Strategic Exchange - October 2012

By Kemp Harr

Two months after we hear that Bentley Prince Street has been purchased by Dominus Capital, there’s an even bigger commercial carpet acquisition being finalized, this time between Tarkett and Tandus. And the interesting twist in this news is the fact that a hard surface company is buying a carpet company. This is a very strategic play for Tarkett for three reasons. First, carpet is the leading surface in the commercial sector, commanding almost 70% of the market and Tandus is well known in this market. Secondly, Tandus is backwards integrated with its own fiber capacity, which gives it the building blocks to easily expand into the residential market as the economy starts to recover. And thirdly, bundling hard and soft surface together as a one-stop shop is a significant advantage when going to market—one that carpet mills, already sensitive to their decreasing share of the market, have been addressing over the last couple of years by adding outsourced resilient programs. In-house production is even better.

Tarkett is a $2.7 billion global producer of flooring and sports surfaces. With its headquarters based in Paris, Tarkett’s ownership is split 50/50 with the Deconinck family and KKR. Tarkett was most recently in the merger business in December 2010 when it announced the acquisition of Centiva, and prior to that—in 2005—when it acquired Johnsonite. Both of these companies were brand leaders in the commercial sector and are well known within the A&D sector.

Worldwide, Tarkett’s portfolio is extremely diverse both geographically and by surface type. Today, 66% of its sales comes from vinyl and linoleum, 12% comes from hardwood and laminate, 11% comes from sports surfaces, and the remaining 11% from rubber and other products. Geographically, one fourth of Tarkett’s annual revenue comes from North America, one third comes from the European Union, and another third comes from the BRIC countries.

Tandus is the fourth largest carpet mill in the commercial market with estimated U.S. sales of $250 million. After the big three commercial carpet producers, Interface, Shaw and Mohawk, Tandus is unchallenged in the fourth position. Tandus is well known in the education sector as the performance brand, thanks to the durability of its Powerbond 6’ carpet, which today it positions as a hybrid resilient with a textile wearlayer. One of Tandus’ unique selling points is that it sells carpet in four different constructions: Powerbond in 6’ widths, tufted broadloom, woven broadloom and modular.

Tandus, as many people will remember, was spun off from Collins & Aikman in February 1997 when Collins & Aikman made the decision to focus its business on the automotive sector. Two investors, Quad-C and Paribas, purchased the company for $197 million. Two years later, the company grew through acquisition by purchasing Monterey in California and Crossley in Canada. In 2001 Oaktree Capital purchased Tandus and has owned it up until now.

PRESIDENTIAL ELECTION’S NEGATIVE IMPACT ON CONSUMERS
As the U.S. presidential election campaign enters its final month, we all have to wonder what the outcome will be. I, for one, look forward to the process being over, regardless of the victor. Every four years I am amazed at the huge amount of money that is wasted in the process and I have to question how effective the negative advertising is in persuading voters which chad to punch in November. I live in a state where the outcome is already decided so I am spared the deluge of rhetoric that is bombarded on those who live in the battleground states like Virginia, Ohio, North Carolina, Colorado, Florida, Nevada and Pennsylvania.

There is no denying that the U.S. economy, 70% of which is driven by consumer spending, would be doing better if both candidates weren’t spending millions of advertising dollars telling us how uncertain our future is—unless of course we vote for candidate A or B.

Few could deny that sales of home furnishing products for Q3 2012 are being hurt by the negative messages that are drummed into consumers’ minds as part of the political process. My travels have taken me into several of these swing states this summer and I couldn’t believe the lies I was hearing from both sides. It should come as no surprise that consumer confidence in August hit a nine month low of 60.6.

The scariest part of where we find ourselves today at the dawn of this next election is the level of national debt. In the last four years, the number of Americans who receive food stamps has doubled to 14 million and our nation’s debt has almost doubled going from $9 trillion to $16 trillion. Regardless of who sleeps in the White House, we have to start living within our means. American voters have to stop listening to political sound bites and start urging Washington to live by responsible fiscal spending policies.

HOUSING ON THE RISE
On a more positive note, it does appear that the housing market is starting to turn the corner. According to Case-Shiller, home values rose 2.2% in the second quarter, the best performance since the fourth quarter of 2005. This is big news for an industry that sells two-thirds of its products into homes. We’ve all learned that economic conditions run in cycles and we’ve been wondering for years now when this last cycle would turn positive for a prolonged period. This past August, new home construction start numbers were the best they’ve been since they were artificially inflated by the mortgage tax incentive two years ago. The annually adjusted rate hit 750,000. This is still a long way from the 1.2 million start rate that is considered a sustainable rate in a healthy economy, but at least it’s moving in the right direction.

There was more good news in the existing home resales number for August, which climbed to an annual rate of 4.82 million units, the best level in more than a year. Inventory of existing homes on the market in July was 2.4 million units, which is a 6.4 month supply—well below the 9.3 month supply from a year ago.

Those people who were waiting to buy a house at the bottom of the market had better move quickly because it looks like that pricing valley in the housing chart has come and gone.

On the home mortgage front, rates are at historically low levels and are almost guaranteed to stay low for a while, thanks to this third round of quantitative easing that Fed chairman Ben Bernanke just pushed through. But the mortgage approval process and paperwork requirements are still very cumbersome, so getting a loan usually takes longer than most people remember from their last experience.

From a sentiment standpoint, consumer moods are still weighed down with knowledge of the persistently high unemployment rate. And while the economic situation in Europe has been quiet lately, it is volatile enough to change the prevailing optimism brought on by these favorable housing numbers. Another negative factor is the lack of leadership in Washington and the uncertainly surrounding taxes, healthcare/social security funding and energy policies—all of which need to be resolved with long-range solutions.

Consumers are more apt to spend money on home furnishings when they feel good about their overall net worth. And thanks to the recent uptick in home values and the steady rise in Wall Street’s Dow Jones Industrial average—which has grown 16.4% in the last year and is now just 500 points from its peak in October of 2007—some consumers are starting to loosen their purse strings.

LACK OF OPULENCE IN COMMERCIAL FINISHES
By poring over the data from our Top 250 Design Survey this month, it appears that luxury and opulence within the specified market is out of vogue. It’s as if no one wants to be perceived as being over the top or extravagant. On the carpet side, we know that face weights are down for two reasons. One is due to the continued rising cost of nylon and wool face fibers but the other reason is the continued dematerialization movement on the sustainability front.

It’s not as if designers are shying away from bold aesthetics like color and texture. In fact, the color trend data shows that fire colors like yellow, orange and red fall right behind the perennial neutral colors in popularity. And with hard surface, we continue to see more and more polished concrete—which in reality can be an expensive finish—but it carries more of that dematerialization message.

If and when the economy fully recovers, it will be interesting to see if this trend is a new normal or just a sign of the times.

REVENUE GROWTH BY SURFACE TYPE
Santo Torcivia’s quarterly market statistics have just been released and it reinforces the premise that hard surfaces are taking share from carpet. Up to this point in the year, hardwood sales have grown the most, up 10% from the same period last year. Ceramic tile comes in second, up 6.3%. Resilient comes in third place, up 2.5%. Carpet and rug are up 1.7% and laminate is down 1%.

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

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