Strategic Exchange - December 2008

By Kemp Harr

Many experts on the state of the economy say that we will continue to see a decline until it bottoms out sometime in the second quarter of 2009. And now, for the first time since the beginning of the decade, the downturn will affect both the commercial and residential sectors of the flooring market.

As we’ve learned over the years, the commercial market usually lags behind the residential market, so the first sign of recovery in 2009 will come in the residential sector—first on the remodel side and hopefully by early 2010 on the new construction side. And if you believe Kermit Baker, the Harvard economist who compiles the American Institute of Architecture Index, the commercial decline should be much shorter than the three year dip we experienced starting in 2000 because, fundamentally, this one is being driven by credit issues and a softened economy and not from an oversupply of unoccupied commercial space due to speculative construction on the non-residential side—as was the case at the beginning of the decade following the dotcom debacle. In fact, Baker told me that he “optimistically” expects this commercial depression to be a “pause” that could recover as soon as the economy and credit market start to recover.

It’s important to remember that the seasonal low point of this industry always occurs in the first quarter of the year—even when times are good. We need to factor this into the equation as we move into 2009 and resist the urge to panic and join forces with Chicken Little.

Stay focused and visible through this downturn. Cutting your marketing budget to the bone is one sure way of fulfilling your worst fears for a loss in business. Business school case studies have proven that companies that maintain their presence in a down market are the first to take marketshare during a recovery. Cutting back some might be prudent but resist the urge to cut everything a little bit. It’s smarter to set priorities and do a few things extraordinarily well. Ask yourself what your brand stands for and hammer that message using the most efficient resources at your disposal.

The Silver Lining
Can you give me any good news? This is something we often hear in the feedback mailbox for our Floordaily website. And, in fact, there are a few nuggets to report. For one, the price of oil is at a three year low, gasoline now costs half what it did in July and the demand for gasoline in the U.S. has dropped 5% since this time last year. This price decline means two things to the flooring business. Naturally it means that the cost for the raw materials to make flooring products is coming down so we should start to see lower product costs in the not too distant future. Polypropylene chip, for example, which is used to manufacture most carpet backing and some carpet face yarns, peaked at just under $1 per pound this summer and we now hear the price has dropped to under 50 cents. And secondly, if consumers are paying less to drive their cars and heat their homes, they’ll have more disposable income to spend on replacement flooring.

Despite this current economic crisis, we are fortunate to be doing business in the best nation on earth. While we only have 4.9% of the population and 6.5% of the landmass, we produce 25.8% of the world’s GDP. The next closest single country is Japan at 8.1%, and then Germany and China are tied for third at 6.1%. We continue to be the largest exporter of goods and services, our manufacturing output is two times that of China and, unlike most European countries, we continue to grow. Thanks to our positive birthrate (2.1) and continued immigration, this country will continue to grow and will reach a population of 400 million people by 2050.

And let us not forget our recent milestone presidential election results, where we proved to the world that we are indeed a nation governed by our own people in a true democracy.

By now, we’ve all heard the statistic that 70% of the U.S. economy comes from consumerism and when and only when consumers start buying again will we start to see an economic recovery. There are, however, other factors that will play into this recovery. Economist Alan Beaulieu, in a recent speech at a National Association of Floor Covering Distributors meeting, reminded us that recessions are a natural part of a free market economy and are just part of the cleansing cycle that has to happen before we can see many more years of steady growth. He warns that government intervention will do nothing but slow our recovery and prolong the pain.

More on Credit
Creative entrepreneurial spirit and trusting partnerships could be the answer to the tightened credit situation that we will continue to face until the economy starts to recover. On the commercial side, contract dealers can be squeezed by large advance orders and slow paying general contractors (and the situation can by compounded by retention issues that delay the collection of funds even longer). In the residential sector, retailers who have routinely purchased speculative inventory in the form of roll goods and special buys may be a little uncertain they can sell the product before their extended terms mature. In both cases, manufacturers may be asked to work more closely with their customers and in some cases extend their normal terms. Fortunately, with interest rates where they are, this type of loyalty concession would not be costly but it could expose the manufacturer to additional risk.

Green Buildings
As evidenced by this year’s attendance at Greenbuild in Boston and the ever increasing number of exhibitors, using sustainable practices in building construction is continuing to build momentum. The stated goal of everyone in this arena is to increase the efficiency of both existing and new buildings by optimizing their energy, water and material usage and reducing their negative impact on human health. But the biggest challenge is cutting through the greenwashing and determining who is really taking responsibility for achieving the goal.

The U.S. Green Building Council has taken a prominent position in this quest using their LEED (Leadership in Energy and Environmental Design) certification program to acknowledge and reward the designers, builders and owners of buildings that do the right thing. Many will remember that for five years the USGBC tried to use the ASTM consensus-based process to create its rating systems but finally decided to form its own committee to facilitate the process. At this year’s conference, it was announced that the 2009 version of the LEED rating system has been approved and will be rolled out next year. In the meantime the National Association of Home Builders and the International Code Council together are developing their own points based reward system called the Green Home Building Guidelines. Sorting through this and its impact on flooring could prove interesting.

Flooring manufacturers deserve credit for being one of the first interior furnishings categories to support this honorable sustainable initiative. For the first few years of Greenbuild, flooring manufacturers were the predominant exhibitors at the show and while their participation is still growing, companies that represent other building materials have started to increase in number. Interestingly enough, the buzz among several of the main flooring exhibitors at this year’s show was centered on carbon credits, social networks and reduced environmental footprints. We’ll provide more in-depth coverage of the show in our January issue.

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