Strategic Exchange - August/September 2010

By Kemp Harr

Almost every retailer I’ve talked to recently in the specialty flooring sector tells me the same story. One week traffic and sales will be good and the next week it’s quiet. Naturally there are some exceptions based on geographical location (the Midwest seems to be more stable) and on levels of ad spending (those who spend more on advertising are selling more product).

So what’s going on in the consumer’s mind? She knows the worst is behind us but she also knows that her house isn’t worth as much as it used to be and she’s hearing that foreclosures are continuing to rise. The sensational consumer media isn’t helping much by throwing up headlines of a possible double dip in the economy so she’s convinced she needs to keep more money in her savings account. She’s concerned that her taxes might rise and she’ll have less disposable income. She watches the stock market rise and fall so the economic signals from Wall Street are mixed.

What can you tell her that will convince her that now is the time to invest in her home—that her home is a haven from all the uncertainties and is still the best investment she will ever make? Do you write these current doldrums off as the new norm or do you reach out because you know she’s waiting for you to tell her something? She needs to be convinced but first you’ve got to get her attention.

Starting this month, thanks to a media blitz by the home centers (see details below) consumers are going to start to think more about updating their floors. Independent retailers need to do what they can to redirect that traffic to their own stores. And once she’s in your store, make sure your staff is trained well enough to tell her what she needs to hear. “Flooring is our business. We don’t just sell product…we sell installed floors. Our goal is to help you wow your family and your guests with a floor that accents your decorating tastes and is tailored to your specific lifestyle. Now is a perfect time to buy flooring. As the economy moves further down the track of recovery, prices will go up, interest rates will rise and inventories on the more popular styles could become limited.”

Home Center Ad Wars
Now that Invista has granted Lowe’s the exclusive rights to sell Stainmaster branded carpet in the home center channel and Home Depot has restocked its shelves with Martha Stewart Living carpet featuring Shaw’s Anso fiber (and another “platinum” rack that has unbranded nylon from other mills), the two major home center brands are launching advertising campaigns to tell the American consumer who has the best deals on carpet. We’ve heard from a pretty reliable source that the total ad buy, which will use radio, cable television and newspaper print ads, is worth $45 million. This campaign will begin in early August and run through the fall selling season. One mill executive jokingly called this huge media blitz the “Dalton Recovery Act” based on expectations from this surge in consumer awareness.

While it’s true that Lowe’s and Home Depot combined have a total of 3,700 stores, remember that flooring only represents about 6% of their sales and their close ratio is much lower than a traditional flooring store (we’ve heard that Home Depot only closes a third of the houses that they go out and measure). The good news is that the consumer is going to start thinking about shopping for flooring during what is traditionally the peak time of the year for remodeling expenditures. It’s also important to remember that carpet, which is the featured product for all this advertising, is not a category that the home centers have mastered. They do much better at selling boxed flooring than products sold on a roll that require professional installation.

This is a great opportunity for every retailer, regardless of size. Fortunately, most consumers know that carpet can’t be installed for $37 and that these home centers are either going to nickel and dime the extras or charge more for the carpet and pad to make up the difference.

Membership is Steady FOR CCA Global
We were surprised to discover in our 2010 Retail Survey last month that membership in retail groups was at a six year low, with 47% of the respondents saying they were members (versus 53% the previous year). And yet 52% of those retailers in a group told us they were very satisfied (versus 46% last year). One would think that tough economic times would make these groups’ discount buying power, marketing resources and peer networks even more valuable.

Last month, CCA Global gathered its two flagship retail groups for a summer convention in Houston, Texas. Most of the members were cautiously optimistic even though sales at retail remain relatively flat. It was also encouraging to hear that the membership numbers within Flooring America/Canada and Carpet One have remained constant. While a few members have been forced to close their doors due to tough economic conditions, the two groups have filled these vacancies with new members and, as a whole, they appear to have weathered this great recession intact. Most members recognize the benefits they gain in buying power, market intelligence, promotional tools, private label brands and consumer advertising, all of which give them a fighting chance against the competitive forces at the home centers and the category killers like Empire and Lumber Liquidators.

Each group rolled out a major hardwood program that takes advantage of the new direct relationship with Armstrong—both under private label brands. Carpet One’s program is called Invincible and Flooring America’s is called the Downs Performance Hardwood collection. Both programs offer a 50 year warranty. Carpet One also rolled out major enhancements to its Lees carpet collection from Mohawk that includes a new display unit and products that tout a lifetime stain warranty. Carpet One also added some new lifestyle categories to its SelectAFloor shopping system—taking the total carpet SKU count to over 400.

Carpet One has recently hired a new vice president of marketing who’s bringing some new energy and strategic thinking to its branding and promotional strategy. Jessica Correa spent the last 13 years of her career with Royal Caribbean—the leading brand in the cruise line industry. (She also has an undergraduate degree from the University of Tennessee in Knoxville, I might add.) One of her first moves in this new position was to add more personality and promise to the Carpet One brand by changing the tag line to “Beautiful Made Affordable.”

Most of the GE Money employees we ran into on our trip to Houston had a mule-eating-briars expression on their faces. Apparently, they beat out Citi Financial and ended Citi’s 13-year relationship as the lead consumer credit supplier to CCA Global retailers. Currently about 20% of consumers who buy flooring at Carpet One or Flooring America use financing, and CCA’s goal is to increase that number because these credit programs increase average net sales and overall store margins. Now, GE has the lead relationships with CCA Global and with Mohawk’s aligned dealer network.

Internet Sales Can Backfire
We watch with great interest how each of the flooring sectors is navigating the temptations created by technology and the Internet. Some suppliers struggle with the allure of having their cake and eating it too. Why go through all the expense of selling through distribution to brick and mortar retailers when you can just sell your products directly to the consumer via the Internet? After all, the consumer is spending more conservatively and, by cutting out the middle man, you can take more of the margin and still keep your unit volume up. But is this strategy short sighted? Most of the large players know this “direct channel” strategy can backfire, and most flooring products are not well suited for this strategy due to installation requirements and the need to actually see and touch the product.

But some of the players in the rug market appear to be catering to this direct e-commerce channel and it will be interesting to see how this plays out. Rugs certainly don’t have to be installed, and they are a cash and carry item but they’re also a fashion item that needs to coordinate with other decor within the home—coordination that can be difficult to achieve via a low-resolution photo from a website. Consumers today seek a good value but they also want service.

Direct Internet sales of rugs is now in third position (in revenue) behind the mass merchants and the home centers and it continues to grow. The large suppliers are fighting this trend with minimum acceptable pricing (MAP) programs while others tailor to this direct channel by serving up low-resolution product catalogs of their entire assortment that are designed for on-line promotion. Suppliers that cater to the e-commerce/direct selling channel strategy shouldn’t wonder where the rug show buyers went and they need to remember that when they sell online, price quickly becomes the only differentiator.

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

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