Strategic Exchange: 2020 is off to a good start - Feb 2020

By Kemp Harr

We received some good news just before press time for this issue that could bode well for the flooring business. The National Association of Home Builders’ remodeling index rose three points to 58 in the last quarter of 2019, and the Architecture Billings Index picked up a half point to 52.5 in December.

Both of these indices are leading indicators predicting favorable momentum for the future in both the existing home market and the commercial building sectors.

In other news, mortgage activity and builder confidence was up in January. Housing starts in December were at a seasonally adjusted annual rate of 1.6 million. That’s up 41% from the rate in December 2018. Sales of existing single-family homes were also up 3.6% to a 5.5 million annual pace in December. So it would appear that the economists were correct that the housing market will be the engine that pulls the U.S. out of the recent economic slowdown. Fortunately, we’re hearing that retail sales of flooring in January were way up over last year.

WHY WERE FLOORING SALES SOFT IN 2019?
As an industry, we do need to reflect on why 2019 was a slow year for flooring sales. Outside of the fact that the economy slowed down, here are a few more trends that contributed to slower growth of flooring sales.

Single-Family Rentals: Not everyone is aware that some major investment money has gone into buying up single-family homes to use as rental property. Two publicly traded companies, Invitation Homes and American Homes 4 Rent, now own over 80,000 and 53,000 homes, respectively. A conservative estimate is that over 500,000 homes are now owned by investment firms similar to the two mentioned above. These firms are catering to people who want to rent and also see the value in raising their children in a home with a yard. This is happening more in major metro markets than anywhere else.

The big question to ask, as this trend grows, is how this affects the sale of floorcovering. At a minimum, it shifts the business away from the local independent retailer and moves it over to the Redi Carpets of the world, which specialize in changing out flooring between renters on a national scale. But you’ve also got to wonder if the mindset of these major investment companies is different than if the home were owned by an individual, who sees the property as their investment nest.

For those of you who are curious and concerned that our economy is shifting away from home ownership, here are the stats: ownership peaked at 69.2% of households in Q4 2004, and it dropped to a low of 62.9 in Q2 2016. Since then, it’s been rising and now stands at 64.8%.

Office Efficiency: For years now, business have shifted to open offices that enable companies to cram more employees into less real estate. In addition, more employees are working at home. The net result is less flooring being purchased in the office environment. Guest editor Mark Nestler does a good job of going into this trend in Industry Barometer, starting on page 73, so there is no need to expound on it here, but there is no denying that it’s affecting unit growth of flooring sales

Extended Turns of Hard Surface: If you buy into the principle of Occam’s razor, this is the elephant in the room. We all knew it would happen, and now we’re starting to feel it. Back in 2013, when the business accelerated its shift toward hard surface, which has a much longer cycle time between replacement intervals than carpet, we knew there would be a time when the chain would catch, and Mrs. Jones would quit coming in every seven years to update her floors. Fortunately, many successful retailers have diversified their offering and added cabinets and countertops. Hopefully now they can also talk her into adding a feature wall made of flooring.

Reduced Net Tickets: Last year, I was told a story about a women who drove up to a flooring store in Naples, Florida in her Rolls Royce, and when she walked in, she told the sales person that she was tired of the cold tile in her home, and she wanted to remodel the entire ground floor with hardwood. He told her that what she really needed was the latest new waterproof floor called LVT-and that’s what she bought. Handled differently, instead of buying a $6/foot LVT floor, she might have bought a $12/foot hardwood floor. Or he might have suggested that she consider ripping out that old tile, installing underfloor heat and installing the beautiful, timeless Italian porcelain that is so popular today.

Now, I grant you that for the last seven years, as retailers have talked the homeowner into tearing out their carpet and installing more hard surface, it has generated more dollars per square foot. But on the other hand, some hard surface products cost more than others, and it could mean leaving money on the table if flooring retailers don’t aim higher and at least try to sell a more expensive product. Plus, as mentioned in the section above, they might not see her again for a while.

Direct Sourcing by Distributors: We mentioned this a few months ago, but it’s worth reiterating that we are clearly seeing a shift by distributors to direct source more products from Asia and sell them as private-label alternatives for their retailers to offer to consumers-often at a slightly lower price. We understand the incentive to buy direct, and we understand the need to offer a fresh brand, but if you have to discount to get the sale, the net result is a decline in sales dollars for the flooring business as a whole.

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

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