Strategic Exchange: The industry faces a mixed economic bag heading into the fall selling season – Oct 2019

By Kemp Harr

The fall selling season is upon us, and we know that those of you focused in the retail flooring sector are hopeful that the consumer is ready to update the interior of their home. The good news is that private sector employment is up almost 2% from a year ago, and the latest consumer sentiment numbers rose to 92 in September from 89.8 in August.

In the building sector, housing starts, which were down in the first half of the year, are starting to tick up in recent months. In fact, the August starts number was up 12% from July and up almost 7% from August 2018. Part of this is due to an improvement in the fixed 30-year mortgage rates, which have been on the decline from a late 2018 peak. Another driver is a solid increase in household formations. It was great to see the builder confidence index for September rise to the highest number we’ve seen this year. According to the National Association of Home Builders (NAHB), two of the biggest obstacles slowing builders down are buildable lots and labor.

Existing home sales are also trending up, but elevated home prices for first-time buyers, who represent nearly a third of the market, continue to be an issue.

On the commercial side of the business, private office construction is up 9.8%, and education construction (primarily K-12) is up 4.8% on a year-over-year basis. Multifamily housing and hospitality are starting to taper off, and retail has been soft for a while.

The uncertainty over the how long and how severe the trade war with China is going to be has the consumer in a state of uncertainty, so they are saving more and spending less.

HIGHLIGHTS FROM THE FALL NFA MEETING
The National Floorcovering Alliance (NFA), comprised of 43 of the top independent flooring retailers across the country, held its fall meeting in Nashville, Tennessee last month. Sales results for the members vary, but there is no denying that retailers with this elevated scale of business usually outperform the average. Most agreed that consumer demand for the first eight months of this year has been softer than the previous year, so the group is focusing its strategy in two areas: gross margin improvement and enhancing the performance of both sales staff and installation crews.

Jason McSwain, who is serving this year as the group’s president, and I recorded a brief podcast that you might find interesting on FloorDaily.net. Hard surface continues to take share from carpet, and in both areas, the group is channeling its buying clout to support suppliers that offer NFA members better margins through pricing discipline. The members do a great job of shopping their competition and aren’t afraid to confront a supplier if they discover lower prices on similar products sold down the street.

It was refreshing to learn that three of the NFA members are bullish enough about market conditions to be adding stores. Flooring 101 in southern California has purchased two stores-so it now has seven stores. Sterling Flooring, based in Anaheim California, is adding a second store, and Worldwide Floors, based in Edison, New Jersey, is adding a fourth store.

DECIMATING DUTIES ANNOUNCED FOR CHINESE-PRODUCED TILE
Those of you who follow the ceramic tile market closely know that back in May, eight U.S. companies asked the U.S. Department of Commerce to investigate whether tile made in China was being subsidized by the government (which could trigger a countervailing duty) or was being sold into the U.S. for less than what it sells for in the Chinese domestic market (triggering an anti-dumping duty).

On September 10, the agency announced that it found that imports of ceramic tile from China are unfairly subsidized. So, effective immediately, preliminary duties of 103.77% will be imposed on all tile imported from China. This decision affects tile imports worth about $481.1 million (using the annual number for 2018) worth of tile.

The Commerce Department has yet to issue a preliminary determination in the anti-dumping part of the investigation but said it initially had proposed anti-dumping duties of 127% to 356%, which could be imposed on top of the anti-subsidy duties.

After this news came out, I spoke with Donato Grosser, who has been a consultant in the tile industry for years, and he feels that a duty in excess of 100% is sure to shut China down as a viable exporter of tile into the U.S. He reminded me that the European Union had implemented duties back in 2011 that weren’t nearly as severe (closer to 40%), and imports from China into Europe dropped by 77%. Donato added that shutting the door on Chinese tile will be good for both domestic tile manufacturers (who were only running at 80% capacity in 2018) and importers from other countries, like Italy and Spain.

China is known for its low-cost tile and, in recent years, has grown to be the largest importing country of tile in square feet. Chinese floor and wall tiles are sold here in the U.S. by home supply chains like Home Depot, Lowe’s, Floor & Décor and The Tile Shop. These products are also currently subject to the 25% Section 301 tariff (set to rise to 30% on October 15) that President Trump initiated last year.

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

Copyright 2019 Floor Focus