Strategic Exchange - May 2009

By Kemp Harr

As a nation governed by the people, we should be concerned about the level of debt we are incurring. We are often reminded to focus on the things that are within our control and yet if we act like sheep as our elected officials spend the sweat of our children’s labor, we will become silent victims and slaves to our own indebtedness. This practice of spending more than we earn is one of the key behavioral sins that have put us where we are today.

On the other hand, conservative stimulus spending might be the only solution that will re-prime the pump that drives the nation’s economy. The trick is to know where to spend and how much to spend. There are wise investments and there is frivolous spending. We can only hope that the people we’ve elected to make the decisions are motivated more by passion for our nation than for the love of power and wealth.

Knowing what to do next in our business is somewhat dependent on where our economy is and where it’s headed. In a recent interview with economist Alan Beaulieu of the Institute of Trend Research, he acknowledged that we’re seeing some leading indicators that conditions are improving but “seeing the sun come up is not the same as being warmed by the sun.” He predicted that we will continue to see a short-term rise in unemployment but concurred that we should see some recovery in the fourth quarter this year. It was good to see that the AIA Billings Index for March, while not yet indicating growth, is headed in the right direction. It’s also good to see that both interest rates and energy prices are predicted to remain low for the remainder of the year.

Changes in Ceramic Tile Market
There were several key news items at this year’s Coverings Show in Chicago that are worth mentioning and yet somehow not surprising. Attendance was down considerably and while the official numbers have not been released, some observers felt it may have been off as much as 40% from the last time the show came to Chicago two years ago. At the Tile Council of North America’s news conference, we were told that U.S. consumption of tile products was down for two consecutive years. The last time that happened was in 1990-1991. In fact, consumption levels are back to where they were in 2001. And although imports continue to make up a significant portion of U.S. consumption, import penetration has decreased for the last two years and at the end of 2008, it had fallen to 80%.

Certainly, with the construction markets being where they are today, a decline in consumption was to be expected. But the shift toward more domestically produced products is being fueled by several factors. In the last several years, major investments have been made to expand the capacity of U.S. manufacturing facilities, many of which are owned by foreign companies. In addition, within the design community, domestic products not only have a greener story because they don’t use fuel to be transported from overseas, but many of the fashion looks that were once only available from Europe are now being produced domestically. And finally, on the residential side, the consumer is increasingly more interested in buying Made in the USA products because they know it will help put our people back to work first.

Another news item is the loss of domination here in the U.S. by the Italian producers. Yes, they are still way ahead in dollar value but in 2008 Mexico (25%) jumped ahead of the Italians (23%) in U.S. consumption in terms of square footage. The Italians have not lost their fashion and innovation edge in the global tile market but the volume of low priced tile coming into the U.S. from Mexico put Mexico out front for the first time.

In addition, more and more tile is being sold in flooring retail stores that carry a wide assortment of other flooring types. Specialty tile stores still lead in volume versus the generalists but the trend is moving that way as more and more traditional carpet stores add more hard surface products.

StarNet Contractors Holding Up
The StarNet group of commercial flooring contractors, with 168 members and 290 branch locations, remains a powerhouse in the commercial flooring arena. A recent benchmarking exercise that was reviewed at StarNet’s recent annual meeting revealed that its membership touched over $2 billion worth (wholesale) of commercial flooring projects in 2008. Most of the members are seasoned veterans in the commercial market and they continue to do well even in this down economy because of their product and service diversity and because of the value their level of experience brings to the jobs they are awarded. Very few of the members focus solely on sourcing products and installing them. Many have insulated themselves through product and service diversity. Some offer flooring maintenance and waste remediation, and instead of just selling carpet or resilient flooring, they also sell stained concrete, raised access floors, stone countertops, soft and hard surface products, design services, and even athletic floors.

Will Direct Internet Sales Take Flooring Sales From Retailers?
Forrester Research predicts that Internet sales will represent 13% of total U.S. retail sales by 2010. As e-commerce (selling products directly to consumers over the Internet) continues to be an alternative channel of distribution for many products, it is important to recognize what motivates consumers to shop online. For many specialty items that are only sold in major markets, the Internet provides a convenient tool for buying without driving to the nearest stocking retailer. For some, it’s also a way of avoiding retail sales tax, but shipping charges usually offset that gain. For most consumers, however, there’s a perception that Internet prices are cheaper than they would pay for the same item in a brick and mortar retail store.

Most of the major manufacturers in the flooring industry recognize that direct Internet sales could be a threat to their traditional retailers and they have established pricing policies called Minimum Internet Pricing. There are two key factors in the flooring industry that hinder direct Internet sales. First and foremost is the lack of strong branding, which makes it difficult for the online shopper to know exactly what quality of product will arrive on his doorstep. Those companies that do have recognizable brand names, like Armstrong and Anderson in the hardwood category, are doing what they can to make sure that products sold over the Internet are no cheaper than you would find at the retail store. Installation is the other key factor. Most flooring products are too difficult to be installed by the homeowner, and consumers who buy the products and then try to outsource the installation don’t end up saving in the end.

The Internet is definitely a valuable tool for flooring consumers—but more so for product knowledge, brand awareness and dealer locator than for direct e-commerce.

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

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