Strategic Exchange - May 2013

By Kemp Harr

A few weeks ago, I interviewed Kermit Baker, the Harvard economist who tracks the commercial market for the American Institute of Architects (AIA) and the housing market in his role with the Joint Center for Housing Studies (JCHS). He pointed out that while some might think that 2013 is going to mirror the previous two years by starting out with a burst of energy and fizzling out in the second quarter, he is not expecting that to happen this year.

His data reveals that the fundamentals within the housing market this year are strong enough to build momentum throughout the year. The commercial market won’t be quite as resilient but should remain consistent until the housing market—both on the builder and remodel side—fuels more economic growth into the American economy.

But with all the talk about continued unemployment and the need to extend benefits to those who are still out of work, I found it surprising to hear Kermit say that a labor shortage is the biggest issue that homebuilders and their subcontractors are currently facing. According to a recent JCHS study, homebuilders have been complaining for the last six to eight months that they can’t find enough skilled workers to satisfy the rapidly rising demand. One can only wonder what is keeping construction workers from coming back to work. Have they moved on to other, less cyclical businesses like trucking or has the federal government enhanced our entitlement programs so much that it’s just not worth it to go to work?

FREEDOM AND INTEGRITY WALK HAND-IN-HAND
April 15 brought back some of those patriotic feelings that we felt back on September 11, 2001. There have been atrocities in movie theaters and preschools in the last year but there’s a different emotional feeling when the attack is against us just because we’re Americans. I don’t know about you but I am so proud of our country. For those who have served in the military so that we can continue to be the land of the free—I can’t thank you enough. Sure, I’m not thrilled about everything this country has to offer—it upsets me when I see young people who cover their body with tattoos and frustrates me when I see where television entertainment is today. What happened to the FCC and the moral scrutiny role that it used to play in protecting the public airways? What is all this recent attention on what people do in their bedrooms and whom they do it with? It just seems like the integrity of society has been diminished, even though it’s a direct result of our freedom.

Freedom brings with it certain responsibilities and nowhere is that more important than in the press. We all recognize the need for laws and for public officials who are paid to ensure we abide by them. The constitution gives the press wide latitude so it can serve as a check and balance system. The press serves to augment the legal system by keeping the public informed.

Our goal as part of the press is to convey all sides of an issue, to bring accolades to the winners and scrutiny to the losers, and for that matter even scrutiny to the winners—and, yes, even to entertain. But the most important attribute for a journalist is objectivity, leaving all biases and prejudices out of the message. Even in this role, here at Floor Focus as a trade publication, we must recognize the freedom given to us by the First Amendment to the Constitution but also use it with integrity.

In the Annual Report section of this May issue, every member of our editorial team has worked hard to accurately report the changes that occurred in this industry in 2012. We’ve conducted countless interviews to triangulate and report on what we think is the most accurate depiction both overall and within each flooring sector. We invite anyone who feels we may have erred in our investigation to chime in, since ultimately our goal is to get the facts right.

ROYALTY—FROM FATHER TO DAUGHTER?
Last month, we reported on FloorDaily that Mike Derderian, the founder and owner of Royalty Carpet Mills, had unexpectedly passed away. And while I didn’t know him personally, I’ve heard stories that he was full of life and passionate about his business. Many in the industry will miss him.

Even though Royalty, with its commercial PacifiCrest brand and its upper end Camelot residential brand, experienced the same revenue declines that we all saw during the recession, it is still a viable factor in the business and we estimate that its revenues are somewhere in the $80 million range. This is one of the few remaining West Coast carpet mills, with a solid reputation and distinctive looking products, which has maintained a strong alliance with Invista and its nylon carpet brands. In addition to selling carpet, the company also distributes imported porcelain tile from Italy and Brazil. I’ve been told that Mike was a shrewd real estate investor and his estate has been left in great financial condition. And I’ve been told that the property in Irvine where Royalty’s dyeing and finishing plant is located is extremely valuable.

I spoke briefly with Andrea Greenleaf, Mike’s daughter, a few weeks ago because, like many of you, I was curious about the company’s succession plan. Andrea told me that she was taking over the role of chairman and was in the early stages of beefing up the company’s sales department. Before joining her dad in the family business, Andrea spent some time as a gemologist but for the last several years she has headed up the company’s PacifiCrest business.

MADE IN THE USA RESONATES
There’s increasing evidence that Made in the USA is beginning to sway U.S. consumers. In other words, for a variety of reasons, they’re beginning to choose products made in this country as opposed to similar products constructed overseas—at least in some product categories. Admittedly, if it was an overwhelming criterion, Apple’s sales would be negatively impacted, since iPhones, iPads and iPods are all assembled in Asia, but we’ve also got to remember that Apple competes in an area where many of the leaders use foreign production.

Some retailers have told us their customers look for USA made products out of desire to keep our citizens employed, to maintain our GDP dominance in the world economy or because they think the products are higher quality. However, price is still a huge factor and so far most American manufacturers haven’t been able to match the Chinese and other Asian producers. But that’s changing—even in our industry—because improved manufacturing technology domestically and relatively low transportation charges are narrowing the cost difference substantially.

Hardwood flooring makers Mullican and Somerset have both brought their engineered flooring production back to this country in recent months. Mullican, in particular, said that new technology makes it possible to use only 10% of the amount of labor used in China to manufacture its products.

Also, Mannington is moving LVT production back to the U.S. Its recent purchase of Amtico gave it production capacity in Georgia, and it’s taking full advantage of that capability. Local production also gives Mannington a much better turnaround time.

Another funny thing about Made in the USA is that it’s beginning to catch on outside the U.S. The Boston Consulting Group reported that more than 60% of Chinese consumers would pay more for U.S. made products, and nearly 50% of Chinese consumers prefer a U.S.-made product to a China-made product of similar price and quality.

Boston Consulting also said its survey showed that both U.S. and Chinese consumers overwhelmingly believe that American products are higher quality, with 85% of U.S. consumers and 82% of Chinese consumers saying they “agree” or “strongly agree” that they feel better about Made in USA quality.

Patriotism is another key consideration for U.S. consumers, as 93% said that they would pay more for domestically produced goods in order to keep jobs in the U.S., and 80% said that buying American shows patriotism.

“Quality and patriotism are powerful factors that retailers will have to consider in their marketing communications around Made in USA products and in their sourcing strategies,” says Kate Manfred, leader of BCG’s Center for Consumer and Customer Insight in the Americas and a coauthor of the survey.

INTERNET SALES TAX TAKES A STEP
Politicians have been talking for years about forcing Internet retailers to collect state and local sales taxes, just as traditional retailers have had to do forever. For Internet retailers, it’s a complex issue given that sales taxes vary substantially from state to state, and even county to county. Nevertheless, this may finally be the year that store-based retailers get a break, thanks in part to lobbying efforts by groups like the World Floor Covering Association and its late CEO Christopher Davis.

As an initial step in ultimately passing the Marketplace Fairness Act, the Senate, as a nonbinding amendment to its budget, voted 15 to 25 to allow states to collect sales taxes from Internet and mail order companies. A final Senate vote is scheduled for May 6.

The legislation addresses the fundamental unfairness that allows out-of-state Internet and mail order companies to avoid collecting and remitting state and local sales taxes while local physical stores are required to collect the taxes. States now can require Internet retailers to collect sales taxes only if the business has a physical presence in the state, such as a store or warehouse. This has been a big issue for states like Tennessee, which not only has one of the highest sales tax rates in the country but also has a major distribution site operated by Internet retailer Amazon.

The proposed legislation, which faces an uncertain future in the House, would create a program that would require Internet and mail order sellers to collect and remit sales taxes to states that elect to participate in the federal program. It closes a loophole in a 1992 law that exempted retailers from collecting taxes in states where they had no stores. That, of course, was before the Internet really took off. According to Forrester Research, online sales are projected to grow 10% annually and by 2017 will account for 10% of all retail sales.

Pressure by WFCA members played a vital part in the initial Senate test vote. The WFCA, at the request of its legislative counsel, LobbyIt, contacted members in Idaho, Illinois, Indiana, Mississippi, New York and Pennsylvania and requested they contact their senators. The WFCA even drew up a form letter for them to use.

“Our members’ response was immediate and ensured that their senators knew the importance of the Marketplace Fairness Act to traditional brick and mortar stores, the backbone of America’s economy,” the WFCA said. “The act will allow WFCA members to compete fairly with out-of-state Internet and mail order companies that currently do not collect sales taxes.”

As the WFCA also noted, there should be plenty of opportunities for its members to make their opinions heard on other important legislation, and this issue has given them a voice “that will be respected in the future.”

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

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