Distribution Evolution - June 2006

By FRANK O'NEILL, Publisher

I’ve told this story dozens of times and I’ll probably tell it many times more, because it’s not only one of my favorite flooring industry stories, but it also illustrates one of the seemingly immutable truths of business—there are some things the little guys do much better than the big guys.

It was 1996, and the commercial flooring business was going through a full-blown revolution, as three big corporations started buying up independent contract dealerships around the country. StarNet, the independent dealer co-op, was all but decimated by defections to the corporations. But 32 members decided that selling their businesses was a bad idea, and they stuck it out—against all the supposedly smart money in our industry.

That was ten years ago. Last month, StarNet held its 14th annual meeting in Bal Harbour, Florida. Almost 600 people showed up.

At last count, there were 149 members in StarNet, with 237 locations nationwide, and aggregate sales a bit shy of $3 billion. According to chairman Bob Sabosik, the group’s goal is to quickly grow to the point where its members represent a dominant share of total commercial sales.

If StarNet didn’t add another member, I feel that it’s already an industry powerhouse. In a time when distribution is everything, it has the distribution points necessary to create the third largest network in the nation, behind Shaw and Mohawk. Of course, StarNet is 149 separate entities, with 149 bosses, rather than two corporations with just two bosses. Nevertheless, it already has the bricks and mortar for a national network, if it chose to harness it.

I think distribution is going to become increasingly important in the U.S. floorcovering industry, and it isn’t going to follow classic patterns. As you’ve seen if you read last month’s “Focus Annual Report,” our industry is changing dramatically, with hundreds of Asian and European companies making aggressive moves to grab a share of the lucrative American consumer market. For these companies to be successful here, though, they need strong distribution networks, and that gets progressively more difficult as traditional distribution channels are filled.

But we’re already seeing new players emerging to fill the needs of these foreign companies. More new importers have formed in the past decade than at any time in the history of the floorcovering industry. We’re seeing big retailers buying direct from companies in both Europe and Asia. Even CCA Global, StarNet’s counterpart in the retail marketplace, is sourcing product directly from China.

While Shaw and Mohawk have used their distribution networks to grow into dominate powers in the floorcovering industry, I’ve been watching one much smaller company, Canada’s Kraus Carpets, quietly establish its own North American distribution network by acquiring distributors in key areas of the continent. Two months ago, the privately owned Ontario company, which has sales of about $320 million, bought the South Carolina distributor Orders. It already owned two distributors in Canada, and three more in the U.S., giving it a very effective North American network for its products.

Another recent intriguing event: Armstrong’s decision to sell direct to the NFA, a loose confederation of some of the nation’s largest retailers. Armstrong’s deal with the NFA is certain to give ideas to other manufacturers. You don’t need sophisticated national trucking networks like Shaw and Mohawk have to target big retailers in 20 or so Metro Markets.

I think these deviations from traditional paths are only the beginning. We’re going to see a lot more thinking out of the box in the years ahead when it comes to distribution. Necessity is indeed the mother of invention, and a lot of companies are going to be looking for opportunities in the marketplace. Throw out all the classic distribution models. They’re all changing, a la Hoboken Floors, which has quickly transformed itself from a classic floorcovering distributor into a serious importer.

Keep your eyes open for new and unique ways for products to get to market.

STARNET STEPPING OUT

StarNet, by the way, is beginning to go beyond U.S. borders for members. Five of the last 13 companies brought into the group come from Canada. That makes eight member companies from Canada now.

THE MAINTENANCE EDGE

Does anyone remember the days about a decade ago when some big retail flooring and manufacturing organizations were getting into maintenance and it looked like we might have another revolution on our hands? CarpetMax, before that retail group imploded, had a division devoted specifically to maintenance.

Well, that revolution never materialized, and the maintenance business continues to be dominated by mom and pop specialty companies. But there is something new developing—a trend toward both retailers and contract dealers adding maintenance to their businesses. StarNet added a maintenance section just a few years ago, when few members were involved in maintenance. Today, more than half of all the group’s members have maintenance divisions, and for many, like R.D. Weis, the rapidly growing Port Chester, New York firm, maintenance is their primary business.

The popularity of maintenance is also evident at the manufacturer level. Mohawk Industries continues to expand its maintenance program for retailers. Millicare, the maintenance division of Milliken, has grown dramatically in the past decade. It now has more than 80 independent franchise operations worldwide, and its 2005 revenues increased 16%.

Why this new trend? It’s simply because more and more contract dealers are discovering that there are big bucks in maintenance.

A STELLAR CAREER

Over the years, Lori Dowling, the president of StarNet, has become a very close friend of my wife Maurie and myself. We’ve watched in amazement as she managed to juggle the complex job of running StarNet with great efficiency and finesse, while also managing to raise two fabulous kids. When she first told us she was going to retire next year to spend more time with her growing children, we didn’t believe it—didn’t want to believe it, because she’s such an asset to StarNet, which has grown from about 40 members when she took over to 149 today. But Lori made it official at the StarNet annual meeting, and the board has already begun looking for her replacement.

Lori will truly be missed at StarNet when she leaves next year, but I have a hunch we haven’t seen the last of her in the floorcovering industry. Kids grow up fast, and Lori is too young, too smart and too energetic to stay away from the game for long.

If you have any comments about this month’s column, you can email me at foneill898@aol.com.

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