Diversification-Beyond Flooring: Independent flooring retailers and dealers branch out with new products and services for growth - April 2020
By Meg Scarbrough
Faced with changes in consumer buying habits, pressure from big box stores and competition from the Internet, as well as economic factors, independent flooring retailers and dealers have looked at diversification as a means to boost sales and increase their client base over the years. That can mean many things, including expanding from the residential market into commercial, introducing new product lines, adding floor care services and offering bundled services and remodel options. It’s not a new concept and has been a part of growth across just about every industry, but for some retailers, there’s been a renewed emphasis in recent years.
In 2000, as a new century dawned, product diversification in the flooring market was not seen as essential to survival. The economy was in good shape and optimism was high among flooring retailers. In a Floor Focus survey released that year, just 38% of retailers surveyed said they felt that diversifying their offerings would improve their competitive position. But much has happened in the years since.
An eight-month recession in 2001 and the September 11 terrorist attacks brought to a halt decades of growth, followed by the Great Recession of 2007 to 2009, which led to a housing market collapse and subsequent financial market crisis. More than 170,000 small independent businesses closed nationwide as a result, according to U.S. Census data. The number of independent flooring retailers was already falling but the recession exacerbated the decline. As of 2016, there were about 10,000 independent flooring retailers left in the U.S. market, according to Floor Focus records.
Those flooring dealers and distributors that weathered the economic hits came through only to face other new hurdles. Home centers like Lowe’s, Menards and Home Depot have been successful in luring consumers with affordable flooring options, convenient shopping hours and cheaper installation rates. As consumers rely more on convenience these days to save time, the allure of one-stop shopping has helped this channel grow. Home centers now represent the largest share of the retail flooring market over flooring stores and other retailers.
The Internet has also played a role, allowing consumers to make flooring purchases with the click of a button. In 2018, e-commerce represented about $750 million at retail in flooring market sales-or about 2.1%-according to Market Insights. Granted much of that business is in area rugs because it can be cost-prohibitive to ship flooring for the average consumer. But some retailers are starting to use e-commerce to their advantage, allowing them to expand their market service areas.
Another significant change in recent years for flooring retailers in particular has been the increase in the desire for hard surfaces and new, longer-lasting products that have come into the market. One such product is LVT. Its durability, ease of install and lower cost have made it a highly desired product. It is the fastest-growing segment and second-largest category of the residential flooring marketshare, second only to carpet. This transition to hard surface means consumers are replacing their flooring less often than in previous decades.
All this is to say that, for one reason or another, retailers and distributors have been wrestling with declining revenues for years. Twenty years later, 68% say they now believe diversification would be advantageous for business, and many of those have either undergone a transition or have started the process. No matter the impetus, they agree diversification is necessary.
We talked to several businesses across the country for their thoughts on diversification and what others should know.
GUY’S FLOOR SERVICE
While some flooring businesses have only recently turned to diversification, it has been part of the fabric of Guy’s Floor Service for decades. Guy Routzon, by his family’s account, was a failed Colorado farmer-thanks in part to the Great Depression-who happened into the flooring business in 1942 when someone he knew approached him about refinishing floors at the barracks at Lowry Air Force Base in Denver. He had no idea how to sand a floor, but he fibbed and said he did. He went and rented some equipment and got to work, according to his grandson and Guy’s COO Matt Routzon.
From there his business began to grow, and soon a local builder in town, Frank Burns of Burns Construction, was asking Routzon to do all the wood flooring in his houses. Burns, at the time, was primarily focused on home builds for soldiers returning from World War II. It was a boon for Routzon’s hardwood business because in those days, carpet couldn’t be used in military housing because it was not approved by the Federal Housing Administration under President Franklin D. Roosevelt. During that housing boom, Routzon expanded from just sanding floors to installing them, as well, and at one point, he became the largest supplier of wood west of the Mississippi, according to his son, Ed Routzon, president and CEO.
But then the federal regulation changed, allowing carpet to be installed over subfloors, slowing down the hardwood and sanding business. Routzon saw the writing on the wall and knew he needed to diversify his offerings to keep up, so he began selling and installing carpet within the single-family builder market.
Years later in 1973, Ed joined the family business after his father decided it was time to step away. It was an unexpected move for a man who had gone to college and became a teacher. But nearly 50 years later, he continues to lead the company and says its diversification over the years has been born from a need and a desire to grow.
Over the years, Guy’s has expanded from flooring into other areas, including countertops. The firm has also grown to include more commercial projects, which now represent about 35% of its total business. “[The move to commercial] was a conscious decision to diversify ourselves away from strictly single-family housing,” according to Ed.
The most recent addition has been its countertop business, which he says was in response to demand from consumers. Granite has seen an explosion in the countertop market in the last 20 years. Guy’s had been subbing out that portion of the business to a friend, but once the market really took off, Ed says they recognized it was time to make an investment. The firm’s countertop division has been fully operational for about 12 years and represents an estimated $10 million a year-or 10% of Guy’s total revenues.
Guy’s has expanded into a new market in the state, as well. Colorado has been experiencing a lot of growth in recent years-outpacing the nation-driven largely by agriculture and creating more construction opportunities, both residential and commercial. “Between 15 to 18 years ago, we saw an opportunity to geographically diversify in Colorado Springs,” says Matt. Though only about an hour apart, Denver and Colorado Springs offered Guy’s very contrasting markets. By partnering early on with a local builder, Guy’s has been able to grow and expand into other builders in that area. “That’s been a very successful decision for us,” he adds.
Few businesses like Guy’s decide to diversify because it can be cost-prohibitive. When Guy’s launched its countertop
division, the company invested more than $1.1 million into a new facility and equipment, according to Ed. While that investment has paid off so far, not everyone is so lucky. He says that’s why it’s critical that companies be well-capitalized before launching into a new venture. Homework and product knowledge are also key to expansion, according to Matt: “Analyze things from every angle in an attempt to figure out what you don’t know.”
While times are good for Guy’s now, both Matt and Ed are honest about what hasn’t worked in the past. When the residential builder business slowed in 2008 and 2009, the firm looked at doing apartment turnkey replacement. “That never worked out,” Ed says with a laugh. “That was a bust. We were not cut out to do that work.” But the challenges won’t likely keep this family from looking for new opportunities in the future. According to Ed, “We are always on the look for something.”
As flooring retailers and dealers continue to diversify their products and offerings, they must hire and educate staff to meet that demand, something that can be a challenge as the labor workforce ages out. Installation is one area being impacted.
Studies show that as the current labor force reaches retirement, there are dramatically fewer people in line to take up those jobs. Some point to Generation X and Millennials as part of the problem. Years of pushing kids toward college paths and away from the trades is taking a toll, leaving fewer people doing manual labor. “What people don’t realize is there’s a tremendous opportunity within the trades to make a very good living,” says Matt Routzon of Guy’s Flooring Service.
Ed Routzon says job websites, social media and even radio spots have been critical in recruiting, but ultimately it usually comes down to word of mouth.
Darren Braunstein of Worldwide Wholesale says that while labor shortages haven’t been an issue for his company so far, it’s something his friends around the country say they struggled with, and the aging workforce is something to keep an eye on. “That’s going to be the question about that next generation and how well we are going to get young people in.”
Businesses are becoming more cognizant of how consumers are growing a one-stop-shop mentality and want the convenience of being able to tackle a project or remodel in one place. This has been especially beneficial to big box stores, which can also provide more competitive pricing. But Worldwide
Wholesale Floor Coverings in New Jersey took notice of the trend and has shaped its offerings-from carpet and stone flooring to window treatments and countertops-to meet the needs of its consumers.
Since 1991, Worldwide has been a wholesale flooring company operating in both the residential and commercial markets; commercial currently represents 15% to 20% of revenues. Darren Braunstein, vice president, said that with growth in flooring slowing, diversification was a natural progression. Worldwide, with four locations in the Garden State, has diversified several times over the years, adding countertops about eight years ago and window treatments nearly a decade ago.
Cabinets, the company’s most recent addition, came less than two years ago. Braunstein says the idea came about after seeing the diversification success stories of his friends in the National Flooring Association (NFA), and over the years, it stayed at the forefront of the minds of company leaders. “Then about a year and a half ago, we decided to get into to it,” he says. That opened the door for the company to take a whole-room approach to selling products, with a focus on kitchen and baths. “We were already communicating with these customers on their tile needs and hardwood needs, and when we saw them doing a renovation, [launching cabinets] seemed to us a natural way to get involved in more of the project,” Braunstein says. This type of packaging method, where either products or services are bundled, has been successful for Worldwide and others who have ventured in this direction. Some companies have turned to offering floor cleaning services (See page 56). To help promote that mindset within the company culture, Braunstein says flooring associates are rewarded when a lead generates a job.
Diversification is often a reaction to a slump in sales, when companies seek ways to protect the bottom line. When done responsibly, it can afford companies a chance to grow within the existing operation with little negative impact. Braunstein adds, “[Branching into cabinets] was an opportunity to grow our sales without expanding into more locations or real estate and with relatively little additional cost requirement.”
Braunstein notes that it still takes money to make money, adding that the initial upfront costs-department improvements, renovations, inventory purchase, etc.-can add up. “You’re going to have to spend six figures to really get started with your best foot forward,” he says.
The expansion into cabinets didn’t happen overnight. Worldwide began by launching the program at its flagship store in Edison, New Jersey before branching out. Braunstein said it was an opportunity for the company to get its feet wet, but also a way to limit the upfront investment that it would have taken to launch at all locations simultaneously. Like others who have diversified, he is quick to point out that success doesn’t happen quickly, but he added that his new cabinet offerings are showing positive signs just over a year in. “It’s growing; it’s a new business,” says Braunstein. “It’s like any new business, and we still feel there’s lots of opportunities for us there.”
CONTRACT FURNISHINGS MART
For Contract Furnishings Mart, situated on the West Coast in Oregon and Washington, success in diversification can be measured by the people on the team. Ryan Bechtold, operations manager for CFM, says that like Braunstein, changes in his organization came about fairly organically and have been centered around responsible growth.
Over the years, the company, which opened in 1981 and is primarily focused on the residential market, has expanded from carpet, hardwood and tile and now offers countertops and cabinetry across 14 showrooms in two states.
The biggest expense-and asset-for CFM when diversifying has been recruiting top-notch staff. “Ultimately, it’s hiring qualified people without sales to necessarily support them and then trusting that growth will come and it will all make sense in the long run,” Bechtold says. It’s also critical to properly train and support that staff-not just at the beginning but on an ongoing basis-so they develop a knowledge base that creates an authority within the market. In turn, staff members will remain on the team for a long time and will help build relationships with customers, which will drive growth.
Picking a product to diversify into can also be a challenge in and of itself. While some like CFM may naturally transition into products, other businesses have said it was just a bit of experimentation, which doesn’t always work out. Bechtold says that when deciding on a product, you’re either in or you’re out; pick something and stick to it. Understanding new products and being able to sell them is key. Bechtold adds, “If we are going to be in a category, we really have to create a destination in our showroom and show the customer that we are the expert and authority on this category and you really don’t need to look anywhere else.” And industry experts we spoke to agree that if you aren’t educated on what you’re selling, it will never be successful.
Bechtold says that like anything, it takes time to grow and develop. “Sometimes those sales aren’t hugely impactful in the short term,” he notes, “but it’s building a foundation to create something really big.”
Diversification is what helped two fraternity brothers in Indiana build a multimillion-dollar company in just a matter of years. Cameron Haughey and Nate Roberts got their start as students at Indiana University in the 1990s. After graduation and with just about $1,000, they launched what would become ICC Floors. In the decades since, the company has grown from flooring into paint, countertops and cabinets, as well as into the commercial sector, bundling products in their Indianapolis showrooms.
The most recent transition was the addition of countertops and cabinets about three years ago. “We kind of jumped in with both feet,” Haughey says. Like Worldwide Wholesale, ICC had already been talking with other members of the NFA about diversification when one of its large building partners lost its cabinet manufacturer and asked Haughey’s team if they could do cabinets. Despite it being a large job, ICC took it on, and the decision to do so helped push ICC into expansion. The company started within the commercial and multifamily sectors and worked backward from there, eventually expanding into residential, Haughey says. Three years later, cabinets represent 8% to 10% of gross sales for ICC, but Haughey believes it could take a 20% to 30% position over the next decade.
The investment in diversification hasn’t been cheap for ICC, but the firm has been fortunate to have support along the way. When ICC brought paint into its lineup, there was a significant cost, but a partnership with Benjamin Moore allowed the firm to get financing to help fund the opening of two stores. Haughey also says they recognized the need to have a substantial number of displays within a nice large showroom. The cost of remodeling, staffing and software additions piled up-and displays can be pricey-but he said manufacturers support these endeavors and offer discounts.
One benefit to ICC’s diversification over the years was that it helped the company weather the nation’s harder economic times. By broadening into the commercial sector, the company was able to sustain some of its work amid the housing market downturn. With an eye on the future, Haughey says there are likely other opportunities to diversify in the near future. A showroom expansion is slated this fall, and he says ICC will probably venture into window coverings, a segment with which ICC has prior experience.
At the end of the day, companies like ICC and others say they believe their diverse offerings and attention to service and customer care are what sets them apart from big box competitors. According to Jason Waggoner, ICC warehouse manager, “We have a lot of customers who come in who have looked or stopped at the big box stores but still come to us. And I think a lot of that is because of that service.”
One way that Carpet One of Billings has managed to establish and retain a high-quality team is through a profit-sharing program, Sometimes we take it on the chin. It can be an expensive proposal at times, but you have to do it. You have to stand behind your people, your products and your service.”
As cities and states across the nation ordered residents to shelter in place or practice social distancing last month in an effort to limit the spread of coronavirus, some homeowners were taking the unexpected time at home to launch DIY projects.
Amid the outbreak, Lowe’s stores nationwide reported an increase in sales across nearly every category as consumers stocked up on home improvement essentials, according to CEO Marvin Ellison, who spoke with MSNBC on March 25. While many municipalities enacted policies ordering non-essential stores to close, home improvement stores like Ace, Lowe’s and Home Depot were allowed to remain open, albeit most of them with shortened hours to accommodate more time for sanitizing and replenishing shelves.
While it varies across the country, “essential businesses” generally include grocery stores, hospitals, banks, pharmacies, trash pickup and big box stores like Walmart and Lowe’s, among many other types of businesses, in an effort to allow residents to buy emergency supplies. But the situation has ignited debate over what’s considered essential and non-essential, with independent business owners, including flooring retailers, upset that the rules don’t seem to be creating a level playing field for specialty retailers that sell products that many would argue are essential.
In New Jersey, governor Phil Murphy implemented new restrictions on March 21 that ordered non-essential businesses and brick-and-mortars to close. With the state under a shelter-in-place mandate, Worldwide Wholesale Floor Coverings closed all of its stores but one, leaving it open on very restricted hours, according to vice president Darren Braunstein. While he is losing business by being closed, the home centers are reaping the rewards, and he points to the fact that there are no measures in place to restrict consumers from buying non-emergency items.
Meanwhile, hundreds of miles away in Ooltewah, Tennessee, Kelley Carter and her husband were using the quarantine time to finally install vinyl flooring they had purchased back in January. While both work at jobs that are considered essential-she works at a medical office, and he is a plumber-they still had more time at home while under a mandate from the governor to avoid public places. By doing it themselves, the couple hoped to save between $800 and $1,000. Carter was optimistic as the project was underway in March, saying, “Since we can’t go anywhere except work, we figure it is the best time to do it.”
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