Strategic Exchange - May 2010

By Kemp Harr

We’ve heard the economists tell us that the recession is over but we’re all holding our breath because, while the GDP might be back on track, we can’t celebrate the recovery until we feel it ourselves.

Last month on April 8, the Business Cycle Dating Committee of the National Bureau of Economic Research met at its headquarters in Cambridge, Massachusetts to look back and pinpoint the actual trough of economic activity, marking the end of the recession that began in December of 2007. The trough date would tell us exactly when the economy stopped shrinking and started growing. While they know the official date was sometime last year, the group is still missing a few key data points to be able to close the book on the analysis. One of the frustrating elements of a recession is that it’s hard to pronounce it until months after it’s started and months after it’s ended.

Closer to home in the flooring business, we’re seeing year over year numbers turn positive, even in a few of the commercial sectors, and we’re hoping this trend will continue. We’ve been reminded that previous recessions have ended with recoveries that produced double-digit growth, but nobody’s seeing those kinds of numbers yet. The reality is that this recession will be over when consumers feel like it’s safe to start spending money again.

The residential remodel market will be the first sector to rebound, but we’re wondering about this “new normal” phenomenon we’ve all heard about and what effect it will have on consumer buying habits. According to an April 15th report from the Joint Center for Housing Studies at Harvard University, annual spending on remodeling is expected to increase this year by 5%—the first growth since 2006, which was the peak of the housing boom. But the motivation behind this new wave of spending is different. During the peak, people believed that whatever equity they plowed back into their homes could be recovered when they traded up. But now, with home values moving in the wrong direction, people are accepting that they may be staying put for a while. So why not make the place more comfortable?

Projects are smaller and the average sale is smaller. One household project that has grown in popularity is removing walls to create more open kitchen and dining areas or to tie the kitchen in with the family room. Converting bedrooms into home offices is also still very popular. But home theatres and large master suite expansions are not as common as they once were.

American Express did a survey in late April that revealed that 72% of affluent homeowners planned to make investments to their homes in 2010. But they expected to only spend an average of $11,500. And many of these projects are going to be paid for with cash instead of credit cards.

The prevailing consensus is that we’ll see a moderate recovery in the range of 3% to 4% this year and the consumer will continue to remain guarded until housing values start to recover and unemployment starts to recede.

Shaw to Distribute LG’s Commercial Vinyl Flooring
One of the biggest news stories last month was Shaw Industries’ new partnership with LG Hausys, which closes Shaw’s last major product gap by putting the firm in the resilient business. Now Shaw offers all the major flooring categories—carpet, rugs, hardwood, ceramic, laminate and resilient. Granted, the news for now is centered on the commercial side of the business, but LG manufactures all types of vinyl flooring (VCT, LVT and sheet vinyl) in its two South Korean manufacturing facilities, so it’s extremely plausible that Shaw could expand this partnership over to the residential side down the road.

We’re all aware of LG’s presence with televisions and cell phones in the consumer electronic sector, but I was surprised to hear just how big LG was as a global company. LG is a 50 year old family owned company with annual revenues of $103 billion. It has 177,000 associates in 52 countries. We estimate that LG Hausys has global flooring revenues of approximately $850 million. LG’s brand presence and stature in the consumer electronics category lends credibility and awareness to its efforts in the flooring business.

In the last couple of years, under the leadership of Harry Brownett and Dave Thoresen, LG has built out a commercial assortment of 350 SKUs—many of which have post-consumer recycled content and indoor air quality certification. Its two biggest competitors in the U.S. are Armstrong and Mannington.

While this move does round out Shaw’s product offering, it still doesn’t give the company its own manufacturing assets in the resilient sector—and Shaw has never acquired manufacturing assets in the ceramic sector either. Interestingly, it also positions Shaw on both side of the PVC issue, with the firm’s EcoWorx PVC-free backing dominating its commercial carpet business.

Shaw’s timing is dead on. There is a strong market for vinyl flooring and this category has actually picked up share in recent years. Dave Thoresen recently told me that Shaw and LG share the same level of professionalism when it comes to manufacturing efficiencies, product quality and environmental responsibility.

Starnet Worldwide Flooring Continues to Grow
At the end of April, the Starnet group of commercial flooring contractors met in Marco Island, Florida for its annual convention. Since its last meeting, Starnet has added seven new members—taking its total membership count to over 170 companies. I’ve mentioned in the past that this group is one of the most professional organizations in our industry, and its members have an entrepreneurial spirit and drive that has helped them survive through these tough economic times. One barometer I’ve developed to gauge a group’s spirit is its level of inquisitiveness—or how many questions they ask as we see each other for the first time in several months—and, I must admit, this group wears me out. There is no end to the membership’s energy level and degree of analysis. These are business owners and, don’t be mistaken, they come to these meeting to learn, network with their peers and get better.

The good news at this meeting was the calming tone of the conversations I overheard during the three-day conference. Granted, there is more pain to endure in the commercial arena, as this is always the lagging sector in a recovering economy. The key reason for the group’s tranquility, however, is because they recognize that they are at the tail end of the storm and they are seeing an increase in “activity” among designers that will ultimately lead to business. The decline has bottomed out and most of them have enough resources in reserve to finance their way through the recovery. Some are even optimistic enough to think that the commercial decline may not be as long and as steep as what we’ve seen in the residential sector.

Over half of Starnet’s members have now diversified into the maintenance end of the business because it helps them maintain a relationship with their customers between flooring purchases. In addition, many customers who went with the low bidder on projects over the last year have been burned and they’ve had to hire a Starnet member to clean up the mess and put the project back on track. So one silver lining to this economic storm is that it has given the Starnet contractors the opportunity to prove their worth.

One of the more interesting data points that I picked up at the meeting is how loyal these business owners are to their employees. They recognize they are in a service industry and, as they’ve made cuts, they’ve done everything in their power to hang onto their people resources. One Houston member took out a second mortgage on his house and then created an employee stock ownership program to defer compensation from cash to partial ownership. And one of Starnet’s largest and fastest growing members, Mr. David’s Flooring International—based in Chicago—told us that keeping talented employees and motivating them to excel is the secret to his firm’s success. Next month, we will feature a complete article on Starnet’s annual design awards.

Sorting Through the Effectiveness of Social Media
Those of you who know me well also know that I go by two names. One that I use for business and one that I use among close friends. This two name system works pretty well because if I haven’t seen someone in a really long time, I know which mental Rolodex to scroll through depending on how they greet me. Like many people, I have my professional face and my personal face, and there are only a few dozen people that cross both lives. For quite some time, I have believed that Facebook belongs in the familiar area of a person’s life and LinkedIn belongs on the professional side. Facebook, in its greed for traffic for its advertisers, is trying to redefine itself and be all things to all people. Now, if you play along with their game and you join as a business, you have fans. And if you join as an individual, you have friends.

I agree with Shannon Bilby’s quote in this month’s technology article that social media is word-of-mouth on steroids. But I also think that some of this can reach a level of overkill. Don’t misunderstand me, every flooring retailer needs a website and some mechanism for satisfied customers to leave testimonials. But I’m still not convinced that every business needs a LinkedIn page, a Twitter account and a Facebook page.

Time will sort all this out and the right answer will rise to the top. This should be interesting to watch. Take my advice, however, and if you get a chance, shut down the computer and spend time with family or read a good book. I worry about those people who tell other cyber-friends their every move via Facebook. You know who you are.

Floor Focus Grows
Let me take this opportunity to introduce two new members of our team at Floor Focus and Floordaily.net. We are very pleased to have Jessica Chevalier join us as editor and Eleanor Staehler join us as account manager. True to form for us, both of these new members of our team are seasoned professionals and we look forward to their contribution to our continued growth. The rest of our team remains the same as we continue to improve our products and serve our industry with our own dedicated staff.

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

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