Strategic Exchange - October 2008

By Jim Vanhauer

Since its peak in 2005, the residential flooring market is down an estimated 25% with no clear upturn in sight. This slowdown is also having an impact on the commercial side of the business but there are things contract dealers can do to mitigate the effects.

In a recent StarNet survey, members identified the movement of traditional retailers into the commercial market as a key factor impacting marketshare and profitability for the established contract dealer. Projects that normally would attract just a few bidders are now garnering a half dozen or more, and the low bidder is often the uninitiated. As retailers struggle to keep their employees busy, an instinctive business tactic is to follow the flow of money. However, this is not an easy transition to make. We may sell many of the same products and services but the businesses are very different. As in any industry, when you move from the familiar to the unknown, it’s easy to make mistakes. Some of these firms have discovered that construction projects can drag on for several years, and they repeatedly make the same mistakes before the financial consequences become apparent.

No doubt, some retailers who make the transition will be successful and will have a new profitable business segment. But rarely have I seen a retailer stay on the contract side once their core business conditions improve. The average retailer would probably be better served by working on their internal organization to prepare for the eventual upturn, rather than risk a temporary venture into a market they don’t fully understand.

At the same time that the residential market is declining, certain sectors of the commercial market are shrinking as well. The luxury condo, retail and financial sectors are slowing, with some projects being put on hold indefinitely. The good news is that other segments of the commercial market such as healthcare and elder care are making up for the difference. However, one has to wonder if the education market will slow if the residential market continues its decline. Many school systems may be faced with the realities of a shrinking tax base as home values fall and residential home sales reach an historical low. With costs soaring for such essentials as utilities, already lean school budgets will face even greater challenges. Flavor that with the recent credit crunch, and who knows what financing will be available for school expansions.

The residential slowdown is also affecting the way the manufacturers do business on the commercial side, especially considering that two of the largest commercial carpet suppliers have traditionally gotten most of their volume in the residential business. The StarNet survey suggests some changes include tighter credit, less inventory and the growth of the ever present scourge of our industry, the “direct sell.” It appears that in the case of the dual residential/contract manufacturer, the commercial side is being asked to carry more of the overhead burden than before. In some cases this leads to short-sighted strategies resulting in sales accomplished, but at a cost to relationships in the dealer community. But savvy manufacturers understand the dangers and risks of such behavior and will continue to support their customer base, knowing that commercial dealers have great latitude in whom they do business with. These same manufacturers understand that it’s a gamble to quote on commercial projects from residential retailers or nondealers for the sake of additional sales.

One of the greatest challenges of the commercial market is the increasing shortage of qualified installers, especially in the high growth areas of the country. Given that there is less work for residential installers, you might think they would be attempting a move to the commercial side, but by and large that does not seem to be the case. The residential installers that are currently searching for work might not be the cream of the crop, and with the complexity of products today their work could result in increased claims.

So what can the contract dealer do to generate new business to take the place of that which may have been lost due to these factors? I think the strategy is simple. First identify the factors that devalue what we do as commercial flooring contractors and find a way to eliminate them. If general contractors are entertaining bids from unqualified dealers, find a way around them. Get back to the basic sales skills 101, call on the owners, call on architects and designers and have the flooring packages taken out of the general contract. Think of how frustrated the owners and the A&D community must be with some of the poor results from unqualified and low bidders.

Now is the time to dazzle them with our capabilities and knowledge. Get involved in organizations such as IFMA, BOMA, and IBD, and participate in a committee. Participation will not only give you access to the decision makers but also an understanding of their needs and desires. I’m betting that few would tell you that they enjoy subordinating their projects to the whim of the general contractor. We need to learn from the contract furnishing industry, where a negligible amount of business flows through the general contractor. Of course this all means an investment in business development people to increase your activity at this level, but it’s an investment that will pay back quickly and profitably.

Secondly, reward loyal manufacturers with increased discretionary business. Partner with the best and avoid those who choose the short-sighted strategies. StarNet has recently embarked on a grassroots program to bring its membership in closer alliance with vendors. The program is just in the early stages but appears to be achieving some very positive results. Whatever alliance or program you may participate in, embrace those manufacturers and I predict you will see favorable results.

Lastly, don’t forget about the additional services that are very important in distinguishing us from the rest, namely maintenance and recycling. As tighter budgets stretch the useful lifetime of flooring products, providing maintenance services keeps you in front of the customer on a regular basis and gives you additional cash flow. Most customers that won’t take time out for a conversation regarding new flooring are surprisingly willing to talk about maintenance, and you can become the problem solver for their number one issue. This concept carries right into recycling and the green initiative. Increase your knowledge and involvement now, as the customer and marketplace moves from “feel good” green efforts to mandates. The green initiative is very high on the concerns of the younger generation of designers, as well as just good business practice.

In the meantime, here’s hoping we’re moving quickly toward a robust and profitable residential marketplace.