Strategic Exchange: Business pace in June outperforms expectations - July 2020

By Kemp Harr

Household spending on goods and services rose a record 8.2% in May, beating all records since the U.S. government started tracking this data in 1959. Despite the surge, consumer spending was down 12% from the February number-pre-shutdown.

Car sales are up. Mortgage applications are at an 11-year high. Mortgage rates are at an all-time record low. New home sales were up 12.7% in May to an annual rate of 650,000. Those that are unemployed are getting weekly unemployment checks that have a $600 bonus included. More than $200 billion in stimulus money has been sent to roughly 130 million Americans so far.

One housing trend to watch moving forward is de-urbanization. With the shift to working from home and the fear of public transportation and elevators, homeowner preference could shift to larger homes with home offices and away from the larger cities.

In the flooring business, conditions and sales are improving faster than anyone would have imagined a month ago. For the month of June, we got the following feedback: on the manufacturing side, we’re hearing sales numbers that are only down 10% versus the same period last year. The commercial business is busy installing its backlog of orders, the builder business is stronger on the single-family side than the multifamily side, the home center business is up almost double digits, and the independent retail replacement business, which was hit the hardest (with a 40% downturn in April and May), is seeing a significant upward swing.

Granted, traffic is down in most flooring stores, but almost every customer that comes in is buying. Some fear that this upward surge may be pent-up demand that could taper off in 60 days, but others feel that home improvement is getting a large chunk of the disposable income that used to go toward travel, vacations, eating out and attending athletic events.

DOMESTIC PRODUCTION OF RIGID LVT
Rigid LVT represents two-thirds of the $4.3 billion (wholesale value) annual consumption of LVT flooring. This product category was invented and refined in China, and it’s been taking marketshare from carpet, wood, ceramic tile, laminate and other resilient categories. According to the U.S. FlooReport, the demand for rigid LVT is on track to drive another 15% growth in 2020.

At this point in time, there are no tariffs on Chinese imported rigid LVT due to an exemption provided by the USTR (U.S. Trade Representative) based on the argument that there is not enough capacity in the rest of the world to satisfy demand. This exemption is set to be re-evaluated on August 7, but most pundits feel it will be extended.

There is no denying that the consumer’s buying habits are changing due to fears related to the coronavirus, and one potential shift could be a disdain for products produced in China. Historically, American consumers have tended to favor American-made goods at the tail end of a recession, knowing that putting Americans back to work stimulates a recovery. But there is also an underlying belief among some consumers that China, not nature, was responsible for the outbreak of the COVID virus. Accusing mankind of manufacturing a natural virus is a bit of blame game, but it still could be a factor.

Based on all these dynamics, we should not be surprised to learn that in the last seven months, five China-based producers of LVT have announced plans to open plants to manufacture rigid LVT in northwest Georgia. On December 18 of last year, Greenview Floors International announced a $26 million plant in Adairsville that will employ 238 workers. At the end of January, Novalis announced its $30 million commitment for a Dalton, Georgia plant that will employ 125. At the end of May, Huali Floors announced a $27 million dollar investment that will employ 315. On June 24, Creative Flooring Solutions (CFL) announced a $70 million factory in Calhoun, slated to create 300 jobs, and finally on June 26, Wellmade Flooring announced a $35 million factory that will add 240 jobs and make product for Home Depot and Floor & Décor. If you add all of this up, that’s $188 million dollars of investment and 1,218 new jobs.

All of this is incremental to recent investments to add domestic rigid LVT capacity by Mohawk, Shaw Industries, Mannington Mills, Tarkett, Nox and Rok Plank. One obvious concern is that supply will outpace demand, and margins will be challenged as companies fight for marketshare.

If you step back from all of this and analyze the historical relationships that the Chinese firms that have recently announced domestic factories have with the traditional American flooring brands, it shows that a source-versus-make strategy can ultimately create a worthy competitor. As we watch all this play out, the key to victory will be innovation and branding.

THE CONSUMER’S PERCEPTION OF PLASTIC
It’s worth noting that last month Germany announced a ban on plastic straws, single-use plastic food containers and polystyrene cups, bringing it in line with a European Union directive intended to reduce the amount of plastic garbage that ends up in the environment.

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

Copyright 2020 Floor Focus

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