Floor Wars - April 2006

By Santo Torcivia

Since 1992, home centers have made dramatic gains in the battle to dominate the retail flooring channel. According to the U.S. Census of Retail Trade, the home centers’ share of U.S. flooring sales rose from 9.9% that year to 31.5% in 2002—ten years later—and Market Insights projects those figures will rise to 41% of the total flooring market by the end of 2006. 

Here’s a look at some of the factors that have led to this startling upswing:

• An increase of 2,834 home center stores between 1997 and 2002, along with a decrease of 1,341 specialty flooring stores during the same period. Home Depot, alone, added 908 new stores, while Lowe’s added 377 stores. Not only that, but both firms have continued to add stores since 2002, and they plan to continue expanding. Home Depot will open 400 to 500 new stores over the next five years and Lowe’s has plans to expand in both the U.S. and Canada.

• During that same period, today’s leading home centers made their greatest gains when competitors such as Builders Square, Hechingers and Payless Cashways, and flooring chains like Color Tile and New York Carpet World closed their doors, losing the battle over the same DIY and price oriented customer bases.

• Gains by the three major home center chains—Home Depot, Lowe’s, and Menards—were largely the result of new store openings in new locations. For Lowe’s and Menards, there are still regions of the country without any stores, so they can still gain from new store openings. On the other hand,  Home Depot is approaching geographic saturation, and Market Insights/Torcivia’s research indicates that the firm’s growth in flooring sales has not kept pace with its growth in stores.

• Today’s highest growth product categories—ceramic tile and laminate flooring—fit best with the retail models of the major home centers. Those products, which come in store-inventoried boxes, have great appeal to the cash-and-carry/DIY customer. Generally, any new, easy to install glueless/click systems that simplify professional installation and promote DIY sales will be the product categories in which the big boxes should continue to excel.

• Also significant: The major home centers essentially serve as wholesalers for independent contractors, especially for those who install ceramic tile. Why? Often, the process is easier. While independent wholesalers and carpet mills that sell direct usually require a storefront to obtain credit and facilitate deliveries, major home centers simply require a credit card. Also, the home centers offer competitive pricing and a product selection sufficient for the contractor market.

THE HARD SURFACE EDGE 

While the home centers’ share of the total U.S. flooring market has grown significantly, the most notable growth has been in the category the U.S. Census Bureau calls “Other Hard Surface Flooring.” This category includes resilient sheet and tile, laminate flooring, and ceramic tile. Home centers now control nearly 60% of retail flooring sales of these products (not included in this share calculation are contractor and direct sales). Proprietary research by Market Insights/Torcivia indicates the majority of this growth has been in ceramic and resilient tile, and to a lesser extent, laminate flooring. 

Home center channels now account for a sweeping two thirds of all ceramic tile sold by U.S. retailers and over half of all laminate flooring sales. Most of those sales come from the top three: Home Depot, Lowe’s, and Menards. Combined, they account for 90% of all ceramic tile sales and 75% of all laminate flooring sold in home centers.

Interestingly, big box success in wood flooring, and carpets and rugs has been less dramatic. Although wood flooring sales grew 61%—from a 17.6% marketshare in 1997 to 28.4% in 2002—specialty flooring stores still account for over two thirds of sales in that category (see chart below). 

Home center performance is least stellar in carpet. Although the share of sales tripled in that same five year period, home centers still represent only 16% of carpet and rug retail sales (see chart below).

So, why are home centers doing well in some categories and not in others? And how can independent flooring stores capitalize on this? 

The short answer is: Where installation is more problematic, home center growth tends to be less successful. Also, flooring categories with the lowest shares of DIY sales have the lowest shares for the home center channels (see chart below).

Still, home centers are poised to gain from the continued growth of ceramic tile and laminate flooring. The logistics of carrying packaged products, high cash-and-carry/DIY rates, and significant sales by independent installers will continue to feed home center growth.

However, the sales strategy that has made Home Depot and Lowe’s so strong is also their weakness. The home centers are trapped by their low cost warehouse format, a format that has been immensely successful for certain customer bases, but has failed to measure up against the service level and customer satisfaction offered by specialty flooring stores for installed flooring. Home centers, which are in the business of outsourcing key services, such as measurement and installation, are held down in these categories.

For home centers to remedy this situation, they’d have to change their retail model by adding costs they don’t currently bear in other areas of the store. Some of those costs would come from: 

• Increasing sales staff (in both quantity and quality) in the flooring department;

• Paying them more (Home Depot and Lowe’s don’t currently pay commissions or other incentives to their sales staffs);

• Finding higher quality installers.

THE INSTALLATION EDGE 

Installation and the equally key task of measurement is a skill, often an art. Outsourcing this function diminishes a store’s control, and ultimately the overall quality of a job. Unless and until home centers invest more in developing their own trade craft, succeeding in installed sales will be a difficult goal. 

When all is said and done, though, neither Home Depot nor Lowe’s is likely to radically change its retail model to improve the sales of a flooring category which represents only 6% to 7% of their total sales.

An important point: Although big box flooring prices are often (not always) 20% or more below those of specialty flooring stores, their installation charges tend to be 20% higher. The home centers recognize that once the product sale is made, the customer is firmly in their hands and they can then introduce services (such as installation) with prices that are less competitive. 

Home centers usually break down charges for furniture moving and tear-outs. Every installation step has a price, and the prices for these steps tend to be at the high end of the scale. In short, when you compare installed prices, specialty flooring stores tend to be much more competitive. 

Retailers have to know all their costs if they’re going to compete successfully.

ACTIONS SPEAK LOUDER THAN WORDS 

Home Depot is closing nearly half its Expo stores, the high end, high overhead retail operations that were going to propel them into the high end, installed market. 

On the other hand, Home Depot has begun to open traditional flooring stores. First there was Plano, Texas, then Fort Lauderdale, Florida. Now the firm plans to have six stores operating in Orlando by the end of the year. 

The fact that Home Depot is opening traditional flooring specialty stores implies that its warehouse format is not sufficient to gain significant share with installed consumers. 

THE BATTLE’S NOT OVER

Before any flooring retailer who reads this article lets his or her guard down, thinking the battle is over, remember: Home Depot continues to try different strategies to sweep up more portions of the floorcovering pie. Its latest, and perhaps most aggressive, is to acquire builder flooring contractors. The firm’s Creative Touch contract business is the single largest builder contractor company in the U.S. After just three years in business, it accounts for one out of every nine new floors in newly constructed homes in the U.S. The builder contractor entity represents the invisible second arm of a movement by Home Depot—warehouse stores on one side, the builder contract arm on the other—that could encircle the residential market. 

In addition, Home Depot’s recent Chem-Dry acquisition will give the firm, via Chem-Dry’s franchisees, access to thousands of American homes each week, a way to observe the state of floors in their customers’ homes long before you, or even the customers themselves, know they’re being viewed as potential flooring buyers. Chem-Dry could be a great source of new sales leads and a feeder mechanism to the big box’s warehouse stores for flooring as well as for other products. It could also serve as the low cost lead source for a whole new shop-at-home service. The Chem-Dry acquisition, in fact, has greatly reduced the cost of acquiring new customers and Home Depot can potentially leverage this advantage in any number of ways.

In the meantime, Lowe’s and other home centers still have their sights set on some geographic areas in the U.S. they haven’t yet penetrated. And, unlike the specialty flooring store, these big box stores sell a wide variety of products that enable them to penetrate less urban markets more easily. And despite the economics, more stores for the home centers means more sales for the home centers.

Like many battles, the flooring channel war is now becoming a war of attrition rather than one of movement and encirclement. The problem is, the home centers seem to be doing all the shooting in this war. 

When are the independent flooring retailers going to start shooting back? 

Copyright 2006 Floor Focus Inc

Related Topics:Coverings, Carpets Plus Color Tile, U.S. Census Bureau