Retailer Product Diversification: Product diversification offers flooring retailers opportunity - Apr 2019

By Jessica Chevalier

In an increasingly competitive retail landscape, independent floorcovering retailers of all sizes are turning to product diversification as a means of increasing tickets, maintaining contact with existing customers and pulling in new clients. For many, it’s a strategy used as a counterbalance to the trend toward the use of hard surface flooring in the home, which results in fewer turns for the flooring dealer than when carpet was more popular. And while launching a new venture is in no way a breeze, it can provide a lucrative burst of energy and income for retailers willing to invest and do it right.

DIVERSIFICATION TRENDING UP
According to “Survey 2018: What the Retailers Think,” from the July issue of Floor Focus, the number of retailers who believed product diversification would improve their business performance rose dramatically in only two years, from 52% in 2016 to 72% in 2018. Of this dramatic increase, editor Darius Helm writes, “This jump in interest in diversification may indicate a frustration among retailers. Despite several years of growth in the economy and the housing market, retailers continue to see business going the way of home centers and the Internet, so perhaps those who were waiting for things to get better have decided to take matters into their own hands.”

It only makes sense for independent retailers to look at what attracts consumers to their competition and learn from them. More time-crunched than ever, homeowners or consumers today frequently turn to Internet and big box options for their ability to save time and streamline the shopping experience, so it stands to reason that consumers will respond positively when independent floorcovering retailers do the same.

To that end, it is very important that new product offerings not be simply a few new displays tossed in the showroom, but thoughtful offerings accompanied by a level of service and selection expertise equal to what is offered in the flooring operation and with a strategy for growth behind it.

Service is, after all, the greatest differentiator that independent retailers have today. There is no doubt: the Internet and big boxes have more stuff, more SKUS and a wide variety of flooring and non-flooring products. On that front, it’s impossible for independent retailers to compete. The big boxes and web retailers are also likely to win on price. But what they can’t offer is the same attention to detail or depth of knowledge that an independent floorcovering retailer can. How much more important, then, is it for the independent retailer to lean into these strengths when expanding the business?

THE IMPETUS
Retailers enter into product diversification in a variety of ways. Some stumble upon an opportunity too good to pass up. Others seek out new avenues through which to leverage their strengths. Sometimes it’s a matter of being proactive; other times it’s reacting to market challenges and demands. But, across the board, one of the central motivations for floorcovering retailers to diversify into additional products is the consumer preference toward hard surface flooring, which results in less flooring turnover and fewer sales. The fact is, with the flooring lifecycle extending from years to possible decades, many floorcovering retailers are in the position of having to supplement their business with additional categories.

Merit Flooring, Kitchen and Bath changed its name from The Carpet Shop in 2007 in an effort to represent its more varied offering. “There is a shelf life for retailers tied to one specific floorcovering category,” explains Dan Holloway, president of the business. “We fought it for years, saying, ‘Carpet will come back; it’s just that the economy is down.’ Of course, today, carpet has come back in quality goods and one bedroom at a time, but I don’t think the days of doing a whole house will be back, at least not in my business cycle. Once we accepted that, we asked ourselves, do we want to be in the commodity business or in the full-service business, managing logistics? We knew logistics was something we were good at-managing people, processes and quality control-and we saw a hole in our market. So we changed our name to a neutral one not tied to a commodity category.

With that history, Holloway is adamant that Merit not look at itself as being in the flooring business or the countertop business or the cabinet business, “What we sell is ourselves, our capability and our process,” he notes. Merit Flooring, Kitchen & Bath provides full-service kitchen and bath renovations from concept to completion: offering layout and design, demolition, plumbing, electric, construction and installation as a package deal.

Donny Phillips, founder and president of Atlanta Flooring Design, dove into the cabinet business during the recession. “Our decision to enter cabinets was borne out of two directions,” he says. “We were looking for avenues to increase revenues on the same ticket, aiming to increase invoice amounts at retail, and, at the same time, we were entering the builder business as well and discovered that some tract home builders were willing to do cabinets with a flooring guy because it means dealing with fewer subs.”

ICC Floors was similarly attracted to cabinets as a third product category-in addition to flooring, it offers paint-because it offered opportunities in both its retail remodel and builder businesses. Says Jason Waggoner, business development manager for ICC Floors, “When we expand lines, it’s always with the idea to leverage the current customer base, and we always consider that the most precious commodity for everyone today is time. If we can consolidate to a one-stop-shop, that’s very valuable.”

Making these sorts of changes means putting a lot on the line, especially for smaller retailers, so why take the risk? Some see it not as a matter of choice but of survival. “I believe there is a limited future for the flooring-specific independent dealer,” Holloway says.

DIVERSIFICATION TOP TIPS
• Analyze your business’ strengths and develop a diversification plan based on what you’re good at.
• Invest in an expert in the field you are entering as well as support staff.
• Commit; don’t just dip a toe in and expect success.
• Accept that you will make mistakes.
• Be patient.

MERIT FLOORING, KITCHEN & BATH
While many retailers are interested in diversification, fewer of them actually attempt it, and that’s because doing it correctly is challenging, time consuming and costly. Holloway says that determining a path forward in the kitchen and bath remodel business was a Lewis and Clark-like venture. “Nobody is doing this,” he says. “Home Depot sort of does it but not really. Homebuilders could do it but don’t want to. The independent flooring dealers are ripe for it, but so many of them are still stuck in the days of the Yellow Pages.” In fact, Holloway admits that he was hesitant to leave the straightforward flooring-only business he knew so well and dive into a new venture, but he felt that stepping out was crucial to his business’ enduring success.

Holloway reports that it took two to three years for Merit to fully understand the ins-and-outs of the remodel business. He says, “The full-service design remodel business is very different from carpet in terms of personnel, process, the way you partner with the customer and the way you market. Our goal is to be full-service-from initial vision to final clean up.” As a full-service remodel business, Merit transacts in flooring, cabinets, countertops, stone and even appliances, and its tickets are significantly increased. Holloway reports that while typical flooring jobs are in the $3,000 range, today it’s not uncommon for Merit to complete a $75,000 kitchen project. In fact, one customer recently spent over $200,000 renovating her kitchen. And this is something that has surprised Holloway-the amount of money people spend on renovation projects. “I didn’t have any idea how much money people put into their kitchens and baths,” he says. “I still don’t think we’re touching the amount of business out there.”

Merit did make some mistakes when undertaking this new venture, and one was to assume that flooring retail sales associates (RSAs) could sell full kitchen and bath remodels. The fact is, success in one field does not correlate to success in another, as not only the product but also the process is significantly different. Undertaking a kitchen or bath remodel project is infinitely more complex, involving not just flooring installation but layout and design, plumbing, electrical work, and often demolition and construction. As a general rule, the time it takes to prepare a full quote for a kitchen and bath remodel job is six weeks. Today, Merit has separate staffs for the flooring and renovation sides of the business.

As for what it did right, Holloway notes that hiring a top-notch kitchen and bath designer was key to finding success in his diversification venture. “That’s the whole crux,” reports Holloway. Adding remodel-specific support staff for the designer was also important. And Merit sought out the best and most like-minded electrical, plumbing and construction subcontractors to partner with. “We wanted the dependable guys,” Holloway recalls. “This is a live job. Our timeline and quality have to be up to snuff.”

Merit has three locations in Georgia: Evans, Augusta and Aiken. The Aiken store, which attracts the highest income demographic, is positioned as a kitchen and bath design center that also does flooring, and the other two locations are more floor-centric while also offering kitchen and bath remodeling.

Because Merit currently has the capacity to do only a limited number of remodel jobs annually, it focuses on the customer who wants or needs a full-service approach, and those customers are typically in the higher income demographics. “It’s not that we’re opposed to doing more moderate prices,” says Holloway. “It’s just that we can do 50 a year right now, and we have to do the best 50 we can.” He adds, “I see a time in the future when we sell cabinets on a different level.” At present, however, Merit doesn’t sell kitchen and bath components in parts-no cabinet-only sales, for example.

In addition, because the price tags on kitchen and bath projects can be quite high, Merit qualifies and educates the customer heavily up front. “Not many consumers understand the cost associated with these renovations or their partnership in the deal,” says Holloway. “We qualify them early and educate them on the process to make sure they have the stomach for it. It’s a merger of partnership, and we need to make sure we are compatible. We let them know the challenges up front.”

And in fact, before the design process begins, Merit asks customers to pay a $500 consultation fee so that they “have a little skin in the game.” Holloway adds, “We used to do it for free, but now we’re engaged with the customer contractually before we get into the hard design.” Ultimately, the fee is applied toward the cost of the project.

As for when floorcovering retailers who undertake similar diversification can expect to see payoff, the entrepreneur notes, “They need to understand that it’s going to take a couple of years, and that is assuming you’re willing to change your mentality. It’s a showroom investment, of course, but it’s mainly a personnel investment. If you just plan to ease into the shallow end, don’t waste your money.”

As for what Merit has gained from its diversification endeavor, Holloway says, “Survival. We have taken our strengths and used those where they were needed and desired, and we have seen an elevation in the quality of our subcontractors. Having licensed subs in electrical and plumbing has attracted a new level of subs across the board.”

Of what he didn’t expect when he entered the business, Holloway laughs. “How happy people are with the product in the end,” he adds. “We don’t often have flooring customers take pictures of their new floors and put them on social media, but with the remodel business, nearly all of them do.” And that sort of customer testimonial is the gravy, as they say.

PRODUCT OR CHANNEL?
All of the retailers we interviewed for this piece have diversified in both products and channels. Todd Wheeler of Salinas, California-based Wheeler’s Flooring believes that moving into commercial sales is, perhaps, the easiest of those ventures, noting, “The commercial segment is big, and a lot of dealers haven’t delved in there.” The company’s commercial segment, launched about 20 years ago, is run as a separate division. The company also does a good deal of property management work.

In addition to his commercial business, a decade ago, Wheeler decided to put to use the 1,500-square-foot building he owned next door to his Salinas showroom. In 2008, he created a new S corp to launch American Wholesale Flooring.

Wheeler felt it was important to establish the venture as a freestanding business because many area installers and contractors would be hesitant about sending customers to select product from a retailer, worrying the retailer might steal the customer, but would not have the same fears of a cash-and-carry operation.

Most important to Wheeler’s venture into American Wholesale Flooring was finding the right individual to run it. Wheeler sought out an experienced but disenchanted employee at a local ProSource. He hired her to run the operation and, ten years later, she’s still in the role. “She brought a customer base with her,” says Wheeler.

Though the operations are separate on paper, the staffs use the two showrooms interchangeably and, because American Wholesale doesn’t have any warehouse space, Wheeler’s sells the business inventory at a 3% to 5% mark up. Of course, Wheeler’s also charges American Wholesale rent. Ultimately, says Wheeler, “American Wholesale grabs a market that wouldn’t come in to Wheeler’s. That’s the difference between a traditional floorcovering retail store and a cash-and-carry.”

ATLANTA FLOORING DESIGN CENTER
Atlanta Flooring Design Center looked into several product diversification avenues before settling on kitchen and bath cabinetry, which Phillips determined was the best choice because it appeals to the same customer as flooring-one actively looking to refresh their home. Unlike Merit, Atlanta Flooring Design Center sells cabinets and installation but not the full remodel package. The business has locations in Suwanee, Georgia (residential, commercial, builder); Chattanooga, Tennessee (discount retail); Charlotte (builder, commercial) and Raleigh/Durham (builder), North Carolina; Conway, South Carolina (builder); and Birmingham, Alabama (builder).

Phillips was also drawn to cabinetry because it presented an opportunity to service both the business’ builder and retail clients. Amid the recession, the company had extra warehouse space, so entry on the builder side was simply a matter of hiring an individual to work with builders and another to check quality in the field.

One challenge that Atlanta Flooring Design Center experienced early in its new venture was establishing partnerships with cabinet vendors, as they had no prior relationships or experience in the field. Ultimately, the company was looking for likeminded vendor partners who were willing to provide a great deal of guidance to them as newcomers. Today, the business has three cabinet vendor partners, and several of those offer multiple lines. Only one of Atlanta Flooring Design Center’s six locations sells cabinets; the business operates in a 1,600-square-foot space as part of its flooring showroom.

Pricing was another element the company needed to iron out early on. “On the builder side, it was mostly a matter of getting pricing correct, and we found that we could reduce callbacks and claims if cabinets went in first, so that there wasn’t damage to the flooring,” says Michael Barrows, general manager for Atlanta Flooring Design Center. Ultimately, Phillips and Barrows report that the builder cabinet business is not that different from flooring. Of course, launching the new venture wasn’t seamless. “We had a few little lumps,” says Barrows. “It took us a year to get the margins where they made sense, a year to get up to speed.”

On the builder side, the sales teams for the flooring and cabinet businesses are completely separate, and today the cabinet business operates out of its own facility.

On the retail side, the launch into cabinetry was significantly more expensive up front, as cabinets are an expensive product, and the retail operation required build-out of several vignettes in the showroom. All told, Barrows estimates that it cost between $75,000 and $100,000 to get the retail operation fully up and running.

Like Merit, Atlanta Flooring Design Center invested in a seasoned kitchen designer as well. The business’ cabinet sales team, by and large, operates separately from its flooring sales team. The flooring team is trained in the introductory aspects of cabinet sales but then turns customers over to the cabinet team. The flooring and cabinet installation teams are completely separate.

As for cross category sales, Phillips explains that customers don’t typically buy cabinets on impulse, as they are costly, but occasionally cabinet customers will spring for new flooring as well.

Installing cabinetry does raise some issues that flooring installation does not, such as handling plumbing and electrical challenges. “We still have a few learning curves,” says Phillips, “both in installing and soft remodeling. We have to have a licensed contractor to move outlets or plumbing; we access those individuals as needed.”

Ultimately, Atlanta Flooring Design Center has been happy with its foray into cabinets. On the builder side, “We are seeing pretty good volume,” says Barrows. “And it’s still a benefit for the builder to have one sub to do both. That division has grown pretty well, and we’re pleased.”

Similarly, the retail side has found its footing in cabinetry and experienced growth-though Phillips believes it still has plenty of room in the market to expand the operation.

To retailers looking to make a similar move, Phillips advises, “You have to be dedicated to it. It was definitely a slow ramp up. You have to be patient and invest in the people and software to make it happen. You really must believe in the business.”

If a retailer doesn’t have the space to introduce cabinets, Phillips suggests that they look at window treatments or carpet cleaning-another venture he’s invested in, “We did it because we wanted to be in the customer’s home more than every seven to ten years. It’s not necessarily big money, but it’s a clutch to hold them in.”

ICC
Cameron Haughey, co-founder of ICC, began considering the paint business when Stainmaster rolled out its paint line, but ultimately decided to go with Benjamin Moore, which was interested in establishing a dealer in Haughey’s region and willing to offer financial assistance to ICC in establishing a showroom. Today, the business, which has three locations in the Indianapolis area, has one standalone paint business and another two that offer both paint and flooring.

The company has also recently diversified into cabinetry in the two locations that carry flooring. On the commercial side, the cabinet business is up and running, but it’s only fully launching on the residential side right now, with the completion of a cabinet showroom at the company’s Indianapolis store.

ICC has already begun marketing the endeavor. “We have started an initial digital marketing campaign, and we have already seen customers come in to get cabinets and leave with both cabinets and flooring,” says Haughey. “A lot of people replace both at the same time, so we thought, ‘Why wouldn’t we make it so they can do both here?’ We made the process easy for customers to do that.” In fact, ICC has already had a customer spend $80,000 on a floor-cabinet combo purchase.

Haughey continues, “We see continued pressure to save consumers time. I don’t know that all flooring retailers have to diversify, but I do know that it’s harder for them to compete today because of consolidation-to sample and display, to operate within the current systems. There’s more technology to keep up with, and they have to do it all to be competitive. I believe still it’s possible for the mom-and-pops to survive in flooring alone, but, at our size, I felt diversification was more important. It’s another tool that we have. If you can’t do it well, don’t do it, but if you can, it’s a huge feather in your cap.”

FAILURE EXISTS
For every floorcovering retailer that has found success in product diversification, there are likely several others that have delved into a new venture only to abandon it later-some breaking even ultimately, others stung minimally by the attempt, and some even losing their shirt in the process.

Certainly, a good many retailers subscribe to the belief that it’s best to stick with what you know well and focus on knocking it out of the park. And that’s an argument with merit in a static market. But the fact remains that as long as the preference for hard surface flooring endures, consumers will need new product less frequently, and that results in fewer turns for the floorcovering retailer.

Some retailers feel they can weather that change, and that may well be the case, but in a changing market two of the most important qualities a retailer can possess are open-mindedness and a willingness to change.

Copyright 2019 Floor Focus