Strategic Exchange: Flooring impacts from Russian invasion plus Interface’s new CEO – April 2022

By Kemp Harr

Russia’s attack on Ukraine is going to impact the flooring industry in ways that extend far beyond higher energy prices. There’s the obvious increase in oil and natural gas prices, which will further inflate the cost of raw materials as well as transportation rates.

The Eastern European region is one of the primary sources for a few key flooring products. In the hardwood sector, the Baltic birch core board as well as European white oak hardwood are sourced out of Russia. In fact, 10% of the U.S. hardwood plywood in 2019 was directly supplied by Russia. In the ceramic business, Ukraine is a key source for the clays and glazes that are used to produce European ceramic tile.

But probably the biggest impact of an extended war in Eastern Europe will be the loss of economic momentum and potentially a recession within the neighboring European countries. If Europe catches a cold, so to speak, it will have an impact on the health of our economy as well.

Another key factor is the American consumer’s emotional reaction-or consumer sentiment-which impacts their willingness to spend. The latest read at the end of last month was 59.4-a drop of 30% from this same time last year. The key driver for this decline is concerns over inflation, but the economic disruption caused by the Russian invasion of Ukraine was top of mind among many of those taking the survey.

We were pleased to learn at the spring National Floorcovering Alliance (NFA) meeting last month that while a few of the members were seeing a slight dip in store traffic, many were still experiencing revenue growth over strong comps from March of last year. Those NFA members we interviewed expressed a concern that sales might start to drop but were not seeing it yet in real numbers.

CCA Global didn’t meet in season one, so we weren’t able to get direct feedback from its members, but we’re hearing that the first half of its fiscal year (which starts in October) brought continued growth, but the second half could taper off if the consumer gets inflationary jitters.

We’ve got to remember that the industry has announced seven price increases in the last 15 months, so revenue numbers are inflated, making revenue a difficult metric for measuring true growth.

It was great to see that the Architectural Billing Index for February was 51.3, up from 51 in January, indicating that specified billings were on the rise. Many industry pundits feel that if the residential replacement numbers take a dip, the commercial and builder markets will continue to drive growth in the overall flooring business, so let’s not talk ourselves into a decline by dwelling on what might happen in the residential replacement sector.

I say “might” because we’ve got to remember that home values rose 19.1% last year, which could make the consumer feel good about further investment. In addition, the LIRA (Harvard’s Leading Indicator for Remodel Activity) calls for an elevated spend of $382 billion for the remainder of 2022. We may not see the double-digit increases we experienced last year, but based on what we’ve seen in the first quarter, this year is still going to bring growth-even if the residential remodel business tapers in the second half.

One potential driver of stagflation could be increases in the home mortgage rates. Last month, rates topped 4% for the first time since May of 2019. And the Fed is signaling an accelerated climb in interest rates for the remainder of the year.

RECENT NEWS FROM INTERFACE
I caught up with Dan Hendrix, the leader of Interface for most of the last 21 years. He had several key news items. First and foremost, he has hired a new CEO, which will enable him to step back into the chairman role. You may recall that when Jay Gould was CEO, Dan took the chairman role but had to step back in as CEO when Gould was terminated in early 2020.

Interface’s new CEO is Laurel M. Hurd. That’s right, a woman! This marks the first female CEO of a major commercial flooring business. The only other female CEO of a big mill that I can think of in this business was Andrea Greenleaf, who took over Royalty Carpet Mills after her father, who founded the firm, passed away-but that was on the residential side. Hurd comes to Interface after spending almost 23 years at Newell/Rubbermaid, where she served as CEO of the firm’s writing and baby divisions, running brands like Sharpie, Papermate, Elmer’s, Graco and Baby Jogger, just to name a few. Prior to that, she focused on Gillette’s Braun brand and Royal Appliance’s Dirt Devil brand. For college, she attended Miami of Ohio. Hurd steps into her role on April 18.

Additional news from Dan was that orders within his Americas business are up 31%. Education, healthcare and transportation carried the firm through the last two years, and the office market started recovering for Interface here in the U.S. last March. More recently, Interface is also picking up business in the hospitality and, surprisingly, the brick-and-mortar retail sector.

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

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