Strategic Exchange - Aug/Sep 2013

By Kemp Harr

Brace yourself for another round of partisan bickering in Washington as we approach the next deadline for raising the national debt ceiling. Most people know that Congress has taken August off for vacation and when they get back, this will be their focus.

Need I remind you that the last time this topic came up two years ago we ended up with a lower credit rating? When Congress gets back in September, they’ll have nine scheduled workdays to agree on the remedy for a $91 billion budget gap that they’ve got to account for prior to the government’s next fiscal year, which starts October 1. To keep from “shutting down” the government, they’ve either got to raise the debt ceiling, drastically cut spending, or go into default.

I’m bringing this up because we’d all like to see a strong economic finish to 2013, and there’s no telling what effect this debate will have on the consumer’s willingness to spend freely on new floorcovering. We all know that a solution will be negotiated, and the government will continue to gobble up dollars at an unprecedented rate, so the only question is what impact this debate will have on the consumer’s willingness to spend, which is, in fact, the country’s economic engine.

You’ve got to chuckle at the absurdity of a comment by the Republicans who are saying, “Well, we’ll only raise the debt ceiling if you’ll agree to cut spending.” Try to explain that logic to a fifth grader.

It’s my hope that the consumer is learning to tune out the Washington rhetoric that’s being amplified by competing 24 hour news stations and that we’ll continue to live conservatively while all the time being optimistic that conditions will continue to improve.

We’ve made no changes to the power group in Washington so to assume that we’re going to get a different outcome fits very closely into Einstein’s definition of insanity…the one about doing the same thing and expecting a different outcome.

SECOND QUARTER RESULTS FOR FLOORCOVERING
Despite the shenanigans in Washington, there’s a strong chance that the economy will continue to maintain its growth trajectory. Granted, we did see a slight dip in housing starts and building permits in July, but according to the Wall Street Journal, this is because smaller builders that traditionally borrowed money from small or regional banks are having difficulty securing financing to acquire land and purchase building materials. In addition, weather has been a deterrent. Despite that hiccup, the NAHB builder confidence index is still tracking at near peak levels.

All of the publicly traded flooring manufacturers posted strong second quarter results. Mohawk’s revenue was up an impressive 34.5% versus 2012. The Dixie Group’s revenue was up 25.6% on a year over year basis, Interface was up 6% and Armstrong was up 4.6%. Europe continues to be a strain on all of the companies with global businesses, but their guidance for the third quarter offered enthusiastic optimism for continued growth here in the U.S.

Armstrong used its conference call to announce that it will build a $40 million LVT plant here in the U.S. This will allow Armstrong to reduce its Chinese purchases by 70%. And it will vastly reduce Armstrong’s import expenses and allow it to be more competitive in the marketplace.

GROWTH AMONG INDEPENDENT RETAILERS FAVORS REGIONAL PLAYERS
We were encouraged at the end of July by what we saw and learned at Carpet One’s summer convention in Denver. As Sandy Mishkin commented, “It’s good to see our members’ teeth,” (implying that people show their teeth when they’re smiling). Some of the news from the meeting was mixed. Interviews conducted during the show told us that many of the members had experienced revenue growth—some of which exceeded 10%—but most of those were the bigger members and many of the smaller members were reporting stable but flat numbers.

This further reinforces a trend we’re seeing throughout the country as economic conditions continue to improve. It appears that the independent retailers who have critical mass in a market are faring better than the one- and two-store operations. There are probably multiple factors involved but the biggest is the efficiency of advertising. Stores that can blanket a market with television advertising coverage and offset the cost against multiple locations have a definite advantage.

But there are other factors as well. Operators with multiple stores have usually hired managers to run each store, freeing the owner up to work “on” the business instead of “in” the business. As a result, the owner can devote more quality time to hiring the right people, putting together better business plans and making sure that employees are properly trained. Retailers with multiple locations are also able to invest in better software support programs and buy products at a lower cost based on volume discounts. And last but not least, suppliers/manufacturers usually offer more support tools to their higher volume retailers, so success breeds more success.

HOME DEPOT VERSUS LOWE’S IN THE FLOORCOVERING DEPARTMENT
It’s interesting to watch the two leading home centers compete between themselves as well as with the other retailers in the floorcovering business. Combined, they represented $6.4 billion in floorcovering sales (as reported in our November issue) for 2012, which economist Santo Torcivia thinks is a little over 15% of the retail flooring market. You might recall that Lowe’s is the only home center that’s allowed to sell Stainmaster branded carpet. Nevertheless, it looks as if Home Depot’s flooring sales are growing faster than Lowe’s.

This year we’ve been told that one major factor is Home Depot’s focus on reducing its service window between when a consumer first agrees to pay to have her home measured and when the product is actually installed. A few years ago, that window might have been 30 days, but this year Home Depot is making every effort to get the window down to nine days. One of the biggest changes is the result of Home Depot buying Measure Comp. Initially developed by Marvin Berlin (who was best known for co-founding New York Carpet World—a 250 store chain that Shaw Industries bought in 1996), Measure Comp is a software program that automates the conversion of room dimensions into a concise order form that can be committed to by the homeowner.

In addition, Home Depot has negotiated with its freight carrier and is paying expedited rates when necessary to get cut orders shipped within a three- to four-day window.

A second dimension in this race between giants is the fact that Lowe’s has yet to take the LVT phenomenon seriously. LVT is without a doubt the fastest growing category in the residential sector and yet you can’t buy it at Lowe’s. Home Depot, on the other hand, launched its Allure program four years ago and gives as much space to LVT as it does, to laminate.

The one area where Lowe’s is beating Home Depot is with its area rug program. Lowe’s devotes three times the amount of space to areas rugs as Home Depot does, and we understand its sales reflect it.

Most consumers realize that the home centers are the place to go when budgets are tight and service isn’t a key factor. It’s difficult to find an informed sales associate at either of the chains, so unless you know what you’re looking for, it’s not a wise place to shop. Having said that, we get the feeling that Home Depot seems to know its place better than Lowe’s when it comes to carpet. So while Lowe’s promotes beautiful Stainmaster products that are priced accordingly, Home Depot has far more value-priced, non-branded buys.

GLASS- VERSUS FELT-BACKED SHEET VINYL
Back in 2004, Tarkett introduced its FiberFloor glass-backed sheet vinyl flooring and ever since then glass-backed vinyl has been taking share from the more traditional felt-backed vinyl. For the last several years, it appeared that both type floors could co-exist because, while glass-backed vinyl is easier to install and has better lay-flat properties, it has traditionally been more expensive. Then along comes IVC, which builds a massive $75 million glass-backed sheet vinyl plant in Dalton, Georgia. Now, as of this summer, IVC is able to eliminate the pricing advantage of felt-backed vinyl with a new builder grade product that lays flat, costs the same as its felt cousin and can be easily installed over practically any subfloor with a light hold glue.

When IVC showed me the product, I asked how they could be so sure that they didn’t make their more expensive products obsolete in an effort to unseat felt-backed vinyl. The answer was that there’s still a distinct advantage in buying the higher priced goods.

THE CHANNEL-TO-MARKET OPTIONS FOR AREA RUGS
Rug marketing strategists face an interesting dilemma as they gamble on which retail route to market to support for optimum growth. It’s much more complex than the home centers versus independent retailers equation that the other floorcovering producers have to balance. And to a certain extent, which retail outlet they choose to focus on also dictates which shows they should attend. Certainly, the direct Internet channel is the fastest growing option, but it creates a slippery slope because traditional brick-and-mortar retailers will usually choose to only support a rug brand that can’t be purchased online at a much lower price.

And since rugs are a cash and carry item, the national account retail options are vast. On the one end, you have the department stores like Macy’s, JC Penney’s and Kohl’s. Then you have the mid-level options like Target and Bed Bath and Beyond, and on the low-end you have Walmart and Kmart. Certainly, the home centers and warehouse clubs are contenders in the rug retailing market. Another option is retailers like Rooms to Go, Ikea and Haverty’s that focus on furniture. And let’s not forget the catalog retailers like Frontgate, Restoration Hardware and Williams-Sonoma. And, last but not least, you still have the independent flooring stores and even the specialty rug stores that only sell rugs.

There’s no denying that the potential size of the rug market continues to increase as more and more homeowners choose to install hard surface flooring. But frankly, I’m disappointed that more floorcovering stores don’t jump in and grasp this category with open arms. Sure, the risks are high—the biggest of which comes from the high cost of inventory. And now that I’ve reminded you of all the many places that carry rugs—you’re wondering, why bother? The answer is because you can win in this game, and the margins are very attractive. With the exception of the furniture stores, none of these other retailers knows how to sell fashion. Make rugs a point of differentiation for you. Hire or train someone within your operation who can tell the consumer which rug is right for her home. If nothing else, that level of decorating talent can be a useful asset with all your other flooring products. Most of the other rug outlets are hammering the same value-priced products so you should offer a full range of prices. But do yourself a favor…work with a supplier that protects you from being competitively shopped versus all the other outlets. How can you be a full service flooring store if you don’t carry rugs?

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

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