Channel Conflict: To thrive, the flooring industry must find opportunity in the midst of market chaos - Dec 2019
By Santo Torcivia
In the not-too-distant past, the flooring distribution channels were orderly, and entities knew and held their place in the scheme of things. Manufacturers sold to retailers either via independent distributors or direct. Channel chaos was rare and short-lived. Then the global market expanded and manufacturers, first large ones and then smaller firms, began to source products from abroad to augment their product offerings.
There were always the exceptions, like Halstead and Quality Craft, that sourced entire product lines from abroad, but these companies mainly served the major home centers. As competition grew, so did the need to find more margin in a market dominated by ever-decreasing prices. Manufacturers then started sourcing cheaper products as private labels from abroad. Soon, retailers were doing the same, then distributors followed suit. All the while, the race was on to find lower priced products that could be sold for a profit in a growing, competitive market. Flooring is not the only category facing this situation. Shop any supermarket and you will find a plethora of private label store brands, from bottled water and toilet paper to deli meats and even soda.
FLOORING RETAILERS FOR THE WIN
Walk into any major flooring retailer today, and you will be greeted with an increasing array of store brands. Home Depot has TrafficMaster laminate flooring, Lifeproof vinyl flooring and Home Decorators Collection, to name a few. And Lowe’s uses Style Selections, Smartcore flooring and Stainmaster. The same is true for other retailers-big and small. These store-branded products are merchandised adjacent to the manufacturers’ brands, and, in some instances, everything is private label. Thus, the major customers of manufacturers are now increasingly becoming major competitors. And this situation is slowly and inexorably growing as more retail selling space and distributor warehouses are being occupied by store brands, and manufacturers simply watch it happen, uncertain of what to do as market chaos grows.
The situation as it currently stands works in favor of the retailer, not the manufacturer. Retailers are closest to the consumer. They sell direct to the consumer, and every time a consumer shops a store like Home Depot or Lowe’s for light bulbs or trash bags or flooring, it is an opportunity to communicate with them.
A generational shift is underway, and the largest demographic group today is no longer Baby Boomers. Millennials (individuals born between 1981 to 1996) now comprise 27% of the U.S. population and are its largest generation. Millennials are adults now, and most will not recognize a store brand from a manufacturers’ brand, given the decline of manufacturers’ brand advertising investment. And thanks to the internet, they are also more educated buyers. They walk into a flooring retailer already understanding the difference between laminate vs. vinyl plank, and knowing whether they want SPC or WPC flooring. Retailer recognition is more important than ever.
According to Kantar Media, over the last five years (2014 thru 2018) the top 16 U.S. retailers selling flooring have outspent all flooring producers in U.S. consumer and Internet advertising for flooring by over seven times-$1.3 billion versus $179 million.
Retailers selling flooring are building their brand equity and communicating their messages to the consumer at a rate that is dwarfing manufacturers’ expenditure, while the majority of manufacturers are squandering the little equity they have left, allowing the retailers to win the mind of the consumer and set the agenda.
THE VOICE OF REASON
Without heightened consumer awareness, the manufacturers’ brands in the U.S. will continue to suffer. Effective producers continuously invest in upgrading and maintaining production equipment that creates their product, as well as in research and development that improves the product. But these investments only take the brand to the warehouse. Without marketing that drives a compelling message and communicates that message to the consumer, a manufacturer’s product will just sit in the warehouse. Investments in marketing and consumer-focused communications are required to create the demand that will move the product out of the warehouse and into the consumer’s home.
Building consumer demand for a product is an effective way to get and keep a flooring product on the retailer’s floor and then to the consumer’s home. Consumers need a reason to choose one floor over another, and it is up to the producer to give them that reason. The investment priorities of manufacturers today show that they are not in sync with the changing times. Investment in communications with customers is critical to survival. Retailers know this well; manufacturers still do not understand the importance.
OPPORTUNITY IN CHAOS
The market is in chaos, to be sure. The tariffs on Chinese imports have whittled away some of the price advantage of out-sourcing private label flooring from China; China imports represented about 24% of the total U.S. flooring market dollar value in 2018. The tariffs on Chinese flooring provide a slight advantage to domestically manufactured product and imports from nations other than China.
The tariffs will also likely disrupt logistical networks for retailers and manufacturers that decide to seek alternate sources of flooring. This is especially true for ceramic tile where Chinese firms were found guilty by the U.S. Commerce Department (USCD) of illegally subsidizing and dumping ceramic tile imported into the U.S. The USCD has imposed tariffs on ceramic tile from China ranging from 104% to 222%, depending on the product, which effectively creates a situation where Chinese ceramic tile will no longer be competitive in the U.S. market. This will surely disrupt the low-priced ceramic tile market logistics, although alternative sources are available in Brazil, Mexico, Turkey and other nations.
The channel conflict will continue to play out. The winners will be those who can innovate a uniqueness and creativity, design a plan to win their battles and stand tall in the marketplace. Companies need to get their priorities in line with the new paradigm, or they will diminish or cease to be.
Let me underline the two main points. First, producers’ major retail and distributor customers are becoming their major competitors. And, second, producers need to invest more heavily in marketing and communicating better with their customers. Investment priorities need to shift to meet the changing marketplace if brands are to survive. There is an old adage that (paraphrased) states that every change and chaotic disruption presents opportunities. Will you find your opportunity and your way through the chaos?
Some examples of generic positions for a product or brand that provides uniqueness include:
• Image: Purchasing this product or brand makes a consumer stylish or smart or sophisticated, etc.
• Innovation: This brand is the most innovative, and its products or website provide consumers the most important features and services.
• Superiority: This product is more durable or reliable than the competition, and the brand can convince the consumer of that (example: Toyota).
• Product Benefits: This brand makes superior styled products and/or its products are easiest to install, maintain, etc.
• Pricing: This brand or product is the lowest priced or the greatest value for its price
Copyright 2019 Floor Focus