Enthusiastic Outlook Fuels Continued Investment: Strategic Exchange - Feb 2017

By Kemp Harr

January was a blur with all the travel back and forth to shows, and there is no shortage of change in the flooring business. Not only is the WPC/rigid core/LVT business continuing to evolve and take share from virtually every other flooring category, but we’re also seeing continued investment in other areas as well.

At the first of the year, we were pleased to see where Lone Star recapitalized Bentley Mills, which enables them to continue to grow as a standalone brand based in California. In a similar move, Norwest Equity Partners recently sold Stanton Carpet to Quad-C Management. And while we were in Germany at Domotex, we heard of Mohawk’s plans to build a modular carpet tile plant in Belgium. Lastly, right before going to press, we are hearing that Mohawk’s acquisition of Emil Ceramica is nearing completion. 

Now that the Dow has popped over 20,000 and business people are feeling good about the economy, this should be an interesting year to watch. 

Another big new items early in January was Interface’s announcement that it was closing all but three of its specialty retail stores, in addition to shutting down its Flor headquarters in Chicago. For those of you who aren’t familiar with Flor, it is Interface’s direct-to-consumer carpet tile brand whereby consumers can build their own custom area rug or carpet runner out of modular carpet tile, held together by adhesive squares called TacTiles. 

This idea of Interface selling modular carpet tiles directly to consumers first started in 2002, and at its infancy, sales were generated via glossy catalogs and a website. As the business grew, the firm opened specialty retail stores in major metro markets, and at the time of this announcement it had 17 domestic stores plus a handful in Mexico. We estimate that annual sales from Flor peaked at around $45 million. 

There are several questions to ponder as we evaluate why this program wasn’t more successful. Certainly, we shouldn’t jump to the conclusion that residential consumers are not interested in buying modular tile. Was the product overbuilt (too expensive) and too commercial feeling? Were the boutique stores unsuccessful because they were only selling one brand and one type of product? Did consumers know what Flor was when they walked by on the sidewalk? Was the program challenged because the consumer couldn’t visualize what their own creation might look like under their coffee table, and they weren’t bold enough to throw down $500 to find out? 

One of the problems may have been that early market tests didn’t accurately predict reality for one reason or another. Early successes with strong margins may have given Interface a false read on the true market potential, which resulted in too much infrastructure in Chicago and too many high-priced leases for the 20-plus stores that were opened in the downtown areas of the top 15 cities in the U.S. 

Flor is not dead by any means, and Interface plans to continue to sell the product via the Internet and catalog. Interface estimates that the impact from the exit of the stores will cut the Flor revenues in half to approximately $20 million a year, but with much higher margins-once the write-offs have been taken.

Meanwhile, Interface continues to run tests with at least one major retailer to determine the viability of selling modular carpet into the residential DIY sector. The trick is to figure out the right price point, the right hand and the right visuals, and like many programs to reduce the complexity. Many pundits in the industry think the question of whether modular tile works in the residential market is not one of if but when and how.

Shaw Industries held its biennial aligned dealer convention in Orlando, Florida last month, and it ran from Sunday to Tuesday right before Surfaces kicked off in Las Vegas on Wednesday of the same week. This Shaw event has grown over the years, and this 11th edition drew roughly 4,000 attendees. Out of that number, 3,000 of the guests worked for approximately 960 aligned accounts.

As in years past, this event feels as much like a party and a family reunion as it does a buying convention. In fact, Randy Merritt, Shaw’s president, told me that this year’s Connect theme took precedence over the product element of the show, and Shaw’s primary goal was to create an environment where its most loyal customers could come have fun, network with others and learn from the over 80 different classes it was hosting, double the number offered two years ago. The sessions were organized across four tracks: Innovation, Consumer, Operations, and Building Value in My Business.

Another continuing component of this year’s event was Shaw’s exclusive access to Universal Studio’s Island Adventure theme park. So, for those of you who have never been: Shaw loads everybody in a bus at the Rosen Shingle Creek resort, hands out Shaw branded fleece jackets, and everyone is offloaded inside a theme park that is not only closed to the public, but is also where all of the many themed restaurants are serving free food and drinks. So, it’s not by accident that almost 1,000 of the guests at this event every other year are kids. Merritt pointed out to me in a recent interview that Shaw recognizes that many of these children will end up running their parent’s businesses and it never hurts to win them over early.

A key components of the meeting was a download on detailed consumer research that Shaw put together in 2016. Last year, Shaw conducted in-depth interviews with over 1,000 consumers who had recently purchased flooring to get a thorough understanding of the entire process, which in this case averaged five months from the awareness stage to the day of purchase-taking them to 2.8 different stores. A few other findings are that consumers now want a customized space that is unique to them, and now more than ever, the consumer wants to integrate more than one surface type. Durability is important, but falls below fashion and style. There were tons of other data points related to key influencers, use of Internet, online reviews, retail sales associate product knowledge, sample interaction and family pet factors. 

In addition, Warren Buffet, CEO of Berkshire Hathaway, which owns Shaw Industries, came to the meeting and after talking casually with Vance Bell, Shaw’s CEO, on stage about the economic outlook and business climate, Buffet welcomed a panel of retailers to ask him unscripted questions. 

There were also a few news items from the expo part of the event. Naturally, US Floors was integrated into the show, now that they are part of the company. In addition, Shaw appears poised to carve out more emphasis on its Anderson and Tuftex brands with striking new visuals that help these brands stand out on the upper end of the market. It was clear that Shaw is actively integrating the knowledge it gained from its consumer research into the product and merchandising displays that were a focal point at the show.

One particular new introduction that was in the center of the showroom is a modular carpet and LVT offering called Floorigami. While still in the conceptual stage, the proposed program has the two surface types merchandised together and designed to be installed adjacent to each other without transition issues and with coordinating visuals. Shaw has tapped Ideo, a global design firm, to work with them on the development of this product.

The decision by Domotex Germany, the largest floorcovering trade show in the world, to completely rearrange the layout of the show to accommodate the shift in surface consumption sends a loud message about the rapid rate of change in this business. When Domotex got started 28 years ago, it was a carpet and rug show only. As the show grew year by year, it added hardwood, laminate and resilient products, and assigned them to specific buildings. But next year, based on three global trends, the show is completely shuffling which buildings products will be assigned to. 

The first trend is a shift in the area rug business from hand-made to machine-made. Today, for multiple reasons, sales of machine-made rugs are outpacing the more traditional handmade rugs. Cottage labor in India, for example, has shifted its focus from making rugs to making more lucrative higher tech products. In addition, loom technology has evolved, speeding up the process but also giving a more handmade look. 

Secondly, the movement we’ve been watching away from soft surface and over to hard surface is a global trend, but with varying levels of magnitude, depending on the region. As a caveat, I should mention that Domotex dabbled in the ceramic tile market for a few years but decided it couldn’t compete with the annual Cersaie show in Italy, so tile is not shown at this event. But the other hard surface categories mentioned above are demanding more space each year.

Lastly, there are more companies that produce multiple surface types, and many of these firms have grown through consolidation. They want to exhibit at this show with one large brand message in a single space, so space needs to be set aside to accommodate this trend. 

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

Copyright 2017 Floor Focus

Related Topics:Domotex, Interface, Shaw Industries Group, Inc., Mohawk Industries, Tuftex, CERAMICS OF ITALY, CERSAIE