Next year shows promise for continued flooring growth: Strategic Exchange - Dec 2017

By Kemp Harr

Little did we know, a year ago, what would transpire in 2017. Many of us saw that quick 1,000-point jump in the stock market right after the presidential election and thought that was a bubble that wouldn’t last-especially in January when we saw how much attention was put on who had the biggest inauguration crowd. But here we stand, with the Dow 25% higher than a year ago and wondering if tax reform legislation will pass before Christmas.

Closer to home in the flooring business, don’t miss our summary of how this business has grown and evolved in the past year in Jessica Chevalier’s Year in Review article on page 27. It’s been an interesting year.

DODGE CONSTRUCTION OUTLOOK FOR 2018
Every year in October, Dodge Data and Analytics publishes its Construction Outlook for the coming year. In the 2018 version, economist Robert Murray tells us that the U.S. construction industry is moving into a mature stage of expansion and that the 11% to 13% growth experienced in 2012 to 2015 is moderating to a more subdued pace of 4% in 2017 and 3% in 2018. It’s important to recognize that Bob is talking about construction starts, and while this 3% growth sounds bleak, he’s still talking about $765 billion worth of construction starts. Back in 2012, that number was closer to $493 billion. So, in the last six years, the amount of money committed to new construction projects has risen 55%.

Granted, not all this investment has gone into buildings that require floors, which brings me to my next point. While the 3% growth prediction for 2018 sounds moderate, the single biggest growth item is single-family housing, which he is forecasting to grow 9% to $240 billion. At the same time, however, he is calling for multifamily housing starts to drop 8% from $89 billion to $82 billion. Under the commercial buildings heading, Bob is calling for 2% growth in 2018 for a value of $117 billion. To put things in perspective, the commercial buildings starts investment in 2012 was $55 billion. So, it’s doubled in the last six years.

An important question to ask is-how long after a $4 billion project is started does the flooring order come in? Take, for instance, New York’s LaGuardia Airport, which is undergoing two $4 billion upgrade phases. The first phase was started in 2016, but it will be next year before any interior finishes will be installed.

So, yes, the construction economy is starting to moderate, but, first of all, housing has a long way to go, and, secondly, there is often a two-year lag between when a project is started and when the flooring is installed. In fact, 2018 could be a strong year in all sectors of the flooring business. For more insight, don’t miss my audio interview with Bob on FloorDaily.

THE TILE INDUSTRY’S TOTAL SOLUTION PLUS MEETING
If there is one surface sector within the flooring business that has its act together, it’s the porcelain/ceramic tile folks, as evidenced by their summit meeting held last month in Washington, D.C.-an annual meeting branded as Total Solutions Plus. For the last seven years, four key leadership groups focused on the tile market have been coming together in a location that moves from one year to the next. The four groups are the manufacturer’s association (Tile Council of North America), the distributor’s association (Ceramic Tile Distributors Association) and two installer/contractor groups (National Tile Contractors Association and Tile Contractors Association of America). The difference between the latter two groups is the TCAA is comprised of union installers. This year’s meeting attracted a record 675 attendees.

By combining the four annual meetings of these organizations into one venue, the groups can hold their individual board meetings and committee meetings off by themselves but also network and have cross-functional meetings to collaborate on issues that are potentially inhibiting a broader use of tile. They can also pool their resources and get better speaker programs, along with reduced meal and venue expenses, because of the economies of scale. The meeting also sells sponsorships for the meals during the core part of the meeting, and those companies get ten minutes of podium time during the event to promote their latest product or service.

When you step back and look at a few of the recent accomplishments within this sector, like the Why Tile campaign, the ANSI standards for both the product and installation of gauged porcelain tile (formerly known as thin tiles), and the installer certification programs, you can tell that the Total Solutions meetings are bringing people together to work as a group and solve issues.

Another highlight of this meeting were the two keynote speakers: Thom Singer and Wayne Sotile-both of whom focused on building interpersonal relationships. It was refreshing to hear words of wisdom about focusing on people and resolving conflict during this time of such national polarization. It’s also neat to see that you can blend conversations on lippage, mud bed and thinset coverage with how to build a better relationship with your spouse, family and co-workers.

The annual hardwood flooring meetings also do a good job of bringing a strong cross-section of constituents together, but the output of standards and communications strategies aren’t as strong. The surface sector that stands to gain the most from holding a harmonized summit of stakeholders is the carpet industry. I understand that the CRI meetings 30 years ago used to be as resourceful as this Total Solutions meeting, but that was before my time.

MOHAWK’S DECISION TO BUY GODFREY HIRST
Toward the end of last month, Mohawk announced that it was buying Godfrey Hirst, the largest carpet manufacturer in Australia. While the company is private, we estimate its annual global sales to be around $335 million. Most of its business is in Australia and New Zealand where sheep graze the land, and wool is what you buy if you’ve got any national pride.

While Godfrey Hirst has a presence here in the U.S. with about 70 sales employees, the U.S. only represents 10% of its global business. The firm’s offering in the U.S. is a bit eclectic. While much of its focus has been on the tufted wool business, the firm also sells PetProtect (Invista’s solution-dyed nylon 6,6) as well as PET. Some would argue it’s hard for one brand to be meaningful across that wide a range of price points and performance attributes.

So, what does this acquisition mean to Mohawk? First and foremost, it gives the firm the leading market position in Australia and New Zealand-whose combined population is around 30 million people. Godfrey Hirst’s domestic carpet market has been transitioning away from wool a bit, and this could open the door for Mohawk to sell more of its synthetic Smartstrand product. Here in the U.S., this expands Mohawk’s position in the tufted wool carpet market, which is a step below its existing Karastan woven wool business. There is no denying that sales are healthy and steady in the U.S. luxury segment of the business, and this move makes Mohawk the clear leader in wool here in the U.S.

It’s worth noting that another wool carpet mill was acquired last month, although on a much smaller scale. Stanton announced in November that it was buying Hibernia Woolen Mills, based in Whittier, California. While this is a much smaller acquisition, it does show renewed interest in wool carpet capacity.

NAFCD DISTRIBUTOR MEETING IN COLORADO SPRINGS
It’s hard to beat the Broadmoor Hotel in Colorado Springs as a plush venue for an annual meeting. Unfortunately, most of us had to forego the health spa, golf course and mountainside setting as we went from one meeting to another. It’s hard to say whether it was the venue or the health of the sector, but this year’s meeting attracted a record crowd, according to Kevin Gammonley, EVP of the North American Association of Floorcovering Distributors. This event is held in partnership with the North American Building Material Distribution Association, so it’s hard to tell the size of each component.

Much of the buzz at the opening reception was about the news items from the last month related to several of the members. On the consolidation front was the news of Gilford Johnson, based in Jeffersonville, Indiana, buying Mastercraft Flooring Distributors, based in southern Florida; and Haines, based in Glen Burnie, Maryland, forming a “strategic partnership” with Belknap-White, based in Mansfield, Massachusetts. Haines is already the largest distributor in the U.S., so combined with Belknap-White, also one of the top five, its annual revenue will be approaching $700 million.

Another big news item was Galleher’s new partnership with Quad-C Management, a Virginia private equity firm that is no stranger to the flooring business. It also owns Stanton Carpet, and several years ago owned Tandus before selling it to Tarkett. Jeff Hamar, the president of Galleher, plans to stay with the firm and use Quad-C’s investment to drastically expand his service area. Galleher is one of top five distributors in the U.S., with annual revenues exceeding $200 million, and its service area currently runs from San Francisco to Mexico on the West Coast and east past Las Vegas to Phoenix.

When you step back and look at this, you’ve got to be careful what conclusions you draw. Certainly, bigger operations can reduce cost through economies of scale. In the case of Gilford-Johnson and Galleher, you’ve got two private equity firms, Blue Equity Group and Quad-C, offering owners like Melinda McChesney, Harvey Johnson and even Jeff Hamar (who are approaching retirement age) an exit strategy. But naturally, they wouldn’t be offering the parachute if they didn’t think floorcovering distribution was a viable channel. And in the case of Haines and Belknap-White, you’ve got two of Armstrong’s biggest distributors joining forces. I’m not sure what that means to Armstrong, but it’s highly likely that these two distributors represent 40% of Armstrong’s business.

Another big news item this year with distributors is this continued focus on selling private label products. Based on several interviews, I discovered multiple factors that are driving this trend. The more obvious is reduced competition for the same product sold through a different outlet, but distributors also recognize that it gives them brand ownership and therefore better control over what’s sold in their service area.

At this meeting, Heidi Cronin passed the NAFCD presidential baton for 2018 over to David Powell. When he’s not focused on this trade association, David makes a living as the IT and marketing director for Erickson’s, a family-owned distributor that focuses on hardwood and services Michigan, Ohio, Indiana, Wisconsin and Illinois.

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

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