Strategic Exchange - February 2008

By Randy Rubenstein

The commercial marketplace has been significantly reshaped since consolidation began more than a decade ago. After many years of heightened activity in the contract dealer and manufacturing sectors, the last few years have seen a distinct slowdown in activity as those players focused on absorbing their acquisitions and streamlining their processes during a very prosperous economy.

For manufacturers, the challenge will be to sustain profitability during the leaner times that are predicted ahead. While contract dealers certainly faced their challenges during the mills’ adventure into distribution, the challenges ahead may be of a different nature. They may stem not so much from the changing nature of the floorcovering business as they do from the changing nature of the construction business, and dealing with the increasingly complex landscape of construction management in an inherently adversarial environment.

As flooring manufacturers consolidated their positions, the commercial construction industry was undergoing a major transformation as well. Many large regional, national, and international firms expanded into a number of metropolitan areas. Many of those firms also changed their focus from general contracting to construction management. The emergence of construction management has required contract dealers to likewise adjust the way they do business to respond to the changing construction environment.

While sales have always played a pivotal role in the acquisition and maintenance of business, service has gained more prominence in the last several years. I don’t mean the traditional field-service role performed by installation mechanics, but the role office staff plays in project management. Today, staff has to be well versed in contract project management techniques that weren’t necessary several years ago. The administrative hurdles that contract dealers now face often include lengthy contract agreements—with many provisions stacked against them—site specific safety plans and meetings, participation in “wrap” insurance plans involving owner or contractor controlled insurance programs, layers of pre-construction meetings, shop drawings, certified payroll documentation, and full-time onsite project management. This doesn’t even begin to include the usual material-submittal process, quantifying and ordering materials, tracking shipments, dispatching and supervision of installation crews, billings and collections.

All this has changed what commercial flooring contractors must do to remain successful. Contract dealers now must hire more highly skilled and experienced staff to meet these challenges, and with that comes an increase in overhead and the cost of doing business.

How this continues to play out in the next few years will be interesting to follow. Certainly the expanding economy over the last several years has helped many flourish. It’s also allowed some businesses to prosper even without good business discipline and controls. However, as we now see signs of a slowdown, with the pace of housing starts and building permits dropping to levels not seen in more than three decades, there will likely be the inevitable cleansing in the marketplace as commercial business begins to taper off. We’ve already begun to see commercial vacancy rates climb and Washington scramble to plug the dike by proposing an economic stimulus package to boost the economy.

Back to basics has always seemed to be a good rule of thumb as times change and new challenges present themselves. But while many basics remain constant, some may have changed. If the economy pulls back, or it simply fails to grow at the previous pace, does that mean that those independent general contractors who started or grew their businesses in the boom years could disappear, leaving only the large regional and national general contractors to service the remaining business? Or might it mean that the large regional and national general contractors can’t acquire enough business to feed the vast network they have built up, and start withdrawing from underperforming markets?

Likewise, at the contract dealer level, smaller, independent, single-location dealers may have to tighten their belts to survive, or some of the larger, multi-branch dealers could withdraw from some markets. If the predictions come to pass about the faltering economy, certainly bill collections will become more difficult and receivables more aged.

But are wholesale changes required to adapt and survive? Probably not, but changes, nevertheless, are always necessary. Those of us in the contract dealer business probably would be well served to go back and analyze things from the ground up to see whether old habits and ways of doing business are still equally viable in today’s economy.

I’m often reminded of the old adage that the only constant in business is change, and those of us who fail to recognize that are probably going to suffer. Does that mean we throw the baby out with the bath water? Clearly not, but it wouldn’t hurt to put a few of the old truisms under the microscope to see if they still apply today.

The growing impersonal and boilerplate approach to doing business at all levels seems to suggest at least one way to blunt that trend: re-emphasize building personal relationships that tend to moderate or round off some of the sharp edges inherent in transacting day-to-day business. This applies to all levels in the chain. Mills have a stake in preserving and promoting the health of the dealer distribution channel to assure the viability of their delivery system, and dealers have a stake in assuring that their manufacturing suppliers remain healthy so they can provide quality products in a competitive and timely manner. And dealers will encounter fewer headaches and more profitability if they can engage the construction community on a repetitive, known-quantity basis rather than relying on transactional relationships that amount to nothing more than a “one and done” approach.

I don’t think it’s going out on a limb to say that commercial floorcoverings will continue to be manufactured, marketed, sold, installed and serviced in the coming years. The only question is by whom, and how successfully. That’s the challenge that the marketplace always poses, and what keeps us on our toes. Hopefully, an orderly marketplace will reward those who do their homework and plan for change in a manageable and meaningful fashion.