Carpet, the economy, and Shaw in Grand Central: Strategic Exchange

By Kemp Harr

Brian Beaulieu with the Institute for Trend Research is a perennial speaker at the annual NAFCD (North American Association of Floor Covering Distributors) meetings. He is an economist with an entertaining stage presence, which helps make him a popular public speaker. Brian’s message in Chicago in mid-November was mostly good news.

This year he started his presentation by showing a chart that proved that most of his forecasts have been amazingly accurate. He does predict that the current economic recovery will briefly taper off in the second half of 2014 but overall the next three years (2015-2017) will be good years. Here are a few of his comments:
• Housing outpaced his original projections for 2013 but it will go flat briefly in 2014.
• Inflation will remain dormant in the near term.
• The U.S.’s position in the global economy is improving. The U.S. will have the most powerful economy in the world for at least the next two decades—so stop worrying about your kid’s future.
• The global population will increase by one billion between now and 2050, and the U.S. alone will grow by 120 million. Population growth is good for the economy. Inversely, the population in China, Japan, Germany and England is shrinking. The only negative demographic in the U.S is related to aging. But this issue will correct itself in 2036.
• There’s a 90% probability that the stock market will go down in 2014 and stay down for four to eight months. This will negatively affect the “affluent” sector of the market the most. A severe downturn in the stock market does not mean the economy will suffer.
• The bond market will not be good in the second half of 2014. New Federal Reserve chair Janet Yellen will continue to stimulate the economy with quantitative easing. She will keep interest rates low despite potential inflationary implications.
• Banks continue to lend more and more money every year. Now is the time in the business cycle to be investing. Hire more salespeople.
• Consumers may have less money to spend in 2014 due to Obamacare.
• Retail sales are up 2.9%. That number needs to stay above 2.5%
• Employment will continue to rise. We need to see at least 150,000 jobs each month. The rate of growth in employment is flattening. The issue is lack of supply, not lack of demand.
• Labor costs and raw material rates will go up before the CPI does but not until 2015.
• U.S. taxes will rise due to our “paternalistic government.”
• We do have a spending problem in the U.S., but we still have time to fix it. Deficit spending will decline for the next three years, making Americans falsely think the issue has been resolved. But in 2017, it will mushroom as interest rates start to go up. Interest rates will go up three points in 2017.
• Brian and his twin brother, Alan, are in the middle of writing their next book called Prosperity in a Major Decline, which addresses their prediction that the U.S. will see another major downturn in the 2030-2040 decade.

THE HIGH END OF THE CARPET MARKET
The stellar performance that The Dixie Group had in the third quarter (with revenue up 37% versus the same quarter last year) tells us that business conditions on the upper end of the market are very strong. Dixie, with its Fabrica and Masland carpet brands, sells both wool and nylon carpet at prices that generally run three times the wholesale cost of the industry’s average. So it is obvious that the consumer at the higher end of the market has money and is willing to spend it.

The stock market’s record performance has created a wealth-effect among the affluent, so they are more comfortable spending money on plush home furnishings. Chris Ramey, who’s an expert on marketing to the affluent consumer, told me in a recent FloorDaily interview that retailers who want to sell to affluent consumers need to focus more on their lifestyle and less on the transaction. To be successful at selling to the affluent, you must know that style and fashion are much more important than price.

SHAW’S GRAND CENTRAL WEAR-TEST PROMOTION
Durability and cleanability are two very important performance attributes for floorcovering. Back in 1933, Karastan, which at that time was owned by Marshall Fields, wanted to prove that its rugs were durable, so it installed a rug at the entrance of the Chicago World’s Fair. Over the course of the fair, the rug was walked on by five million people. Afterwards, the rug was cleaned and it looked so good that it was called the “wonder-rug.”

Move forward 80 years and a similar promotion is happening this holiday season with the Shaw Floors brand. This time the venue and the products are different and the traffic numbers are even greater but the concept is the same. So for six weeks, starting November 18, 14,000 feet of Shaw’s carpet, hardwood and resilient flooring are covering the floor of Grand Central’s Vanderbilt Hall, site of the Centennial Holiday Fair. Each day, roughly one million people travel through this building, so the message from Shaw is its residential floorcovering can withstand a beating and still look good. As part of this promotion, burgundy rugs with the Shaw Floors logo have been installed at all of the main entrances of this iconic terminal, along with huge brand banners in the main hall. While it remains to be seen how the product will survive under all this traffic, one thing for sure is that many more consumers will be exposed to the Shaw Floors brand.

In an age when retailers would rather either own the brand experience themselves or, at a minimum, prefer the products be sold under a private label, this is a refreshing marketing investment on the part of Shaw Industries, and I applaud it. As we mentioned in an article earlier this year, brand messages from flooring manufacturers to consumers have been on the decline, and most of the business school case studies have proven that the entity that commands the voice to the consumer will be more successful at achieving its growth and profit goals.

One of the more subtle nuances of this promotion is the tie-in with a few iconic brands that have withstood the test of time. Not only is Grand Central Station a symbol that’s well known throughout America but the Rockettes, two of whom helped kick off the promotion, and Manhattan itself are strong, traditional brands that give this promotion even more clout.

CARPET CONTINUES TO LOSE SHARE
It does appear as though carpet has lost share to hard surface flooring in 2013. As we end the year, we hear that carpet units in the U.S. are up less than 3% versus 2012 and the numbers for hardwood, tile, LVT and sheet resilient are all up over 5% in units. The biggest single factor in this share loss has been in the multi-family sector. As more apartments have come online and existing units have been remodeled, carpet has been relegated to the bedrooms, and LVT has taken its place in a larger percentage of the living areas.

The same trend is occurring in the residential builder market. As more new homes are being built (the pace for new homes in 2013 is running about 630,000 units), more rooms in the living area and, with some homes, even the bedroom area, are foregoing wall to wall carpet for a hard surface alternative.

There are multiple factors that are driving this trend. On the upper end, as home values have risen, homeowners are comfortable making the investment in authentic porcelain tile and hardwood floors, which many consumers feel are more durable and easier to keep clean. And in more affordably priced homes, carpet is being pushed out by LVT, which today looks so close to real wood, tile or stone that many people can’t tell the difference without reaching down and touching it.

In the commercial sector, we continue to see the de-selection of carpet at airports and in hotels. Carpet is being removed from high traffic areas down the main corridors and in the lobby areas. Even the guest rooms are being converted to hard surface in the economy-level hotel properties.

While much of this trend is being driven by product innovation, with digitally produced visuals making today’s LVT look like realistic wood, tile, and stone, other factors are durability and perceived ease of maintenance—especially now that over 50% of all homes have pets. There are others, however, who believe that part of the issue—in the commercial and multi-family sectors—is being driven by facility managers and end-users who have recently been disappointed by the performance of the carpet they’ve purchased. One can easily tell by looking at the statistics within the carpet industry that the construction of carpet has been rapidly changing. Face weights are lower and polymer use has shifted, both of which can have an effect on the durability and performance of carpet, especially when janitorial constraints also reduce the cleaning frequency.

High quality carpets that last are still available on the market today but not at the same price that you could buy them for ten years ago. As with many products, you get what you pay for.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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