10 Questions With ....
Rupesh Shah
M S International
Ever since joining the family firm in the early 2000s, Rupesh "Rup" Shah saw the industry and the company -- M S International -- grow at an almost exponential rate.
As co-president (along with his brother, Rajesh) since 2012, he's guided a coast-to-coast expansion of locations, along with adding to the company's natural-stone offerings with quartz surfaces, tile, hardscape material and luxury vinyl tile (LVT) .
Shah's also been one of the point people opposing unfair-trade tariffs on foreign shipments of quartz surfaces. And, it's a sector where MSI is covering all bases by partnering with Spectrum Quartz on a new U.S. manufacturing facility in Latta, S.C.
Stone Update caught up with Shah earlier this summer at MSI's Orange, Calif., HQ. (Masks were worn and proper social distancing observed.)
Compared to a year ago, where are you in terms of business transaction, workforce inventory, the like?
SHAH: Pre-COVID, we were in aggressive expansion mode. Through the middle of March this year, we were growing at healthy double-digit rates. Last year, we announced seven new distribution\s centers across the country. We actually opened six of the seven, and the seventh, which is in Philadelphia, opens in August. So we were in an aggressive expansion mode. We added, over the last year, about 100 employees and we crossed over 2,000 in total. But we also invested heavily in technology. We are laser-focused on improving the productivity of virtually every function across distribution, including sales, operations, picking and packing orders, the physical inventory process, marketing and merchandising, how you import containers, how you deliver your material, and how you process payments to name a few. There are probably over 100 different processes involved in distribution that people seem to forget. Obviously, increased adoption of digital technology in almost every function has been critical to our productivity improvements. In terms of inventory, we have an internal goal that 15% of our sales need to come from new products. We're going to hit that again. So we’ve been very aggressive and continue to introduce new product lines. Our inventory levels are generally in line with our sales growth as we continue to broaden our product offering. Despite COVID, our medium-term outlook really has not changed and we continue to invest in people, inventory, and geographical expansion, but obviously with the increased scrutiny. The good news of operating in a privately owned, conservatively capitalized, family business environment is that you can make decisions based solely on the long term. You don't need to overreact short term, and we don't believe COVID has changed our long-term outlook on the surfacing industry. Two years from now, we believe the hard-surfacing industry will be better than it is was pre-COVID.
What made you realize that this was going to be a different year? What did you do here to deal with that?
SHAH: Beginning in early, early March, when you started to see the first news reports of travel starting to be curtailed, we started to realize that things are going to get a lot worse before they got better. But it's hard sitting here in California to necessarily have a feel of what the entire country is feeling. We have over 35 distribution centers, so we started doing weekly surveys across all our locations to all of our managers. And quite frankly, the surveys were useless. Even as recently as March 15, our surveys of our managers were telling us that things wouldn't be so bad, and the drop in demand would be very limited anyway. I think the whole world started a much-more-accelerated pace of change on March 19, when California was the first state to issue a stay-at-home order. Then, of course, it was a domino effect. And as stay-at-home orders were initiated across the country, all of our lives changed. Here at MSI, we became experts at reading and interpreting each order and how they could impact our business. You know, each order was different for all of our 35 distribution centers, and each one you had to adjust your operations a little bit differently. I remember that, for almost a week-and-a half, it was like every two hours, a new order or revised order would come out. Now what do we do? What do we have to change? It was unlike anything I can point to. The first thing we did is we moved as much of our workforce as possible to work from home. We deployed hundreds of laptops in a matter of days. Given the strength of our supply chain, we were ahead of most companies in securing the necessary PPE to give out to our workforce. We ordered thousands of gallons of sanitizer and disinfectant, tens of thousands of masks and face shields, and increased air-filtration devices across our organization as just a few examples. Our team did an amazing job working together to change our operating procedures. We literally had to change tons of different things on how you ship goods, how you get delivery signatures, how close people work to each other’s desks and the layouts for the people who continue to work here to comply with all the orders. We've also dramatically increased our communication. With our teams across the United States and Canada, we moved to once-a-week calls with our top 125 employees in the company. Each call would last about two hours and provide updated guidance on everything from health and safety demands, changing sourcing conditions and guidelines for customers for opening and closing our showrooms, cost control, and channels to focus on in times of depressed demand. The calls are extremely helpful to make quick decisions in a continuously changing environment. One thing that didn't change through all this was our commitment to our team. In my own personal view, it takes years if not decades, to build a company culture, and we're very lucky to have a great team and culture. While we took a sharp look at every aspect of our business because we were preparing for a scenario where our business could drop as much as 50% to 60%, layoffs were always off the table. I think too many companies made some short-term decisions and overreacted, and now they will struggle to rebuild their culture as we come out of this. We took a lot of short-term hits, but we believe, long term, it's the right decision. One last thing I'll mention, which I think was something very innovative, is that with the stay-at-home orders, all of a sudden, we have all our employees whose kids aren't going to school anymore. They're working from home, and it's pretty amazing how quick schools adjusted to a digital or virtual environment, but one thing that is kind of less-reported-on: Would people like our employees have the infrastructure in place at their homes to effectively participate in virtual learning? At MSI, we gave out over 1,000 laptops or iPads to hourly employees and their families to help their children with the virtual schooling, which continues today. And quite frankly, I couldn't think of a better way to help our employees in these tough times. Education is critical to the future.
When do you think you're going to return to pre-Coronavirus levels? And how you see the industry responding?
SHAH: It's interesting how fast sentiment changes. In the beginning of April, we thought our industry would disproportionately be negatively affected by COVID. Sitting where we are today, we're finding people are spending much more time in their homes and, with interest rates at all-time lows, there's more pent-up demand than probably ever for remodeling your home. MSI tends to be stronger on the residential side than commercial side, so although April and May were very tough months for us, June and July are much better. We're cautiously optimistic that conditions will continue for hard surfacing into the late summer and early fall. However, it is too early to really predict what happens after we catch up for the lost sales in April and May. It’s impossible to estimate right now how much of the demand is really pent-up demand, or if there is a long-term secular shift about how people think about their homes. As cases continue to go up, at some point, having unemployment above 10% will depress demand. So, you know, it's too hard to say how each month is going to look. But again, I can confidently say two years from now, the industry will have its best year ever. We're very, very positive on that.
You've been very active on combating the tariffs on quartz surfaces. Where are we at this point? Is this the new level of where it's going to be?
SHAH: First, all quartz imports from China have effectively stopped, with the exception of some what I would call unscrupulous companies who are illegally transshipping material. We believe U.S. Customs will increase its enforcement, resulting in both penalties and potential jail time for those involved in this illegal behavior. Quite frankly, I'm surprised at the number of companies who are knowingly engaging in this behavior. The India and Turkey cases came to a conclusion in June. The duty rates, as expected, came in the low single digits. So of course, imports from India and Turkey are going to continue. It's impossible to predict what's going to happen next. We continue to believe the trade actions by the U.S. Commerce Department on India and Turkey violated the plain terms of the law. Simply put, the Commerce Department didn't get fabricators' opinions in garnering 50% support, even though fabricators are clearly part of the domestic industry, and they make up the vast majority of employment, payroll and even investment in the industry. There continues to be a threat of Section 301 tariffs of up to 100% on natural-stone and quartz products imported from Spain, Italy, and Germany as the WTO dispute between Airbus/Boeing continues. Although quartz and natural stone were spared on the initial list of products affected, they are up for consideration again. COVID is a real threat to all supply chains. I think overseas manufacturers are going to be hesitant expanding with all the uncertainty, and access to capital has become challenging overseas. As a result, I think you will see a slowdown in expansion in the supply chains. As it relates to future quartz cases, its impossible to predict what will happen next. As shown in the results of the India and Turkey cases, the test is for quartz industries is if they don’t have significant subsidies and also if products are sold at fair value. The next obvious countries in terms of imports would be Spain and Vietnam. I don’t know enough about the situations in those countries to comment on the likelihood of success.
When you're dealing with those single-digit tariffs, is it really going to even have an effect on those two countries?
SHAH: The quartz industry is going to continue to expand and take market share from all surfaces. Quite frankly, because of the supply shortages in the last two years driven by these trade actions, innovation has really suffered in the quartz industry. I think product and design innovation will drive growth. Factories based in market economies that are confident in their innovation will likely continue to expand. When I look at our own color palettes, we're working on a number of new colors that look absolutely stunning. This includes colors we are working with our overseas suppliers, as well as colors developed at our domestic manufacturing plant in South Carolina. While you may see some slowdown in new factory expansion, I would attribute that to COVID and the uncertainty around that. I expect the imports numbers for all countries to be relatively soft for the foreseeable future.
What is the progress of what's going on at the South Carolina plant?
SHAH: You have to take a long-term view. The factory in South Carolina is progressing nicely. Unfortunately, we're behind schedule, largely due to the inability of technicians from the machine manufacturers to be on site because of travel restrictions imposed by COVID. We continue to progress with the installation of all four lines, with the first line coming literally online as we speak. Hopefully, we'll introduce our domestically produced color palette as we move into the second half of the year. We're lucky to have great partners in Spectrum Quartz. We couldn't be happier with our partners. We've known them for years. We're almost a year into the relationship and it couldn't be working better.
Are you going to continue aggressive moves in both products and location, or are you maybe going to fine-tune the approach?
SHAH: Growth is in our DNA with our entire management team. We're not happy with inflation-type growth; we need to grow at double-digit rates. To get there, we're going to continue to invest in our existing product lines. I'm sure we'll add new product lines and geographical expansion is going to continue. In terms of locations, I think we can open at least another 20 locations as we look forward into the future.
Where does MSI see the fabricator in the business chain?
SHAH: From day one, we've always viewed fabricators on the countertop side as the most-influential part of the chain and they're absolutely critical. I think we're seeing fabricators increasingly becoming sophisticated and capturing more of the value chain; they have their own retail operations, design centers and in-house designers, and they come up with their own merchandising concepts. If you think even more-broadly about the countertop market, as it went from natural stone to quartz, I think most have underestimated the role fabricators play in the adoption of new surfaces. We believe if you can't get the fabricators on board, it's a real uphill battle, and you are seeing that as we speak at the very limited adoption of porcelain slabs.
So where is natural stone fitting in at this point?
SHAH: Natural stone isn't going to disappear. In my own personal view, the primary reason for the recent declines in natural stone has really been the change in design trends towards white marbles, along with some other looks not readily available in granite. From a durability perspective, most granites perform as well as quartz or, in some aspects, actually better than quartz. The real issue right now is that people don't want the look of granite. They want the looks of marble or limestone and, unfortunately, both those surfaces are significantly inferior from a durability perspective. Quartzite continues to grow as they match up well with current design trends and they are a wonderful surface from a durability perspective. It's hard to believe, but just ten years ago, what were the most popular colors? Baltic Brown, Uba Tuba, Tropic Brown and gold granites from Brazil. Now, it's hard to imagine trends changing away from white and gray back to browns and beiges. I have no idea when it's going to happen but, I guarantee you, it will eventually happen. Depending on where trends are in the future will be a major factor in future demand for natural stone. I'm surprised at how long the white and grey trend has lasted, and we still don't see any indications of it significantly changing anytime soon.
What kind of countertops do you have in your home?
SHAH: Taj Mahal quartzite on my kitchen island and Alaska White Granite in my outdoor kitchen. All the bathrooms have different colors of limestone-looking quartz. The last room I did was about five years ago. When I think about remodeling today, which is a natural thought if you're in the industry, I don't really want to change any of the natural stone. There's something timeless about natural stone that doesn't translate to the manufactured materials in my house. I have quartz and porcelain in many places, and it just doesn't have that timeless beauty that natural stone has.