Distribution Evolution - August/September 2006

By FRANK O'NEILL, Publisher

When I heard that Julian Saul was retiring as president of Shaw Industries, I wasn’t too surprised. Julian had talked about retiring. But just a few weeks later, when CEO Bob Shaw said he was stepping down and turning over the day to day operations of the company to Vance Bell, I was very surprised. How could the man I’ve always thought had the most brilliant strategic mind in the floorcovering manufacturing sector be leaving? I thought he’d never retire.

Well, he’s not exactly retiring. He’s just “stepping down,” turning over the job of CEO to Vance Bell and the role of president, which was held by Julian Saul, to Randy Merritt. He, meanwhile, has set up an office in downtown Dalton and will continue on in an advisory capacity.

I’m told that this transition has been in the works for several years now. Both Vance Bell and Randy Merritt are very well qualified to lead Shaw Industries, and I have a hunch we’ll see some dynamic changes there in the months to come. Nevertheless, Bob Shaw is a tough act to follow, He’s cast a big shadow in our industry ever since I started writing about it in 1981. Shaw Industries was the sixth largest carpet manufacturer in the U.S. back then, with sales of $250 million. But the firm’s young president was just beginning to carry out his grand plan to make Shaw a self-sufficient, dominant manufacturer in the floorcovering industry. He decided early on that he wasn’t going to run his company like the traditional carpet mill, but rather like a Fortune 500 company. And he had the vision to anticipate change and initiate it, never follow it.

Bob Shaw began acquiring yarn mills in the early 80s. Then he began bypassing distributors and selling direct to retailers. By 1985, the firm had grown into the largest player in the carpet industry, with sales of $519 million.

But while many men might have been satisfied being the number one player in a $6.6 billion industry, CEO Bob Shaw had hardly begun to realize his ambitions. Once, when he was about to make an acquisition, someone on his management team thought the selling price was high. “You don’t think with enough zeroes,” he reportedly said.

In the early 90s, he bought Amoco Fibers, and began the process of turning Shaw into the world’s largest carpet fiber producer. Today, because of all those moves Bob Shaw made in the 80s and 90s to create a powerful company with control over its own destiny, the company was able to grow into the world’s second largest floorcovering manufacturer in the 21st century.

By all accounts, Shaw Industries is far from the end of its growth mode. In fact, one of Bob Shaw’s priorities in his new role will be to weigh in on potential acquisitions. My guess is that we’ll see plenty of activity in that area in the months ahead.

As I said before, both Vance Bell and Randy Merritt are well equipped to run Shaw Industries. Vance has been with the company since 1975, just two years after he left Georgia Tech. He spent 16 years heading the sales and marketing operations before taking over operations seven years ago. Randy, meanwhile, joined Shaw the year after Vance and spent three years in R&D before moving into sales. In 2002, he was named executive v.p. of sales and marketing for the entire company.

IS HOME DEPOT FALTERING?

Home Depot recently told a group of analysts something we’ve been telling you for more than a year now: the company is having a tough time making money selling floorcoverings. In April, the company brought in Jim Robinson as the new global merchant, and his clear mandate is to turn around the floorcovering business.

Before all you independents start to gloat and say, “See, we told you so,” let’s take a look at some hard, cold facts. According to Market Insights/Torcivia, the Building Materials/Home Center category will account for an estimated 41% of total retail floorcovering sales this year, and Home Depot and Lowe’s will account for far more than half that total. That’s nothing to scoff at.

And according to this year’s survey of independents (see the July issue), mom and pop retailers are also struggling to make money, partially because most of you haven’t figured out how to raise prices enough to make up for price increases on the products you buy. Why? Is it because you still haven’t learned how to sell on anything but price? Or is it because the big boxes still manage to take business away from you by being better advertisers and by their sheer physical presence on the landscape? Or is it a bit of both? Take a look at Sonna Calandrino’s StoreFront column on page 23 for some great ideas on getting back those increased costs.

Having said all that, it isn’t difficult to figure out why Home Depot is struggling with its floorcovering business—the Big Orange just doesn’t pay enough to get competent people working for them, and every independent retailer worth his or her salt knows that competent people are the backbone of their business.

Home Depot’s problems, I’d guess, go far beyond the service consumers get (or, rather, don’t get) on the warehouse floor. They have to pervade virtually every step in the company’s floorcovering business, from product selection to installation. You just can’t run a big business like that fluidly with people who are underpaid.

The situation at Home Depot and the other big boxes was clearly driven home in a New York Times story last month. The Chicago City Council has passed an ordinance that big box stores have to pay a minimum wage of $10 an hour by 2010, as well as at least $3 an hour worth of benefits. Most significantly, other big cities are looking to Chicago as an inspiration for passing similar laws.

The action taken in Chicago is good news for independents who are struggling to make a few bucks, and there must be some comfort in knowing that at least one of the big boxes is struggling, too. But the independent’s primary task now has to be finding ways to keep margins healthy. I’d like to see the manufacturers get involved in helping them do that. It’s certainly in their best interest to keep the independents strong. They’re not the ones who are squeezing their suppliers for every last penny they can get out of them.

WHERE IS THE BUILDER BUSINESS GOING?

Builder retailers were just getting used to the idea that they have to compete with Home Depot when another big national competitor entered the picture. At the end of June, Stock Building Supply, a $4.16 billion home building materials supplier, bought the $200 million Illinois builder retailer Coleman Floors, and made its entry into the flooring part of the home building supply business.

Stock, which is headquartered in Raleigh, North Carolina, at last count had more than 300 locations in 33 states. Its target customers are the Lennars and Toll Brothers of the world—the big national builders of single and multi-family housing. Ironically, at a time when the red hot housing market has begun to cool, the company has been on a big growth spurt. It spent more than $250 million in acquisitions on its last fiscal year and added 3,600 employees and 47 locations. And growth will be even greater this fiscal year, which ended on July 31.

Stock is actually one of two U.S. subsidiaries of the British firm Wolseley, a $20 billion giant with operations in 14 countries. Its other U.S. subsidiary is the $7.1 billion plumbing supply distributor Ferguson.

It’s too early to tell just what impact Stock’s acquisition of Coleman will have on the flooring builder business, but one thing is certain: the home building business is changing dramatically, with big national builders taking a greater and greater piece of the pie from smaller regional and local builders. Many of them want to get all their supplies from a single source. But are they willing to exchange single sourcing for the far greater service they’d get from the flooring specialists?

Only time will tell.

By the way, be sure to see our interview with Jay Smith, the president of builder group Floor Expo, on page 57.

PLAYING HARDBALL

The Internet seems to be a growing battleground in the floorcovering industry, even though very few retailers have been successful selling flooring online so far. I was surprised to see iFloor.com, one of the more successful ones, launch a fairly vicious and one-sided attack on Boa-Franc, the manufacturer of the Mirage hardwood line. Why? Because Mirage refused to allow its products to be sold online by iFloor.

I won’t go into the details; you can go online at www.ifloor.com and see for yourself. But the fact is, Boa-Franc isn’t the only manufacturer refusing to sell its products online out of loyalty to its true customer, the bricks and mortar retailer. Take note, all you independents, of the manufacturers that are loyal to you, and make sure you support them.

If you have any comments about this month’s column, you can email me at foneill898@aol.com.

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