In February of 2015, Lumber Liquidators, one of the largest and fastest growing retailers of hardwood and laminate flooring in North America at the time, was involved in a supply chain expose. Over a year later, the retailer continues to struggle with the customer and financial impacts of that disclosure.
A broadcast report from CBS News’s 60 Minutes program turned a public light on the retailer’s supply chain in terms of sourcing and product composition. The 60 Minutes report indicated that:
“Much of its (Lumber Liquidator’s) laminate flooring is made in China, and as we discovered during our investigation, may fail to meet health and safety standards, because it contains high levels of formaldehyde, a known cancer causing chemical.”
During its investigation, the news networks placed hidden cameras and conducted interviews of the company’s flooring suppliers. Employees of three Chinese mills indicated they were using core boards with higher levels of formaldehyde to save the retailer up to 15 percent on price. Three mills further admitted on camera to falsely labeling products as CARB 2–compliant.
By May, the flooring retailer announced that it had suspended all of its China sourced laminate flooring products. The retailer further disclosed that a Special Committee composed of independent directors, with the assistance of third party advisors, had been conducting an ongoing review of allegations regarding laminate flooring sourced from China. That body engaged a former FBI director and his firm to review the retailer’s product sourcing practices and to serve as an independent compliance advisor. In its public update, the retailer indicated:
“From early March through May 1, 2015, BHC sent approximately 26,000 testing kits to nearly 15,000 Lumber Liquidators customers and approximately 11,000 of those testing kits were returned. As of May 1, 2015, over 3,400 testing kits from approximately 2,600 households with laminate flooring sourced from China had been reviewed and analyzed. Of those households, over 97% had indicated indoor air concentrations of formaldehyde that were within the guidelines set by the World Health Organization as protective against sensory irritation and long-term health effects.”
However, those actions, although relatively swift in nature, were not enough to convince consumers, and since that time, amid continued fallout, several top executives have departed including the CEO at the time of the incident.
For the quarter ending in March, the flooring retailer reported its fifth straight quarter of revenue declines and much deeper loses than expected. Same store sales declined nearly 14 percent in the recent quarter. The Q1 loss was reported as $32.4 million compared to a year-earlier loss $7.8 million. Expenses climbed 20 percent due to a $16 million charge related to a securities class action and a $13.5 million increase in in legal and professional fees.
The company shares have not lost more than half of their value over the past 12 months.
Once again, there is a need to focus on some takeaways. In its apparent zeal to reduce its lumber costs allegedly by 15 percent, the retailer appears to have paid a far higher price in customer loyalty, in subsequent added expenses and in shareholder value. With no recognized U.S. or global wide standards for indoor formaldehyde concentrations, the retailer was subject to varying consumer perceptions as to the overall safety and standards related to certain lines of flooring.
One year later, Lumber Liquidators remains under the looking glass, providing yet another example of how a supply chain focused disruption or snafu can have much more lingering effects