Strategic Exchange - Aug/Sep 2011

By Kemp Harr

If our nation’s debt doesn’t concern you, you need to tune in to what’s undoubtedly the most serious issue America has faced in decades. Surely, you’ve heard by now that we currently owe $14.34 trillion? Granted, a trillion is a hard number to get your arms around, but the most sobering fact is that in the last two years we’ve increased the amount we’ve borrowed 55% from $9 trillion to $14 trillion.

Today, our government is so out of control that it currently spends $4 billion a day. And perhaps a few of you feel better after you heard that in return for raising the debt ceiling in early August, we also agreed to cut spending. The laughable part, however, is that if you read the fine print, we will only be cutting $21 billion from the government’s 2012 budget of $3.7 trillion. So Congress debated for the whole month of July and all they ended up cutting was five and a half days of spending.

The scariest part of all this is how numb we’ve grown to the reality that this practice cannot sustain itself and has to stop immediately. When 40% ($1.4 trillion) of our budget goes toward paying interest on our debt, and our interest rates are variable and float based on our credit rating, an increase in interest rates could be devastating to our solvency. We can’t keep bringing in $2 trillion in tax revenue and spending $3.7 trillion on expenses.

Most of you have to agree that our current polarized political situation is taking some of the luster off of America’s global reputation. Think for a minute about what we’ve been able to accomplish as a nation since the end of WWII. The world has watched us as we invested $12 billion on the Marshall Plan to rebuild Europe, built the interstate highway system, assembled an enviable public education system, put men on the moon, and took a leadership role in the development of much of the new technology that increased our society’s efficiency. And while we were at it, we grew the median income of the workforce so that Americans could afford to buy cable television, air conditioning, cell phones, second cars and many other items that were considered luxury items in the ’50s and ’60s.

Even if you dial out inflation, America’s middle class is $11,000 a year richer today than it was 30 years ago. But if you divide the nation’s debt—as it stands today—by the number of taxpayers, we now owe the equivalent of $104,000 apiece.

The only way we can keep this country out of the ditch is with serious government reform. Unfortunately, the system our forefathers developed favors the majority and today the majority appears to be happy with the very social programs and entitlement checks that are breaking the bank. Our only hope is to elect representatives that understand compromise and are intelligent enough to look beyond their own self-interests. In the end, we’ve got to reduce the size, role and scope of the federal government.

Lessons from CCA Global
Flooring America/Canada and Carpet One held their summer convention in Anaheim at the end of July and communicated their three-year plans for growth. As part of this meeting, they also rolled out several new product lines and promotional schedules.

Jonathan Trivers was on hand with his usual entertaining presentation style and with some interesting statistics about the current state of the independent flooring retail sector. According to Jon, the number of independent retailers in the U.S. has declined from its peak of 15,300 in 2002 to 11,000 today. So that’s 28% fewer competitors who, based on his estimate, sold roughly $2.5 billion worth of floorcovering. Unfortunately, we will have to wait another two years for the government to confirm these statistics but he may not be too far off in his retailer count.

He also pointed out that the 78 million baby boomers represent 28% of the population but control 67% of the discretionary spending. So it’s the people over 45 that buy the majority of the home furnishing products that are sold today.

At the meeting, CCA’s leadership gave an update on their Healthier Living carpet installation system. As part of this installation package, installers wear plastic shoe covers, they isolate the work space with plastic curtains, vacuum under the old pad once it’s removed, spray the entire subfloor with a special liquid solution, and install a new premium antimicrobial with spill bloc pad. And finally, after they’ve installed the new carpet, they vacuum a second time before they remove the plastic isolation curtains. And just in case that’s not enough to justify the added cost, should the consumer choose to go with this package, she also gets a doubled manufacturer’s warranty on the life of the carpet.

Under the context of up-selling the consumer, this program appears to be working and no one should complain when a group of retailers wants to try to create a differentiating service that sets it apart. The issue with this whole program, however, is its potential to backfire, since it uses fear of allergens, which is already a sticking point with the carpet industry and could be one of the leading reasons that homeowners deselect carpet as a floorcovering option.

As of today, 61% of CCA’s sales are for soft surface products and carpet is by far its most profitable category. It will be interesting to see if asthma and allergy concerns will be further accentuated by this new Healthier Living installation package. One thing is for certain: this installation package is a far cry from what you get from the home centers.

Carpet One’s two big fall promotions this year are both carpet centric. The first promotion, scheduled for September and October, features the Lee’s brand and is sourced exclusively from Mohawk. During this “Spillabration” event, Lee’s carpet will be heavily advertised as being “up to 50% off.”

The second event, scheduled for October/November, will promote CCA’s Resista brand of polyester carpets. This sale will be promoted by both Carpet One and Flooring America. This year, the Resista brand has been updated to include a new Refresh line of carpets sourced exclusively from Beaulieu of America.

Beaulieu was tapped to update this collection because it came to the table with a collection of ultra soft polyester carpets that also addresses the consumer’s need for bacteria fighting, odor reducing household products. In fact, this new Refresh collection offers Silver Shield antimicrobial protection plus an ActiFresh odor control additive.

As part of this fall promotion, these products will be heavily advertised with “national looking” cable TV ads that build traffic for the local stores in each market. The offer with these ads is that if you buy one room of carpet you get the second one for free.

As an added treat at this year’s meeting, Carpet One invited Jeffrey Gitomer, an author who has written several popular books on selling. He opened the session by saying there are basically three types of people in the world: those that make things happen, those that watch things happen, and those that don’t know what’s happening. He had several great sales pointers but one that rang home the most is: people buy for their reason…not yours. The best way to get the sale is to ask questions.

Growth in the Luxury Sector
During this last recession, we commented on the decline of conspicuous consumption as even the most affluent curbed their spending habits. But it does appear that Muffy, Arthur and their country club friends have held back long enough and have started to loosen their purse strings.

One indicator here in our own industry, which confirms this trend, is Dixie Group’s recent second quarter report. Last quarter, Dixie outpaced the market by growing its residential carpet revenue by 15% while most other mills were up only a few points. Dixie, as many of you know, caters to the upper end of the market with a focus on branded nylon and wool carpets whose retail price points start at $5 a foot and move up from there.

According to Mark Zandi, an economist with Moody’s Analytics, the top 5% of income earners account for approximately a third of spending, and the top 20% account for close to 60% of spending. More evidence of this trend comes from several of the luxury brands. Mercedes-Benz, for example, sold more cars in the U.S. in July than it had in any July for the past five years. And LVMH, which owns Louis Vuitton and Givenchy, reported 13% growth for the first half of 2011.

Flooring retailers who cater to this side of the market need to train their sales people to park their frugal paradigms at the door. As Houston retailer Sam Roberts said recently in a FloorDaily interview, “People of money want something of quality and they are willing to pay for it. If you understand your product and know how to communicate why it costs more, it’s not difficult to persuade the consumer to buy something that is a suitable match for their home. All you have to do is be able to prove why it costs more.”

Salespeople who don’t believe that better-end goods are worth what you pay for them will undersell your affluent customers and, as a result, your margins will suffer. The trick is not selling the same goods for more but rather selling better goods and having the customer leave thinking they got a bargain. 

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

Copyright 2011 Floor Focus