Strategic Exchange: Leading industry groups offer networking opportunities - Nov 2017

By Kemp Harr

The third week of October was a busy week, as three of the most influential groups in the flooring business held meetings. Starnet, the largest group of commercial flooring contractors, met in Atlanta for its fall meeting. The National Floorcovering Alliance (NFA), a group of 42 highly successful retailers, convened in Newport, Rhode Island for its fall meeting. And FloorExpo, the group of flooring contractors within CCA Global that focuses on the builder and multifamily sector of the business, gathered for its annual meeting in San Antonio, Texas.

We attend these meetings every year so we can assess growth within each sector, but more importantly to learn what actions these entrepreneurs are taking to overcome the latest obstacles in the market. It’s no surprise that all three groups report growth that is outpacing our estimate for the market overall.

Without a doubt, one of biggest issues that these groups are facing is the availability of competent installation labor. Here are a few of the highlights from each meeting.

Starnet now has 174 members and wants to add 26 more by the end of this decade. One of its primary objectives is to increase the purchases within the group’s vendor partners. The group has landed its first big national account customer in the healthcare sector after almost two years of negotiations. Starnet held an information session on the new OSHA silica regulations, which went into effect on September 23. Fred Williamson, executive vice president, also announced his plans to retire at the end of 2018 after a 50-year career in the flooring business.

Average growth within the NFA membership so far this year is 5%. Consumers are buying better-end goods and WPC (rigid LVT) is the fastest growing category. Carpet’s share within the membership continues to decline. As members recognize that selling more hard surface products will mean fewer replacement purchases by the consumer, they are diversifying their product mix by adding countertops and cabinets. On the final evening of the meeting, the group held a special retirement dinner at the Rosecliff, one of the Gilded Age mansions in Newport, to honor Shaw’s Randy Merritt and John Godwin and the Dixie Group’s Paul Comiskey-all of whom are retiring before the next meeting.

At the beginning of the FEI Group’s annual meeting, CEO Dave Gheesling and president Jay Smith pumped up the audience by highlighting the current state of the economy. They pointed out that the stock market is up over 23,000, household wealth is up $1.7 trillion, total wealth in the country is up $5.2 trillion, unemployment is down to 4.2%-the lowest rate in 16 years-the U.S. GDP for Q2 was 3.1%, single-family housing starts are tracking at 830 units, planned multifamily housing starts are projected to be 4.6 million units over the next 13 years with occupancy rates up to 95.5%, and existing home sales are running at an annual rate of $5.35 million units. Their message at the end was that, under these conditions, it would be easy to grow complacent-so fight the urge.

The theme of the meeting was Texas Tough, and it attracted over 550 people, counting members, vendors and guests. One of the core focus items from an education standpoint was increasing efficiency by streamlining processes.

ATTEMPT TO ELIMINATE DISCOUNT TERMS ON CARPET
When I first read Shaw Industries October 6 price-increase letter, which Mohawk followed a few days later with similar language, I had no idea how emotional this topic was going to be to the dealers in the marketplace. It wasn’t until my phone started ringing with angry and concerned retailers on the other end that I fully understood the passion. I could tell by the tone and the language that dealers were taking this change personally, which I’m guessing was a miscalculation on the part of Shaw and Mohawk.

After all, flooring is a building material, and when you consider the broader scope, the number of building material products sold under discount terms are in the minority-especially with interest rates as low as they are today. Money is so cheap today that giving five points to ensure bills are paid within 20 days would be hard to justify as a new program. But this practice has been the norm for so long that retailers and contractors have built their accounting, pricing, commission and bonus structures around it. They see it as a loyalty perk that they’ve earned after years of prompt payment. It’s what separates them from the “bad guys” that sell out of the back of their truck.

I had one major, and very successful, retailer tell me that he’d rather get a 7% price increase than lose a 5% discount.

As I’ve delved further into the details surrounding this response from retailers, I’ve been told that hard surface products are sold on a net 30 basis and that this move was being made so that the dealer wouldn’t need separate invoices when both hard and soft surface products were being delivered on the same truck-especially now that hard surface products are collectively pulling ahead of carpet in marketshare. I’ve also been told that the home centers buy carpet on a net 30 basis.

But no matter how hard Shaw and Mohawk tried to rationalize the basis for their decision to eliminate term discounts, they soon discovered that it was a losing battle-and they retracted to a simple 5% to 6% price increase.

ENGINEERED FLOORS’ ACQUISITION OF BEAULIEU
One of the biggest news items on the supply side of the business in the last month is the bankruptcy court’s approval of Engineered Floors’ (EF) offer to buy Beaulieu’s assets. The news release dated October 6 said a definitive agreement had been reached to purchase all of the operating assets. It goes on to say the transaction is expected to close in early November.

I haven’t been able to get anyone to go on the record with me, and I’m sure there are some gaps in our intelligence on this matter. By the time you read this, the transaction deadlines set by the court will have transpired, but this is what the transaction looks like as of late October.

The value of this transaction is rumored to be in the neighborhood of $90 million. The biggest asset is probably the Bolyu commercial business, but I’ll get to that in a minute. From a pure asset/property/hardware perspective, EF will take ownership of Beaulieu’s headquarter building on Coronet Drive in Dalton. Granted, this is an old building, and it needs a new roof, but up until now, EF’s leadership team has been working out of several locations, so this could prove to be a valuable resource moving forward. A second property is the Seretean plant right across the street from the HQ building, and it has a dye line that will enable EF to offer a wider range of products-since much of what it currently sells is solution dyed. A third asset, just down the street in Dalton, is Beaulieu’s Memofil fiber plant, which brings extrusion, twisting and heatsetting assets. Some of these assets are in high demand today, based on the industry’s shift to lower denier PET fibers.

A fourth asset is the fabrics plant in Bridgeport, Alabama. You may recall that Beaulieu also had an extrusion plant in Bridgeport, but it was sold to Mohawk earlier this year. With the addition of this remaining fabrics facility, EF will be able to make its own primary and secondary carpet backing. Up until now, EF has sourced its carpet backing from other suppliers, and Shaw and Mohawk own their own backing operations, so this could be an advantage if the equipment isn’t too outdated. Alternatively, EF could choose to flip this asset once the deal closes, because this type of fabric is also in high demand for use as geotextiles.

Working down the list, there is at least one distribution center in the Dalton area and potentially two that the firm could end up with. Mr. Shaw is well aware of the costs associated with staging and double-handling product, so all of his new factories were designed with built-in distribution centers. But as the company grows and mixes both hard and soft product shipments, stand-alone distribution could prove resourceful in the future.

And last but not least, the two commercial carpet plants in Georgia’s Chatsworth and Adairsville are probably the sweetest parts of the deal. These facilities produce specified commercial carpet in both broadloom and tile formats for the Bolyu contract brand and the Aqua hospitality brand. As part of the negotiations, EF has opted to not buy the buildings, but it does plan to lease them until the equipment can be integrated into other company-owned facilities. Both of these commercial brands are well known in the business and, up until the bankruptcy announcement, were in a growth mode. Floor Focus’ revenue estimate for 2016 for this specified carpet business was $94 million. And let’s not forget that carpet continues to be the surface of choice in many sectors within the commercial market.

From an intellectual property perspective, Bolyu has a carpet tile range in Adairsville that uses a patented process that the firm called Nexterra. It’s no secret that EF is building a 520,000-square-foot carpet tile plant in Dalton that is scheduled to open in the first quarter of 2018. Prior to joining EF in 2011, James Lesslie ran the Beaulieu commercial facilities and was instrumental in its success. This makes him well suited to know how to integrate them.

Another part of the deal is Beaulieu’s hard surface business. Granted, this is a sourced business with most of the products coming out of Asia, but over the years Beaulieu has established relationships and quality control processes that could benefit EF’s foray into the LVT, laminate and engineered hardwood businesses. A few years ago, I toured an impressive lab in Shanghai that Beaulieu was using to test products it was buying prior to shipment to the U.S. We may have to wait until the Surfaces show at the end of January to see how EF is choosing to move forward with hard surface products.

Another part of purchase is Beaulieu’s trade names. Any guess on how EF plans to move forward in this area is pure speculation, but there is a high likelihood that the Beaulieu name will become a distant memory. At this point, EF goes to market with Dream Weaver as its retail brand, Dwellings as its builder brand, Pentz as its mainstreet commercial brand, and J+J Flooring as its specified commercial brand. Some of the brands that EF could choose to build on from this acquisition are Bolyu, Aqua, Hollytex or even Coronet.

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

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