Home sales, Anderson, Fuse, Armstrong Flooring: Strategic Exchange - Apr 2016

By Kemp Harr

In January, the American Institute of Architects’ (AIA) billing index dipped below 50 for the first time in five months, but the February number inched back up to 50.3. I had a conversation with Kermit Baker, the AIA’s chief economist, right before press time and he stressed that this is a leading indicator because design work precedes construction by about nine months. We all know that flooring is one of the last finishes to go in on a construction project, so there is a good chance that this year will look much like last year in the commercial sector. 

Baker did caution that he sees a dip in the growth of construction activity on the horizon, but thanks to core economic fundamentals—low unemployment, increased wages, no signs of being overextended—he doesn’t feel the next dip will be “on the level of a national economic recession, and we should be able to enjoy a period of stable but slower growth for the next couple of years.”

In 2015, existing home sales had their best year since 2006. But this has eaten the existing inventory down to a four-month level, based on the current rate of sale. We haven’t seen this low of a level of inventory since 2005. Naturally, this makes a pretty good case for builders to pick up the pace of building new homes. It is worth noting that builder confidence in March was 58, and while that’s down from a peak of 65 back in October, it’s still way above 50—and any number over 50 indicates that more builders are bullish on the future demand for new homes.

Obviously a rise in new home construction increases the demand for flooring products, but statistics show that sales of existing homes also trigger an uptick in spending for repairs and alterations—and a percentage of that goes toward flooring. A few years ago, the National Association of Home Builders conducted a study that compared the spending behavior among three groups of single-family detached homeowners: buyers of new homes, buyers of existing homes and non-moving owners. The typical buyer of an existing home spends nearly $4,000 more on remodeling than an otherwise identical homeowner who has not recently moved. And a new homebuyer will spend an average of $7,400 more than a similar homeowner who has not moved.

The most recent Leading Indicator of Remodeling Activity (LIRA) report, published by economists at Harvard University, calls for an acceleration of home improvement spending from 2.4% in the latter half of 2015 to 6.8% in the second quarter of 2016. Baker commented that the good news is that much of this activity has moved from necessary spending on things like HVAC and roof repairs to more discretionary items like kitchen and bath updates. In addition, the Wall Street Journal reported last month that U.S. households closed 2015 with their home equity at the highest level in a decade.

All of this data points to more opportunity for residential flooring sales, but it won’t happen if you just sit around and wait for the consumer to walk into your store. First and foremost, she might choose to spend in other areas, like new furniture or appliances or exterior repairs like roofing, painting or siding. And even if it’s flooring she wants, she might opt to buy at the home center. You might have noticed, in reports that came out last month, that sales at Home Depot and Lowe’s grew 6.4% and 5%, respectively, in 2015 versus the previous year. 

If you’re an independent flooring retailer, how does that compare with your growth? How vocal are you with your target market? Are you shaking the bushes and making yourself known? You’ve got to remember that flooring and your store brand will only be top of mind if you invest in raising the awareness of both. Now is the time.

Most of the players in the hardwood flooring business are closely watching Shaw Industries’ recent decision to remove distributors from the mix and sell the Anderson brand directly to retailers. You may recall that Shaw bought Anderson back in 2007. Prior to the acquisition, Shaw was the sixth largest player in the hardwood industry with a 4% share and Anderson was the third largest with a 6.2% share. In 2007, the total wholesale value of the hardwood flooring market was $2.2 billion. 

Fast forward to today. Following Shaw’s acquisition of Anderson, Zickgraf and Stuart, and total retooling of its South Pittsburg, Tennessee plant, Shaw’s hardwood business has surpassed Mohawk’s, and it now holds the number two market position with about 10% of an almost $3 billion market. 

Prior to the Shaw acquisition, Anderson went to market with four separate brands, and the company was recognized for its styling and innovation. This reputation for innovation was earned through the development of game-changing hardwood enhancements like the aluminum oxide finish, hand-crafted distressing using prison labor, and the entire concept of the cross-ply core, which led to the sub-category of engineered hardwood—and which today outsells solid hardwood flooring.

In the last eight and a half years, Shaw has stayed true to its commitment to only offer the Anderson brand though distributors, but during that time, the product development teams, and even the factories, have been so intermingled that it’s hard to differentiate the Shaw-branded product from the Anderson-branded product. 

But to be fair, the equation has also changed at the distributor level in the past nine years. Distributors have learned that sourcing Asian-produced engineered hardwood and offering private-label products to their loyal retailers can earn both the retailer and the distributor a few extra points of margin. So some of the distributors who once were closely aligned and positioned with Anderson as their go-to hardwood brand now offer competing private label products. 

Part of the issue, one that has plagued this industry for years, is the debilitating race to the basement on pricing. The consumer wants value, not cheap flooring. Value comes from buying a quality product that is easy to maintain and lasts forever and perhaps even carries a prestigious brand that the homeowner can feel pride in when she tells her neighbor, “It’s a Karastan” or “I bought Bruce.”

I had to smile last year when Neil Poland, the president of Mullican Flooring, stood before his loyal distribution network at the firm’s 30th anniversary celebration and admitted that the hardwood industry is craving a brand leader to step up and lead. Poland’s statement is dead on. Who will be that brand? Yes, it used to be Bruce—back in the days of Triangle Pacific—but then Armstrong gave Bruce to the home centers.

If you know much about branding, you know that historically a brand was established to communicate source of origin: Who made it? Where did the trees come from? How thick is it? How many layers of finish does it have? How stylish is it? What makes it Anderson? 

Whichever brand steps forward to take the lead needs to remember: it can’t be a story. It has to be real. And if branding stays true to its purpose, it most likely won’t be a store brand or a distributor brand or even a buying group brand.

By the time you read this issue, Armstrong World Industries (AWI) will have divested its flooring business from its ceiling business. Effective April 1, Armstrong’s flooring business now goes by Armstrong Flooring Inc. and is publically traded on the New York Stock Exchange under the symbol AFI. Any shareholder who owned AWI stock as of late March got one share of AFI for every two shares of AWI. 

In 2015, the ceiling business earned $345 million EBITDA on $1.2 billion in revenue, and the flooring business earned less than half of that, or $112 million EBITDA, on roughly the same level of revenue.
As part of the move, Matt Espe will step down as CEO, and Don Maier will maintain his leadership role as president and CEO of Armstrong Flooring. 

Hopefully, as Armstrong’s flooring business starts a new chapter, it will be able to focus on the fundamentals of the business, unconstrained by the corporate distractions of being part of two separate businesses with few, if any, synergies. Flooring is where Armstrong started, and it would be great to see the company put new energy into this business. 

In the last several years, it has pulled out of the European flooring business, closed its Chinese engineered hardwood plant, and invested heavily in domestic production for both its resilient and hardwood businesses. This year, it’s launching a differentiated U.S.-made LVT collection with an unprecedented durability story. Hopefully, these strategic changes are enough to get the business back on track.

The Fuse Alliance network of commercial flooring contractors met in Nashville last month with a record number of attendees. This was the first meeting since its founding leader, Ron Lee, retired, and the new executive director, Geoff Gordon, did a fine job at the helm for his first solo performance. The co-op has taken in seven new members this past year, lifting its total count to 85 member companies, and its goal for 2016 is ten more—which many would agree is rather aggressive.

This year’s meeting started with a roundtable discussion, which quickly revealed the issues that the members are facing. Top of the list are concrete moisture and installation labor, but one new item is freight surcharges. Apparently, many of the industry’s suppliers have not reacted to the obvious reduction in freight costs due to lower fuel prices, and this group of contractors is taking note of which suppliers have rescinded the fuel surcharge and which have not.

Fuse is starting its second year with a renewed focus on its marketing investments, centered on positioning the group as the go-to network for designers and end users. Much of that investment is going toward new websites and other digital tools that streamline the communications between the network, its members and its vendor partners.

This year, the group is launching a new Spark Awards contest, and winners will be announced at next year’s meeting in Austin, Texas. Unlike Starnet’s design awards, which are given to A&D firms, these awards will recognize the members in categories like toughest subfloor installation, shortest timeline, most challenging installation, and best of show. All projects that are entered must utilize product from the group’s list of vendor partners.

Fuse is continuing to put emphasis on its national account program, called Fuse Commercial, and recently hired Mike Hutton, formerly with Interface, to lead it. With this program, Mike is charged with developing relationships with national and regional companies to handle all their flooring installation and refurbishment needs. Fuse admits that its main business is to sell product and installation, but it also wants to be considered for labor with the major end-user companies that insist on buying flooring directly from the manufacturer.

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

Copyright 2016 Floor Focus

Related Topics:Karastan, Fuse Alliance, Mohawk Industries, Starnet, The American Institute of Architects, Fuse, Shaw Industries Group, Inc., Armstrong Flooring, Interface