Domotex Germany, carpet insights, economic mixed signals: Strategic Exchange - Feb 2016

By Kemp Harr

It was encouraging to see that many of the key economic indicators remained strong in January, despite the correction in the stock market. Homebuilder sentiment and the architectural billings index remain positive, and it looks like profits among financial institutions are still solid. In January, the stock market overreacted to concerns over declining oil prices and the outlook for China’s economic situation. But it’s important that we avoid herd instincts when it comes to equity investments and keep our eyes on a bigger picture. It’s true that low priced oil is going to hurt economic growth overall, but it will also mean more disposable income for American consumers and higher profits for manufacturers of durable goods.

Retail traffic continues to be a mixed bag in January, depending on where you are and how you promote your business. The Surfaces expo in Las Vegas is kicking off just as we go to print with this issue, so we’ll go into that more next month. While Vegas is not an ideal place for a trade show, it’s great to see most of the residentially focused players together in one place. 

DOMOTEX OPTIMISM WAS ENCOURAGING
Having just left the Domotex show in Germany, I was encouraged at the optimism and energy level of the people who came to the world’s largest flooring expo. Traffic was on par with previous years, and most of the people I spoke with were encouraged by the business contacts they were making at the show. 

On a side note, it was interesting that people were asking me about our front running political candidates, and I got the feeling that many of them were hoping the Americans would elect a kook so that the Euro would regain its advantage versus the dollar. Europeans are a proud lot and they are very competitive. I’ll give you a full report on this show in the next issue.

FINDING RETAIL SUCCESS WITH THE RIGHT ATTITUDE
Carpet sales last year for members of Carpet One Floor & Home amounted to 51% of overall flooring sales, according to group president Eric Demaree. That’s six percentage points ahead of the dollar share level that carpet commands in the entire U.S. market. One of the biggest reasons for the higher carpet share is that the large competitors (i.e. the home centers, the warehouse clubs, Lumber Liquidators, and Floor & Décor) do a better job of stocking and selling hard surface products. These products, which are shipped in a carton and stacked on a pallet, are better suited for the cash and carry environment that you find in these other outlets. 

We’re in the early stages of realizing two factors that are going to have a long-term impact on profits for Carpet One’s dealers. One is declining margins in the carpet segment and the second is the longer lifecycle of hard surface products. 

Most business people realize that you make more money selling a $30 item at a 45% gross margin than you do selling a $20 item at a 45% gross margin. And in the last several years, thanks to the efficiencies of mills like Engineered Floors and the overall shift from nylon to PET, the average wholesale price of carpet has been dropping. So the consumer ends up paying less for her carpet and the dealer is making less money on every yard of carpet. 

To make matters worse, carpeted floors wear out faster than hard surface flooring. So as more and more consumers choose to install LVT instead of carpet, not only do consumers have a wider range of retail outlets to choose from, but once the product is installed, Mrs. Jones won’t be coming back in seven years to replace her LVT like she did when she purchased carpet. 

These are some of the factors that are driving growth-oriented flooring dealers to consider adding cabinets, window coverings, and even closet products. If flooring purchases are going to be one-and-done, then product diversity is a viable strategy.

A second option, however, is to focus on area rugs. Consumer research continues to indicate that the consumer will inevitably choose to use some type of textile floorcovering to soften the noise of their hard surface flooring and coordinate with the upholstered furnishings. It’s not a factor of if but when. 

Unfortunately, many flooring retailers have been hesitant to get into the area rug business because they’ve dabbled in it unsuccessfully in the past, are afraid of the inventory investment or believe that much of the area rug business is now conducted online. 

It’s true that more area rugs are sold in furniture stores than at flooring dealers. It makes sense that buying a rug that matches the sofa at the same time the sofa is picked out makes it easy. But it’s also logical to go back to the flooring store and buy it there with the help of a fashion oriented salesperson—a “colorist”—who can match the sofa with the floor and even the wall paint.

So as the future of carpet continues to evolve, the end is not in sight for retailers who have the gumption to try new things and train their people to service their customers.

Related Topics:Coverings, Domotex, Carpet One, Engineered Floors, LLC, The International Surface Event (TISE), Lumber Liquidators