Economic forecast, installation issues and IFI's design policy: Strategic Exchange

By Kemp Harr

Memories of the snow and the sharp decline in first quarter GDP seem to be in the distant past as the fall school year kicks in and business intensity levels pick up. While sales of flooring products this year have been less than robust, there have been pockets of growth. The prevailing consensus among economists is that the rate of growth will accelerate in the fourth quarter and on into 2015. Harvard economist Kermit Baker told Floor Focus at the end of September that he feels good about where we are headed. In July, the Architecture Billings Index was 55.8, which was the strongest number since before the downturn started in 2007.

Lower energy prices here in the U.S. coupled with no foreseeable budget issues on the federal and state levels allows more money to flow into infrastructure investments, which fuels the demand for more labor. As more people get back to work, they’ve got to build back their savings account and feel secure about the future before they start to spend again. Real consumer disposable income declined 0.2% in 2013, but during the first half of 2014 it increased 2.4%. In 2015, that number is expected to grow 2.8%, and to rise up to 4% in 2016.

So far this year, the housing market has underperformed and fallen below expectations, especially with single-family starts, which are flat with last year. Much of the new housing investment has been in the multi-family sector, which grew 16% in the first half of 2014. Younger households seem to prefer urban living and like the flexibility associated with renting. One additional factor that’s driving this trend toward multi-family units is the attractiveness of condominiums for retiring baby boomers. This trend is having a negative impact on flooring sales, since the average floor area of an apartment or condo is less than half the size (42%) of the average home.

But while the current housing construction pace is soft, the forecast is calling for robust growth for the next several years, as we move from having too much inventory to not having enough. At the end of September, the National Association of Home Builders housing market index rose to 59, which is the highest level since November of 2005, almost nine years ago.

With commercial construction, the sectors that will continue to expand are healthcare, hospitality, education, corporate and retail. Meanwhile, government and institutional will remain constrained due to public funding issues.

So while the outlook is very positive, the current rate of sales for flooring products needs to pick up steam if we’re going to end the year with the 5% revenue growth that economist Santo Torcivia forecast at the beginning of the year.

HOW TO SOLVE INSTALLATION ISSUES AND CHANNEL CONFLICT ALL AT ONCE
There’s no denying that installation labor is becoming an ever increasing issue in the floorcovering business, especially among retailers. Quality installation can be a key differentiator and, when a consumer cycles back into the market after a seven to ten year hiatus from their last flooring purchase, many are expecting to buy the product and get it installed all as one smooth transaction.

There are several factors that have contributed to the limited supply of qualified installers—especially those who are true craftsmen. Naturally, as the recession cut back on the demand for floorcovering, many installers moved on to other trades that offered either better pay or a more stable supply of projects. In addition, some of the more seasoned installers are just getting older and reaching retirement age.

But one of the biggest factors that’s keeping new recruits from signing up and learning the trade is compensation. The industry cannot expect to attract and retain new talent if it insists on paying the same $2 a yard rate for carpet installation that it paid in the early ’80s. Laborers who are good with their hands have too many other higher paying options, so flooring installation can’t compete with the other builder trades like carpentry, electrical, plumbing and HVAC.

One solution that many retailers are opting for is to make their installers company employees. For many years, the majority of floorcovering installers have been independent contractors with their own vehicle and tools but who relied on one retailer to keep them busy. But in this year’s Floor Focus Retail Survey (July issue) we noticed that in one year, the percentage of installers who were company employees jumped from 17% to 23%. 

I can tell by listening to the conversations at the retail shows I’ve attended that more and more retailers are considering hiring their installers as employees. We expect this trend to continue as the labor market tightens up and as the demand for flooring continues to recover. 

One key issue in the installation trade as new talent is recruited is training and certification. Not only does attending training and certification classes cost money, but it also takes the technician temporarily out of the workplace. Most retailers recognize the benefit of having trained installers, due to a reduction in claims. Several manufacturers have learned that installers can influence what products are sold and as a result are offering free training and certification classes in an attempt to make the installer loyal to their brands. Some trade associations, like the World Floor Covering Association, offer their members training reimbursement scholarships in return for paying membership dues.

Some consumers, who make price their key priority, would rather buy flooring on the Internet and then find an installer on their own. But in today’s world, where most couples work long hours, many consumers would rather have the process taken care of by the dealer. For many years, the industry has toyed with the notion of requiring that the product be installed by a certified installer to keep the warranty valid. Should this option ever be adopted—much like what you see in the HVAC or car service business—not only would the installation labor issue be resolved but so would many of the channel issues. Consumers would not be able to buy floorcovering on the Internet if it had to be installed by certified installers who could only be hired through the local retailer.

HIGHLIGHTS FROM FLOOREXPO
There were a few take-aways from this year’s annual FloorExpo (FEI Group) meeting, held last month in Lake Tahoe, that I’d like to share with you. The leaders of this group of flooring contractors do a great job of hosting an event that has a solid mix of supplier interaction, networking, and education seminars. But unlike many of the other meetings I attend, this group spends an inordinate amount of time making sure you’ve got your head in the right place. 

During the opening session, the group’s CEO, Dave Gheesling, quoted Henry David Thoreau: “If one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours.” This led to an open discussion of what makes people successful. Dave’s premise was that success comes to those who are more focused on why they do what they do and not simply on what they do. In other words, greater success comes to those who have a sense of purpose. To give you an example, some people sell and install flooring, but there are others who focus on improving the aesthetics and performance of their customer’s interior spaces. 

In another session during the FloorExpo meeting, Andy Wells, with MasterBrand Cabinets, quoted consumer research that concluded that 86% of buyers were willing to spend more money for a better experience. Consumers today are more interested in authenticity and the story behind the brand than buying a solution that merely provides a basic function. Wells went on to tell the group that baby boomers will inherit $15 trillion in the next ten years. He also offered merchandising advice: provide clarity, reduce clutter and merchandise your flooring products by genre (i.e. modern, casual, traditional, etc.).

IFI DESIGN POLICY STATEMENT
In April, I was invited by Shashi Caan, IFI president, to participate in a symposium hosted by IFI (the International Federation of Interior Architects/Designers) in New York City. The two-day think tank gathered to create a “consensual design policy statement.” Similar to the take-away mentioned in the FloorExpo section above, the goal was to come up with a statement that defines the ‘why’ for the design profession. Here is the output from that meeting.

Design Policy Statement: 
• Redefine design as a cross collaboration of all disciplines and leverage their knowledge to create an innovation coalition. 

• Establish a vision of a prosperous global community demonstrating the value of design through storytelling and measured economic, social and environmental impact. 

• Harness the value of design as essential to health and wellbeing and embed this intrinsic expectation of the value of design through education across society. This will ensure that all designers and design professions are active participants and leaders in activities and discussions that shape our future.

Related Topics:Lumber Liquidators, FEI Group