Strategic Exchange - June 2012

By Kemp Harr

Why does spending in the corporate sector, which is the largest within the commercial market, continue to be so conservative? The word we’re hearing on the street is that planning activity is more robust than last year but no one is in a hurry to close the deal to get the work started. It’s as if the leadership within corporate America is waiting for some signal that the nation’s economic situation is securely on track for growth. What is the source of the fear that is paralyzing the type of activity that will get our commerce flowing at rate to perpetuate growth? Is it the uncertainty within the European Union, or is it closer to home here in Washington?

As cynical as this might sound, is it possible that the nation’s board room decision makers recognize that it will be much harder to unseat the current president if voters are complacent with our current economic trajectory? Let’s build on this plot for a second. Are the Bush-era tax cuts—which will be resolved one way or another by the next president—that important? What other pro-business decisions lie in the balance for the next administration? Since most companies’ planning vision is longer range, is it feasible that business leaders would purposely chill economic growth in the short-term to ensure a longer-range pro-business administration? While this notion is certainly feasible, Peter Drucker always reminds us to think of the financial motivators—and purposefully decelerating growth would certainly negatively impact year-end bonuses. On the other hand, longer-term gains in the form of stock-option values could override any focus on year-end bonuses.

INSTALLATION SKILL LEVELS CONTINUE TO BE AN ISSUE
Not long ago, I asked Svend Hovmand, one of the godfathers of the U.S. ceramic tile business, why he felt that the per capita usage of tile in the U.S. was so much lower than in any of the other developed countries around the world. He mentioned several reasons, but the one that rang loudest, was a fear on the part of the end-user that the product would not be installed properly. Soon after that, I passed through Atlanta airport’s U.S. Customs quarantine area at terminal E and could not believe how shoddy the wall tile installation was. 

Svend’s concern is part of the driving force behind all of the recent effort within the Ceramic Tile Education Foundation (CTEF) not only to train and certify installers but also to make the use of certified installers required in the product warranty and/or commercial specification. Since there is no licensing requirement for installers as there is for other trades, this is probably the best way to raise the skill level.
This installation problem is not unique to the ceramic tile market, and there can be many factors resulting in a poor installation. Many times, it may not be the installer’s fault.

Today, there’s a lot of pressure to get construction projects finished quickly. For example, every day that a retail store delays its opening, it loses revenue. So everyone’s feeling the pinch to get things wrapped up quickly. But with flooring installers doing their work at the tail end of these projects, they feel the pressure most acutely and sometimes they have to work in poor conditions and time constraints for installing their products effectively.

The recession has also created immense competition for the installers who are working, and many of them are self-employed subcontractors. So end users who pick an installer based on price might well find themselves with the least desirable installer out there—the one who will promise anything to get a job.

Right now the best advice is don’t take anything for granted when it comes to installation. Do the homework, check references, and even make a site inspection of the installers’ previous work.

WFCA PROMOTES FLOORING TO CONSUMERS
I was surprised to see a World Floor Covering Association (WFCA) ad on the back cover of the June issue of Country Living, a consumer shelter publication. After doing a little digging, I found that this is the third year of the WFCA’s ad campaign to consumers—a campaign that was started when the WFCA shuttered its own consumer publication, Beautiful Floors, which launched during the recession and was met with mixed success. The organization felt that this route to reaching the consumer might be a better use of its dollars. 

During its first year targeting the consumer, the association advertised with Meredith, whose portfolio includes Better Homes and Gardens and Family Circle. After that, it transitioned to Hearst and has been with that publisher ever since. This year, between April and September, the WFCA will run two ads in five different books that target the affluent female consumer: HGTV Magazine, Elle Décor, Country Living, House Beautiful and Veranda. 

As you probably know, consumer advertising is very expensive, especially for a cover position. The WFCA paid a discounted package page rate for its Country Living advertisement but was given the back cover because, amid a range of kitty litter and rheumatoid arthritis medicine promotions, it is more relevant to the Country Living subject matter. 

The call to action within the ad directs readers to the WFCA website, which, according to the ad, “…is the only place to go for honest, unbiased advice and expertise.” The WFCA used to position itself more narrowly as an advocate for the retailer. Now, it seems that it has broadened that scope and sees itself as the voice for the whole industry—including the consumer.

I did, of course, visit the WFCA site and I think that our readers may also enjoy seeing how each flooring surface is being represented to the residential consumer. 

Back in 1998, you may recall that the Carpet and Rug Institute embarked on a multi-million dollar consumer campaign promoting “Carpet—It just feels better.” The budget for the current campaign is much smaller and the supporting website addresses all the different flooring categories. Last month, we published an article that showed the drastic decline in consumer floorcovering advertising, and this type of message does help to keep flooring in the minds of the consumer.

One component of this promotion is a dealer locator that helps the consumer find the nearest retailer who is a WFCA member and who agrees to abide by the WFCA code of conduct.

OWNERSHIP CHANGES AHEAD?
From this vantage point, I’m hearing a lot of buzz about ownership changes on the supply side of the flooring business. Many companies feel that diversity in product type, sector focus or geographic coverage helps to mitigate risk. Mohawk, Shaw, Interface, Milliken, Tarkett and now Mannington have been making strategic investments to expand globally. 

Much of the consolidation in the industry prior to this great recession was driven by the bigger U.S. based carpet companies, which first bought up other carpet companies and then expanded their scope to include hard-surface producers. With each acquisition, the buyer not only eliminated a competitor but also gained more capacity and in some cases brand presence. Mannington’s acquisition of Burke followed by Amtico, and Tarkett’s acquisition of Centiva are really the only strategic buys of any significance in the last few years. 

Many believe that it doesn’t make sense to add capacity during an era of contraction, which explains why M&A activity has been very quiet for the last several years. The next couple of months should be very interesting to watch. If suppliers are going to change hands, I’d personally rather see less consolidation and more financial investors. 

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