Strategic Exchange - November 2008

By Doug Chadderdon

Reading the newspaper today can be a depressing experience. Some say it’s the worst economic times since the Great Depression. Despite the bleak financial news, from where I sit there are plenty of reasons to be optimistic about the next twelve months as it relates to sales of flooring. This is especially true for retailers who position themselves for growth by focusing their attention on the basics of their business.

Here are a few reasons to be optimistic.

Declining Oil Prices:
With the price of oil declining by roughly 50% in recent weeks we should see some relief from the unprecedented price increases on carpet. Since carpet is made from ingredients derived from oil it may be reasonable to assume that we will have a decline in carpet prices. At a minimum we should not see another price increase for quite some time. Freight cost will also be coming down and lower shipping costs will make our products even more affordable. But more importantly, lower gasoline prices will also generate more disposable income for consumers. This should also add to retail floorcovering sales.

Remodel Market:
Many economists are calling for further declines in the remodel market. They cite fewer home equity loans and declining home prices as the primary reasons. However, our own recent sales activity does not agree with this. A number of our recent customers are fixing up their existing homes. With slow home sales the homeowners who were hoping to move up to a higher price home are unable to do so. Additionally, they have less equity in their current home so moving up is a gamble many are not willing to make. Also, many architects have said they are working on remodel projects with homeowners who have decided to take the home off the market and stay in it for a couple more years. This is an excellent time to target architects and builders who specialize in remodeling. Baby boomers are willing to put more money into their existing home if they are forced to stay in it for a few more years.

New Home Construction:
New home construction numbers recently showed that production was at a 60 year low. Most economists predict further declines and few are willing to say when the market for new homes will bottom out. Former Federal Reserve Chairman Alan Greenspan said recently he believes new home construction is near a bottom and we should see improvement in that market by mid 2009. While we might have a few more soft quarters in home construction I believe we will see improvement next year. New home sales often trigger existing home sales as people move up. Floorcovering dealers get a double bonus as they have the opportunity to provide flooring for the new home as well as replacement flooring for an existing home that has sold. If this is indeed the case we should have a stronger market for flooring sales in 2009.

The Green Movement:
The desire by many homeowners to have more environmentally friendly products in their homes is a big opportunity for flooring dealers. We have seen significant increases in products such as bamboo, cork, linoleum and wool carpet. Each of these products has a great green story to share with consumers. Wool is renewable and is certainly natural. Bamboo is a rapidly renewable product—and much like grass, it can be cut and harvested every few years from the same plant. Cork has a similar story since it comes from the bark of a unique species of oak tree and can be harvested without damaging the tree. Linoleum is made with linseed and delivers excellent durability. Each of these items is being sought after by today’s environmentally conscious shoppers.

Additionally, the carpet manufacturers are doing a much better job of both creating products with corn based polymers and recycling fiber to create new products. Wood flooring is also a great green story. Today, there is no reason we shouldn’t be able to meet the customer’s needs when it comes to green products. The trick is to know when and how to position the green attributes of these products. The most important part of the story is all of them make for beautiful and durable flooring.

As an aside, I admit we’re watching with cautious eyes to see if the economics of recycled fiber will be affected by lower oil prices. Much of the recycling activity started after oil prices began to rise sharply. Whether or not recycling facilities remain economically viable with lower oil prices remains to be seen.

Interest Rates:
Since the credit crisis began some months ago there has been a tightening of credit. After several moves by the Federal Reserve and the Treasury Department we are beginning to see credit loosen and interest rates come down. The current 30 year fixed mortgage rate continues to be very attractive in historical terms. Some experts are predicting that these rates could go as low as 4.5% in the coming months. If this happens we could see a significant spike in mortgage refinancing and an increase in home sales. When consumers refinance at a lower rate they have more disposable income for purchasing items like floorcovering and furniture. With home prices down and mortgage rates declining, home affordability has improved significantly.

Focus Your Attention in the Right Area
Each of these items should point to improved floorcovering sales. It will take some time for each of them to trickle down to the consumer but there is reason to be optimistic about business in 2009. In the meantime each of us must continue to be diligent about watching expenses and preserving cash. This is an excellent time to review all of your business operations. For example, are you collecting payment in advance on your sales? Are you shedding excess staff that won’t be necessary over the next several months? Make sure you spend your advertising dollars wisely. If you are independent consider joining a buying group. There are many advantages to belonging to a buying group. In addition to the well known buying groups, both Shaw and Mohawk have excellent options for dealers. Stay in close communication with your banker and vendors. They provide critical liquidity in these challenging times. The more information you’re willing to share with them about current business activity the more likely they are to continue working with you. Most importantly, take care of your customers. Consumers are shopping more than they have in the past several years. With their eyes on a budget and their hands on their wallets consumers can be more demanding than they have in the past. Make sure you listen to their needs and that you stick to their budget. Take care of your customers and they will take care of you.

Business might be rocky for the next few months but there are a number of signs that point to better times ahead. Make sure that you and your business are around when the good times arrive.

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