Strategic Exchange - October 2009

By Kemp Harr

Merger and acquisition activity in the flooring industry has been relatively quiet as we’ve watched the wholesale value of this industry drop from $24 billion to $17 billion over the course of the last three years. We’ve seen ownership changes with Pergo, ArborCraft (Harris Wood), Columbia, Anderson, Zickgraf, Burke, Solutia, Propex and Monticello, and we’ve seen recent investment infusions with Tarkett, Armstrong, Stanton, Home Legend, US Floors and Aquafil. But based on the pace of change this industry saw in the decade prior to this Great Recession, many would call these last three years relatively subdued from an investment standpoint.

Smart investors try to time their acquisitions so that they are buying at the bottom of the market cycle when values are depressed and when growth forecasts are all trending steep and positive. And that’s exactly where we are today. Most economists agree that we’re at the bottom of this painful three-year recession, so we should soon start to see a flurry of M&A activity. In fact, we’ve heard about several consolidation moves in the commercial carpet arena, which are rumored to be in the due-diligence stage now and should be making news this fall.

There’s also been some recent good news about investments for new operations and expansions. The most visible was Belgium based IVC’s announcement that it would be spending over $70 million on a new sheet vinyl production facility in Dalton, Georgia. Shaw Industries has also been busy planning three new expansion projects—its PET recycling plant in Fayetteville, North Carolina (in partnership with DAK), its second waste to energy plant in Dalton, and its nylon filament plant in Calhoun, Georgia. We were also amazed to tour Crossville’s major expansion in Crossville, Tennessee last month, where it’s added the largest production press in the world, purchased a second roller kiln, and doubled the size of its lab and product development facility. There is also a brand new polyester fiber plant being built in Calhoun called Engineered Floors LLC, a joint venture between Bob Shaw and Bentley Dye Services.

As the flooring industry starts to rebound, we expect the first signs of life to appear in the residential replacement (retail) sector, followed by builder and multi-family sectors, and lastly in the commercial sector. From a timing standpoint, we foresee most of this happening in 2010. But now that the consumer has decided that a savings account might be a wise and comforting asset, thus diminishing disposable funds for a deferrable purchase like flooring, recovery may come at a slow pace. And when consumers do finally start to shop, their purchasing priorities may have shifted toward price and value and away from the plush extravagance and wow-factor thinking that was prevalent in 2005. In the commercial market, recovery continues to be hindered by lack of credit on the financial side and the weakened economy, driven mostly by a lack of consumer spending. Since the commercial sector was the last market to slow down, it follows that it will also be the last to show recovery.

As American consumers start to spend during the impending recovery, the high unemployment rate and recent feeling of uncertainty around their own job security are going to be top of mind. As a result, the Made in the USA label is going to carry new weight and will be much more of a decision factor than recycled content or other sustainability factors.

Armstrong AND Beaulieu Team UP in THE Builder Market
Bundling products into one offering is an effective marketing strategy that has proven successful for Microsoft with its Office software suite and more recently with telephone, cable TV, long distance, and Internet providers. In this industry, as Shaw, Mohawk and Mannington have expanded their businesses to include other hard surface flooring, their ability to provide a wide range of products with a single source of contact and a congruent warranty offering has given them a competitive advantage.

Just recently, Armstrong used this strategy without making a huge acquisition investment to overcome a hurdle it was bumping into in the builder and multi-family markets. It’s partnering with Beaulieu of America, and aligning its hard surface products with Beaulieu’s soft surface products—all under the Armstrong brand name. Now the builder and ultimate consumer can choose the single Armstrong brand and warranty program for all the new floors in their new home, much like they’ve been able to do with recent builder programs developed by Shaw and Mohawk.

As part of the new arrangement, Beaulieu will manufacture, service, and sell its soft component direct through the flooring contractor to the builder, and Armstrong will continue to use its well established distribution system for its hardwood, vinyl and laminate products. The benefit to the builder and homeowner is a single-brand, six-level program organized by consumer-centric benefits and warranty coverage.

A Challenge Worthy of Barnum
At first glance, Mohawk’s Smartstrand Rhino Challenge sounds more like a P.T. Barnum stunt than a floorcovering promotion. But when you look closely at the strategy, players involved and the ultimate results, it may well prove to be one of the more successful carpet promotions in recent history. Not only did the promotion involve Mohawk’s polymer supplier, field salesforce, HGTV spokesperson, dealer base and end-use consumer, but it used the latest in Internet technology and social media tools.

It doesn’t hurt that the promotion is supported by two strong brands. DuPont, on the supply side, brings its red oval and a brand that has stood for scientific innovation for decades. And thanks to the advertising investments that Mohawk has made in the last five years (27% of all consumer advertising spent by a carpet mill or fiber producer in 2007 and an estimated $46 million in consumer advertising from 2003 to 2007), it’s built one of the stronger consumer brands in the flooring industry.

The promotion idea itself is outlandish. You take one of the heaviest zoo animals, a 2,800 pound black rhinoceros and you carpet his pen/cage/latrine, whatever you want to call it, with wall to wall beige carpet for two weeks and then see if it will come clean. During the two week “challenge” period while the carpet was installed at the Birmingham Zoo, Mohawk pulled out all the latest Internet technology tools to spread the word. Webcams were installed and streamed via the Internet. Social media sites like Facebook, Twitter and YouTube were used to spread the word. To date over 2,400 friends have signed up to be Ricko Rhino’s friend on Facebook. In addition, Mohawk spokesperson and HGTV personality Chip Wade recorded several YouTube videos touting the carpet’s performance with the slogan, “If it can stand up to this wild life, it can definitely stand up to your wild life.” All in all, Mohawk has to be pleased with the level of visibility it achieved with over 250 news agencies posting some type of coverage.

In the next stage of the promotion plan, Mohawk’s sales force will hit the field with samples of the actual zoo carpet to show the retailers firsthand just how well the carpet performed. The fact that Mohawk is the only carpet company with access to this Triexta carpet fiber is unprecedented, and it will be interesting to see how it continues to work toward maximizing the benefit of this exclusivity.

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