Strategic Exchange: U.S. economy and flooring sales predicted to cycle upward in 2020 - Jan 2020

By Kemp Harr

Last year was a bit of an anomaly in the flooring business. U.S. floorcovering sales usually track about 1% better than GDP, but our initial read here at the end of the year is that we probably tracked at or slightly below the nation’s overall growth-which at last estimate was 2.1%.

Let’s face it, flooring is a big-ticket investment as well as a deferrable purchase. So, when the consumer is uncertain about what the future might bring, they choose to spend less on unnecessary upgrades. A second factor is housing starts, which for the first half of the year remained subdued in the mid 1.2 million range.

As we shift our focus on what the first year in the new decade might bring, we’re hearing optimism for an upturn that should kick in by the middle of 2020. Interest rates are low, consumer confidence is high and housing starts in November rose to an annualized rate of 1.365 million. That’s up 13.6% from November of the previous year.

The two economists that we stay close to, Kermit Baker at Harvard and Alan Beaulieu at ITR, both tell us that Q4 2019 and Q1 2020 could well be the bottom of the current economic cycle and by the second or third quarter of 2020, U.S. GDP could start to rise again. The good news is that we avoided an economic recession this cycle, but when you avoid dips, you often don’t see higher peaks in a recovery. ITR is calling for this next growth cycle to take us to the end of 2022 before we see another mild dip. Beaulieu points out two recent and major accomplishments that are favorable for the U.S. economy, our energy independence and our shift away from China-with Mexico and Canada replacing China as our top trading partner.

The flooring import equation is still heavily weighted to China, with roughly 90% of the industry’s fastest growing category-rigid LVT-being sourced there. And with the section 301 25% tariff being exempted until at least August of 2020, and recognizing that much of the innovation in this category was refined in China, it is unlikely we will see many changes in the near term.

MANNINGTON'S ACQUISITION OF PHARR AND PHENIX WILL BE ACCRETIVE
Family-run, privately held companies tend to take a longer view when it comes to capital investment and reaction to demand cycles. So, while I’m not a big fan of industry consolidation, the recent news of Mannington Mills’ plans to buy the Pharr family flooring assets, which include Phenix Flooring and Pharr Fibers & Yarns, will most likely be good for the industry and everyone involved.

First and foremost, it moves Mannington’s annual revenues up to well over $1 billion. So, after Mohawk and Shaw, the industry has three companies with sales over a billion-Mannington, Engineered Floors and Tarkett-and Mannington has been family owned from the beginning. It’s often been said that if a company isn’t climbing, it’s falling, and Mannington has made three strategic acquisitions in the last 11 years that cement its upward trajectory-first Burke, then Amtico and now Phenix-Pharr. And in the case of the first two, the firm invested more money after the initial acquisition.

There is a second dimension to this buy that needs to be highlighted-that this move is sure to be accretive. Mannington didn’t buy a competitor. The two businesses that Mannington picks up are incremental to its portfolio. Now Mannington is in the fiber and yarn business and in the residential carpet business. Both of these businesses complement its portfolio, fit into its core competency and provide bundling opportunities with its client base.

It is also worth mentioning that Mannington is 104 years old and the Pharr family has been in the flooring business for 80 years. This type of heritage provides a base of multigenerational experiences and relationships that brings respect and preference even among today’s Millennial workers and consumers.

If history repeats itself, Mannington will give the Phenix and Pharr brands the necessary investments to differentiate themselves and build marketshare. Consumers buy flooring based on style, design and performance, three areas where Mannington has a history of showing success. On top of that, the channel likes to support suppliers that closely emulate them.

For years, retailers, distributors and commercial contractors have been attracted to Mannington’s Campbell family handshake, which now extends into the residential carpet market.

Sure, there are armchair quarterbacks that challenge the wisdom of buying into the shrinking carpet market. But as Mannington’s CEO, Russell Grizzle, pointed out, the carpet and resilient categories are the two big ones in the flooring business. Mannington’s been in the resilient business for decades. Phenix has been growing rapidly in a shrinking market and Mannington plans to continue to invest in the areas that set that brand apart.

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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