Mohawk's IVC purchase, Shaw's LifeGuard, Starnet news
By Kemp Harr
Wow, what a January. There’s been plenty of energy and enthusiasm at the shows we’ve attended and, with no bitter cold weather, the year is starting out on a stronger note than we saw in 2014.
Undoubtedly, the biggest news of the month was Mohawk’s acquisition of IVC. Practically overnight, Mohawk becomes a major manufacturer in the global resilient sheet and LVT business and its stock price jumps from $155 to almost $170. This news is big, not only because Mohawk is already the largest flooring manufacturer in the world and this makes it even bigger, but also because LVT is the fastest growing flooring category and IVC is poised to ride that wave with two brand new LVT plants—the second of which is coming online here in the U.S. in April.
IVC is a company on the move, operating some of the resilient industry’s newest and most efficient manufacturing assets, with plants in Belgium, Luxembourg and Dalton, Georgia. Out of IVC’s $700 million in global revenue last year, 50% came from sheet vinyl, 30% laminate and 20% LVT, but that LVT mix could be twice as big by the end of the year. Geographically, 60% of its revenue came from Europe, 20% from the U.S., 10% from Russia, and 10% from the rest of the world. Last year, IVC earned $120 million, which puts its margins at 17%.
IVC’s current revenue in the U.S. is less than $150 million and it will be interesting to see how fast that number grows when Mohawk’s sales team gets behind it and the new LVT plant comes online in Dalton. It will also be interesting to see if Mohawk shifts some of IVC’s focus over to the commercial market or if it continues to source those materials from other companies.
IT’S NOT EASY TO DECIDE WHEN TO SELL A BUSINESS
We’ve all heard that small businesses are the engine that drives the economy in the U.S., just based on the sheer number of them and the number of people they employ. Thanks to continued consolidation, there are fewer and fewer small businesses on the supply side of this business, but the route to market in the floorcovering industry is full of small businesses. All the independent retailers, commercial contractors, installers and, yes, even a few of the publications are small businesses.
There have been plenty of articles written about the ageing population and the fact that 10,000 people turn 65 every day in the U.S. Most of these articles are talking about the need for more healthcare workers or the demand on Social Security or, even in this issue this month, how that trend affects the housing inventory.
What I haven’t read and feel the need to point out is the potential surge in sales of small businesses that are going to take place as the Baby Boomers reach their prime and try to maximize the return as they seek a new owner. For many small business owners, this will translate to how comfortable they will be in retirement. Not to sound like Chicken Little, but think about it. What if there aren’t enough buyers to go around and the person who’s buying knows he doesn’t have to pay what the business should bring based on the normal valuation figures like assets, cash flow, and profitability?
A very successful Carpet One dealer told me a few weeks ago that he was going to sell sooner rather than later, for that very reason.
If you are a corporate reader, you might be thinking; “Damn, good thing I didn’t go out on my own!” To those folks I say, you could be right but you’ve got a different set of problems. You have to worry about somebody buying your company’s pension fund liability and then changing the terms—but let’s not go there.
So what options do small business owners have to make sure they’re not greeting folks at Walmart when they’re 75? First, there will be competition—especially for the type of young professional who can buy you out and subsequently pick up where you left off and continue to grow what you’ve started. You also might start to rethink how friendly you are with your competition because they might be a prospective buyer.
If you’re wise, you’re probably watching these seven year economic cycles so you’re not trying to sell in the middle of a down cycle. That might be why we’re seeing so many transactions right now—we’re right in the middle of an upswing.
Probably the best option, and the one that many business owners who don’t have interested heirs to take the business over are doing, is making sure they’re building a bench of capable employees who might be interested in sticking around and buying them out over time, in an owner-financed type of deal. This may not work if all your core managers are your contemporaries.
I certainly don’t have a solution that’s tried and true, but you do need to be thinking about it. I personally take solace in the fact that I’ve met plenty of sharp young professionals lately and I’m hearing good statistics about the number of people who were born in the Baby Boom echo.
SHAW’S LIFEGUARD COULD CHANGE THE INDUSTRY
Shaw’s introduction of its LifeGuard backing system could be a bigger deal than most people realize. The industry has been assembling tufted residential carpet using basically the same process since the ’60s, with the only real change being the move from jute to synthetic backing. In layman’s terms, the face yarns are tufted into a primary backing, which is flipped upside down and run through a coater that pours a slurry of SB latex (blended with calcium carbonate as a filler) onto the back of the primary. Then an open weave secondary backing is added and the whole matrix runs through an oven. The latex is the glue that holds it all together and it is cured with heat.
While I haven’t actually seen how Shaw runs its new LifeGuard backing, I understand the basic premise. Instead of pouring glue on the back of the primary, a preheated sheet of hot molten plastic is laid on the back of the primary and the secondary backing is then pressed into the hot plastic before it cools. This thermal melt process creates a stronger matrix with a long list of performance enhancements. It has three times the tuft bind, liquids can’t pass through it, it’s light and flexible, and it’s green. The whole matrix is made of polymer that can be completely recycled, it has low VOCs, and it’s less likely to break down or wrinkle over time.
It does cost a little more to produce and it requires a different type of coater to assemble—requiring more capital investment—but it makes a better carpet. I’m sure in the last 50 years there have been enhancements to the latex compound that’s been used to hold tufted residential carpet together but this is a whole new process.
While this construction method is new to residential broadloom carpet, Shaw’s been using a similar process for several years to produce its EcoWorx backing in its commercial business. So Shaw has a lot of experience both running and installing carpet made with a thermal backing. But as we all know, the face of residential carpet is different and it’s installed differently, so Shaw’s been testing this new product in the field for over a year.
Today, this product’s being rolled out only on upscale products as a solution for pet accidents, but I suspect that both the market positioning and the number of SKUs will expand once the market sees the full benefit of this technology. Let’s not forget that Shaw is the world’s largest carpet company and it’s touting this process as a patent protected innovation. It’s refreshing to see new innovation in how carpet is assembled. Up to this point, most innovation in carpet has been focused on yarn chemistry and construction.
MOHAWK GROUP AND STARNET END VENDOR PARTNERSHIP
The recent report that Starnet and the Mohawk Group have agreed to part ways with their “Preferred Vendor” relationship after 20 years is big news. Starnet’s vendor partner program is one of the primary funding mechanisms in the organization and it’s set up with the understanding that the members will try to drive business toward their vendor partners and in return the vendor partner pays a fee in the form of a rebate.
The key question that’s been asked for many years is how much of the decision on which product is installed on any given commercial project can be influenced by the commercial contractor. There was a time when Interface, Shaw and DuPont felt that the level of influence wielded by the commercial contractor was so important that they decided to go out and buy a bunch of them. That’s old news.
The answer to this question about the level of influence probably varies depending on the contractor. Those contractors who only focus on having a relationship with the general contractor probably don’t wield as much influence as those who call on the end user and the specifier and make sure they’re not only the first people who are called when it’s time to install flooring, but are also in the kitchen when the designs are being finalized and the product is being selected.
It’s no secret that both Shaw and Interface have chosen not to formally support either Starnet or the Fuse Alliance. So perhaps the Mohawk Group’s rationale for going alone is similar to these other big carpet producers.
Another factor might be the burgeoning trend for end users to buy directly from the manufacturer and then turn around and contract with an installation-only firm. Now that most of the bigger producers can offer products in nearly every surface category, an end user can choose one firm and theoretically satisfy all of its flooring needs.
Many Starnet members position themselves as the local entrepreneurial advisor. They feel the end user gets a more objective recommendation when they are consulted on which product to install on a given project, because they touch the product going in and maintain it, and because they’re not locked into selling only the products that they make.
Whether the Starnet-Mohawk split was intended to be a “test case” or not, this event may reveal where the true influence lies. Ironically, it’s the Starnet members themselves who could decide the long-term viability of the cooperative. If the larger members turn around and set up their own discounts with the Mohawk Group—much as they do with Shaw and Interface—we are likely to see a weakening of Starnet as a viable entity. If, on the other hand, the group recognizes the intent of the vendor partner program and remains loyal to those suppliers that are part of the program to prove they do indeed wield influence on brand selection, Starnet will continue to be a force in the business.
If you have any comments about this month’s column, you can email me at firstname.lastname@example.org. Copyright 2015 Floor Focus
If you have any comments about this month’s column, you can email me at email@example.com.
Copyright 2015 Floor Focus