Strategic Exchange: A focus on being the best will prevail in the end - Mar 2019

By Kemp Harr

We hear that retail floorcovering sales for the first two months of 2019 have been soft, and many are pointing to the weather as the primary cause.

Those that monitor the University of Michigan’s consumer sentiment survey watched it drop to 90.7 in January from 98.3 in December, but the preliminary numbers in February have it back up to 95.5, so perhaps it was a short bout of uncertainty. According to the survey, the two biggest areas of concern for consumers were the partial government shutdown and the Fed’s decision in December to increase interest rates. But now that Congress has funded the government and the central bank is taking a “patient” stance on interest rate hikes, consumers are starting to feel better about the economic outlook.

We’re also seeing good news related to Chinese tariffs. At the end of February, Trump announced a second delay in his plan to raise tariffs to 25% on $200 billion worth of Chinese imports, which includes floorcovering, having already moved the January 1 deadline to March 1, but now, thanks to “substantial progress” in bilateral talks between the U.S. and China, no new date has been set.

The plan now is to hold a meeting in late March to sign a final deal with President Xi Jinping of China. So, not only is the 15% increase off the table, but there are many who believe that the original 10% tariff will be reversed as well.

I am fully aware that there are people within the flooring business that thought these tariffs were a good idea. There is the notion that a 25% tax on rigid LVT would breathe new life into those categories negatively impacted by the rapid growth of this new type of flooring. But, in reality, it’s only a matter of time before this product is available from other countries as well as here in the U.S. And from a broader economic perspective, a 25% tariff on $200 billion worth of consumer goods would have had a considerable impact on the U.S. economy from both an inflationary perspective as well as GDP growth.

A wiser strategy for those categories negatively impacted by rigid LVT is to ramp up their message points on why their product is better in the long run. We’re seeing positive efforts with the “Why Tile?” and “Real Wood. Real Life.” campaigns and perhaps it’s time for the $8.5 billion carpet industry to bring back “Carpet, it just feels better.” or a new “What did you say?” campaign centered on acoustics.

Protectionism has never been a sound business strategy for long-term growth. Just be the best.

SHAKE-UPS IN DISTRIBUTION
Last month brought the news of Belknap White taking controlling interest in Haines and the demise of the Cronin Company. So, what’s the latest on the health of the floorcovering distribution business? It’s no secret that hardwood has always been an important category for distributors, and in the last several years, we’ve seen LVT taking share from hardwood. This share shift has lowered the distributors’ average net selling price, so while distributors are just as busy, their gross margin dollars are lower.

Also, in a few cases, there is the private equity factor. As owners age out, they bring in an outside interest that funds the transaction with borrowed money. Margins are thin in this channel, so it can be difficult to cover the interest expense when you’ve let the seasoned former owner sail away on his retirement boat.

There are those in the distribution business who are doing just fine, and many of them are finding success by focusing on their own private label brands. One of the biggest expenses within distribution is freight costs, which continue to escalate, so I’m not surprised to hear some companies are struggling.

SHAW’S STRONG 2018 SALES NUMBERS
Berkshire Hathaway’s 2018 annual report came out last month and buried in the middle of its financial report was the fact that Shaw Industries’ revenue grew 7.9%, which is almost double our estimate for the total market.

This is impressive for two reasons. First, Shaw is the largest producer of carpet in the world, and, second, we’ve got to assume its carpet sales were flat at best-which means that much of that growth came from its hard surface business. I’m not sure if it’s luck, timing or wise leadership, but Shaw certainly benefited from focusing its growth strategy on both rigid LVT and commercial carpet tile-two of the strongest growth areas in the flooring business.

FLOOR & DÉCOR IS WORTH WATCHING
If you’re a retailer, I hope you took note of Floor & Décor’s year-end financials, released last month. This publicly traded hard surface flooring retailer increased its top line revenue by 23.5%. Yes, they opened 17 new stores, bringing their total to 100 locations nationwide, but the firm’s comparable store sales growth was 9.2% in 2018. At this stage, Floor & Décor is more of a factor in larger U.S. markets, and we’ve got to assume much of this share came at the expense of home centers and perhaps even Wayfair. But the company’s long-range plan is to open 400 stores-so it’s time to take notice.

The best strategy to win is to take product price out of the equation by offering turn-key service that includes design assistance and full service installation. You also need to make sure that none of Floor & Décor’s brands are in your store, and that your assortment stands tall in comparison. And it never hurts to accentuate the buy-local aspect. Even price-focused Millennials understand the benefits of keeping profits in the community.

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

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