Strategic Exchange - February 2009

By Kemp Harr

Most economists agree that sometime during 2009 we will experience the trough of our current economic depression. Now exactly when and what type of recovery we will see in the flooring industry will vary depending on your market sector focus, product diversity and geographic location. And the wildcard in this forecast is predicated on the confidence level of the American consumer. 

While Warren Buffet is 78 years old, he has been a wise investor and he tries to make it his business to stay on top of economic trends. He spoke at a recent Shaw Industries meeting and predicted some mild recovery in the third quarter of the year. He pointed out that the continuing glut in housing inventory—both new and existing—is a key impediment but added that low mortgage rates, positive population growth and continuing American ingenuity will be the catalysts that ultimately lead to a slow recovery. 

The first signal that will tell most consumers it’s okay to resume spending will come from Wall Street. Once the stock market stabilizes and begins to climb, retail sales numbers should start to improve and housing activity will pick up. The first flooring sectors to see improvement will be the retail and multifamily residential replacement business, followed by the builder market and then finally the commercial sector. Within the commercial contract flooring sectors, we expect healthcare to remain steady, followed by education. Hospitality will start to taper off in 2009 and could fall off substantially in 2010 as new room inventory exceeds demand. Retail flooring will also be soft for some time as consumers buy more conservatively and the excess space from bankrupt retailers is absorbed. The corporate sector won’t start to recover until the unemployment trend reverses sometime in early to mid 2010.

Geographically, some parts of the country will do better than others. For example, in Texas and Pennsylvania there is no glut in unabsorbed housing or foreclosures. Also, as mentioned earlier, population growth is a factor as is industrial growth. Population continues to shift south and west toward the Sunbelt states and away from the Northeast and Midwest. In addition, many manufacturing jobs are moving southward due to lower labor and energy costs. Unemployment in the U.S. is expected to climb above 9% this year before it starts to recover.

The two biggest threats to a U.S. economic recovery are a destabilized currency brought about by continued federal budgetary deficits or a terrorist attack.

In 2009 and throughout the early stages of recovery, carpet and resilient flooring should recover some lost marketshare in the residential sector as consumers put more emphasis on value and conservative spending. 

Oil vs. Product Pricing
Last year, flooring prices went up along with oil prices and many dealers are now asking when product prices will come down, now that oil prices have dropped. We checked with a few of the major flooring companies and were told that their profitability picture is still marginal. As oil prices climbed, the product price increases couldn’t keep up and never came close to covering the increase in raw materials. In fact, over the past ten years, oil prices have gone up over 300% (and that is calculated on today’s current price of about $40 a barrel) and carpet prices have risen less than 40%. And last year, the average price of oil for the year was $80 per barrel and so much flooring inventory has that cost basis. 

Manufacturers have also taken a major hit on throughput efficiencies. With unit sales on the decline, production runs are shorter and manufacturing costs per unit are higher. 

Fortunately, there are enough major suppliers of flooring products to ensure that the competitive nature of a free market economy will keep pricing in check. All of the major players know that their new product introductions will not be successful if they are not competitively priced. Once again, it bears pointing out that flooring products—across the board—are a tremendous value to consumers. Working out how to sell for more will earn dealers far more money than focusing on buying for a few pennies less.

Selling Scared
When store traffic is down at retail or when fewer bids are on the table in the contract sector, or, in our case here at the magazine, when fewer people are buying advertising, one strategy that we all need to avoid is lowering price, thinking that price is the issue. A person who follows this thought process is assuming that pricing is the cause for a decline in business. Don’t think for a moment that Lumber Liquidators is continuing to grow—even in this economy—because they sell hardwood at the lowest price. The biggest reason Lumber Liquidators is doing well is that it is investing nearly 10% of sales revenue in advertising. This, on top of the fact that its name gives the illusion of being a close-out specialist, seems to be a winning recipe. If you take a look at its financials, you’ll see its pricing strategy is very profitable. 

In the long run, the successful dealers are the ones who offer a full service and focus on building relationships with their customers. Some niche players only offer “discount” product but the consumer (and building owners on the contract side) are really looking for value. Ask yourself if you really want to be the low price guy, because there can only be one and most people recognize that you usually get what you pay for. Give your customer value, know how to communicate what you bring to the table (without singling out the competition and mentioning them by name, please) and charge a fair price for what you offer. 

Lessons in Leadership
Bill Curry, who played under Vince Lombardi in Super Bowl I, played again in Super Bowl V, and later went on to coach at Georgia Tech, Alabama and Kentucky, was the motivational speaker at Shaw’s recent aligned dealer conference in Florida. Not only is Bill a successful coach but he’s also a Southern gentleman—full of style and with a great sense of leadership and morality. His message was one that we would all do well to hear. Using his alluring Southern drawl and his commanding confidence, he reminded us that greatness of spirit is the key behind any successful person. He told story after story of coaches, players and choir directors who went out of their way—with acts of kindness—to lead him down the path of success. 

As he looks back on all his experiences and all his role models, he has developed a list of the five characteristics of the greatest leaders. Below is his list as he presented it. All great leaders:

1. Have singleness of purpose,
2. Are unselfish, 
3. Have toughness—not brute strength but telling the truth and offering acts of kindness,
4. Are smart—more prepared than blessed with high IQs,
5. Never quit—except when it’s a matter of honor and convictions or when it makes good sense. 

Copyright 2009 Floor Focus