being shown great fireplaces or having fireplace options, will default to either price or just expecting a basic fireplace. So if our distributors or manufacturers aren’t out there saying, ‘Here’s what consumers want, and here’s how you can make money,’ there’s an incredible disconnect.

“Eighty-five percent of people want a fireplace; only 49 percent of them are getting a fireplace in their new home. If we’re not in their face saying, ‘Mr. Builder, you’re missing what consumers want,’ it’s not the builders’ fault. They don’t know that. It’s our fault. If we go to them and present our entry price-point product rather than bringing them in and saying, ‘Let me show you what’s available and, oh, by the way, let me tell you what consumers want and what they are willing to pay for it,’ then it’s our fault, it’s not their fault.

“Our job, as an industry, is to properly represent to builders what consumers want, what their desires are and the products we have to fulfill those desires. I can’t tell you how many times I go to a builder and say something like, ‘Why aren’t you doing X, X and X?’ Then I show them some of our products, and they look at me like I’ve shown them an iPad and we’re in 1995. Their usual reaction is, ‘I didn’t even know that existed.’

“It’s so easy for us to say that the builders are stupid. Well, the builders aren’t stupid. They’re business people and they will do what they know makes them money. If we show them that our product category is a profit category for them, guess what – they will put in $5,000 fireplaces or $10,000 fireplaces or even $20,000 fireplaces. But in the absence of understanding what’s available, they will put in a $1,200 fireplace or an $1,800 fireplace.”

Construction of a new house in the greater Denver area.

We entered the hearth industry at the end of 1979, and can clearly recall conversations back then with folks from Heatilator, and they were saying that, with builders, it’s all price. They just want the cheapest box they can buy, and sales of builder boxes into new construction are so competitive that even 50 cents a unit can make or break a deal.

It’s interesting that, 35 years later, you’re telling me that it’s still going on - that the hearth industry hasn’t done a very good job of educating builders on the variety of products and price points available to them.

Oxford: “Yes, and if we continue to under- spec product and not get the right product in peoples’ homes, they’re going to stop wanting our fireplaces. If a homeowner buys a cheap fireplace, they aren’t excited about it. But when you give them a great fireplace, they bring their neighbors over to look at their very cool, new fireplace, and they use it every day.

“It’s our responsibility as an industry to position fireplaces as a profit opportunity for builders, because they are highly desired by homebuyers and consumers. With that information, builders will make the right decision on which fireplaces to put in their homes and, in the absence of that, they will either default to price or just take a fireplace out of the home.

“When a builder says something about price, rather than saying or thinking ‘All they care about is price,’ I would rather have builder sales reps ask themselves the question, ‘What is it that I didn’t do to show them how they could be profitable with the fireplace category, or how much consumers want fireplaces? What can I do differently to sell the category?’

“I’m still convinced by what I learned years ago: There is only one in nine purchasing agents who buy with price as their number one concern. So it really is our responsibility to help builders make the right choices.”

Through the years and going back into the ’90s, Roger Sanders, a hearth dealer in Bend, Oregon, tried to convince his manufacturers to create a more expensive fireplace. Bend is second-home country for wealthy Californians, and Sanders kept saying, I’m selling fireplaces for $4,000 or so, but I could easily sell many for upwards of $15,000.

Not one manufacturer took him up on it. Now we have linear gas fireplaces that manufacturers have sold for as much as $150,000. The 2015 Vesta Best-in-Show winner was Big Woods, with a very unique glass burner. That fireplace retails for $70,000 or so. In my view, ultra-expensive hearth products are a new category in the industry. Roger Sanders was way ahead of his time.

Oxford: “Roger Sanders was right; he’s a visionary thinker. When we first showed a Solaris fireplace some years ago, the price tag was $15,000. Everyone was asking, ‘Who’s going to pay $15,000 for a fireplace?’ Now it’s not unusual for a consumer to spend $15,000 or $30,000.

“Those are the kinds of things we’re working on, and we’re being challenged by some of our distributors for pushing too hard, but we have to, because otherwise our industry is at risk.

“If you look at the incidence rate chart through the years, what you see is that, up until the early ’90s, the fireplace incidence rate was on a fairly gradual increase. Then it went down. The reason, most likely, was that gas fireplaces in the early ’90s had a blue, ghostly flame, and that didn’t change for some time.

“So the incidence rate went down, and now it has started to increase again. I think you’re right on. It has to do with the outdoor fireplaces; it has to do with the linear look; it has to do with the modern category. You can drop a flat screen TV on top of our Primo linear fireplace, because it’s all zoned heat, and it’s killing it in the market.

“Two or three years ago, when we said we weren’t going to put fans on that product, and that we weren’t going to have it put out heat, the trade channel thought we were idiots. But when you listen to what builders are challenged with, they’ll tell you they don’t have room for a big fireplace and a flat screen TV. So we had to figure out how to put the two together. You will see many more products like that in the near future.

“The Primo is one of the ways we can do that; another way is to go vertical or go with units you can recess in the wall. All of these approaches help us keep the focal point of the fireplace, and at the same time meet the needs of the builder to go with the changing trends of big screen TVs, more windows, more open areas, fewer walls.”

At the low end, what’s the cost of a fireplace going into new construction?

Oxford: “When you talk about a gas direct-vent fireplace installed, $700 is at or near the bottom in very competitive markets at the installed price for a builder, even at the entry price-point. That’s without a mantel or surround.”

Roger Oxford examines a fireplace installation.

You talk about having your distributors upsell builders into something better; ballpark, what’s the price point of such a unit?

Oxford: “In my estimation, builders are selecting fireplaces at about 50 percent of the spec level that they should be. Another way of looking at it is that we as an industry should hold ourselves accountable for doubling the spec level of what builders are putting in today.”

Now, even with a story such as that, which is so compelling, you still have distributors baulking at sending their people to your classes to learn how to do it? That would double their business.

Oxford: “Yes, without growth in the industry, without increasing incidence rates, without taking any business from the competition, they could double their business.”

If somebody came to me and said, “I can double your business. Just send your salespeople for a two-day course.” I would be pretty dumb not to do it, wouldn’t I?

Oxford: “Yes. Double the business and probably triple the profit. It doesn’t cost you any more in labor to install a mid-range fireplace than it does an entry price-point fireplace.

“We as a manufacturer know we have to do a better job of getting fireplaces that work well in warmer climates; we have to have more outdoor products; we have to have better small-footprint fireplaces that are not entry price-point. We have to do a better job in all those areas.

“We’ve talked about distributors doing a better job. Salespeople have to do a better job of helping position the category to builders, because it’s not that builders have price paradigms (that can’t be broken) or just want to buy the lowest price units. It’s that they don’t know any better.

“Fireplaces historically represent somewhere between .5 percent and one percent of the purchase price of a home. They don’t have enough time or energy to focus on something that’s only .5 percent. We have to hold ourselves accountable to be the professionals, the experts, to go to the builders and say, ‘Let me help you make money in our category.’

We in the hearth industry are fortunate. The product we work with is still the focal point of the home. It’s a fortunate luxury to have that as the product we’re selling. Then we dumb it down, and we’ve been selling, up to now, mainly the cheapest stuff that we can produce. At least that’s where the numbers have been. That makes no sense whatsoever.

Oxford: “One of our distributors, a company owner, went through our training, and when he finished he said, ‘I loved it. I thought it was great.’ But then he got back into the day-to-day task of running a business and he said, ‘I’m driving and one of my longtime builders who has known me forever calls and says, ‘Hey, I’ve got a new home going. It’s got two fireplaces in it. Can you send out a couple of fireplaces for my job?’ Well, normally I would have said, sure, I’ll write it up and send it out. But then the training dawned on me.’

“He told the guy, ‘I can’t do that. I can’t just send you the same fireplace as you put in your last house. I need to ask you some questions. Who are you building this home for? What type of home is it? What do the homebuyers want? I’ll bet you haven’t been in my showroom in 10 years. You don’t even know what’s available. I’m not going to just send you a fireplace. What I will do is meet you at my showroom. I’ll show you some of the great products that are available. You can show me the plan. We’ll pick the right fireplace for the home and I’ll buy you lunch.’

“The guy came in and spent five times as much as what he normally did because he had been buying the same fireplace for the last seven years. The distributor called me and said, ‘Ah, the light went on. Now I get what we’re doing wrong. I get it. We were listening to what a builder or a purchasing guy says. The purchasing guy doesn’t say, Come show me your expensive stuff. He does what purchasing people do. They call and say, Hey, I need a great price on a fireplace.

‘So I told my guys, I don’t care if they say they only want to look at low-end product. Don’t show them just the inexpensive stuff. Force them to look at the good stuff and then have some before-and-after pictures and show them what the competition is doing.

‘Show them that the competitor they either dislike the most, or are the most concerned about, is putting in better fireplaces and say, Here’s what you’re doing, Joe. Let me show you what the guys that are selling to your same homebuyer are putting in.

“Every single time, if you get somebody who is in sales or design or who has P&L responsibility, they’ll say, ‘That’s what we’re putting in? And that’s what my competition is putting in?’ They then turn to their purchasing people and ask, ‘What are you thinking? Put the better products in!’

“If we’re not selling in this manner, and then we blame the builders for just choosing the low-end product, whose fault is it? It’s not the builders’ fault (laughs).”

I think the key is what you said before, which is that the consumer should be the one choosing the fireplace. I believe you said they always will spend twice as much.

Oxford: “Yes, at least double. For instance, if I showed you the plans of the home I’m building in Colorado, you would be courteous and say, That’s a really nice home, Roger. But because you live in a very old house in New Hampshire, you would be thinking, I wouldn’t want that home for anything because it’s very contemporary and very western. So if both your builder and my builder called a builder sales rep and said, Hey, I need a quote on a fireplace. If that rep is not thinking about, and asking, ‘Who is this home being built for?’ then we’ve lost the battle before we even got started.

“Why would we shoot ourselves in the foot? Why would we do that to ourselves? Yet we do it in our industry literally every day.”

I interviewed Chris Robins, the new CEO of Char-Broil, a large, worldwide grill company. She said, “I’ve studied this industry. I’ve had enough time in the grill industry. This is a bunch of white guys who are making products for themselves instead of looking at the consumer and asking, ‘What does he or she want?’ and then building to that vision. They are building to specs so their factories can function efficiently.”

She is probably much more right than wrong. She said, “My mantra is consumer first. First we find out what the consumer wants. Then we build that product, and we do it for every one of our brands and we do it every year, and we keep changing and we give her or him exactly what they want.”

I think a vast majority of hearth manufacturers (and patio furniture and barbecue grill companies as well) – I don’t include your company – never do any research in terms of what consumers want.

Oxford: “I think you’re right, and we’ve probably frustrated our customers a bit because we believe the same thing. It’s not that I don’t respect what a distributor tells me about the product that they want or think they need. It’s just that, if I build only what our channel is asking for we’ll never lead the industry and we’ll never change the hearth industry.

“What we have to do is build product that homebuyers want, or at the very least build product that they don’t even know they want, but will value, and then go to our trade channel partners and get their input.”