NFA, Starnet and Coverings: Strategic Exchange - May 2016

By Kemp Harr

Last month, participants at the three events I attended were extremely upbeat about sales growth and current market conditions, and each one is focused in different areas. I’m referring to the NFA spring meeting, the Starnet annual meeting and the Coverings expo.

Professionals in the flooring business continue to tell us that residential replacement is the softest sector and that single-family builder, multi-family and commercial are the three growing sectors. We’re also hearing that the builder market varies depending on where you live. Sales in the West declined in March after surging in April. Purchases are up 5% in the South, and in the Midwest sales grew 18.5%. The Northeast is flat. Based on the current sales rate, inventory nationwide is running about 5.8 months.

NFA MEMBERS SEE AN ACCELERATED SHIFT TO HARD SURFACE
One of the more interesting retail groups in the flooring business is the National Floorcovering Alliance, a group of 42 retailers that meets three times a year but networks year-round to help each other out. One of the biggest benefits of belongting to the group is its collective buying power. And one of the side benefits is the attention the group gets from senior managers on the supply side who don’t have to ask for permission to negotiate a deal.

Leading manufacturing executives attend the NFA’s meetings for several reasons—aside from the fact that the meetings are held in luxury locations. For one, it’s easy to get an honest read on what’s happening in the marketplace from professionals who understand market dynamics. Also, it’s an opportunity to network with senior members of the competition in a friendly environment.

This group works well because of a few strategic decisions that are part of its bylaws. The members don’t overlap geographically, so they don’t compete with each other. The members also decide who can join, and on occasion, who must leave, based on their falling below the $10 million minimum sales threshold.

Last month, the group met for its spring meeting at the Grove Park Inn in Ashville, North Carolina. Unfortunately, the weather was unseasonably cool due to a cold snap that Southerners call Dogwood Winter, but the group still had a wonderful time at one of the nation’s most upscale resorts, nestled into the southern end of the Appalachian Mountains. Historic photos on the wall tell a story about three gentlemen—Henry Ford, Harvey Firestone and Thomas Edison—who met there on a frequent basis to network and exchange ideas, much like the NFA was doing.

During the business meeting on the first day, each member gives a brief recap of the growth of their business and any issues they may be addressing. Growth within the membership is running between 3% and 15%, with the better numbers coming from members who know how to control the installation, and members who have a larger amount of builder business in regions where the builder sector is strong.

Key issues the members are facing are direct Internet sales, recruiting, hiring and retaining salespeople, and navigating the labor laws related to direct versus subcontractor installation labor. However, probably the biggest headline from the meeting, was “the amplified shift of sales from carpet over to hard surface in the last six months,” according to Dave Snedeker, the group’s president.

This should be a wakeup call to the whole industry. Naturally, it will affect which assets the industry’s suppliers will be able to run, but unless something changes, it will also have a serious impact on the gross margin performance within the retail sector. It is no secret that carpet is the most profitable surface category for retailers, especially when you factor in pad sales and installation. And another factor is the long-term effect on business due to the extended lifecycle of hard surface flooring. Consumers who install wood or tile, for example, are less likely to be looking for flooring eight to ten years from now, unless it’s a new area rug. Also, it’s a lot easier to buy hard surface over the Internet than it is to buy carpet, due to the simple freight logistics of buying a carton versus a 12’ or 15’ roll.

Another trend that revealed itself during this meeting was an uptick in consumer demand for better end goods. Based on feedback from its members, the NFA is considering building new relationships with vendors that specialize in selling prices above the NFA’s current sweet spots. This reinforces the boutique trend at retail where consumers are seeking lower quantities of finer quality merchandise.

Before we leave this NFA topic, I should mention that several members were overheard sharing their success stories about their latest ventures into the kitchen cabinet business, so diversification of mix continues to be a strategy worth considering for independent flooring retailers.

This fall the group is traveling to Aruba to celebrate its 25th anniversary.

STARNET’S RECENT GROWTH VALIDATES ITS BUSINESS MODEL
Starnet, the largest group of commercial contractors, was another group with smiles on their faces when they met last month for their annual meeting. This year, the attendance in Miami at the Trump Doral surpassed the previous record achieved four years ago when the group met in Puerto Rico to celebrate its 20th anniversary. Based on the numbers I heard from many of the 168 members in attendance, business in the last year was better than it’s been since before the recession.

Jeanne Matson, the group’s president and CEO, was much more relaxed this year, and for good reason. Last year, when the group met in New Mexico, it was facing a bit of uncertainty on several fronts. First and foremost, the group had decided to part ways with its largest and longest standing vendor partner, and as with any broken relationship, this forced some reflection on what the future might bring. Some even wondered whether the group’s business model would continue to be viable.

Those of you who have followed the historic path of the commercial flooring contractor over the last 30 years can empathize with last year’s uncertainty—especially in an industry where the supplier base has continued to consolidate. We all watched as Shaw, DuPont and Interface decided that dealer/contractors were such a crucial component in the channel that owning them would be the alchemy for marketshare growth. But in each instance, we watched as this strategy reversed itself and small business entrepreneurs stepped back in to drive the business back to prosperity.

So once again, as we hear that in 2015 Starnet’s revenue grew 13.6% and the co-op returned a 76% dividend back to its membership, the group has clearly validated the resiliency of its business model.

In addition to filling the funding gap left with the departure of its largest vendor partner, the group has been busy building infrastructure around its new strategic account initiative by formatting a nationwide pilot program that includes 12 member companies. According to Leah Ledoux, who joined Starnet a year ago and is leading this program, each of these 12 firms anteed up with some additional funding, and they were prequalified based on the size and scope of their operation, which included diversity of sector focus and an established maintenance component. This pilot program is structured as a two-year test.

As part of this initiative, Starnet has been promoting its service-oriented brand to national account end users by exhibiting at sector-focused trade shows like Global Shop, which concentrates on the retail sector of the commercial market. This presence will not only raise the awareness of Starnet as a group, but will also help drive business to the vendor partners closely aligned with the co-op.

A second new program that gives even more credence to the relationship between the members and its vendor partners was the first annual Dream Team Awards—the brainchild of Rob Hailey, owner of Howard’s Rugs in San Diego. This year, for the first time, three members and three vendor partners were recognized for working together and securing major projects by teaming up and making joint sales calls to secure the business.

Like many entrepreneurial groups of family-owned businesses, several Starnet members are facing retirement age and analyzing their options for a lucrative exit strategy. To help them weigh their options, Starnet brought in Andre Gien, a Charlotte, North Carolina based expert, who spoke about getting a business “investor ready.”

There’s no denying that this organization is continuing to evaluate its core competency and making course changes to remain relevant. Long gone are the days when Starnet’s members could sustain themselves by merely calling on general contractors and offering carpet installation services. Today’s successful flooring contractor must offer a diversified mix of services and have a solid brand reputation with end users, A&D specifiers and general contractors.

Starnet’s fall meeting will be held in Nashville in early November.

COVERINGS CELEBRATES STRONG GROWTH NUMBERS
The last time Coverings, the largest ceramic tile and stone show in North America, came to Chicago was in 2009, which we can now look back and see was the bottom of the last recession. Obviously, flooring sales have been recovering ever since, and while consumption is not where it was at its peak in 2006, last year’s total tile revenue growth of 9.8% in the U.S. set a positive tone for this year’s show.

While Coverings is primarily a distributor show, hosting it in Chicago brings in a large number of interior designers. Exposing an expanded group of specifiers to how far the tile market has evolved in the last seven years should be great for business in the years to come.

Tile sales usually track closely with the builder market, so continued recovery in that sector has been good for the tile business. Also, thanks to increased value of the dollar, imported tile is more competitive and, in fact, imports from Italy were up 19% in the first two months of 2016.

People who study the tile market know that Italy is still the leading importer of tile into the U.S. in value, and 80% of the tile made in Italy comes from a town called Sassuolo. Sassuolo’s status as the center of the Italian tile market is similar to Dalton, Georgia’s position in the U.S. carpet business. It’s also worth noting that while carpet is still the largest flooring category here in the U.S., tile is the leading flooring surface in Italy, as well as most of Europe.

People have joked lately that Tennessee is becoming the Sassuolo of America, thanks to the number of tile factories that have either recently been built or are currently under construction. The first porcelain tile plant in the U.S. was built by Crossville in Crossville, Tennessee 30 years ago. Since then, Florim has built a plant in Clarksville, Fiandre has built a plant in Crossville and called it StonePeak, Del Conca has built one in Loudon, Dal-Tile has constructed a large facility in Dickson, the Concorde Group is about to open its plant in Mt. Pleasant, and the Wonderful Group is building one in Lebanon. Out of all of these tile plants, two have U.S. based investors, one is Chinese and four are Italian.

Naturally, the primary reason for this concentration in Tennessee is proximity to the natural clay used to produce porcelain tile, but I’m sure tax incentives, energy costs, and highway access are also factors.

I saw a slide in the Tile Council of North America’s presentation that hinted the tile industry doesn’t plan to sit around without a fight and let tile lookalike products made from laminate or LVT take marketshare. The slide touted the fact that real tile is durable, fireproof, chemical free and hypoallergenic. It will be interesting to see if the wood guys go after the tile guys for imitating them.

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

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