Distribution Evolution - May 2007

By Frank O'Neill

If I were a betting man, I’d give you odds that Kohlberg, Kravitz & Roberts and Tarkett will be the new owners of Armstrong World Industries before the trees in Lancaster, Pennsylvania are in full bloom. Why am I so sure that KKR will win the auction for the nation’s third largest floorcovering manufacturer when there are so many other players in the mix?

Because KKR has the most to gain by buying Armstrong. Most of the other companies competing in the bidding are financial players. The only strategic players on the flooring side are Tarkett, Shaw and Mohawk. Tarkett already makes all the flooring products Armstrong makes, while neither Shaw or Mohawk make vinyl flooring, Armstrong’s biggest category, and one that keeps losing marketshare to other flooring products. Shaw recently got into hardwood production, a category that Mohawk has yet to enter as a manufacturer. Both would definitely covet Armstrong’s world leading position in hardwood, but neither are likely to want the vinyl business, which continues to lose marketshare to laminate and other categories. Tarkett, on the other hand, should be very interested in the vinyl business.

Why?

Tarkett not only has a growing U.S. hard surface commercial business, but it also has the nation’s second largest vinyl composition tile business, the one vinyl category that’s doing worse than either sheet vinyl or vinyl tile these days. VCT is the workhorse of the commercial flooring business, the low cost product that everyone uses for very high traffic, but not too glamorous projects like supermarkets. Problem is, the VCT business has been so competitive in recent years that nobody can make any money selling it.

So why would Tarkett want to own more of this stuff that doesn’t make any money?

VCT is one of those products that isn’t going away, in spite of the fact that it’s not a money maker right now. And Tarkett’s ownership of Armstrong’s VCT business could change that.

There are only three players in the North American VCT business: Armstrong, Tarkett and Mannington. Armstrong has the largest share, probably 50% to 60% of the market, followed by Tarkett at 30% plus. Mannington has the rest, but that company is already involved in a joint venture with Tarkett that shares the output of Tarkett’s Houston plant. If Tarkett owned Armstrong, it would not only dominate the VCT business, but eliminate its one real competitor.

There are plenty of other reasons that KKR and Tarkett should own Armstrong. Not the least of them is Armstrong’s distribution network. One of the reasons Tarkett has never done as well in the U.S. as it might be expected to do is that, despite high quality products and the world’s greatest share of the hard surface flooring business, it has a less than spectacular U.S. distribution system. The company bought Johnsonite over a year ago to correct that problem in its commercial business. (Wait until you see the magnificent job the Johnsonite folks have done preparing Tarkett’s commercial vinyl business for big growth in North America.) Now Tarkett chairman Marc Assa has his astute eye on not only strengthening Tarkett’s commercial position further by dominating the VCT market, but also dramatically strengthening his position on the residential side of the business.

Perhaps by the time you read this, we’ll have a better idea if Armstrong is going to be part of Tarkett’s growing domain. If it does happen, I’ll go into the other half dozen reasons why it will be a good fit. In the meantime, you should read what Darius Helm has to say about Tarkett in this year’s Annual Report, which begins on page 33.

GETTING GREENER AND GREENER

One of the next big fads in the U.S.? Buying green—green homes, green energy, green everything. With the price of oil hovering around $66 as I write this, with no signs that it’s going to drop very much, I think Americans are going to start thinking about the environment in a big way.

An early sign of this trend: a new northern California community called Sonoma Mountain Village, still in the planning stage, that will be almost completely sustainable. The 1,900 housing units and 750,000 square feet of commercial space in the village will have 90,000 square feet of solar panels, central heating and cooling from its own power plant, passive cooling for the houses provided by prevailing northwest winds, a network of cisterns to collect rainwater that will be used to flush toilets—and, to keep people out of their cars, all residential units will be located within five minutes of the town center and ten minutes from a proposed train station.

HD KEEPS ON GOING AND GOING

One of the comments Santo Torcivia made in last month’s comparison of big box and mom and pop flooring sales was that the big boxes have not only taken huge chunks of marketshare, but they never stop experimenting. Then a few days later, Home Depot underscored Santo’s words by saying it’s going to roll out two new store formats: a supersize one—as if they aren’t big enough now—and a mini one.

The first super store is already being built in Union, New Jersey, on the site of a closed Expo Design Center. The 225,000 square foot store—about twice the size of traditional stores—is patterned after the stores Menards has been building in the Midwest in the past few years, but it’s going to be different inside, combining products from both its traditional stores and the high end Expo stores. So far, no word on what kinds of floorcoverings are going to be offered.

At the same time, the Big Orange is introducing stores that are about half the size as the traditional store. The first ones will open in the San Francisco Metro Market. The idea is to put them in smaller market areas, in vacation spots and other areas where it’s difficult to put a bigger store.

The largest Lowe’s stores, by the way, are under 120,000 square feet.

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

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