Strategic Exchange - November 2009

By Kemp Harr

Economic debate has moved from whether we’ve reached the bottom of this Great Recession to what the recovery might look like and what the “new normal” might be on the other side of this deep economic dip. On one extreme you have consumer behaviorists who believe that this recession has neither been painful enough nor lasted long enough to modify the long-term buying habits of consumers. On the other extreme, you have analysts who predict that the pain from this severe contraction, coupled with heightened awareness about the impact on the ecosystem of our materialism and culture of disposability over the last 30 years, will result in a drastic cutback on consumer spending. Those in the middle agree that the age of conspicuous consumption is over, and living within your means will be the new normal—at least for the next several years. 

Working in our favor is the continued rise in population due to legal immigration, a longer living senior population, and a positive birth rate. Once we’ve consumed the existing housing glut created by the speculative building of the mid-decade and worsened by the more recent foreclosures, new home construction should start to be in more demand and the single-family builder market will start to recover. Houses are now more affordable, interest rates remain low, and there is a strong chance that the government will continue to offer tax breaks to qualifying first-time home buyers. Recent sales data indicates we have at least turned the corner with the housing component of the economic equation.

Unfortunately the commercial construction market has a ways to go before it turns positive. The most recent (September) billings index with the American Institute of Architects was still below 50, which indicates a continuing decline in the design activity among U.S. architectural firms. This index has been below 50 since January 2008. In a recent interview on our Floordaily website, AIA economist Kermit Baker reminded us that we’ve lost over seven million jobs to this recession, which not only cuts into the demand for office space but also reduces consumer spending by those who have lost their jobs.

Fortunately, over the last six months, the index of leading indicators (published by The Conference Board) has risen 5.7%, the fastest increase since 1983. These numbers strongly suggest that a recovery is developing but it will take a while for it to impact the commercial flooring sector.

CARPET MILLS RETHINK PRICE INCREASES
Last month, the carpet manufacturers attempted to raise prices to cover rising raw material costs, and the move was met with such pushback that it was rescinded. It’s true that prices for adhesives, backings, and benzene (a key ingredient in nylon) have been steadily rising all summer, but just as the carpet increase was announced, nylon prices started to stabilize. Another key factor is that carpet demand has hit its lowest point since the early 1990s. In addition, while many independent retailers can accept pricing increases over the course of the year, some of the mills’ bigger customers, like the home centers, can’t accept increases until the end of the year. I would anticipate that another attempt to raise prices will happen at the beginning of 2010 and it will probably stick. 

Under normal conditions, carpet prices rise and fall with oil prices and at press time, oil prices were tracking 10% higher than the summertime average of $75 a barrel. Anybody who understands manufacturing knows that when throughput is down, fixed costs are harder to absorb. There’s no denying that carpet margins have to be thin right now.

SURVIVORS LIKELY TO HAVE COMMON TRAITS
This year will go down in history as the largest market correction in 70 years, and many of us will remember the decisions we made to survive these difficult times. We will remember the friends that helped us make it and we will tell stories about the businesses that didn’t pull through.

I suspect that three years from now, when we look back, we’ll see that many of the survivors were in membership organizations or supplier aligned groups. I recently attended the meetings for two membership groups that are both market sector leaders—Floor Expo on the builder side and National Floorcovering Alliance on the retail side. At both meetings, attendance was high, the tone was attentive yet optimistic, and the network conversations were all about peers helping peers. When the dust settles from all of this, I feel certain that statistics will indicate that group members fared better than independents.

I feel equally sure that retailers who didn’t hunker down and continued to promote themselves aggressively will also still be standing. There’s a reason Home Depot, Lowe’s and Lumber Liquidators don’t hold back on advertising during a recession—because it works.

MILLIKEN ENHANCES ITS PRESENCE WITH CONSTANTINE
Milliken is well known in the commercial flooring market as a leading supplier of high quality printed broadloom and modular carpet products. Over the years, in our Floor Focus research, it’s actually scored higher among facility managers than with the design community. In the last couple of years, however, with the help of Dave Caples and Kaye Gosline, Milliken has developed new pattern and texture products that have been winning accolades from architects and interior designers. And now that Milliken has acquired Constantine, the company has accelerated its goal to be relevant among designers who are looking for higher end designs. 

Constantine’s founder, Bob Weiner—who started Harbinger (now part of Mohawk) and Prince Street (now part of Interface)—has a keen sense of carpet style that designers adore. With Constantine, Bob was once again able to use his deft touch to build a brand over the last ten years that is extremely sought after on the upper end of design. It will be interesting to see how Milliken utilizes Bob’s talents in its overall global business.

Not only does this acquisition give Milliken more visibility among designers but it also expands its manufacturing footprint and capacity here in the U.S. Constantine’s manufacturing facilities are in Calhoun and Dalton, Georgia, and Milliken, which also owns manufacturing in Europe and Asia, does all of its U.S. manufacturing in LaGrange, Georgia. And don’t think for a minute that Milliken is going to keep all this new Constantine capacity focused on the commercial market. Russell Grizzle, Milliken’s president of Global Flooring, told us in a recent interview that many of the residential styles they plan to introduce at Surfaces in February 2010 will be styled and manufactured with the help of Constantine’s assets.

WFCA MARKS ITS GOLDEN ANNIVERSARY
Last month, the WFCA celebrated its 50th anniversary with a gala evening in the Scottsdale Plaza Resort in Scottsdale, Arizona. The event included dinner, dancing, a fascinating slide show, and the induction of legendary retailer Marv Berlin into the WFCA Hall of Fame.

Back in 1959, a group of dealers in the West banded together, at first to negotiate labor agreements for installers, then to exchange ideas and come up with programs and educational opportunities. Eventually, that group became the first WFCA—the Western Floor Covering Association. In the 1970s, another group was formed, the Retail Floorcovering Institute (RFI), with Haig Pedian as the first president, and in 1988 it changed its name to the American Floorcovering Association (AFA). In 1995, under the new leadership of Chris Davis, the two groups were merged to form the World Floor Covering Association (WFCA).

At the celebration in Scottsdale, 32 past presidents and chairmen of the two groups were in attendance, including Pedian, as well as Paul Pumphrey, the only member to serve as president of both the Western Floor Covering Association and the Retail Floorcovering Institute/American Floorcovering Association.

Berlin, who passed away ten years ago, was honored for his innovative contributions to the flooring industry, including his pioneering work with computer systems. Accepting the award on behalf of Berlin and his family was Don Roberts, a former executive with Berlin’s New York Carpet World.

The highlight of the evening was probably the 42 minute slideshow, featuring flooring dealers and industry leaders from the last half century. The slideshow was most interesting (and revealing) as it swung through the 60s and 70s, eliciting gasps and laughs from the crowd as they recognized themselves sporting clothing and hairstyles that most would sooner forget. 

Copyright 2009 Floor Focus