Distribution Evolution - August/September 2007

By Frank O'Neill

If you read July’s feature, The 2007 Retail Survey, you know that there aren’t a whole lot of optimistic retailers out there these days, except maybe in the Pacific Northwest, which hasn’t suffered from the housing downturn like other parts of the country. The biggest complaint we saw from retailers this year was low margins. Installation, the perennial front runner among Top Problems, was relegated to second place on this year’s survey. The economy was foremost in the minds of more retailers than ever before.

Not surprisingly, retailers who put their eggs in one basket, particularly if that basket happens to be builder sales, are having the most difficult time. Those who diversify are doing the best. If you’ve spread your business over the retail replacement and commercial markets, you’re certainly doing better than most retailers. And if you’re in a high end Metro Market, you may be way ahead of the game, too. Sales of luxury homes in places like Miami haven’t suffered as much as lower priced homes.

Diversification tactics can ease some of the pain from the current downturn in retail sales. The more products you carry, the more often you’ll get your best customers back in the store. Same goes for services. Many retailers and contract dealers have begun offering maintenance services in recent years. Not only is it a profitable business, but it gets you back in your customer’s home or business on a regular basis—not just every decade or so, when a new floor is installed.

Another interesting service that will bring your customers back more often: wood floor refinishing. It’s such a good add-on investment, in fact, that CCA Global began offering it to its members a couple of years ago under the Magnus Anderson brand name. In its latest annual report, CCA Global points out that about 33 billion square feet of wood flooring have been installed since 1980 and a lot of that massive expanse is now in very bad condition. It’s those floors that the group is going after with Magnus Anderson.

HOME DEPOT’S BLIND LUCK

Sometimes even a blind squirrel can find an acorn. Home Depot got very lucky when it found a buyer for HD Supply in June—even though the unit was sold at a considerable discount. The sale came just before problems in the home building sector, HD Supply’s target market, went from bad to worse. Last month, the Big Orange cut its profit outlook for 2007 in anticipation of continuing problems in the housing market, which accounts for a considerable chunk of its sales.

At this point, I have no idea what the new owners, the investment triumvirate of Bain Capital, Carlyle Group and Clayton, Dubilier & Rice, plan to do with HD Supply. The builder market, as every flooring retailer who targets that market knows, is very service oriented, and large corporations have historically fallen flat on their butts when they try to build a service oriented business. That’s why Home Depot’s new president, Frank Blake, quickly sold his predecessor’s $12 billion folly for just $10.3 billion. He felt the company had stepped outside its core competency in that business.

If the new owners can figure out how to buy well (that’s the easy part) and distribute and service product efficiently (that’s the hard part), they’ll be a menace to independent retailers, not only in the flooring part of the supply chain, but throughout the home construction business. I don’t think that’s going to be such an easy job, though. We’ve seen over and over again what happens when non-entrepreneurial businesses get involved in entrepreneurial endeavors. They consistently fail.

We’ll keep our eyes on HD Supply.

THE HOT COMMERCIAL MARKET

Remember how bad the commercial market was in 2002 and 2003, when the country was still trying to cope with the devastation of 9/11? While that slump just seemed to get worse, the residential market was already well into the greatest upswing in U.S. history, an upswing that would keep going strong through 2005. During that period, the strength of the residential housing market kept the economy from feeling the full impact of the downturn in the commercial market.

Well, the same thing is happening in reverse right now. The commercial market continues to grow, while the residential market languishes. According to Ken Simonson, chief economist for The Associated General Contractors of America, a 2.5% uptick in nonresidential spending in May more than offset a decline of 0.8% in residential construction.

The hospitality sector continues to show the biggest growth, followed by hospitals, and that retail subsector known as ‘multi-retail’ (big box stores, shopping centers and malls).

Don’t expect the good times to continue to buoy all sectors of the commercial market next year, though. Simonson says he expects state and local governments to cut spending late this year. Virginia’s governor has already ordered state agencies to spend less as real estate and sales taxes fall short of expectations. Meanwhile, sales in the corporate and hospitality sectors are still expected to be strong.

RETAILERS BEWARE

If you’re using a product called Tile Perfect Stand ‘N Seal Spray-On Grout Sealer, stop doing so immediately. More than 30 lawsuits have been filed against the manufacturer and distributor of the product, as well as against Home Depot, alleging that this aerosol sealer contains Flexipel, a chemical whose manufacturer said should have not been used as an aerosol.

According to the Fulton County (Georgia) Daily Report, two people have died from use of the sealer and others have been left with permanent lung damage.

Home Depot and the other defendants are fighting the claims.

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

Print the Article