Housing, carpet numbers, Home Depot, Metroflor, USGBC: Strategic Exchange
By Kemp Harr
The pace of existing home sales has eaten up the inventory of available homes, and at the current rate of sale, the supply will only last 5.1 months. That is below the six to seven months of supply that the National Association of Realtors says is needed for a balanced market.
Naturally, every market is different, but in 1/3 of the 300 largest metropolitan areas tracked by Realtor.com, homes listed for sale in June had been on the market for a median of less than two months. Those markets can now clearly be classified as seller’s markets where homeowners can demand premium prices.
While the slow pace of new home construction is a major contributing factor to the tight supply, a second factor, according to real estate database Zillow, is that 15.4% of homes (7.9 million units) continue to be underwater. So these homes are basically off the market unless the homeowner chooses to pay the shortfall on their old mortgage in addition to finding the funds necessary to sell and move.
The lack of available financing for the small to midsize builder, which account for three quarters of the homes that are built, also contributes to the slow pace of construction of new single-family homes. An additional factor limiting the available inventory is the 2.6 million homes that were bought by investors during this past recession and converted into rental properties.
CARPET SEGMENT ANALYSIS
Have you ever wondered how the various segments of the carpet market break out? I recently sat down with a couple of friends and a bar napkin, and this is what we came up with.
If the wholesale value of all the carpet sold in the U.S. in 2014 was $8.4 billion dollars and $3.6 billion of that was commercial carpet (specified and mainstreet), then $4.8 billion was residential. Out of that $4.8 billion residential pie, we estimate that $1.4 billion was sold to the builder/multi-family market, $1 billion was sold through the home center/category killer channel, and $0.6 billion was sold through all the CCA global outlets (excluding FEI Group, which is part of that $1.4 billion piece). So that remaining $1.8 billion was sold by specialty retail outlets.
Various numbers have been thrown around about how many specialty flooring retailers there are, but the number that seems to stick is around 9,000. Removing CCA stores from that figure puts the number at around 7,500.
Granted, not all retailers are equal, but if you divide $1.8 billion by 7,500, you’re left with about $250,000 of available carpet to sell per store. Of course, we’re talking carpet only and at a wholesale value-no pad, labor or installation supplies-but this certainly indicates that to make a living as a specialty retailer, you have to either own more than one store or diversify your offering so that carpet is only a fraction of what you offer your customer.
HOME DEPOT’S LIFEPROOF
Last month’s survey of independent flooring retailers revealed that home centers ranked second behind installation as retailers’ top problem. Home Depot is the largest player in this category with 1,980 retail stores in the U.S., and roughly 6% of this big box giant’s $75 billion in annual U.S. sales, or approximately $4.5 billion, is derived from the floorcovering department. Not only does this number include flooring material, installation supplies and labor, but it is also heavily skewed toward cash-and-carry boxed flooring like ceramic tile, hardwood, LVT and laminate.
Home Depot’s share of bulky material like carpet and resilient sheet remains slightly lower than its other floorcovering categories based on the nature of the home center shopper, many of whom are DIY focused. We estimate that Home Depot’s share of the retail broadloom carpet market is just under 15%, but I’m guessing that the firm’s intention is to increase that share number, based on what we’ve learned about its LifeProof Carpet brand strategy and the dollars it plans to spend to promote the line to the consumer.
We were first made aware of this plan when Jeff Macco-a successful retailer based in Green Bay, Wisconsin-walked into a Home Depot store early one morning to order some blinds for his new home. As he sat at the order desk, he overheard an employee training meeting taking place in the adjacent flooring department. I interviewed Macco on FloorDaily soon after this happened, and I invite you to listen to him recount what he overheard.
Among the many nuggets of information communicated during this training session was the boast that the advertising investment to support the launch of LifeProof would exceed the dollars spent to launch Stainmaster 20 years ago. And by now many of you may have started to notice these ads on radio and TV. The subject of the TV ad is a boy named Henry whose “expertise and life’s work is to stain carpet.” It’s probably no accident that this little boy looks a lot like Ricky, the toy fire truck-driving redhead boy who was featured in the Stainmaster TV ads in the mid ’80s.
At this point, we can only guess how much money will be spent this fall promoting LifeProof carpet at Home Depot, but according to Santo Torcivia of Market Insights, last year Home Depot spent $884 million in advertising and 6% of that is well over $50 million, which provides an idea of the magnitude of what might be spent in a year to promote the flooring department.
To fully understand Home Depot’s strategy around the launch of LifeProof, we need to step back and look at the whole picture. In March 2010, Invista told Home Depot that it could no longer sell Stainmaster carpet, as Invista had decided to give that brand exclusively to Lowe’s in the home center channel. Home Depot turned right around and launched a Martha Stewart collection manufactured by Shaw Industries at the same upscale price points where Stainmaster is positioned.
Last November’s Focus 100 Retail article pointed out that Lowe’s was beating Home Depot in carpet sales per store, based primarily on the success Lowe’s was having with its Stainmaster Pet Protect product, which is made of solution-dyed nylon 6,6 and has been heavily advertised on cable TV.
Another contributing factor in the story is that last year Home Depot replaced Randy Brown, its carpet department merchant/buyer, with Shawn Wilson. I recently met briefly with Shawn, and he is an impressive young guy, who spent several years at Mohawk prior to joining Home Depot and has written a thesis in pursuit of his PhD at Coles College of Business at Kennesaw State, related to optimizing the relationship between national chains and their core suppliers. Wilson’s fresh perspective and analytical approach is no doubt a factor in Home Depot’s carpet strategy.
The new LifeProof carpet displays, which were installed this summer in all Home Depot stores, are judiciously positioned on a high visibility end-cap in the center of the flooring department and replace the Martha Stewart collection from a price point perspective. There are 36 arms in the display-25 feature triexta from Mohawk and 11 feature solution-dyed nylon 6 from Engineered Floors. The point-of-sale material, which is critical in a home center where consumers are forced to help themselves, screams “Advanced Stain Technology and Best Warranty Ever!” The assortment is positioned in the middle- to upper-end, as the weight ranges from 30 to 60 ounces per yard, at $22 to $45 dollars per yard to the consumer. It’s important to note that the consumer has no way of knowing who the manufacturer is, and it’s not lost on me that the star of this show is the LifeProof brand, especially given the recent launch of LifeProof vinyl flooring. So, while Mohawk and Engineered Floors are supplying the product today, that could change over time.
Another noteworthy strategy tidbit that Macco overheard is Home Depot’s emphasis on selling the consumer a $35 in-home measure service. Home Depot has learned that it can close 85% of sales to customers who invest the upfront $35.
If you’re a student of Home Depot’s flooring business, you know that the company spent $45 million dollars in 2012 buying MeasureComp LLC, which greatly enhanced its ability to accurately measure a consumer’s home and turn that information quickly into a cut order for flooring. It has also beefed up its logistics system to enable it to shorten the window between when an order is placed and when it can be installed.
Granted, this is a lot of information, but independent retailers need to know this to be able to compete head to head with Home Depot’s strategy. And customers need to understand that walking away from a $35 measure fee is nothing compared to the cost and trouble of redoing a botched flooring installation. In fact, Macco told me in his interview that he’s started using that $35 measuring fee against Home Depot, offering to “refund” the $35 to the customer if they will let Macco and his team measure their home for free.
Take it from Macco, whose business is doing very well. Put your store right next to Home Depot and let them bring the traffic right your door. After all, Home Depot is spending millions getting consumers in the mood to buy flooring.
WHY METROFLOR SWITCHED FROM LEED TO GREEN GLOBE
Last month, I attended Metroflor’s grand opening of its design center in Calhoun, Georgia. Most of you know Metroflor as a family-owned business that has been a player in LVT since the mid 1960s. They clearly understand the advantage of differentiation through the proper use of intellectual properties (IP), such as innovative patents, copyright protected designs and trademarked branding
Many of the company’s brands-which include Konecto, Aspecta, Allure, Engage and Iso-Core-are not simply names but stand for a unique promise to the markets they serve. This IP strategy pushes the pricing factor further down the priority list when end users are making the decision to purchase products. I say all of this as background for my next point, because this firm clearly makes decisions based on well-vetted strategy.
Back in 2011, on this same campus in Calhoun, Metroflor cut the ribbon on a LEED Platinum building. The new design center unveiled last week is Green Globe 3-globe certified, so the Stone family, which owns Metroflor, has chosen to support competing systems for accreditation of two prominent buildings on the same campus and, in doing so, is sending a loud message to the U.S. Green Building Council.
The message, as expressed at the podium by COO Michael Kaminsky, is that the USGBC LEED process is very bureaucratic and expensive, and there is now a refreshing alternative that achieved the same goal in less time and at half the cost.
But a second message is that the USGBC should be careful not to penalize a building material like vinyl flooring without careful analysis and unbiased understanding of all the facts involved. I applaud Metroflor for voting with its wallet and for paving the way to an alternative method for sustainable accreditation.
RICK FEDRIZZI’S RETIREMENT FROM USGBC
Back in June, Rick Fedrizzi announced his intention to retire at the end of 2016, so he’s giving his board 18 months to select a replacement. Does that sound like a bureaucracy to you?
I am hopeful that Fedrizzi’s replacement can put renewed focus on the USGBC’s core mission as a nonprofit organization of improving the built environment both from an indoor health and an energy usage perspective, and to continue to drive innovation in the field of sustainable buildings.
Should the USGBC, LEED and even Fedrizzi himself be commended for their accomplishments? Most definitely. But let’s cut that search time by a year and keep moving forward. Twenty-two years…and for he’s a jolly good fellow.
If you have any comments about this month’s column, you can email me at email@example.com.
Copyright 2015 Floor Focus