Is the optimist outlook built on sound reasoning?: Strategic Exchange - March 2017

By Kemp Harr

What are the first two months telling us about the outlook for the remainder of the year? It was good to see that new home sales for January were tracking at a 555,000 pace, up 5.5 % from January 2016.

In addition, January’s pace for existing home sales of 5.69 million was up 3.8% versus the previous year. But the big news here is that this January’s pace is the highest it’s been in ten years. Certainly, the stock market is showing signs of optimism, but there is a high likelihood that these overheated PE ratios cannot sustain themselves and we’ll see a correction before any true economic growth actually kicks in. Growth in the 4th quarter is expected to come in at 2.1%-which puts the 2016 average GDP growth rate at under 2%. It’s hard to know what dynamics are contributing to this market euphoria. If it’s based on pro-business thinking in Washington, D.C., it may be a long time before any laws are passed that might stimulate the economy. In fact, the Treasury Department just announced it will be August before it’s ready to roll out any tax reform details. One short-term factor could be the signaling by the Fed that it will most likely pass on recommending an interest rate increase in March.

HOME CENTER FLOORING GROWTH
It was very interesting to hear in Home Depot’s quarterly earnings call that Tools and Flooring were the only two merchandising departments that had double-digit comps in the fourth quarter of 2016. It would be useful to know how much of this is due to an increase in consumer demand and how much of it is based on changes that Home Depot has made within its own organization. Before I go any further, I’d like to emphasize the use of the word “comps,” because it is no secret that Home Depot’s flooring sales a year ago were depressed and this double-digit performance is coming off a low base from Q4 2015.

At the same time, several pundits who are watching this closely tell me that the free carpet installation offer that Home Depot rolled out back in November is a bigger factor in this turnaround than is an uptick in consumer demand for flooring. So, if you are an independent retailer and you haven’t taken note, please do so now. Because if overall demand is flat, double-digit growth in one channel means loss of share in another.

For those of you who haven’t been into a Home Depot store lately, here’s the offer. Any carpet that sells for more than $9 a yard qualifies and the carpet order has to add up to $699 or more. If you meet those two conditions, the whole installation is free: no hidden fees, no surprises, no charge for rip up and haul away, no charge for moving furniture, and no charge for doing stairs. The next obvious question is, how are they making money? Come to find out, Home Depot quietly raised its prices on carpet last fall in preparation for the roll out of this program.

It hasn’t take Lowe’s long to follow suit and it is now also experiencing similar sales growth. But in the case of Lowe’s, the offer is limited to Stainmaster branded carpet and pad.

The big difference with this free installation offer compared to previous years is that there is much less fine print. Apparently, they really do mean free installation and they are paying for it through elevated product pricing.

We’ve got to wonder if it’s the “free” word that is and creating this flurry of activity at the home centers. Was PT Barnum right when he said there’s a sucker born every minute? Doesn’t an educated consumer realize that there is no such thing as free?

THE AMAZON EFFECT
Let’s shift our focus to the recent department store closings at Sears, JCPenney, Kohl’s and Macy’s. What effect is online shopping having on brick-and-mortar stores? Is it as simple as the free freight offer at Amazon that’s driving people to prefer shopping at home in their PJs?

Some historians would tell you that it was price tags (having a fixed price to all consumers) that drove the shift from the day-to-day haggling with street vendors and rural general stores to department stores around 1876. Others would add that it was the abundant mix of wares all in one place.
Recent news tells us that Walmart-the once feared chain that changed the face of retail in small town America-is now having to react to the Amazon threat.

So, what can an independent flooring retailer do to compete, both against the home centers and the online threat? Many of the people reading this column already know the answer. It’s about the experience. Consumers need help from an expert who can ease their fears about the investment and guide them to an easy choice that is unique to their set of circumstances. Is price a factor? Sure it is. In the end, the consumer needs to feel they paid a competitive price.

And what role does the Internet play? It is key. It plays the role of your front door and it’s where the consumer gets their basic understanding about product options prior to the purchase. Use your site, not only to attract them to visit you but also to help them learn from the expert the background information they need to make the right decision. It is key that what they read online matches what they hear in the store.

Floorcovering is an expensive investment that must be installed by a professional. The purchasing factors are much more complex than the types of products sold on Amazon. And consumers do care and understand what it means to buy local.

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