Distribution Evolution - March 2006

By FRANK O'NEILL, Publisher

Home Depot continues to gain marketshare in the floorcovering category at the expense of independent retailers. The Big Orange dominates the 2005 Focus 100 Retail list with flooring sales of $5.465 billion, far overshadowing Peninsula Floors, the nation’s largest independent, which had sales of $258 million last year. Yet by all accounts, Home Depot is struggling to make money in the floorcovering category, particularly in area rugs and its installed businesses—broadloom carpet and hardwood.

All of which makes Home Depot’s latest strategy unsurprising. Early this year, the company made two acquisitions that will impact the floorcovering industry: first it bought Chem-Dry, the nation’s largest carpet and upholstery cleaning franchise. The next day it bought Hughes Supply, a major builder supply firm.

Let’s take a look at Chem-Dry first. I think this acquisition is a great one for Home Depot, simply because it moves the firm away from its Achilles heel—installed floorcoverings, which translates to service. Owning a franchisor is a great idea for Home Depot, because they don’t have to be good at service—the franchisees take care of that themselves. And it’s a quantifiable fact that franchises perform better than many independent businesses, because franchisees have to follow a tried and true business plan.

How much of an impact will the Chem-Dry acquisition have on mom and pop retailers? Probably some, because it gives consumers another reason to shop at Home Depot. But it sure isn’t going to do anything to solve the big chain’s problems making money on carpets, area rugs and hardwood.

The Hughes Supply acquisition gives Home Depot an ever-greater breadth and depth in its Home Depot Supply builder business. After a series of acquisitions, the firm now carries just about everything new home buyers/builders would need to furnish their homes. The very fact that Home Depot Supply has become so big and so all-encompassing could create big headaches for builder contractors like Peninsula Floors, Interior Specialists and Coleman Floors—all Top Ten Retail players—just as the big boxes have created problems for mom and pop retailers for many years. Having said that, though, home building is a service business, and Home Depot could easily stumble there, just as it’s doing in its warehouse store businesses.

By the way, some flooring builder specialists—most notably the co-op Floor Expo—have been expanding beyond floorcoverings, which gives them the same broad appeal to new home buyers that Home Depot is getting through its rapidly growing Home Depot Supply.

Be sure to read Terry Wheat’s insightful take on the role of the big boxes and the mom and pop retailers in the floorcovering industry (page 66 of the March 2006 issue of Floor Focus).

MORE CHANGES IN THE CONTRACT BIZ
It’s been over a year since Interface and Invista decided to get out of the contract dealer business, but we’re still seeing changes in that business. Not the cosmic changes we saw when Invista decided to get out of the business and many of its aligned dealers joined StarNet. I’m talking about more incremental changes, like RD Weis’s acquisition of the assets of Spectra Contract Flooring’s Union, New Jersey and New York City locations three months ago. Or the acquisition of Spectra’s western New York business by the Buffalo firm, Heritage Contract Flooring, shortly after that. Or last month’s decision by the Manhattan firm, Lane’s Floor Coverings, to establish Lane’s Commercial Carpets North. Or the establishment of Resource Connect, a dealer-owned network of former Re:Source Americas aligned companies.

Are we at the forefront of a new consolidation phase in the contract dealer business?

I doubt it. I think these and the many other changes we’ve seen in the past year are just the normal adjustments in a business that’s already gone through some big changes. I think most of the commercial floorcovering industry has learned that there are areas of our business that are best left to entrepreneurs, and one of them is certainly the contract dealer sector. Today, Spectra, the dealer network established by Shaw Industries a dozen years ago, is the only manufacturer-owned network left, and Spectra gets smaller and smaller all the time.

Smart dealers, meanwhile, continue to look for opportunities in these changes. It was just a few years ago that Randy Weis, the owner of the Port Chester, New York StarNet dealership, RD Weis, had one operation that concentrated primarily on maintenance. Today, six acquisitions later, RD Weis has become a dominant full-service player in the greater New York area.

Lane’s Commercial Carpets North, meanwhile, was formed when Lane Bretschneider and Richard Wolland, partners in the Manhattan firm Lane’s Floor Coverings, joined forces with Ron Cassin, who managed Rochester Flooring’s Albany location. Cassin recently left that firm, which had acquired eight dealer locations from the Invironmentalists last year. The new dealership will focus on government and A&D projects.

The most significant development we’ve seen in the contract sector in a long time has to be the decision by 78 former Re:Source Americas aligned dealers to continue working together as a Limited Liability Company called Resource Connect. The new group, which will be headed by Ron Lee, bought the Resource name from Interface.

Resource Connect, like StarNet, is a major independent dealer network, but there are several differences between the two groups. As an LLC, the Resource dealers will buy shares in the group. They’ll also focus more on the education, hospitality and health care sectors more than on the corporate market. Eight vendors, including Interface Flooring and Bentley Prince Street, will serve the group.

RETAIL FACELIFTS
I spent some time at the Alliance Flooring annual meeting last month, and enjoyed the usual family spirit you find at an Alliance Flooring meeting. Lots of good suggestions for the CarpetsPlus Color Tile, Carpetland and Floorco dealers who attended, but one that stayed with me was Jon Logue’s comment that retail stores should be remodeled every three to five years.

How many of you remodel your store every three years? Or even every five years? I’d be willing to bet that not more than a handful of you do. But if you want to retain your store’s sex appeal, it’s a great idea.

And be sure to keep things uncluttered. Instead of filling your showroom with every product you have, concentrate on showing your best sellers. You don’t have to overwhelm your customers with every style you have. It certainly won’t help you sell more, and it may even turn away more discerning buyers.

Another interesting tidbit from Jon Logue: he’s predicting that as the housing market cools down, we’ll see a resurgence in remodeling. In spite of the housing boom of recent years, half the homes in the U.S. are more than 50 years old, and retailers should be prepared for more business from the people who live in those older homes.

One new concept unveiled at this year’s convention I found particularly interesting: a new “ideacenter,” a store addition that shows consumers how to create a unified look in their homes by displaying soft and hard surface products together. It seems like such a no-brainer, but how many retailers do that today?

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

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