Channel Wars - January 2011

By Santo Torcivia

 

Through the 1990s and first half of this decade, many of the great, large flooring retail chains saw their demise: Color Tile, Shaw Retail, Carpetmax, Giant Carpet along with home center chains like Hechinger’s and Builder’s Square. These and others are all now footnotes in flooring industry history. The fallen retailers were clear casualties of their own flawed strategies and the rising power of Home Depot and Lowe’s. Through it all, however, the small flooring stores—the mom-and-pop types that gross less than $3 million annually—largely survived due to a number of factors, including the fact that they have greater profitability than their larger competitors. But will the time come when these small retailers are threatened as well?

In other industries, economies of scale have given a distinct advantage to larger firms, and this advantage has allowed them to squeeze out their smaller competition, creating competitive concentration in the process. A weak economy, such as the one we’re currently experiencing, would only facilitate this culling process by magnifying the economic forces on the weaker competition. In the past, this process was slowed among flooring retailers because the smaller retailers were actually stronger than the larger ones. Thus the smaller retailers have been able to resist the major home centers better than their larger brethren.

This situation had been the result of the fact that smaller flooring retailers were the most profitable. How do I know? Well, the Risk Management Association (RMA) tells me so. The RMA accumulates data from commercial banks that submit the financial statements of their customers so that bankers, credit issuers, and analysts like me can assess and compare the financial statements of potential customers to industry norms and evaluate risks and trends. An analysis of 366 statements that RMA compiled of 2008 sales at floorcovering stores indicates that the “large” flooring stores are less profitable than the “small” and “medium” ones (see box on right).

The analysis compares gross profit margin (expressed as a percent of net sales) and inventory turns (the cost of goods sold divided by average merchandise inventory). These statistics are then multiplied to derive the gross profit multiple, which measures the profitability (gross profit) of the merchandise sold, adjusted for the rate of speed that the merchandise turns (how often the gross margin is earned annually).

Another factor supporting smaller retailers is that local distributors (and direct mills) generally provide very high levels of service. They maintain significant inventories, provide training, and deliver accurately and on time. Thus distributors and direct mills have taken on many of the operating costs usually born by retailers in other industries, and this fact has diminished barriers to entry for retailers. Smaller retailers do not have to risk stocking inventory that may not sell if the distributor or direct mill is willing to make it available to them in a timely fashion. In many other industries, retailers are required to take that risk. The dynamics of apparel retailing or car dealerships or department stores make it imperative that the inventory the retailer decides to acquire is that which will sell reasonably quickly. This is not true in flooring stores. Yes, the retailer can make a higher margin on the product he stocks, but he also risks a lot if the inventory he decides to invest in does not sell quickly enough. So many retailers, especially smaller ones, get by through drawing from the distributor or direct mill’s inventory because it is less risky and it is available.

Further, buying groups and similar co-ops allow individual stores to present themselves to distributors and manufacturers as a major chain, gaining price concessions and attention beyond what they could accomplish on their own. Such retailers also gain access to the group’s private label products that potentially provide them a higher margin. For example, a single location retailer in the Abbey franchise group is treated by his suppliers as though he is a member of a 500+ store retail chain, and this goes a long way to leveling his competitive situation. I believe the recent rise in the medium sized retailer’s profitability is in large part the result of advantages they have garnered from group and co-op participation.

THE RISE OF THE FLOORING CONTRACTOR
A growing cadre of installers, also called contractors, has made it easier for retailers of all sizes to find trained, qualified tradesmen to install flooring. As the number of flooring retailers has declined, down 11.7% from 2002 to 2010, the number of flooring and ceramic tile contractors has grown. This is in the face of the fact that, according to the U.S. Economic Census, all other retail types selling flooring have risen, along with the two contractor types (see box on right).

The number of contractors has risen as the number of home centers and other retailers have also risen. While some flooring and ceramic tile contractors work for a flooring store, others install for a home center, and still others work for one by day and the other (or themselves) by night. These installers that work both sides are like the gun runners in the old Western movies, selling weapons to both sides in a range war. The growth of new flooring outlets like Sam’s Club and Lumber Liquidators, and for that matter Home Depot and Lowe’s, could not have been possible without the growth of flooring contractors to install product they sold. It is obvious to me that one spurred the other and visa versa. 

On-hand inventory, good service and delivery, a large pool of installers, and the ability of single location retailers to leverage their position as if they were a large chain (when part of a group or co-op) allow small retailers to act like large ones. These facts serve to bolster retailer profitability and diminish the value of economies of scale. How flooring contractors will impact this equation in the coming years is yet to be seen. 

Copyright 2011 Floor Focus 



Other Archived Articles

Coverings Announces Seminar Schedule   Full Article
Alexandria, VA, March 17, 2015—Coverings has unveiled its conference session schedule. The trade show will be held April 14-17 at the Orange County Convention Center in Orlando, Florida with conference sessions beginning April 13.

Housing Starts Fell in February   Full Article
New York, NY, March 17, 2015—U.S. housing starts fell 17% in February to their lowest level in a year, likely due to harsh weather, according to the Commerce Department.

Fitz Flooring Named First Canadian Armstrong Elite Retailer   Full Article
Lancaster, PA, March 17, 2015—Fitz Flooring is the first Canadian retailer to enter Armstrong’s Elite Retailer program. The store’s two Calgary locations earned the distinction.

New York Manufacturing Slows in March   Full Article
New York, NY, March 17, 2015—Manufacturing activity in New York state expanded at a slightly slower pace in March, slowed by weaker shipments and new orders, according to the Federal Reserve Bank of New York.

Tarkett Flooring Featured on Nat Geo's Cabin Fever   Full Article
Chagrin Falls, OH, March 17, 2015—Tarkett flooring was recently featured on National Geographic Channel’s new show Cabin Fever. Tarkett’s FiberFloor, laminate and luxury vinyl tile (LVT) were utilized throughout the space.

Builder Sentiment Falls, but Conditions Still Seen as Favorable   Full Article
Washington, DC, March 16, 2015—U.S. homebuilder sentiment declined for a third straight month in March, but more builders still view market conditions as favorable, says the National Association of Home Builders.

Factory Production Declines for Third Consecutive Month   Full Article
New York, NY, March 16, 2015—Factory production in the U.S. declined 0.2% in February for a third consecutive month, says Bloomberg News.

Sale of HUD Loans Helps Over 16K Avoid Foreclosure   Full Article
Washington, DC, March 16, 2015—The sale of $16.7 billion in nonperforming loans by the U.S. Housing and Urban Development Department helped the owners of about 16,700 homes avoid foreclosure, reports Bloomberg Business.

Altro Safety Flooring Introduces Tape Installation System   Full Article
Wilmington, MA, March 16, 2015—Altro Safety Flooring has introduced a new adhesive free, tape installation system for resilient flooring called Altro XpressLay, which minimizes installation downtime.

Gerflor Expands Sales Team to Cover Entire U.S.   Full Article
Bensenville, IL, March 16, 2015—Gerflor USA has added 14 reps to its Gerflor USA sales team to cover the entire United States and provide additional reach in major markets.

Wholesale Prices Slid in February   Full Article
Washington, DC, March 13, 2015—Wholesale prices fell 0.5% in February, says the U.S. Bureau of Labor Statistics. The unexpected drop represents the fourth consecutive down month, as measured by the Labor Department’s producer price index.

Interface's Claims New Microsfera Has Lowest Carbon Footprint Ever   Full Article
LaGrange, GA, March 13, 2015—Interface has unveiled its latest product, Microsfera, which the firm says has the smallest carbon footprint of any carpet tile in history.

Ecore Revamps Business Structure   Full Article
Lancaster, PA, March 13, 2015—Ecore is making changes to its business structure in conjunction with IHRSA 2015 by launching a new category of sports and fitness flooring called Ecore Athletic.

J+J Flooring Video Wins Gold in AVA Digital Awards   Full Article
Dalton, GA, March 13, 2015—J+J Flooring Group video was named gold winner in the corporate image category of the AVA Digital Awards.

Average Mortgage Rates Rising, Buoyed by Strong Jobs Report   Full Article
McLean, VA, March 13, 2015—Average fixed rate mortgage rates are moving higher amid a strong jobs report and bringing mortgage rates back to where they were at the start of 2015, according to the results of Freddie Mac’s Primary Mortgage Market Survey.

Trade Sales & Manufacturer Shipments Edge Down in January   Full Article
Washington, DC, March 12, 2015—The combined value of distributive trade sales and manufacturers’ shipments for January was estimated at $1,302.5 billion, down 2.0% from December 2014 and down 0.3% from January 2014, says the Commerce Department.

Retail Trade Sales Down from Previous Month But Up YOY   Full Article
Washington, DC, March 12, 2015—Retail trade sales were down 0.6% (±0.5%) from January 2015 but up 1.0% (±0.9%) over 2014, says the Commerce Department.

LL's Free Air Quality Testing Won't Meet CARB Standards   Full Article
New York, NY, March 12, 2015—Lumber Liquidators will offer free indoor air quality testing for its consumers--conducted to workplace standards,-- but OSHA's thresholds for formaldehyde in the workplace are not as stringent as CARB's for the home.

Parterre's Vertu Resilient Plank Wins ADEX Recognition   Full Article
Wilmington, MA, March 12, 2015—Parterre’s Vertu Resilient Plank won two ADEX awards.

Consumer Survey Reveals Optimism about Housing Market   Full Article
Washington, DC, March 12, 2015—Consumer optimism toward the economy is growing and appears to be contributing to further improvement in overall housing sentiment, according to results from Fannie Mae's February 2015 National Housing Survey.