MS International, more commonly known as MSI, started making headlines about 15 years ago as an affordable source of ceramic tile and stone. Over the past decade, the 48-year-old company got into the SPC game in a huge way, becoming the second-largest supplier of that product in the U.S. The company continues to grow through innovation, a diverse product assortment and holding true to its core tenet: “Making Dream Surfaces Attainable.”
FCNews publisher Steven Feldman sat down with MSI co-CEO Raj Shah earlier this year to discuss the dynamics impacting the industry at large and MSI in particular.
Let’s look back to 2022. Did the year meet your expectations?
It exceeded our expectations. I would say it was definitely a roller coaster. The first eight or nine months were very different from the last four months, but generally exceeded our expectations. During the year many new challenges as well as opportunities were presented to us.
What were the bright spots, and where did you feel you fell short?
Overall, sales growth was a bright spot. Residential remodel was great for almost the whole year, and MSI focuses on the residential remodel customer. That’s our expertise. But commercial, coming off the COVID-19 years, had a very strong year as well. There were really no down segments. Even residential new construction was strong. On the downside, the increase in interest rates has taken some bites out of the business.
2022: High single-digit growth?
For us, double digits.
Talk about 2023 now that we’re seven months in. Bright spots and challenges.
2023 has been a very different year compared to the past few years. With interest rates reaching recent record highs there has been significant slowdown in numerous parts of the industry. In addition, the failures of Silicon Valley Bank and First Republic also significantly reduced overall lending activity. We have also seen a transition in spending from goods to services. A lot of vacations planned this year, which is reducing the spend on renovations. Finally, deflation in product pricing has been a big story for the year. On the bright side, virtually all the shipping-related issues and obstacles have been removed. We have seen raw material availability significantly improve and even labor availability has started normalizing.
What about the UFLPA. How has that impacted MSI at the ports.
MSI strongly believes in human rights and does not tolerate product that may have been made with forced labor. UFLPA has affected the overall industry with thousands of LVT containers being detained. MSI has put together an industry-leading due diligence and raw materials tracing capability. In addition, we have diversified our sources of production. Overall, our customer base has seen no disruption due to UFLPA. The strongest hedge we have against this is our domestic inventory, diversified manufacturing base and industry-leading due diligence/tracing. We believe the industry will continue to see disruptions due to UFLPA, and MSI will work closely with our customers to minimize overall supply issues.
With interest rates still high, I see a lot of builders doing some rent-to-own programs, which I actually think is interesting.
It’s become quite an industry, actually. It’s billions and billions of dollars behind the build-to-rent industry. If you think of numerous industries and how they’ve consolidated, this is just another example of that, both the technology that’s available today to allow for it and the requirement to reduce overall overhead means you have to have a huge portfolio. These huge portfolios are produced by the build-to-rent segment.
Will flooring wind up in the black this year?
This will be difficult. It will definitely be higher than pre-pandemic with normalized growth added. Deflation is a challenge this year, and that is putting some pressure on dollars. The second half of the year will have easier comps than the first half, but the industry does have a large hole to fill for 2023.
Will MSI be up double digits again this year?
Double digits will be extremely difficult with the headwinds we are facing.
Do you see SPC continuing to grow, plateau or regress a bit given a reduction in prices, deflation and the influx of cheap product that has resulted in claims?
I do think SPC will continue to grow. There’s a couple of places for it to continue to take market share. Obviously, WPC is one. Second, it will take share from some glue-down products. Third, I don’t think it can take too much more market share from most hard surfaces, but there is still market share to take from soft surfaces. Although carpet penetration has been reducing over the years it’s still a huge industry. Every survey will show you that 80% to 90% of homeowners, given the choice and affordability, would want a hard surface floor—which the first level up is SPC. So I do think it can grow, but it won’t be at the same rate as it has been the past few years.
What’s changed at MSI over the last 12-18 months?
My brother and I became co-CEOs, but not much will change. MSI is a family business, and it started 48 years ago when I was born. So we all were brought up on the same set of values, and thus our view of MSI is very similar. There may be some tactical differences of how we should get things done, but from a strategic standpoint we’re very aligned on what type of growth, where we want the growth to come from, how we communicate and practice our values. I don’t think neither the industry nor our company, employees or families will see a difference.
Although we don’t think of ourselves as young, in the grand scheme of things we are fairly young. Both of us think MSI’s best days are ahead of us. Our goal is to continue to run MSI as a long-term legacy business.
How will you divide your responsibilities as co-CEOs?
It’s all over the place. We’ve both been cross-trained on just about everything. We’ve gotten to the size where we can do what we enjoy. My brother enjoys the countertop side more; I enjoy the flooring side much more. Then on the shared services, whether it’s HR, accounting, finance, imports—each of us follows the operations we find interesting.
Any other recent changes?
We’ve added new product lines. We recently launched our engineered wood line called W. We entered the laminate business, we entered the artificial turf business. One thing we’ve always talked about is if things slow down a bit, increase your addressable market. Find more stuff to go after, which we did with these add-on product lines, and all of them have the potential for being $50 million to $100 million in the short term and much larger in the long term.
Over the last 18 months, what’s gotten better? What’s gotten more difficult?
Getting better lead times, supply side pricing—all of that has gotten pretty much back to pre-pandemic levels. What continues to be a challenge is labor and the wage inflation. Also, keeping employees engaged challenged—that’s becoming tougher.
On this labor issue, is there a solution for getting the young people engaged?
I don’t think there’s one solution. There’s no silver bullet to this. It starts with your company’s values having to align with theirs, and you cannot take for granted that everyone understands your values. You have to continually communicate what those values are. There’s different ways of communication in today’s world. It used to be you and I sit down, talk about our values, maybe have a town hall meeting. Today, whether it’s social media, email, digital, blogs, they’re reading it all and getting bombarded with content. So you have to find ways to integrate your messaging within that content. That’s a challenge that didn’t exist in the past.
What about labor? Any solution?
We all act like this is a big shock. There are fewer people in the labor pool, people are having fewer kids, and there’s lower immigration. I don’t think there’s a single solution. I do think there’s some help on the horizon, whether that being AI, robotics, etc. Our goal is to increase our overall staff while implementing many tools to help increase the overall productivity and efficiency of our staff.
And it’s a profession that’s aging out.
Yeah. So it should not come as a shock.
Has the slowdown of new home construction impacted MSI in any way?
I think it definitely impacts the company. Obviously, when things slow down, you have to rethink how you do things. MSI, just like everyone, got over-inventoried because we assumed sales would continue to grow. That did not happen this year so we all got over-inventoried. That said, I think most of us are getting to the point where we’ve worked through most of that. I also think when you’ve had so many go-go years, every now and then a slowdown allows you to think again, to do things the right way, to do a little bit of spring cleaning whether it’s processes, procedures or systems. A lot things just got out of hand, and a little slowdown is probably a good thing.
What about the war in Ukraine? Has that forced you to pivot?
Yes. It’s a really unfortunate circumstance for the people of Ukraine, and we as a company continue to stand by them. We were buying both ceramic tile and pavers from Ukraine. The most direct impact is we can’t get that product. The indirect impacts are the costs and availability of natural gas. Obviously Europe is a huge exporter of ceramic tile, and natural gas is about 15% of the cost of the ultimate product. So that has caused some obstacles. The other one is clay. For ceramic tile, a lot of clay used to come from Ukraine. Everyone had to re-source their clay. So it has definitely caused obstacles.
Switching gears, if I’m a retailer, why do I want to do business with MSI?
It starts with our tagline, “Making Dream Surfaces Attainable.” I think our products are on trend, and we’re spending time inspiring the end consumer. Hopefully that pulls through for our retailers as we help inspire with all the different tools we employ from marketing to technology to social media, all of these tools that paint the dream. Value is a big piece of what we deliver to our retailer customers. Pricing is one big piece of value, but I would say there’s numerous other pieces of it. We continually strive to be the easiest company to do business with, because there’s cost of product and there’s cost of doing business. We definitely want to minimize the cost of doing business with MSI. For example in 2022, we added 10 locations. This helps us be as close as possible to our retailer customers.
How many locations do you have now?
We’re up to 46, with another five close to being finalized.
What does MSI do differently or better than your competitors to benefit the retailer?
Our No. 1 goal is to increase the size of the pie. The ways to do that are to engineer a pricing system, a set of products, and then the operational/logistics side to put that all together where the consumers want more of these products. I think that makes us different from just about everyone else in the industry. Most people in our industry are trying to increase their margin and reduce overall volumes.
Surfaces was big for MSI back in January. What were retailers most excited about?
This was the first time MSI was an all-encompassing hard surfacing player. We had tile, we had LVT, we had laminate, we had wood, we had decoratives, we had pavers. Never in our history have we been able to have every segment of the hard surface industry displayed. We have come a long way from being just a natural stone company.
Give me a product that’s somewhat unique to MSI that provides a solution for the consumer and the dealer can make some money with.
Woodhills. That’s an SPC core with the top layer being real wood. That product is not commoditized and it’s probably a little higher end. So it allows the retailer to make money.
How are you able to do that successfully? A lot of companies have tried that hybrid product and failed.
Our sourcing teams spend a lot of time on product development, testing, QC, putting all that together. Luckily, we’ve successfully been able to launch this product with effectively no claims.
MSI remains one of the top 15 importers in the U.S., right?
Yes.
Was that a good or a bad thing over the last few years given the supply chain challenges?
I think no matter how you look at it, it’s always a good thing to have volume. It did make things challenging, but if things were easy, everyone would do it. Every time there are challenges, it produces opportunity. Our model is not just importing but we import from everywhere. So having the ability and the quickness and the relationships, all that together to move things around real time. So if China has a problem, Vietnam. If Vietnam has a problem, then it’s India. India has a problem, Turkey. Turkey, has a problem, Brazil. We were moving pieces quite a bit. It gives us that flexibility when things get challenging.
Is trucking still an issue—getting product from the port to wherever it is going?
Even that has subsided as a problem. So we’re almost literally across the board back to a pre-pandemic situation.
Plans to expand domestic production?
Yes. In fact, we hope our expansion will be done shortly. We’ll be adding a few lines there. We plan to continue to expand. Again, this is part of that diversity in terms of where we get product because the world continues to have its set of issues. We will also be manufacturing a high-end line of LVT at the facility. Our retail customers have been pushing us to have a higher-end LVT line and now we can provide it to them.
What keeps you up at night?
There’s always the risk you didn’t think of, and then you can put things like cybersecurity issues into that bucket of things you don’t necessarily think about every day, but it can shut down your business. The No. 1 thing I worry about, and it’s more longer term, is how do we continue to have this double-digit growth as a company? Because that’s our goal, and at the same time keep the values and cultures of a small, family business.
Do you see the day when you make a big purchase?
I could never say never, but we haven’t found the right opportunity. Greenfielding has worked better for us.
The other way to grow would be to expand into other product categories, right?
If you think about it long term, it would make sense for us. The way we look at it is what categories within building products has a fragmented vendor base or a fragmented customer base and is a growing product category that we can bring value to? It obviously helps if it goes to our current customers because our same salesperson can market and make the sale. There are many multi-billion dollar categories out there that we have not yet analyzed, and they’re all opportunities.
What do you view as the biggest challenges for retailers right now and how can MSI help alleviate those challenges?
During the pandemic you didn’t have to inspire. Consumers were naturally inspired to update their homes. Today, it’s incumbent on a retailer to inspire a consumer because the economy is a little tougher. Their payments on everything are higher because of inflation. So we’re competing for wallet share. To compete effectively, we have to inspire. We’ve built tools, but we haven’t made it necessarily easy on the consumer to be inspired on what could be done with their home.
Is there a way to help them?
Yes. We have a lot of tools—whether it’s our virtual reality tool, our website, Instagram, etc.—trying to inspire them.
What’s worse—inflation or high interest rates?
The two are very connected, so it’s hard to separate one from the other. But I think for this particular industry, high interest rates probably have a longer-term deleterious effect on the industry than inflation.
What’s happening on the ceramic/stone side of the business right now?
For many years, people thought LVT was just cannibalizing tile and stone. I think we’ve reached the point where that’s over. Ceramic tile can virtually be used anywhere—on a floor, on a countertop, on a wall, on a driveway, outdoors, indoors. There’s no other product like that. Again, this is one of those challenges we need to put out to the industry. The U.S. per capita usage is amongst the lowest in the world. But again, this goes to inspiring.
How is MSI able to deliver a phenomenal-looking ceramic tile to the consumer much more affordably than others?
It ultimately comes down to volume and focus. Two things that are a little different for MSI is, one, we follow a sourcing model, which is a little different from others. We put the whole package—LVT, wood—together for volume. Remember, the No. 1 cost of tile is probably logistics because its value-to-weight ratio is very low compared to just about anything else in the world. So volume is everything with freight rates. The more you can fill up the truck, the better the amortization of the freight.
What percentage of MSI is vinyl, ceramic and countertops?
Pretty much equal pieces.
Give me a couple of things retailers might not know about this company.
No. 1, that we exist. The number of times I’ve heard from retailers, “Who are you guys again?” So I’ll put that on us. We like being off the radar, but when it comes to a retailer, I think we provide such great value that just knowing we exist is something that goes a long way.
What’s next?
What isn’t next? My brother and I are young. We’re hungry, we’re driven and we’re motivated. Our whole senior team is that. Our DNA is growth-minded, so we’re always looking for opportunity, and the good news is within our current product lines our market share is relatively low. Geographically, there’s more to be done. Product categories, there’s a lot more to be done.
