Strategic Exchange: 2018 is on track to bring prosperity and change to the industry - Feb 2018

By Kemp Harr

In this column a year ago, I mentioned that the Dow had crossed 20,000. And now it’s over 26,000. That’s a 30% increase in one year. Stock prices are an indication of what companies are expected to earn, so obviously expectations are running high. The good news is that economies around the world are doing well. Global output is estimated to have grown 3.7% in 2017.

The $64 question is how long all of this is going to last. Should we be concerned that the value of the dollar has continued to fall this year, even though treasury yields-one of the traditional drivers of dollar strength-are on the rise? Also factor in the positive forecast for U.S. GDP this year, which the Federal Reserve expects to grow by an annualized rate of 2.5%, and consider that our unemployment remains below 4%.

Fortunately, the conversations I’ve had with pundits who understand all of this better than I do is that 2018 is going to be a great year. Yes, interest rates are going to climb, and inflation is going to rise, but, in the short term, consumers and businesses are going to have more money to invest thanks to the tax reform bill that was passed in December. There is one minor downside to this tax reform that could have an adverse effect on flooring sales in the remodel sector: interest on home equity loans is no longer tax deductible. Time will tell what effect that has, especially as interest rates rise.

CONSUMER RESEARCH REVEALS INTERNET AS MOST TRUSTED ADVISOR
The bigger questions for us in the flooring business are what is the consumer going to buy, who will serve as their trusted advisor in the buying process, and where will they purchase the product? The first consideration-what will the consumer buy-is too large to tackle here, but let me share my thoughts on the other two.

In the residential sector, recent consumer surveys conducted by Shaw Industries and the National Wood Flooring Association (NWFA) are telling us that the Internet has become the consumers’ go-to resource for reliable information while shopping for flooring. Hearing that, I’m sure many of us are concerned as to whether the information consumers are relying on is accurate. How does the consumer distinguish between true and biased information? Today, there are fewer and fewer resources that speak honestly and objectively.

The next question is where will they buy. This is where we have to scratch our heads. Home centers score much better than those of us who make a living in this business would think. Consumers know the big boxes buy in bulk, so they think they’re getting a great price. And since they’ve already picked a product based on their online research, they don’t mind that the store employees are more order-takers than product experts. In fact, they prefer the fact that no one challenges the conclusions they’ve reached using Internet research. Consumers rate many independent stores lower because prices aren’t marked on the product, and the sales process is too high pressure.

DEFINING REAL HARDWOOD FLOORING
Both consumer research projects that I mentioned earlier confirm that hardwood is the type of flooring that homeowners aspire to have above all others. This is not new news, but, thanks to the many hardwood lookalikes, there seems to be some grey area on how to interpret these findings. Does the consumer want hardwood flooring or something that looks like hardwood flooring? Is she looking for white oak, or will decorative PVC work just as well? I addressed my concern over not having a U.S. standard that defines real hardwood flooring back in our 25th anniversary issue in August 2017.

Now, seven months later, after hearing the pitch behind Mohawk’s new RevWood product, learning what’s under development in the multilayered flooring category at Domotex in Germany, and also realizing that the consumer is willing to trust whatever he or she reads on the Internet, I feel strongly that the need for an unbiased standard that defines the product is long overdue.

While I was in Germany, I did a little digging around and found that Europeans are way ahead of us with regard to standards for hardwood flooring. Let’s not forget that laminate flooring was first developed in Europe, so that may have been the catalyst that drove what I’m about to tell you.

In Europe, hardwood flooring is called parquet, and the trade association for that business is called the European Federation of the Parquet Industry (FEP). Its website is www.parquet.net. The group’s mission is to strengthen the position of hardwood flooring against other floorcovering products-to protect and reinforce its image.

On its website, the federation acknowledges there are two types of hardwood flooring, solid and engineered, but it goes on to say, “a wood flooring product must have a real wood top layer that is at least 2.5mm in thickness.” Converted to inches, that’s roughly a tenth of an inch.

To further reinforce my premise about this group’s concern that laminate and hardwood might blur in the mind of the consumer, take note of how the website defines laminate: “Laminate floors are made from fibres, which are pressed together, and the ‘wood effect’ surface is a printed image with a wear-resistant finishing top layer. Laminate floors are not made of real wood, and they don’t have a real wood surface layer. Laminates and wood-effect floors, though often radiating a ‘wood look,’ should not be confused with real wood floors.”

After finding this information, I reached out to the NWFA’s CEO, Michael Martin, to see where the association stands on clarifying what is and isn’t real hardwood flooring. He told me that the need for defining standards was on the agenda for the next board meeting and a task force within the group has been formed to expedite the process.

DOMOTEX USA TO DEBUT IN ATLANTA IN FEBRUARY 2019
Hannover Fairs released an announcement early last month that it was launching a new residential flooring show in Atlanta in early 2019. Since then, I’ve conducted audio interviews on this topic with the show’s American business leader, the CEO of Deutsche Messe and the show director for the existing Surfaces. And, from my perspective, I feel the approach has merit: they have picked Atlanta, their initial offering is regionally focused, and they know the flooring business inside and out.

Andreas Grochow, the CEO with Deutsche Messe, recognizes that building a show of any magnitude will take time, and he has committed to hold this show a minimum of three consecutive years in Atlanta to build up an audience. He added that Hannover Fairs conducted extensive research prior to launching the show to uncover the unmet needs of the target attendees that it hopes to attract to the show. He stressed to me that the approach with Domotex USA is not to displace another show, but to create an event in the eastern U.S. that rivals their shows in Germany and China-which today are the two leading shows in the global flooring business, from both an attendance and leased square footage perspective.

For the first couple of years, I’d say the two shows that need to be concerned are the Atlanta regional show-which normally takes place in Atlanta in early January at the Galleria-and the Atlanta Rug Market, also in January. Domotex USA will be a three-day event and, unlike the Rug Market, won’t require that a company rent a permanent showroom in downtown Atlanta for a year-and let’s not forget that rugs are a major component within the existing Domotex shows, so the show has worldwide connections in that sector.

A big issue for 2019 will be timing. The show is a little late, due to the Atlanta Superbowl, and exhibitor contracts have already been signed for both 2019’s Rug Market and Galleria show. In addition, both Shaw and Mohawk will be holding their aligned conventions.

Another small show that will be impacted in the early stages is the American Floorcovering Alliance’s FloorTek equipment show, which is held in Dalton every third year. Manufacturing equipment is another strength of the existing Domotex shows, so it will be interesting to see what effect that might have or how the two shows choose to work together.

There are plenty of people in the industry who feel the U.S. flooring market has too many shows to begin with. Domotex USA is wisely staying away from Coverings because it has no plans to offer tile and stone products. Coverings is owned by five trade associations that are actively involved in the business, so they are firmly entrenched; plus, the existing Domotex shows in Germany and China don’t feature tile. Domotex USA is also staying clear of NeoCon by specifically stating that its show is focused on the residential market and is timed to match the cycle of new product releases in that market.

There is a long list of residentially focused specialty shows tied in with the annual meetings of various flooring groups. For example, the NWFA has a show every year. And among the buying groups, CCA Global puts on two shows a year, Abbey has a show, Flooring Alliance has a show, and Floors and More has a show-this year, it is in Vegas the weekend before Surfaces. The National Floorcovering Alliance meets three times annually, but only one of those events has a trade show feel to it, and currently that happens the day before Surfaces in Vegas. The North American Association of Floor Covering Distributors also has a table-top show once a year, adjacent to its annual business meetings. Beyond that, there are seven rug shows every year and four regional residential shows outside of the Atlanta one that I mentioned earlier. Oh, and while we’re counting, let’s not forget the Shaw and Mohawk aligned dealer trade shows I mentioned earlier.

The Domotex Germany show-for those of you who have never been-is a marvel to experience and very professionally done. The level of forethought, investment and energy that goes into the show is nothing short of amazing. But that show has been around for 30 years, and it took time to get where it is today. Here in the U.S., Surfaces has been the go-to residential show for 28 years, and the only big issue with this show is that 70% of its audience comes from the western third of the country. Not to get nostalgic, but Surfaces has come a long way since that two-level show at the Sands. Do you remember that lower level dungeon? Only time will tell if one prevails over the other or if they can co-exist.

FLOOR & DÉCOR’S RAPID SUCCESS
Floor & Décor Outlets of America is becoming a major factor in the big box channel of the floorcovering business. Its year-end sales in 2012 with 31 stores was $335 million, and at the end of 2016, it achieved over $1.0 billion in sales with 70 stores. That’s an average of over $14 million per location last year.

Floor & Décor is a one-stop hard surface flooring outlet specializing in ceramic tile, hardwood, laminate flooring, LVT and some area rugs. No carpet and no vinyl sheet. It buys direct, doesn’t use any manufacturers’ brands and doesn’t offer installation. In addition to flooring, it also sells stone and granite countertops. Another important statistic is that 60% of its business comes from contractors.

This company is a force in the marketplace, and we recommend that competing floorcovering retailers shop them to see where their businesses overlap and where they can both maintain and achieve differentiation.

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

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