Economy, LVT in multi-family, trade shows, hospitality

By Kemp Harr

Now that we’re halfway through the year, it looks like the flooring business is about to round the corner and start performing at the pace we enjoyed last year. This has been a discouraging six months and most of us are realizing that this past winter was tougher on the American consumer than we originally anticipated. The recent second downward revision of the first quarter GDP—now down to a negative 2.9%—confirms the impact on the collective economy, especially in contrast to the fourth quarter (2013) growth of 2.6%.

Not only did the winter temporarily confine our mobility but it also hit us hard in the pocketbook, with property damage and extremely high energy bills. Does the word “vortex” bring back memories? This, coupled with today’s increased grocery prices, higher healthcare costs and expensive gasoline, continues to eat away at those discretionary spending dollars that might otherwise go toward replacement floorcovering.

Growth has been lethargic for the first half of the year in the housing sector as well. But it was great to see that the number of contracts to purchase existing homes climbed 6.1% in May—the biggest advance since April 2010 (and this time there is no tax incentive like there was back then). New home construction is also rebounding from the dip it took earlier this year. This year’s May figure is tracking at an annual pace of 991,000, which is up 9.4% versus May of last year.

It’s encouraging to know that David Crowe, the economist with the National Association of Home Builders, and Santo Torcivia, our own economist, both believe that the economy will pick up speed in the latter half of the year. Consumer sentiment is climbing (82.5), car and truck sales in May were tracking at an annual rate of 16.8 million (the highest level in seven years) and the Architectural Billing Index for May showed growth again with a score of 52.6. Torcivia is predicting that we will still see a 5% growth in floorcovering revenue in 2014 despite the weak first half.

THE DOWNSIDE OF LVT IN MULTI-FAMILY
One housing sector that continues to outpace all others is the multi-family sector. We’ve all read that apartment living is thriving, as many would-be homeowners are either challenging whether homeownership—and the prospect of building homeowner equity—is still feasible, or are just simply not able to secure a mortgage. In April, multi-family construction increased almost 40%. As these units are being finished, we’re seeing a major shift in the type of floorcovering that’s being used to finish out these new apartments. LVT is taking major share from carpet.

For decades, carpet has been the floorcovering of choice in rental apartments, but now that the visuals for LVT are so realistic, we’re seeing a wide swing over to hard surface flooring in the multi-family sector. In the kitchen and bathroom LVT that looks like tile is being used, and in the rest of the unit LVT that looks like wood is being used. And to remain competitive, older complexes are ripping out the carpet and installing LVT in the routine process of freshening the units between tenants.

Flooring dealers who focus in that sector are thrilled to see all this floorcovering work (in both the new and remodel stages of construction) but I’m not sure they fully understand the long-term ramifications of this shift over to hard surface flooring.

Traditionally, apartment owners whose units were pre-dominantly carpet would cycle through the floorcovering every three to five years. In fact, one bribe to get a prospective tenant to commit to a multi-year lease would be the offer of “brand new” carpeting throughout the unit.

I was recently visiting with a high-level executive at a mill that sells both hard and soft surface flooring, and he predicted that this trend toward hard surface flooring was going to hurt the long-term growth of floorcovering dealers that cater to this market. Granted, these dealers are only reacting to the wishes of the apartment owners that are the ultimate decision makers, so they may not have much say in the matter. But there are two facts that these dealers need to factor into their growth projections: First, this type of growth cannot sustain itself; and second, hard surface flooring will not be cycled at the same frequency as carpet.

It’s probably worth mentioning that carpet mills that focus in this sector are also going to be hurt by this trend.

TRADE SHOWS AND CITY APPEAL
I traveled to Shanghai this year for the Domotex Asia show and, as I settled into my seat on the return Delta flight, I glanced across the aisle to see subtle expressions of pleasure on many passengers’ faces, which I’m pretty sure were not motivated by either the size of the seat or the prospect of flying 17 hours back to Atlanta. It’s the same feeling that most of us get when we’re leaving Las Vegas. Sure, some of the emotion comes from the knowledge that we’re headed home to our loved ones, and that’s usually a pleasant thought. But I believe the biggest source of this exuberance comes from knowing that we’re leaving an uncomfortable place.

Covering this industry forces me to travel on a frequent basis, and I usually enjoy it. But there are a few destinations that make me wonder what some people find so appealing and why shows continue to go to places that aren’t really attractive to their guests. In Shanghai, for example, many of the residents wear the type of masks that surgeons wear in the operating room. What do the residents know about their air quality that perhaps ought to be considered before the show lures another group of 40,000 people into town?

Let’s go back to Las Vegas for a minute. This year, I’ve flown to Vegas three times—to attend Surfaces, Coverings and the Hospitality Design show. Twenty-five years ago, when shows first started frequenting Las Vegas, the allure was obvious. Sure, it was a long flight, but you couldn’t beat the airfare. Hotels, taxis and meals were a bargain, and you could have a free cocktail if you sat down to play video poker. Plus, if you wanted to entertain customers, you could see magic acts, comedians or a circus show for $60 a head.

Times have changed in Vegas and I believe Steve Wynn and his associates are sending us a very loud message. Marble hotel rooms are expensive to build and maintain, and gambling proceeds are not covering the overhead. So on top of your quoted room rate is a $25 resort fee. Oh and did you want to use a credit card to pay for your taxi? Just add a flat $3 “convenience” fee. Do you need a drink of water out here in the desert? Those are $6 for the small bottle.

Let me sincerely say that none of these comments should be taken personally by the shows that host events in Shanghai or Vegas. But, I do urge show organizers to take note that there might be optional venues to consider. I’ve recently attended major events in cities like Nashville, Chicago, Denver and San Francisco. And all of these cities were very affordable in comparison to Las Vegas. There is a strong chance that moving an event to a fresh and welcoming venue provides an added incentive for the audience to attend.

HOSPITALITY FLOORING CONTINUES TO EVOLVE
While on the topic of Las Vegas, I should mention my recent visit to the Hospitality Design show, which was held at Las Vegas’ Mandalay Bay in mid-May. Hospitality is a market sector where customization of the interior furnishings is the norm, and most signature properties recognize that one Trip Advisor review that labels a property as “run-down” is the kiss of death. As we pointed out in our May coverage of this vertical commercial sector, renovation investments among hotel properties have been strong for the last several years.

It’s so strong, in fact, that the Hospitality Design show has been able to carve out a leadership position in this sector. We do understand, however that the boutique shows like BDNY, ICFF and HD Americas are also doing well and could be attracting designers who might not consider a trip to Vegas as being the most efficient use of carbon units.

Nevertheless, the show this year was well attended, and one telltale example that the industry is profitable again was the number of post-show parties. Durkan, for example, held a memorable event that attracted over 400 of its closest friends—a few of whom were very influential decision makers within the major hotel chains.

Mohawk and Shaw won the two big IIDA floorcovering awards presented at the show. Shaw’s award was in the carpet category and Mohawk won in the hard surface category—interestingly enough, in LVT, which is a brand new category for Mohawk’s Durkan brand. Atlas was at the show debuting its latest look, thanks to a recent investment in computer controlled tufting equipment. Dixie and Desso were together in one booth, now that they’re approaching this market with one face. Desso is offering woven carpets and Dixie’s carpets are tufted. Interface also had a strong show presence even though the penetration of carpet tile in this sector is still in the single digits. Charlie Knight, who focuses on this market for Interface, told me that he is seeing a rapid change in the perception of carpet tile and foresees a sea change of rapid adoption in the next couple of years, once all the cost factors and downtime are dialed in.

As more and more mid-level properties accept pets, some chains are experimenting with the use of more LVT with area rugs and less wall-to-wall carpet.

Globalization in the hospitality sector is a major factor. Suppliers that can style regionally, produce globally and satisfy the design consultants and buying offices on separate continents are better suited to earn and retain the floorcovering business.

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

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