Strategic Exchange: The business outlook for 2019 - Jan 2019

By Kemp Harr

Are we going to let the mainstream media talk us into a recession? They’re coming off a great year, thanks to the big spend on advertising during the midterm elections. In Tennessee alone, ad spending in the U.S. Senate race to replace retiring Bob Corker set a new record at over $70 million-in a state with less than seven million people. Jeff Lorberbaum, CEO of Mohawk, opened up the Edge Summit meeting in early December with advice to the over 500 retailers in the audience to turn off the news.

Let’s look at the economic fundamentals. The unemployment rate is at 3.7%, a 49-year low. Economic output (GDP) in the third quarter of 2018 rose 3% from a year earlier, a rate of growth exceeded in only three other quarters in the last ten years. The Consumer Sentiment Index for 2018 was higher than in any prior year since 2000. Right before Christmas, we learned that existing homes sales in November were up 2%, and the Architecture Billings Index for November rose to 54.7-the strongest growth figure since January 2018.

Affordability in the housing market is a big factor, and the two key components that affect it are mortgage rates and inflation. In January 2018, the average 30-year rate was 3.95%, and just a few weeks ago, the rate was 4.63%. Housing prices dropped 35% during the last recession and just now are back to where they were in 2006.

I wouldn’t get too excited about the wide swings in the stock market, especially now that much of the trading is done in bulk using computers, and it’s no longer a fair assessment of an individual company’s performance-at least not on a day-to-day basis.

Probably the biggest factor we’re facing today, as we plan for 2019, is the trade war with China. Most everybody in this business is in favor of unfettered global trade, but some feel that corrective action is overdue with China to level the playing field. In light of this, look for GDP growth in 2019 to be around 2.5%, and for growth in the flooring business to be slightly better.

This trade war with China will slow the growth of LVT and could very well shift some volume over to laminate and hardwood. Some might ask, but won’t the tariffs help ceramic as well? Maybe not, as there’s plenty of idle capacity in Turkey and Spain, and the real issue with ceramic is the shortage of qualified installers. Ceramic installation is complicated and time consuming, so the labor shortage is negatively impacting this business in a disproportionate way.

I mentioned last month in this column that the economists say we are in the late stage of expansion, and the speed of the ship is starting to slow, but there is still plenty of opportunity for growth this year.

MANNINGTON RETIREMENT PARTY
In mid-December, Mannington hosted a retirement celebration in Wilmington, Delaware for three executives who have devoted most their professional careers to this 100-year-old family-owned business. The three honorees were Ed Duncan, who spent 30 years at Mannington and who most recently served as president of the residential business; Joe Amato, who worked for Mannington for 39 years, most recently as vice president of residential styling; and Steve Zangla, who worked at Mannington for19 years, ultimately as vice president of residential sales. That’s a combined service of 88 years. Just prior to the event, the company held its annual year-end board meeting to review 2018 numbers. Being private, they wouldn’t share the numbers with me, but I can tell you that everyone was smiling, so it’s good to see they had a strong year.

Attending this gala was reminiscent of being in the movie “Somewhere in Time.” The live swing band, flowers, men in suits and women in long dresses with corsages. Hearing laughter and old stories like the first job interview of one of retirees 40 years ago. Some might think that holding hands at the blessing and singing family songs together doesn’t sound like a leadership meeting of one the industry’s top ten suppliers, but it does help remind us that relationships are the cement in the structure of society. It was a memorable night, and I was hoping I wouldn’t pick up a newly minted penny before the evening ended. It was refreshing in a world of fast-paced change to see that some traditions endure, and there are places where people sincerely show their gratitude. The residential Mannington team we see at Surfaces this month will be there in new roles. Zack Zehner, a fifth-generation Campbell family member, takes Ed Duncan’s role as residential president. Terry Marchetta takes the lead role in residential styling, and Max Holland takes over as vice president of residential sales.

TARKETT BRANDING NEWS
Right before press time for this issue, we got the release that Tarkett North America is moving forward with a monolithic branding strategy and plans to transition away from using Johnsonite, Tandus, Centiva, Desso and even the newly acquired Lexmark. All of these brand names were companies at one time-many with a history that goes back for decades. I remember hearing that Johnsonite got started as a rubber gasket company for paint buckets.

Obviously, the trick with a transition like this is to try to move all the equity with each of these brands so that it becomes a part of the Tarkett legacy. I’ve always heard that the key to branding is much more than recall in the mind of the intended audience. They need to not just remember you, but remember you for the right reasons.

BRAND CONSOLIDATION TREND
Tarkett’s not the only flooring conglomerate to be tightening up its brand portfolio. At last month’s Edge Summit meeting, Mohawk announced that its three core residential brands in North America will be Mohawk, Karastan and Pergo. In fact, if you look at its consumer website, those are the three brands that are tabbed at the top of the page. Under the fourth tab labeled “Other Residential Brands,” the firm has listed Daltile, Godfrey Hirst, IVC, Marazzi and Quick-Step.

You may recall last year that Shaw announced they were shifting their focus to three residential brands: Shaw Floors, Anderson Tuftex and Coretec.

With all this focus on branding, we need to remember Jeff Bezos’ perspective when he said, “Your brand is what people say about you when you’re not in the room.”

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

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