Strategic Exchange - April 2013

By Kemp Harr

With the first quarter behind us now and the spring selling period starting to kick in, we’re getting mixed signals as to how steep of an economic recovery we can expect in the retail flooring business. Many of the large independent retailers are well stocked with healthy pre-buy orders that were committed to during the winter buying markets.

So what’s in the cards for the second quarter? Flooring sales have historically tracked in sync with housing figures, and those numbers continue to be positive. Sales of previously owned U.S. homes rose in February to the highest level in more than three years—tracking at an annualized rate of just under 5 million. And now that more homes are selling, many home sellers are jumping off the sidelines and back into the market. As a result, the number of previously owned homes on the market climbed to 1.94 million from 1.77 million in January. This is the first gain in supply since April of last year. At the current sales pace, it would take 4.7 months to sell those houses, compared with 4.3 months at the end of January.

Those buyers who were hoping to buy at the bottom of the market had better jump in now, since the median price of an existing home increased to $173,600 in February, up 11.6% from February 2012. Overall, U.S. house prices have risen 6.5% in the last 12 months, led by gains on the West Coast and in Arizona and Nevada.

Granted, some of this activity could be giving us a false sense of euphoria when you factor in the news that blocks of these properties, especially in Arizona and Utah, are being snatched up by private equity firms that plan to hold these assets as rental properties and flip them as home values get even healthier. But by and large, much of the sales activity across the country is encouraging and should be taken at face value.

So, what are our retail friends telling us here at the beginning of April? Certainly, weather was a deterrent in the first quarter—especially when you compare this year to the unseasonably warm first quarter that we saw last year. But we’re hearing that store traffic is up and renovation projects are being planned, priced and budgeted.

I’m anticipating that higher end goods are going to be hotter this year, because the people who are in a buying mood are the more affluent. Here’s my case: First, let’s look at jobs. While unemployment has been improving, there are still plenty of people not counted in those figures who are underemployed (i.e. they’ve taken something to get by but it’s not what they aspire to do). So those folks won’t be remodeling because there’s another job change on the horizon. In addition, we’ve seen gasoline prices go up 12% so far this year. That doesn’t bode well for a large section of Americans who live hand to mouth. This is the same group that’s been impacted the hardest by the 2% payroll tax that went back into effect at the beginning of the year. These are the people who normally shop on the lower, value priced side of the market, and their situation is still tough.

But then we have the more affluent, who own multiple properties and healthy stock portfolios, and they are feeling much better about where things are headed. After all, property values are climbing and the stock market is at a new record high. These people have been holding on, waiting with the rest of the country for the right signal to buy—and I believe that time is now. They’re thinking: “The presidential election is over, the economy is moving upward, energy prices are fairly stable, the retirement fund looks solid and we’re probably going to be here for a while…so let’s remodel.”

If you’re in the retail business, do yourself a favor and make sure you’re stocked with products that will satisfy the upscale shopper and your RSAs aren’t still trying to play “let’s make a deal” by underselling the customer who is willing and capable of buying better end goods.

The commercial flooring sector is a different story. Past recessions have shown us that a solid commercial flooring recovery usually follows a housing recovery. Naturally, there are sectors that buck that trend. Healthcare is strong because of the sheer number of aging people. Hospitality is also surprisingly strong on the renovation side—because of their nature, properties that stay fresh are the ones that guests choose to frequent. But with corporate, education and retail, most industry experts agree that a solid commercial recovery is more likely to happen in 2014. As for now, we hear the business is steady but not robust.

WFCA TAPS SCOTT HUMPHREY AS NEW LEADER
We have now waited over a year to hear who the World Floor Covering Association (WFCA) would choose to replace Chris Davis as its president and CEO, and we are pleased to hear it is Scott Humphrey. We actually had several friends vying for that position—all of whom would have brought different perspectives and skill sets. I was encouraged by the diverse range of applicants for the position.

The WFCA, with its 3,000 members, positions itself as the unbiased source of information on all types of flooring, dedicated to providing consumers the service and support needed to ensure a successful flooring purchase experience. After it sold the Surfaces expo to Hanley Wood for over $40 million, it wisely used its endowment to fund education and training scholarships for installers and retailers to help raise the level of professionalism within the industry. It also manages the Floor Covering Industry Foundation (FCIF), the charitable organization set up to help workers within this industry who face unforeseen expenses due to illness or disability.

Starting in 1994, Chris Davis channeled his passion into making the industry a better place. He came to the industry with a background in tourism, event coordination and broadcasting. In the last 12 months, the WFCA’s board has searched diligently for a new leader, engaging the help of Leonard Pfeiffer & Company—a well known executive search firm.

Many of you may know Scott Humphrey from the pages in this magazine. He has been entertaining our readers and inspiring them to step out of their comfort zone for the past eight years as the author of our People Power column. But that was just a hobby. Scott grew up in the flooring business, working for his dad, who owned a small carpet and rug manufacturing facility. He has spent the last 25 years working for Shaw Industries with a focus on training and development. For the last six years, Scott has led Shaw’s aligned dealer network—nurturing Shaw’s relationship with 2,000 of its closest retailers.

Scott is married with four children—three of whom came all at once (he has triplet daughters) and his home is in Chatsworth, Georgia.

If Pfeiffer and the WFCA board were looking for a leader with passion, they made a wise choice with Scott. This industry faces some tough challenges and Scott can pick up where Chris Davis’s initiatives left off by getting everybody in the same boat and rowing in the same direction.

VACUUMING ULTRASOFT FIBER
Speaking of everybody rowing in the same direction, I’ve recently uncovered some animosity between the carpet industry and the vacuum cleaner producers. I was innocently trying to investigate what progress was being made to solve the recent issue that has arisen with the introduction of these new low denier, ultra-soft carpets. As I mentioned in this column in January, several of the leading types of vacuum cleaners do not function well on these new carpets, and in a few instances there seems to be some significant finger pointing going on.

There are a few people within the carpet industry who feel that if they didn’t make carpet, there would be no need for vacuum cleaners. But in reality if you look up vacuum cleaner in the dictionary you’ll read: “An electrical appliance that cleans surfaces by suction.” That’s right…no mention of carpet. Granted, carpets and rugs continue to be the leading flooring surface in this country, but vacuum cleaners are designed to clean more than soft surfaces.

Apparently these issues have been going on for some time. About ten years ago, the Carpet and Rug Institute (CRI) saw the need to test how well vacuum cleaners interacted with carpet with its Seal of Approval vacuum cleaner testing program. One of the byproducts of this program was that CRI pointed out that there is no direct correlation between a vacuum cleaner’s ability to remove soil from carpet and its cost. In other words, some of the cheaper vacuum cleaners do as good a job with carpet as the expensive ones.

Now I’m finding out that this issue with cleaning ultra-soft carpet is throwing new fuel on the fire. It’s not lost on the producers of these home appliances that the carpet industry has consolidated and the top two or three producers hold much of the clout in residential carpet. While none of the vacuum cleaner people would go on the record with me, a few expressed their discontent with Shaw and Mohawk issuing care and maintenance pamphlets that tell consumers which vacuum cleaner works with their carpet. One of the technical guys I spoke with said, “How would they like it if we issued a pamphlet that told consumers which carpet to buy…because I can tell you that not all carpet is created equal.”

The more I dig into this, the more I wonder who named the spinning brush on the front of many vacuum cleaners a “beater bar.”

AIRLINES AND CREDIT CARDS
Phil Wexler told me last year that one of the first programs that they studied back in 1992 as they were pulling together the International Marketing Group (IMG), which later became Starnet, was the American Airlines frequent flyer program. They were intrigued with the notion of rewarding loyalty and wanted to borrow certain aspects of the program for use in the commercial contracting business.

My recent experience is telling me that the airlines are starting to reward the wrong behavior. Are they in the transportation business or the credit card business? Do they want people to fly with them or bank with them? I realize this has little to do with the flooring business except that many of us do fly extensively and I’m betting we share this frustration. With Delta, for example, practically anyone who carries a SkyMiles credit card gets priority boarding and a free checked bag.

I have a suggestion that sounds counterintuitive, but is logical, so I’m planning to give it a try. Most of my travel in and out of Chattanooga is routed through Atlanta, so for many years I’ve channeled my business toward Delta, which is based in Atlanta. But starting this year, I’m going to use United whenever possible and here is my reasoning: In Atlanta, well over half the flyers have elite Delta status, so it doesn’t really mean much. On the other hand, elite status with United on a flight departing from Atlanta is still a novelty so it will result in more upgrades. I’ll let you know how it goes.

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

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