Strategic Exchange - October 2011

By Kemp Harr

 

We all understand the notion of self-fulfilling prophecy. If you believe something will happen, and you change your behavior based on that belief, you can ultimately turn the belief into a reality.

The notion that we might be able to change a predicted and feared calamity by doing something to prevent it is not a new phenomenon and was actually the basis of the well known Greek legend of Oedipus. If Oedipus’s father had loved his son and never cast him out—fearing that one day his son would come back and kill him, as was predicted by a prophet—Oedipus would have known his father and loved him in return, and the prophet’s prediction would have never come true.

If we pessimistically believe the constant stream of news reports that we might be headed for a second economic recession and we react by cutting back, hunkering down, hoarding cash and foregoing strategic initiatives, we’ll ultimately end up exactly where we feared—in a double dip recession.

We do have another option. But first, we must recognize that bad news sells more newspapers and garners more cable TV viewers than good news and, therefore, is the true motivation for fear mongering and negative news stories—just as is spelled out in Don Henley’s hit song “Dirty Laundry.”

Some pessimistic business advisors will tell you that if you plan for the worst, then anything short of disaster will be an unexpected windfall. But listening to these advisors is much like listening to the prophet in Sophocles’ Oedipus Rex.

The right course of action is to listen to the right pundits, track the right indicators and take a conservative, yet optimistic approach. DuPont economist Robert Fry recently told me that the fundamentals that he tracks point to slow but steady growth until at least the second quarter of 2012. He pointed out that the growth that had been predicted for the first half of 2011 was primarily derailed by unexpected extreme weather conditions—volatile storms followed by oppressive heat. The earthquake in Japan was aanother negative factor. He also said there’s more than a 60% chance that we won’t see a second recession. And according to Fry, most recessions that are caused by a financial crisis have historically resulted in the same type of long, slow recovery that we are experiencing today. 

Just before releasing this issue for print, we received more good news that the AIA (American Institute of Architecture) billing index for August surged to 51.4 following four straight months of negative numbers. Any score above 50 means that billings for American design firms are increasing. Many of the people we talk to on the commercial side of the business tell us that credit availability continues to be the most debilitating factor for stronger growth.

In the residential sector, we also learned that sales of existing homes rose 7.7% in August to a five month high. That’s an annualized pace of over 5 million homes. On top of that, the BuildFax remodeling index, which tracks the dollars spent on residential remodeling, rose 24% to the highest level since the index was introduced in 2004. All of this data, coupled with the fact that there are fewer flooring dealers due to this prolonged downturn, bodes well for the retailers that are left to handle the business.

Trends from Cersaie—The Global Italian Tile Show
The crowds at this year’s annual ceramic tile show in Bologna, Italy were as strong as ever, and once again we used this show as an indicator of where the fashion side of the interior furnishing business was headed. Gone are the flashy metallics and opulent glossy surfaces. In their place are subdued colors with natural woods, minimalistic concrete and faux stone looks featuring matte and honed finishes. The role of tile in the mix of interior finishes is, for the most part, one of background versus accent. 

More specifically, the featured colors this year were grey, beige, black, toast and taupe. A few companies were using orange, blue and red accents, but most of the coloring was muted and nature based.

Technology with respect to digital printing, larger formats, and thin composition continues to allow this surface category to evolve beyond its traditional uses in the residential bathroom and kitchen. Digital printing creates more realistic natural stone looks, allows for realistic looking wood grain planks, and eliminates the issue of several tiles in the same box sharing the same graphic. But it also allows manufacturers to lay down intricate images on textured and raised relief patterns and—as is the case with thin tiles—it enables them to give the product an image before it’s been stabilized in the kiln.

Nearly all the major producers offer a thin tile option, which broadens the areas where tile can be installed, makes remodeling easier, reduces freight cost, reduces the amount of raw materials needed, and makes it easier to handle and install larger format product. In some instances, this new product is available in 1x3 meter configurations and is being positioned as the new wear surface for a multitude of applications: door skins, counter tops, building cladding, ceilings, case goods and built-in furniture. It also enables the designer to color coordinate multiple surfaces in a room. 

There are currently two different techniques for creating thin tiles and we’ll go into more depth on this topic next month. With the ultra thin method (which is usually about 3 millimeters thick) the tile must be laminated with a reinforcement fabric like fiberglass, which also adds costs to the product, not only for the added materials and processes but also for the patent royalties. Other producers, like Marazzi, are able to produce a tile that’s 4.8 millimeters thick but doesn’t require laminated reinforcement and still meets the fracture strength standard for porcelain tile.

Despite the global economic situation, we were encouraged to hear that global sales of Italian tiles are rising for 2011, and, if the current pace holds, sales could finish the year up 5% to 6%. This is a stellar performance based on the fact that U.S. demand for Italian tile is down 10.1%. That decline is being offset by higher sales in France, Germany, Australia and several countries in Africa and eastern Europe.

Floor Focus Seeks to Recognize this Industry’s Future Leaders
Granted our industry is considerably smaller than it was four years ago and we often dwell on the negative aspects of the decline, but we need to remember that our industry contributes to the interior function and design of every room by supplying the bottom plane of the cube. There’s plenty of business out there now and down the road, and floorcovering sales will grow again. 

Floorcovering is often the first interior design consideration and the industry needs to continue to lead both in fashion and design, as well as in sustainability and performance. As the leaders of today start to retire, we’ll rely heavily on the next generation to initiate change and take us to the next level of success.

With this in mind, Floor Focus and 3M have joined forces to create the Future Focus Awards—a group of awards designed to recognize and honor the up and coming leaders in six separate categories across all the sectors of the business. Our goal is to encourage excellence and reward vision and hard work. We seek to identify the individuals (who are currently under 35 years of age) who offer the most potential to be the future leaders of the floorcovering industry.

We invite any and all companies—from retailers, contract dealers, A&D, distribution, manufacturing and supply who feel like they have a rising star to nominate. The six categories to be judged are sales, marketing, R&D/product design, HR/employee development, manufacturing and sustainability.

Specific details on this contest are available online by going to www.floordaily.net/futurefocusawards.

Fourth Quarter Carpet Price Increase Postponed
The more consolidated a market gets, the more transparent efforts are to raise prices, and in the last couple of months it’s been interesting to watch as the three carpet industry giants fell out of unison on whether it was a good time to raise prices for the fourth quarter. Most of the time, all three companies move in near lock-step fashion when it comes to price increase letters, but that wasn’t the case last month as two of the mills attempted to raise prices (which would have been the third price increase this year), but the largest mill didn’t follow suit.

There is no disputing that prices for raw materials for carpet have continued to escalate. Nylon, polypropylene, polyester and wool fiber are all up double digits for the year as well as backing, latex adhesive and transportation costs—so a price increase is probably justifiable. But at the same time demand is way down, so marketshare is also a major factor as the mills struggle to cover their overhead costs. This time around, Mohawk (a publicly traded company) and Beaulieu (which is currently refinancing some of its long term debt) made the first moves with letters to their customers announcing a price increase. But Shaw, which has often been the first out of the blocks with price increases, sent a letter to customers saying that it planned to hold pricing until at least the first of the year. So for now, with a few minor exceptions, Mohawk and Beaulieu have changed their minds about raising prices.

In a market where the path to the end user varies—some products move through distribution, others move direct to dealer, some are sold through major national accounts or buying groups, and others are sold via the Internet—it’s hard to know for sure how evenly these price increases are accepted across the different types of customers. One would assume that big volume customers like the home centers, buying groups and category killers would be in a better position to push back than the smaller guys. Another question that might be difficult to answer is how much share shift is created when one supplier’s price is lower than another’s. Most of us know first hand that we’d change where we buy gasoline in a heartbeat based on a few cents per gallon. Hopefully carpet hasn’t reached the same level of commoditization. The only way to move price down the buyer’s priority list is through differentiation. And the best way to differentiate products and services is through innovation, quality, service, styling and reputation. 

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

C

opyright 2011 Floor Focus 



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