Strategic Exchange: Is a moral compass one of your innovation tools? - Mar 2018

By Kemp Harr

It’s dangerous to wade into a topic as polarizing as gun control, but with the latest school shooting in Florida, it’s on all of our minds. In many instances today, we talk about the rapid pace of change, but for the 17 children and teachers that were killed, perhaps our laws and our sense of reason have not evolved as fast as our technology. As numb as we’ve grown to these senseless killings, this tragedy may result in some overdue and necessary corrections.

Similarly, in consideration of the rapid pace of change in the flooring business, we too must employ some type of litmus test that factors in what’s right and what’s wrong as part of our decision making. As we develop new types of flooring and invest in new processes, our view must extend beyond broadening margins and beating the competition. We need to be asking ourselves whether the consumer or end-user is going to be better off down the road for having bought our product. Is a moral compass one of the tools in your toolkit as you consider how thin is too thin? Is the density of the construction matched with the performance of the fiber? Does the wearlayer match the warranty? What effect does that chemical have on an albino rabbit? Does the installer know about all the potential issues based on the changes that were made during the manufacturing process?

Fortunately, in a business like ours where the channel still has at least one layer between the producer and the end user, the buyer in the middle adds a layer of protection. And fortunately for the end-user, most retailers and commercial contractors understand that their brand is on the line and they play an important role of filtering out garbage and only selling products that hold up and perform as promised. In fact, considering how little, if any, consumer advertising is coming from manufacturers today, the dealer’s brand carries the bulk of the clout. The buck stops with the dealer, so to speak. Especially with the rising importance of online reviews, it is critical that dealers only carry and sell products that bring luster to their brand.

This, by the way, is what sets a dealer apart and gives them distinction in their local market. It is important that dealers take that role seriously and promote it as part of the conversation during the sale.

STATISTICS THAT GIVE A CLEARER VIEW
Let’s turn our attention briefly to some recent statistics related to housing and commercial construction. I was surprised to read the news last month that multifamily housing starts jumped 19.7% in January. This comes in contrast to single-family starts, which grew at only 3.7%. There is a good chance that apartments and condominiums could be at a saturation level, so, hopefully, the balance will soon swing over toward the single-family side. According to a Harvard University report published in December, the number of renter households dipped in 2017 for the first time in 13 years.

Part of the sluggishness in the single-family sector is due to land and labor issues, but some of it may be more strategic on the part of the big publicly traded builders, who continue to consolidate. With fewer units available for sale, homebuyers are forced to pay more. Darius Helm has written an update on the single-family builder sector that starts on page 77; don’t miss that piece.

Also, last month we reported that the January Architectural Billing Index was 54.7, up from 52.8 in December. This reflects healthy conditions in all regions except the Northeast, where firm billings softened for a second consecutive month. With this being a leading indicator, there is a strong chance we’ll see commercial flooring growth well into 2019.

A couple of other data points to make note of: Mohawk reported in its 2017 year-end financials that its Flooring North America sales increased 3.8%. This doesn’t include any numbers from its ceramic business-and we know that the ceramic category is growing and that Mohawk’s U.S. marketshare in ceramic is nearly 50%-so it’s safe to assume the company’s overall growth was well above that number.

Home Depot, in its 2017 year-end financials, reported comp store sales growth for its U.S. stores of 6.9%. While no specific number was given for flooring, it did perform “below the company average,” per Ted Decker, VP of merchandising.

A few interesting statistics related to the effect of the tax reform legislation on homeowners: 80% of American households will have more money this year. Only 5% of houses sold on an annual basis will be impacted by the $750,000 cap on mortgage interest deduction. Housing in California and New York might be negatively impacted by the inability to deduct state and local taxes, but those two areas also have housing shortages, so the impact should be minimal.

Some of the energy that we all witnessed at the January Surfaces show in Las Vegas is based on the strength of sales in the fourth quarter, as well as optimism generated from the tax reform legislation and forecasts from Harvard’s Leading Indicator for Remodeling Activity (LIRA) published in January. LIRA projects that homeowner spending on improvements and repairs in 2018 will increase 7.5% over the previous year to $340 billion.

THE LATEST CARPET STATISTICS
It’s no secret that the single biggest sector in the flooring business is carpet, and it looks like demand for carpet in 2017 has leveled out from a total yards-sold perspective-especially in the residential sector. Some of you may find that statistic interesting in light of all the industry hype related to the growth of LVT. Some pundits estimate that LVT and its rigid core cousin grew 24% last year, but if you believe the statistics coming from the Carpet and Rug Institute, residential unit sales for carpet in 2017 did not drop, so much of the share loss came from other surface types.

The news broke at the end of last month that CARE (Carpet America Recovery Effort) has been fined over $1.0 million for failing to meet continuous improvements in the recycling of carpet from 2013 to 2015. This covered a time when a drop in the price of oil made recycled plastics less competitive versus virgin polymer. It was also a time when the industry started to see more PET carpet being discarded-a waste stream that has yet to develop markets for down-cycled materials. This is California bureaucracy at its finest.

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

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