Strategic Exchange - March 2013

By Kemp Harr

Just as we prepare for the winter thaw—feeling good about the increase in retail store traffic, the positive tone at Surfaces and the renewed level of energy on the commercial side based on February’s sales numbers—we once again see more shenanigans in Washington, this time called sequester. The government’s inability to compromise has led to yet another sensationalized finger-pointing showdown that is sure to further dampen the consumer’s enthusiasm for any potential economic recovery.

By the time you read this, the March 1 deadline will be behind us and as I write this, it appears as if the $85 billion cut in spending will take effect. If smarter, more cooperative minds had prevailed; we would have cut the government fat in every area including the entitlement side of government, which is the cause for the growing deficits in the first place.

But even though we’re cutting beyond the fat and into the meat of some government programs that many would deem necessary, we have to start somewhere. I’m reminded of Theodore Roosevelt’s quote: “In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”

Every citizen in this republic has to keep in mind the magnitude of our debt. Last year alone, we spent $3.5 trillion and only collected $2.2 trillion. Our level of indebtedness as a nation has now reached a staggering and unprecedented $16.5 trillion. Our debt now exceeds the value of our annual GDP as a nation. In fact, our interest expense on this debt in 2013 alone will be $250 billion. The total amount of spending to be cut this month with this sequestration mandate is $85 billion—or roughly 2.4% of total expenditures. We have to address this drunken spending and quit putting these hard decisions off for another day.

Either we address today the results of a decades-long broken political process in which both parties have gained favor by leveraging future generations’ lifestyles, or we go over a cliff far more dangerous than what Greece experienced. According to estimates by the Congressional Budget Office, if the U.S. doesn’t raise taxes further and cut spending dramatically, the national debt could easily reach 153% of economic output by 2035.

So as the nation struggles to cut 2.4% of its spending on the federal level, consumers are feeling some pain of their own. Now that the government has eliminated the 2% payroll tax cut that was put into place in 2010 to stimulate consumer spending, workers making $50,000 per year are going to have an additional $1,000 taken out of their paycheck by the end of the year. And on top of that, gasoline prices went up substantially in February. The national average for regular gasoline rose $0.45 to $3.78 last month. This is up about $0.11 from the same time last year, or about 3%. So, while property values and personal stock market equity have been improving, disposable income is being hit with increased taxes and transportation costs. Given all these factors, it was heartening to see that February’s consumer sentiment index was up to 76.3 after a slight decline in January to 73.8. It will be interesting to see how this affects floorcovering sales in the first quarter.

PRICES ARE UP—SO IS STORE TRAFFIC
Wholesale floorcovering prices are also going up, no matter what the government says in its monthly inflation reports. Most of the major carpet brands have announced increases that range from 3% to 8% and kick in sometime this month. Hardwood and resilient price increases have also been announced for March by many of the larger suppliers. Fortunately, the consumer only considers a flooring purchase once every five years, so she probably won’t remember what flooring cost the last time she made a purchase.

On a more positive note, floorcovering retailers are telling us that store traffic has picked up considerably in the last two months (except in areas that have been impacted by the recent snow storms). I can tell you that the traffic at this year’s home show in Chattanooga was up noticeably versus the last several years. The number of flooring exhibitors was also up. Among those exhibitors selling carpet, some were promoting high-dollar wool carpets and others were leading with value-priced polyester. Much to my chagrin, I saw two “general handyman” exhibits that were also promoting a national carpet brand and I shook my head wondering why any retailer would be loyal to that brand when the barriers to entry are virtually non-existent.

RETAIL BRAND STRATEGY—SOME RENT AND OTHERS OWN
Just as with government, sometimes we lose sight of the intended purpose for the things we create. Brands, for example, were originally created to identify and protect the identity of the source of origin. And yet today, retailers and even some buying groups use their house brands to hide the identity of the source of origin.

For those of you who think Hampton Bay is a producer of ceiling fans, think again. When Home Depot first started using the brand, it was limited to ceiling fans, then a few years ago, it extended the name to patio furniture, and this year, we hear the home center giant plans to extend it to floorcovering. By creating a retail brand like Hampton Bay or TrafficMaster, Home Depot hopes to eventually own the connection with the consumer and source products from anyone who will meet its demand for the lowest price.

Unfortunately, manufacturers who are dazzled at the prospect of landing that level of volume have to change their business model. In order to be tapped as a home center or category-killer supplier, they have to focus on low prices and forego investments in either quality control measures or the type of product development that brings innovation into the marketplace. You can’t fault this strategy on behalf of the retailer. Even the big retailers are trying to guard their flank from new competition in the form of Internet sellers like Amazon. It’s virtually impossible for the consumer to price shop a product that’s produced to a retailer’s spec and sold under its house brand.

The shortsightedness falls to the manufacturer who doesn’t realize the long-term implications of not having what true marketers call a channel strategy. It’s easy for a sales-minded executive to say: “Well, if we didn’t sell them, someone else would” or “How can we not sell to a customer that represents 10% of the market?” There are brands, however, that are more selective and they are being rewarded for it. Most of them fall in the designer category of consumer goods, but we have a few in our business. In fact, this month’s cover photo features the flooring of one such company in the hard surface business. Mirage is a brand that focuses on quality hardwood and it isn’t sold in the home centers or at Lumber Liquidators. As a result, its retail “partners” are loyal and Mirage is able to command a significantly higher price for its products.

It’s often been said that a truly successful brand is one that is supported emotionally by its fan base. I’ve got to admit, getting a consumer emotionally worked up over a flooring brand, like a motorcycle owner is over his Harley, might be difficult, but I’ve seen retail sales personnel passionate about the go-to brands that they pitch to their prospects.

One interesting aside while we’re on the topic of branding: there are companies in this business that know how to create an emotional preference among designers in the commercial sector but spend much less effort to endear their channel partners in the residential retail sector.

And how would you like to be in charge of the Carnival Cruise brand?

LAS VEGAS EXPENSES
I know I’m going to date myself with this comment, but do you remember when Las Vegas used to be an affordable place to go? Part of the allure was that you could get there for less than it cost to fly to any other city, quality hotels were competitive and meals were tasty, yet reasonable. Not anymore. We’ve already mentioned in Viewpoint the exorbitant price to exhibit, but after you add in what it costs for taxis, meals and beverages, Vegas is no longer the affordable oasis in the desert that it used to be. I stopped at the Red Bar for a quick martini after the expo in January and couldn’t believe it cost $24 before tip. Ouch. That’s one way to keep from drinking too much.

FLOOR FOCUS BECOMES MORE INTERACTIVE
Please notice that we’re making some subtle changes here at Floor Focus to make our readers’ experience more interactive. You will start to see more changes to the FloorDaily website as the use of mobile devices becomes more prevalent, and the magazine also has a new feature starting with this issue. We often examine the same topics here in print that we cover on FloorDaily via an interview with a subject matter expert. Now we are enabling connectivity to FloorDaily content in the printed magazine through QR codes. This gives you the option of linking the two sources of information seamlessly. I will make you a promise, however, that we’ll never take this interactivity to a level where you can’t sit and enjoy Floor Focus without being forced to use some Internet connected battery-driven device to get the full story.

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

Related Topics:Mirage Floors, Lumber Liquidators

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