Strategic Exchange - October 2010

By Kemp Harr

The founder of Home Depot, Bernie Marcus, was on the CNBC Squawk Box program recently to talk about the attitude among his friends, most of whom are small-business people. Many of you are small-business people and you may find his comments interesting. Admittedly, Bernie is a wealthy man now but for most his life he was just another one of us. And it’s worth noting that Squawk Box is often as much of a political forum as it is a forum for business insights.

In this brief interview, Bernie says that small businesses are the engine that drives the economy and provides most of the jobs. But he goes on to say that most of his friends are just “hanging in there” and their businesses are not growing. He blames this economic stagnation on the leadership in Washington and its lack of empathy toward how hard small-business people have to work to create a successful business. His circle of friends is now burdened with new regulations that further complicate their processes. One example he mentions is the new 1099 filing rule, which requires businesses to file paperwork for anyone with whom they do over $600 worth of business (part of the new healthcare legislation). But he goes on to say that Cap and Trade and Card Check legislation, if passed, would add more pain and administrative expense for businesses.

Bernie’s small-business friends are also worried about who’s going to pay back the national debt. “We are all hocked up to our ears and the small business people know that they are the ones who are going to have to pay it back.” Bernie’s conclusion is that we need more businesspeople running the country and fewer academics at the helm.

Regardless of your political views, there does appear to be some paralyzing aura hanging over the economy that is stifling the recovery that we all anticipate is just around the corner. Perhaps it’s the unemployment rate, even though we’ve been told that employment figures are usually a lagging indicator. Perhaps it’s the lackluster stock market performance or maybe even that yield curve that economists keep pointing to. Or perhaps it’s quite simply a fear of the unknown, which could be overcome if we’d all just settle down and have faith in our free-market economy.

Limited Access to Capital Stifles Economic Recovery
It’s been three years since this great recession began and while GDP figures tell us we are recovering, this recovery is softer than the ones we experienced during the last three recessions. While some sectors are seeing the light, very few are feeling any warmth. Unfortunately, the financial institutions that played a large role in digging this hole to begin with are big contributors to our lack of recovery.

Through all the news of foreclosures, the financial institutions have portrayed themselves as the victims in all this. How big are your crocodile tears as you read how tough and stressful things are for the banks as they try to “survive” and recoup their losses while Americans fall further behind in their payments? Who was it that held the gun to their heads and forced them to lend money on a sub-prime basis and forget everything they were taught in finance school about loan to equity ratios and other fundamental business principles?

Now, as so-called victims, bankers have forgotten who the customer is—even those customers with excellent credit, very little debt and substantial income. They’ve moved from growth facilitators to paper pushing bureaucrats who actually encumber the process. Their tone has shifted from “How can I help you” to “You’re lucky I even called you back.”

Many of you, like me, are small-business owners who have fewer sources for credit than large firms (which can issue bonds or stock), and the banks are our only real options for securing capital for expansion. Now, as the market starts to recover, is the best time to make acquisitions or invest in improvements that will help widen the gap between you and the competition. And with interest rates as low as they are, who can resist the temptation to tap into those resources? In reality, limited access to money, along with the uncertainty of how Washington plans to pay off its debt, is a big part of what’s holding this recovery back.

Wilsonart and Creston Carpet Mills
We’ve been taught that recessions are part of the normal business cycle in a free market economy. As part of the cycle, some businesses don’t make it, and we are sad to see Wilsonart and Creston Carpet Mills announce their departure from this industry. For many years Wilsonart has been a leader in the laminate flooring business with products that were known to withstand the heavy traffic demands of the commercial market. Owned by Illinois Tool Works, Wilsonart never converted its manufacturing process from high pressure to direct pressure and some insiders tell us this might have been a contributing factor to its demise. Apparently, direct pressure involves fewer steps and is a less expensive manufacturing process. If you flip to the Floor Notes section of this issue, you will see that as Wilsonart bows out, two competitors, Kronotex and Clarion, are announcing expansions.

With Creston Carpet Mills, the story is somewhat similar. Creston, which opened its doors in 1997 and grew to a peak of $27 million in sales and 122 employees, built its product line on residential loop-pile construction, which it sold through distributors and the big box home centers. According to George Hearne, two factors led to its demise: residential styling preferences moved away from loop type construction, and margins continued to decline as they competed with larger mills that could extrude their own yarn.

Both Wilsonart and Creston had a great reputation for quality and they will be missed.

Consumer Fee for Carpet Diversion from Landfill
When California legislators first drafted a bill to divert the massive amounts of worn out carpet that ends up in the state’s landfill (carpet represents approximately 3% of the municipal solid waste in the state), the original plan was to have the manufacturers pay the costs. But after some heavy lobbying by the Carpet and Rug Institute and its members, an alternative plan was passed in the Legislature and, as of our press deadline, was awaiting Gov. Arnold Schwarzenegger’s signature. Once this bill becomes law, starting July 1, 2011 consumers will pay a diversion fee when they purchase new carpet at retail in California. Set initially at a nickel per square yard, this fee will go into a fund that will be managed by CARE, the Carpet America Recovery Effort. CARE will use these funds to incentivize carpet recycling and landfill diversion.

The exact system for who gets the monies and on what basis has yet to be ironed out, but the goal is to reward companies that can find alternative uses for post consumer carpet so that it never ends up the state’s landfill.

The ramifications of this bill could be far reaching. First, it could be used as a model for other states and eventually take on a more national scope. Also, the nickel per yard fee was initially established as a guideline and can be increased if it’s determined that the reward systems are not great enough to motivate change. There’s a wide range of diversion options for carpet, ranging from waste-to-energy power plants to secondary uses like carpet pad or plastic car parts or even fibers for erosion control products. And let’s not forget carpet that can be converted back into carpet based on a change in how it’s originally constructed. It will be interesting to see how the many options are vetted out and how the funds are ultimately allocated.

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