Strategic Exchange - March 2010

By Kemp Harr

The next six months should be interesting to watch. Those companies that are keeping their powder dry and watching from the porch until they see first hand what we all know is true—that, yes, the American economy is going to recover—might misjudge the trough and jump back in too late. Do we still have some pain to endure? Most definitely. But comfort comes from knowing that even the most conservative economists are calling for an uptick in business by the third quarter.

We continue to see signs that the economy is starting to stabilize. Fourth quarter GDP here in the U.S. was up 5.7%—the best quarterly growth rate in six years. Also, the unemployment rate has not only stopped climbing but actually fell in February to 9.7%. Industrial output is up, and in fact, here in our industry, the output for carpet is starting to outpace historical annual numbers for the first time since the middle of 2006.

On the other hand, there are still almost eight million people who are behind on their mortgage payments, according to a recent article in the Wall Street Journal. And most people suspect that our nation’s GDP performance is artificially inflated due to the billions we’ve spent in the government’s stimulus package.

But remember that economists make their predictions about the future based on the here and now and how that corresponds with historical precedents and textbook theories. While it’s a little more sophisticated than reading tea leaves, it can still be thrown off by misreading a trend that may be more weather related than economically triggered.

So, if the worst is behind us, what have we learned through all of this? When it comes to viewing our home as an investment, we’ve learned that economic cycles definitely have an impact on the asset value, and while it will still appreciate over the long term, it won’t at the pace that many felt plausible a few years ago. We’ve also learned that living within our means is a much more mature approach to consumerism.

The end of the last three recessions have been kind to the flooring industry. Will this one, which has run deeper and lasted longer than any dip in the last 70 years, be any different? Each recovery has its own set of circumstances but a few stats that bode well for flooring are the low interest rates, affordability of housing and pent up demand.

INSIGHTS WORTH READING
When Tom Lape and I sat down to talk about the industry for the interview featured in this issue, I couldn’t help but wonder what it is they put in the water in Durham, North Carolina or what it is about the gothic architecture at Duke University that allows them to create such pensive graduates. My mind drifted to my own family situation as I wondered if Duke is where I should send my 16-year-old son, Ellis.

Without a doubt, Tom gets it. And as a journalist who likes to cut through the corporate propaganda and get to the essence of the issues, I urge you to read this interview. Tom has a solid understanding of the hurdles that lie before us. He knows that the residential carpet players will not be able to create profit for themselves and their dealers by producing non-distinctive, me-too beige carpet where the only differentiator is price. (One insider recently reminded us that 80% of all residential carpet sold is some shade of beige.) And when it comes to branding, he also completely understands the power that retailers have to change the consumer’s mind once she enters the store and that continued work must be done to build alliances between retailers and manufacturers. Another refreshing observation from this interview is that Tom knows that the customer is the end user. But at the same time he recognizes the complexity of the channel issues and tells us that Mohawk wants to support the channel that gives the consumer the best shopping and installation experience.

Tom and his team also recognize the value of research and make many of their strategic decisions based on what their constituents in the marketplace tell them. And lastly, he recognizes that preparation and timing for the inevitable economic recovery will make a big difference in who will be profitable as the market recovers.

Q.E.P. BUYS ARBORCRAFT
By now you’ve probably heard that Q.E.P., the flooring tools, adhesives and underlayment company that’s probably best known for its line of Roberts installation tools, has purchased ArborCraft, the hardwood producer that was founded in the late 1800s and is probably best known as Harris-Tarkett. This Johnson City, Tennessee based manufacturer was a family owned company until Tarkett—the leading hardwood producer in Europe—purchased it in 1983. But in 2007, Tarkett decided to exit the U.S. hardwood market and sold the business to New Stream Capital. Q.E.P, which is headquartered in Boca Raton, Florida and is a publicly traded company, closed the deal late last month. According to company filings, it paid $10 million for a company that generated $27 million in revenue in 2009.

Now, practically overnight, Q.E.P. which originally stood for Quality Electrical Products, is a player in the hardwood market where margins have been historically thinner than the tools and adhesives business that it’s focused on until now. At first glance, I thought that there must be some strong crossover alignment between those distributors that ArborCraft was using and those aligned with Q.E.P., but I discovered that the only match was with Swiff-Train and NRF. So if the synergy is not distribution, perhaps it’s the national account relationship, as both Q.E.P. and ArborCraft have a major relationship with Home Depot. But, then again, it might simply be motivated by the realization that the hardwood market is at the base of its decline with a huge upside potential—especially since most homeowners list hardwood as their number one flooring preference for their dream home.

PRELIMINARY 2009 STATISTICS
Santo Torcivia with Market Insights is starting to pull together some preliminary 2009 numbers for our May Annual Report issue. At first glance, it appears that the wholesale value of the flooring business has dropped to $18.5 billion (down from just over $20 billion in 2008). On the retail side, the home centers have picked up a little marketshare during this recession and may now have as much as 30% of the market, with independent specialty retailers holding just under 50%. Marketshare by product category in wholesale dollars is: Carpet and Rug—64%, Ceramic—12%, Wood—9%, Resilient (vinyl)—8%, Laminate—4%, and Rubber—3%. As far as pricing per square foot is concerned, the average preliminary wholesale prices by category are: Wood—$2.31, Laminate—$1.26, Ceramic—$1.18, Carpet—$0.88, and Resilient—$0.56.

INDUSTRY LEADERSHIP CHANGES
There is certainly a changing of the guard with respect to industry leadership that deserves mention—men and women who spent most of their lives driving innovation and change throughout the flooring industry, people who have left a lasting mark on the business and helped position the industry as fashion and environmental leaders in the interior furnishings sector. Last year saw the retirement of Lee Schilling, the head of marketing at Tandus who is probably best known for driving segmentation and making sure this industry took a leadership role in environmental change. Lee was actually a second generation flooring leader, as his father was instrumental in building the Bigelow and World brands. Joyce LaValle, who retired late last year as head of marketing for Interface, held many roles at the firm, including president of Prince Street. She leaves her mark in the industry in two areas—she was instrumental in getting Ray Anderson to turn the company’s focus toward Mission Zero and she helped diversify the sales force at Interface and promote the role of women in that position.

We also saw the retirement of Jim Bethel as CEO of J+J/Invision. In his 30 years at this family run, midsize commercial carpet mill, he always took the long-term approach and built the type of relationships both internally and with customers that helped them develop their reputation as a design leader in the commercial contract business. And one last industry leader on the commercial side that deserves accolades and left a definite mark on the industry is Randy Gablehouse with Armstrong.

On the residential side, David Polley is an industry leader that left his mark first at Burlington, then at World, which was bought by Mohawk, and finally at the Dixie Group. In each instance, he became president of his division and was best known as a turn-around agent who knew how to analyze the market and develop products that not only fit the customers’ needs but were also profitable to produce. At Dixie, he started the Dixie Home division. And lastly, I must mention Jim McIntosh, who led the marketing at Queen and for a few years for all of Shaw’s residential business, and spent the last four years as general manager of Shaw’s West Coast Tuftex division. Jim is another professional that devoted his whole adult life to challenging the status quo and pushing the envelope on style and design. It always appeared that Jim was having fun (he loves red wine and fly fishing, and he named most of Tuftex’s new products after music he liked) but in reality, he was listening to his customer and working long hours to develop beautiful carpet. Two of his latest accomplishments were the Disney broadloom collection and a Tuftex carpet color line designed to coordinate with tile and stone. Jim has already bought a home in Utah and sold his place in southern California.

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

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