Strategic Exchange - April 2011

By Kemp Harr

Flooring producers in our network are telling me that sales numbers in March are tracking much better than in January and February. This is good news in light of the discouraging global and national news that could have a dampening effect on consumers’ willingness to open their wallets. Since I last wrote this column, more than 10,000 people were killed in the worst Japanese earthquake in centuries, the U.S. military took a leadership (and no doubt expensive) role in protecting the human rights of the Libyan people from the brutality of Muammar Qaddafi, and gasoline prices continued to rise and are 30% higher than they were this time last year. It’s hard to guess what effect these events will have on flooring sales.

There’s no doubt that the flooring business today (and most likely for the remainder of this year), is strongest on the replacement side. In the residential sector, consumers are realizing that they most likely will remain in their current home at least until housing values stabilize, so they’re repairing or upgrading their flooring to make their home more comfortable. In the commercial sector, businesses are starting to hire again but banks aren’t willing to fund new buildings, so most of the activity for this sector is also on the replacement side. 

As we evaluate the year-end numbers for the publicly traded flooring companies, we see an improvement in earnings even though sales remain flat. Two noteworthy exceptions were Dixie and Interface, both of which grew sales and earnings. Dixie’s sales rose 13.7% and Interface’s revenue was up 11.8%. 

Many of the economists we talk to are still calling for a stronger second half for 2011. According to the Commerce Department, fourth quarter GDP grew by 3.1%. For all of 2010, the economy grew by 2.9% and corporate profits grew by 20.4%, the most since 2004. In addition, the index of leading economic indicators—a major indicator of future economic growth—has recorded seven consecutive quarters of solid growth, averaging 7.5% per quarter. 

CoVERINGS TONE TURNS POSITIVE
In the normal cycle of this industry, April marks the end of all the residential market events and buying group meetings. As the commercial sector starts to ramp up, we have the Hospitality Design Show in May followed by NeoCon in June. The Coverings tile and stone expo was held a month earlier than usual and attendance seemed to be on par with what we’ve seen during the last several years of this economic recession. In fact, I heard several attendees jokingly comment that the term “new construction” was an oxymoron.

Overall, however, the tone at Coverings was upbeat, especially in light of the news that U.S. consumption of ceramic tile was up 6% in 2010 versus the previous year. The Italians still lead as the largest exporter of tile to the U.S. from a dollar perspective but are number three in units behind Mexico and China. 

One of the big news items at the show was the anti-dumping complaint that had been filed by the European Ceramic Tile Federation against Chinese exporters of tile to the European Union—especially in light of what we’re seeing here in the U.S. in the engineered wood category. Last June, a complaint was filed with the European Commission on behalf of 69 producers who represent 30% of Europe’s domestic tile volume. And on March 16, (right in the middle of the Coverings show) the European Commission imposed duties on imported Chinese tile ranging from 26.2% to 73%. 

Again, similar to the engineered wood complaint here in the U.S., the Chinese are accused of selling tile in Europe below cost. The investigation appears to have found that significant dumping is indeed taking place and that unfairly priced Chinese imports are causing serious financial injury to European tile producers.

Advocates for Chinese manufacturers say that European complainants are guilty of trade protectionism, and trade experts believe that the fines will have a significant negative impact on China’s economy, especially in Foshan, where 80% of the 1,400 companies involved in the probe are located. The duties will remain in effect from six months of the date issued.

Consumers and Lifestyle Trends
One of the more interesting seminars at Coverings this year dealt with lifestyle trends and how they influence the home environment. The speaker was Robin Avni, who started her career as a lifestyle columnist with the Philadelphia Inquirer, spent eight years with Microsoft doing user research, and is now a lifestyle consultant.

In her presentation, Avni reminded us that women control 91% of all home purchases. But she also gave some interesting statistics that show how women’s lives are evolving. In the ’70s only 10% of women decided not to bear a child but today that percentage has doubled. In addition, 10% of all children today live with their grandparents. 

She also pointed out that economic recessions change the motivation behind how we purchase goods. In a recession, we only spend what we have to and we work from a priority list. When times are good, we work from a wish list and buy things we dream of having. Speaking on the state of the economy today, Avni tells us that we are somewhere in the middle between replacing what’s broken and fulfilling our dreams. 

Avni also delved into how technology has changed the decisions we make around home décor. Consumers expect more than a design choice, and they want to be proactive. They see the Internet as a creativity tool as much as a productivity tool, and they want their homes to be created to their specifications. This bodes well for those of you who have websites that allow consumers to design their own space.

In addition, consumers are moving toward what Avni calls “Swiss army knife syndrome”; they desire small spaces that function with ultimate efficiency. Remember the wall tiles of the ’60s that had insets with toothbrush holders that also held soap? Dutch company Dtile takes that idea a step farther. The company’s collection of wall, floor, and counter tile includes built-in towel holders, vents, shelving, book holders, plant holders, first aid kits and television units. One kitchen counter tile even functions as a mortar where the household chef can grind spices or grains. Using these products, consumers can tailor a space to their specific needs with more permanent—and therefore more sustainable—materials.

Avni also pointed out that the U.S. is becoming a more diverse country, which will also have an impact on how the home is decorated. In Texas, California, New Mexico and Hawaii, for instance, the Caucasian population is already a minority. In some areas, the McMansions of yesteryear are becoming homes to several families who choose to live together to consolidate living expenses. What was once a Hummer house or a starter castle can now become a haven for an extended family of recent immigrants. 

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

Copyright 2011 Floor Focus