Strategic Exchange - June 2011

By Kemp Harr

We’d all love to see the summer that we’d hoped for in 2011, where the economy continues to expand and consumers are comfortable enough with their current financial situation to invest a little money to keep their home décor up to date.

From a flooring perspective, there has to be plenty of pent up demand—considering the length and depth of this great recession. Based on a few key indicators, consumers appear to be taking care of the necessities first—like transportation and clothing—and remodeling still appears to be further down the priority list. New car sales have been up every month this year (April was up 17.9% from the previous April) and many of the department stores are experiencing steady sales growth (overall retail comp sales were up 9%). And on another positive note, consumer sentiment rose higher than expected in May to a reading of 74.3 so we’re on the right track.

It is anybody’s guess when consumers will make it down to the home furnishing/flooring line item on their needs list. For the first five months of the year, the weather has been more of a debilitating factor in consumers’ ability to focus on remodel projects. First we had the multiple snow storms and then the heavy rains followed by the tornadoes and floods. Naturally, some of these disasters will result in an uptick in flooring demand as homes are repaired from these unforeseen calamities. But the weather also creates a distraction that can further delay routine remodeling work.

Fortunately, the economy continues to expand and the interest rate yield curve is aligned to motivate banks to expand their balance sheets by increasing their loan portfolios. Economists never predicted that 2011 would be a robust growth year but it continues to provide the necessary time and momentum to allow us to work through the housing market headwinds created by declining home values and excess supply. We all know it takes time to turn a large boat, and a $15 trillion economy doesn’t turn on a dime.

IVC’s Aggressive U.S. Expansion
The Belgians are no strangers to the flooring business. Their carpet manufacturing cluster is second in the world behind what we’ve created here in the U.S. in northwest Georgia. And while most of our production is consumed in the U.S., Belgium carpet is sold throughout Europe. Here in the States, two well established companies that have deep Belgium roots are Beaulieu of America and US Floors. Beaulieu is number three in U.S. carpet sales and US Floors is a leader in the cork and bamboo flooring market. Now, there is third Belgium based flooring company that is poised to capture a leading share in the resilient market—International Vinyl Company, better known as IVC.

Last month, IVC opened an impressive $75 million sheet vinyl plant that is tooled with the latest technology for producing glass-backed sheet vinyl. At full capacity, this new production line, which is touted as the longest of its type in the world, will produce 5,000 miles (4 meters wide) of product annually. IVC could have put this plant anywhere, but decided to build it right in the heart of carpet country—in Dalton, Georgia.

If you looked at the 2010 statistics we published in last month’s issue of Floor Focus, you learned that the resilient business grew about 3% last year but still only commands about 9.5% of the overall U.S. flooring market in terms of revenue. It has been taking a little share from laminate but overall it’s been ebbing and flowing with the overall flooring market, which we all know is relatively flat. So to bring this much domestic capacity online will certainly result in somebody losing marketshare. Certainly, this frees up IVC’s Belgium plants to service other parts of the world. Prior to this plant opening, all of IVC’s products have been produced in Belgium, and IVC has been building its U.S. presence since 2003.

The four leading producers of resilient flooring in the U.S. today are Armstrong, Mannington, Tarkett and Congoleum. The marketshare leader is Armstrong and last year it spent $26 million converting its vinyl sheet plant in Lancaster, Pennsylvania from felt backed to glass backed. We should also mention that Shaw entered this market this year, with most of its products coming from LG’s plants in South Korea. Suffice it to say that until the overall flooring market starts to grow, the capacity for sheet vinyl products in the U.S. far exceeds demand, so it should be buyer’s market for the near term.

IVC is not tiptoeing into this market by any means. It has a well established business with CCA Global and is already making plans to add LVT capacity at the Dalton plant as the next phase of expansion. The Balcaen family, which owns IVC, used to own the Balta Group but sold majority interest to a British private equity firm. With this transaction, they divested themselves of the carpet, rug and artificial turf businesses but chose to focus on the vinyl business because they think it has the best potential for long-range growth.

During the grand opening, Jan Vergote, CEO of the IVC Group, stated that the new Dalton plant would help to “take more jobs back from the East.” This comment was very revealing about what Vergote thinks the U.S. and the Europeans should do to maintain their economic strength in this global marketplace.

Orchid Ceramic Leaves U.S. Market
At the end of last month, we heard that Orchid Ceramic had decided to pull out of the U.S market after nine years of business. This decision will be a big loss to the U.S. ceramic tile market and could be very telling about where the Colombians think the growth sectors are (or at least aren’t) in the future global economy.

The decision to pull out was based on two core issues. Probably the biggest factor is the exchange rate of the dollar versus the Colombian peso. As the dollar has weakened and the peso has strengthened, the gap between the two currencies has increased. This negatively affects the margins on import products purchased with U.S. dollars. In addition, the Colombian market itself and several neighboring countries in South America offer growth opportunities that exceed what we’re seeing here in the U.S.

Orchid is owned by the Corona organization, a 129 year old Colombian based conglomerate. In addition to its five floor and wall tile plants in Colombia, Corona also manufactures toilets (Mansfield brand), sinks, faucets, construction materials (mortars), electrical insulators and dinnerware. It also owns specialty retail stores and home centers in South America.

Orchid started focusing on the U.S. market in 2002 when it opened a corporate headquarters and distribution center in Tulsa, Oklahoma. In 2006, it developed a design council, which helped to build its reputation as a fashion leader in the business.

With this news, the 30 employees based in Tulsa will lose their jobs, but the company will continue to supply a few major customers on a private label basis.

Winners and Losers
Socrates told us that the unexamined life is not worth living and I must admit that if we don’t re-evaluate where we’re going and make some course corrections here in the U.S. soon, the BRIC (Brazil, Russia, India and China) countries are going to eat our lunch.

We need to stop being spectators and jump back into the game. We are suffering from a bad case of affluence and we’ve grown complacent. We need to get up, turn off the TV, and recapture the entrepreneurial spirit.

It will be easier to retake a leadership role in this global economy now while we still control a dominant share than if we let these BRIC countries usurp our global position. As with most maladies, finding the cure will only come if we can identify the problem that got us where we are today.

If we look back over the last 60 or so years, we see what Tom Brokaw called the Greatest Generation, followed by the Baby Boomers and then the Gen X and Gen Y (also called the Trophy Generations). Something broke over that period of time and we need to fix it before it’s too late.

The blame could potentially rest with the 74 million Americans who were born between 1946 and 1964. We (yes, I’m part of the group that started the problem) lost the focus and self-reflection that our parents had. But we still ended up okay financially because we benefited from their parental discipline and we understood what it takes to win and get ahead. But it’s the decisions that we have made with our children that has badly damaged America’s ability to maintain its edge.

Back when we were growing up, we knew that if we won the game, we’d get a trophy and, if we didn’t, we’d go home empty handed. But when we became the coaches and the rule makers, we decided that this was too harsh a punishment for our precious children. So, if we kept score at all, we’d make sure that the winners got a trophy—but we thought the losers should get one, too.

Now, this coddled group, which some say represents 92 million people, is entering the work force and making decisions that will ultimately have a bearing on where America ends up in this global economic race. Hopefully they can learn that in every challenge there’s a winner and a loser—and in most cases only the winner gets the prize.

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

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