Strategic Exchange - June 2013

By Kemp Harr

Most economists agree that the housing recovery has gathered enough momentum to drive economic growth in the U.S. for the next couple of years. In fact, the new home sales number for April was up 29% versus April of last year to an annual rate of 454,000 units. So this is good news for those of us in the flooring business.

The three items to watch on the horizon that could impact this prosperity in the near future are Obamacare, continued unemployment, and the sequester. I found it interesting that Alan Beaulieu with the Institute for Trend Research is going so far as to predict a negative blip in the growth curve in 2014 based on these issues. He predicts that the strongest expansion economically for the U.S. won’t come until 2015, 2016 and 2017. Our own economist, Santo Torcivia, is a little more optimistic and feels that the recovery will continue to steadily move upward—albeit frustratingly slow at times—but nonetheless continuing to move in a positive direction.

When it comes to the jobless rate specifically, I’m sure Federal Reserve chairman Bernanke and the rest of the Feds who are staying up late trying to stimulate the economy are scratching their heads wondering why the unemployment rate is not dropping faster than it is. Do you think they realize that 47 million Americans are on government assistance, including welfare and food stamps, and many of them are just fine with that?

This recovering housing market is definitely different than it was pre-recession. Material costs for new homes are at the same prices that they were at the peak of the market. So the median cost for a new home in April was at a record $271,600. Granted, the median price for an existing home in April was $192,800, which makes “used” homes more affordable, but those prices are also up 11% from April 2012. For the housing market to be healthy, first-time buyers need to be entering the market so that existing owners can sell what they own and move up. In April, only 29% of sales were from first-time buyers and that number used to track at about 40%.

The issue with these younger first-time homebuyers may not be initial up-front cost to buy but rather the freedom to roam that comes with renting an apartment. This next generation may view life and work commitments in a different light, and this could slow the rate of home ownership. We’ve all seen the trend toward more frequent job changes, and selling a home can take time.

We’ve also seen the spike in multi-family construction and even with all these new units the national apartment vacancy rate for the first quarter of 2013 was the lowest in 12 years. So will the next generation of Americans be more apt to rent than to own, or is this just the natural cycle that occurs when the economy travels through a deep recession?

This single-family to multi-family ratio will have a material impact on the quality and type of flooring that is consumed. In the U.S., rental properties use lower grade flooring, and the replacement cycle is more frequent. Carpet and resilient are the two surface types seen most frequently in apartments, while homeowners usually install more hardwood and ceramic. In addition, the sales channel is different. Apartment owners usually buy their flooring by the truckload, and no retailer is involved. Homeowners, on the other hand, will upgrade their flooring with smaller purchases (one or two rooms at a time), and they normally purchase through a retailer.

In light of all these recent trends, it might be calming to ground yourself on the homeownership patterns in this country over the last 50 years. Back in 1960, 62.1% of Americans owned their own home. That number peaked in 2004 at 69.2%, and today it’s closer to 65%.

And while younger Americans try to decide whether to own or to rent, I always like to point out that income levels among homeowners are considerably higher than renters.

COMMERCIAL CONTRACTOR BUSINESS MODEL EVOLVES
Back in late April, Starnet held its usual first-class meeting, and this time drew roughly 630 attendees. Last year, at this time, Starnet celebrated its 20th anniversary at a resort in Puerto Rico, and I was surprised to hear that this year’s numbers almost matched the attendance of that celebration event. Starnet continues to be the largest group of independent commercial flooring contractors in the business. One of its biggest challenges is working in an industry where some of the manufacturers choose to sell directly to the end-user, which cuts contractors out of the transaction part of the process and removes their ability to earn margin on the sale of the flooring product.

The commercial contractor’s role is very complex, involving the leveraging of their knowledge and expertise across a range of functions. However, the traditional model is that they earn money in two areas: on the sale of the product they install and on the labor side of installing the product. On many large commercial projects, they serve the role of the flooring subcontractor to the general contractor (GC), and the money flows from the end-user through the GC to the Starnet member.

There’s nothing new about the issue of the commercial flooring contractor’s supplier becoming their competitor. In fact, this was part of the motivation for Starnet recently changing its bylaws to develop an incentive for members to support the group’s vendor-partners who agree to work with the membership instead of around them. The age-old debate is how influential the flooring contractor is about which brand of product actually gets installed on a given commercial project.

Regardless of the channel the product flows through to get to the job, the product still has to be installed by a trained contractor. Some Starnet members refuse to serve as the installation contractor if they are circumvented as the “dealer” for the actual product. Other members will take any level of involvement because they know if they get their foot in the door with the end-user, they will ultimately develop a relationship that will put them in the driver’s seat on future projects—or perhaps even with that end-user’s flooring maintenance needs.

One such Starnet member with that perspective is DFS Flooring. I listened to Richard Friedman’s take on this issue at Starnet’s meeting, and we decided to spotlight him in our Best Practices column on page 19 of this issue. As you will discover by reading this article, Friedman does not keep coming back to the same section of the maze looking for his cheese.

IICRC UPDATE ON S600 CARPET INSTALLATION STANDARDS
It’s been four years now since The Institute of Inspection Cleaning and Restoration Certification (IICRC) was appointed by the World Floor Covering Association (WFCA) and the Carpet and Rug Institute (CRI) to rewrite the carpet installation standard using the American National Standards Institute’s (ANSI) consensus process. When the project was filed with ANSI in July of 2009, a voting committee with 20 members was formed, and James Mullins, Shaw Industries’ technical director, was appointed the consensus body chair. A timeline of 36 months was laid out for completion, and it was agreed that the committee would meet four times a year.

At the onset, funding for the project was to be split 50/50 between the WFCA and the CRI with the IICRC serving as the standards developing organization. I was told that both organizations invested $150,000 each, and now that the completion has run past the initial schedule, the IICRC has agreed to pitch in with funding as well.

I found it odd back in 2009 when I heard that the CRI was not going to drive the process of overseeing the writing of this ANSI standard—for three reasons. First and foremost, it has the largest knowledge base in this area since it was the organization that wrote the initial carpet installations standards (CRI 104 and 105). Secondly, it had just finished developing the carpet sustainability standard (NSF 140), so CRI was well versed on the ANSI standard writing process. Lastly, its focus has always been centered on the carpet industry. In a recent conversation with Mili Washington, the standards director for the IICRC, she explained that since the IICRC was a certified ANSI standards developing organization, it was an obvious choice to lead the process.

Those who are closely following this process know that a draft of the S600 standard was published for its public comment period in January and the period ended in mid-March. According to Washington, there were over 300 comments, and each one has to be addressed in writing according to the ANSI process. Most of the discussion is focused on where the responsibility starts and stops between the manufacturer and the installer.

Washington told me that the group is making headway and that a second public comment period will be scheduled for August. She is hopeful that the standard will be published by the end of this year. Once published, the rights to this standard will be jointly owned by the three organizations that funded it, so there should not be any issues around getting it into the hands of the people who need access to it.

Back at the beginning of this process, Chris Davis, who at the time was president of the WFCA, told me in an interview that he hoped this certification would validate the use of a trained installer and enable manufacturers to tie their warranties to installations that were completed to a specific standard. It will be interesting to see if this dream becomes a reality.

HGTV SMART HOME
HGTV continues to build its media empire, and its promotional materials tell us that it influences 99 million U.S. households with all kinds of advice related to home furnishings and gardening tips. Several flooring companies have chosen to partner with HGTV on one or more of their promotional activities, and for the last five years Shaw Industries has been a sponsor of HGTV’s Green Home Sweepstakes.

I recently was invited to tour this year’s home, which was built in Jacksonville, Florida, a short distance from the beach. While this is the sixth home that Shaw has sponsored, I was curious why the name had been changed from Green Home to Smart Home. I figured it was either because green building was no longer a novel idea or because “smart” opens the door for more HGTV product sponsors. When I asked Jack Thomasson—the professional house planner who’s in charge of HGTV’s Dream Home, Smart Home and Urban Oasis projects—to explain the name change, he simply said it was a transition from a home that continues to be green but that is also “flooded” with new technology.

So in the end, we’re still left with a beautiful new residential home project that is energy efficient, uses less water, that’s built with sustainable finishes, but that also has some really cool automation and security products—many of which are controlled by apps on a smart phone or tablet.

I’m not surprised that Shaw sees value in this annual project. Not only does it provide a platform to accentuate the green aspects of its carpet and hardwood products, but it also gives Shaw an opportunity to shine (to a rather large audience, as I mentioned before) from a fashion and design perspective. I’ve traveled to all but one of these homes in the last six years, and Thomasson and Linda Woodrum, the interior designer, always do a fantastic job of creating a real showcase.

Shaw’s aligned dealers also get the merchandising benefit by showing the photos and video clips of the home as part of their showroom presentation.

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

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