Strategic Exchange - Aug/Sep 2012

By Kemp Harr

As we look back on floorcovering sales in the first half of this year, we see a similar picture to what we’ve been seeing in the two previous years—a burst of energy in the first quarter followed by sluggishness in the second quarter. And so far for the third quarter, the signals are mixed. Home values have stopped their decline, builder confidence is up, as are housing starts, and the architectural building index is up (albeit still below 50).

On the other hand, home resales fell in June, retail sales declined for a third straight month, and consumer spending was flat. And now, as we approach the distractions from the pending U.S. presidential election, most consumers will likely take a wait-and-see posture—especially when it comes to deferrable purchases like floorcoverings.

At press time, there are 80 days before voters will pick the next president of the United States. Laughably, the campaign debate today seems to be centered on distracting topics like unwillingness to share tax returns and gay marriage when the real issues are the sluggish economy (specifically housing recovery and job growth), our nation’s staggering debt and a declining middle class.

Even the most optimistic consumer, who is confident that we’re in the final wave of housing foreclosures, that housing is more affordable than ever and that economic recovery is a when, not if question, is about to be bombarded with billions of dollars in negative political advertising that will undoubtedly push them further away from the retail cash register. In fact, Advertising Age predicts that political advertising this year will outpace 2008 by 40%.

EXPERT OPINIONS
Kermit Baker, the Harvard economist with the Joint Center for Housing Studies, told me during a FloorDaily interview at the end of June that the housing recovery is going to feel like two steps forward and one step back as we slowly begin to pull out of this recession, which started six years ago. He added that housing typically accounts for 30% to 40% of the economic growth in the early years of an economic recovery, but this recovery will be much slower than in years past. According to Baker, this is the best time to buy a home in generations, based on depressed home values and low interest rates. He admitted, though, that mortgage bankers are being very restrictive and appraisals are often coming in below the asking price. According to Baker’s statistics, 600,000 homes were built last year, and this year the pace is running around 700,000. That is less than half of the roughly 1.5 million homes that the market should be able to absorb in a healthy economy.

John Baugh, a securities analyst with Stifel Nicolaus, issued a report in early August that called for a potential rebound in the carpet sector of 25% once the economy turns for good, but didn’t predict when that rebound might occur. When asked to summarize his outlook for the second half of the year—based on the quarterly conference calls he’d recently monitored—Baugh called for a moderate decline in the residential replacement market, flat sales in commercial and a 15% increase in the new home construction sector. He added that hard surface sales were outpacing carpet—especially through the home center channel—and that sales of luxury priced goods were picking up strength.

BENTLEY PRINCE STREET PURCHASE IS REFRESHING NEWS
The biggest news in the flooring industry so far this year is Bentley Prince Street’s pending separation from Interface. On July 25, it was announced that Interface had agreed to sell BPS to Dominus Capital and members of Bentley’s senior management for $35 million. This could be good news, not only for the two brands, Bentley and Interface, but also for the industry.

Back in 1993, Interface catapulted to the number one spot in Floor Focus’ top commercial mill list from the fourth position it held the previous year by buying Bentley and then Prince Street. In one year, Interface’s commercial sales moved from $140 million to $285 million and its marketshare jumped over Milliken, Mohawk and Shaw. But now, in retrospect, what was good for the Interface brand may not have been as good for Bentley’s brand. Back in 1992, Interface’s revenues were only $15 million higher than Bentley’s, and yet today—20 years later—Interface has grown its global modular business to almost $1 billion in annual revenues and Bentley Prince Street’s revenues are just over $100 million.

Bentley’s reputation with interior designers has also dropped relative to Interface’s over the last two decades. Back in 1994, in Floor Focus’ Top 200 A&D survey, Bentley was first in Service, Performance and Quality, second in Design, and fourth in Value. Interface’s scores were much lower—placing fourth in Service and sixth in Performance—and otherwise it wasn’t on the radar. But in last year’s designer survey (October 2011), Interface held a first or second position in every category and Bentley Prince Street was further down the list. Interface undoubtedly focused most of its resources on becoming the world leader in modular tile—Ray Anderson’s vision from the very beginning.

The mass defection of Charlie Eitel, David Oakey and Gordon Whitener from C&A over to Interface in 1993 was another huge contributing factor to Interface’s growth. Those three, along with John Wells and Dan Hendrix, focused much of their attention on helping build Interface into what Anderson had always dreamed it could become.

So now Bentley is liberated under Anthony Minite’s leadership and, as Minite told me in a recent interview, “is now free to move back to its entrepreneurial roots” and use Dominus Capital’s fresh resources to build Bentley’s brand beyond what it was able to do as an Interface subsidiary. I can tell you from firsthand experience that there is no greater motivation for achieving success than having ownership in the business you strive to build. And those around Minite know that he doesn’t require much sleep.

I mentioned earlier that this move could be good for the industry overall. Dominus Capital is no stranger to the flooring industry. In fact, Mac Bridger, who was president of C&A/Tandus for many years, is one of Dominus’ operating partners. Several of the firm’s investment partners were instrumental in liberating C&A’s floorcovering business (now Tandus) from Collins and Aikman, and helped build Universal Fibers into the yarn supplier that it has become today. In an era where we’ve seen mostly consolidation, it’s refreshing for the industry to get new energy, striking visuals and an established brand with solid financial backing. Bentley, under Ralph Mishkin’s leadership, was the first mill to listen to the customer and create what the designer wanted, rather than what the machine could make. Hopefully, the new team can build on this legacy and its West Coast location and create bold new products for the contract flooring market.

THE BENEFIT OF PROPERLY TRAINED INSTALLERS
It’s often been said that floorcovering products don’t become a floor until they’re properly installed. And yet, installation is often treated as an add-on during the retail sales process and most retailers (82%, according to our July survey) use independent contractors to do their installation work. For many years, installation made the top of the list when we asked retailers what their top problems were, but when this recession hit six years ago, low margins and intense competition became higher priorities. We assume that the installation issues didn’t go away, but bigger issues moved to the top.

Most consumers, who on average only buy flooring every five to seven years, are not aware that this industry has such an arm’s length relationship with the craftsmen who skillfully create the finished floor. The level of partnership between a retailer and installer varies depending on the level of trust, the skill level and quite often the rate of pay the retailer is willing to offer.

I attended the annual CFI (Certified Floorcovering Installers) meeting in Nashville in early August. This is the organization that Jim Walker started 19 years ago to raise the skill level of “carpet layers” and turn them into certified floorcovering installers.

One clear message that should be heard by every installer and retailer in the business is centered on how mutually beneficial the right partnership can be for a skilled installer and a professional retailer who look after each other’s interests. Flooring installers who know how to look and dress professionally, interact with the homeowner, take ownership and pride in the work, and ask for the referral can be one of the retailer’s best assets for future business.

Reciprocally, a retailer who pays a competitive rate for installation, trains its sales staff to properly prepare the homeowner for installation, rewards its installers for positive feedback and referrals, and sells enough flooring jobs to keep the installer busy is a valuable asset to a skilled installer.

This type of relationship, built on a mutual respect for each other’s role in the process, can lead to economic growth for both parties.

CORRECTIONS TO ANNIVERSARY ISSUE
We hope that you enjoyed our 20th anniversary issue as much as we enjoyed putting it together. We made a few mistakes that deserve correction. On page 45, in the consolidation chart, we incorrectly listed Thomas Industries as a Milliken acquisition. In reality, Al Penny bought most of those assets and then J&J ended up with the best parts.

We also incorrectly listed Interface’s 1991 revenue on page 50. We inadvertently added the $295 million that Interface was doing internationally. We estimate that Interface’s U.S. sales then were actually $160 million.

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

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