Strategic Exchange: U.S economy vs. flooring economy, Lowe’s and Stainmaster - Aug/Sep 19

By Kemp Harr

If you watch the economy closely, you are aware of two noteworthy news items in the past month. The government released the Q2 2019 GDP estimate, showing growth at 2.1% (after a first quarter reading of 3.1%), and the Federal Reserve cut its benchmark interest rate for the first time since 2008.

Let’s take a look at the GDP trend first. According to ITR Economics’ short-term forecast-ITR is led by Alan and Brian Beaulieu, who frequently speak at various flooring meetings and have an unusually strong track record of accuracy in their predictions-U.S. GDP will continue its downward trend and bottom out at 0.7% growth in the first quarter of 2020. But the extended forecast predicts a mid-range cycle of growth that will peak in June 2022 before taking another dip. So, the economy is going to continue to slow for the next three quarters but will shift into a growth mode by April of next year, which will continue for another nine quarters, or 27 months. If ITR is correct, the longest recovery period between recessions is going to extend for at least another three years-or a minimum of 13 years. The predicted slowdown would not qualify as a recession, since a recession is by definition two consecutive negative quarters of GDP.

When the Federal Reserve cut the interest rate by a modest quarter point (0.25%), the committee recognized the strong labor market, an uptick in consumer spending and inflation running below 2%. But they also recognized other economic uncertainties around the world as well as a decline in fixed investments here in the U.S. that could slow the growth of the U.S. economy. It will be interesting to watch what happens with interest rates over the next six months if ITR’s predictions are accurate and the economy continues its downward dip into the first quarter of next year. Many are expecting at least one more cut. It is not unprecedented for an incumbent president to push for lower interest rates to stimulate the economy going into an election cycle, but the Fed likes to show its independence from political posturing.

THE FLOORING ECONOMY IN CONTRAST
While the U.S economy seems to be operating with its own checks and balances, the flooring economy is another story. Stifel analyst, John Baugh-who tracks the publicly traded flooring companies-pointed out in a recent FloorDaily interview that all but one of the flooring stocks are trading at or near a five-year low. And Charlie Dilks, the chief product officer with CCA Global, concurred that 2019 “is a real head scratcher” when you compare the positive economic conditions and consumer sentiment on the one hand with the flatness in floorcovering sales on the other. Both men are hopeful that the second half of 2019 will be stronger than the first half.

One of the primary drivers of this softness is the lackluster housing market. The June numbers have existing home sales down for 16 consecutive months, and single-family housing starts over the past 12 months are flat with the previous year, even though the 30-year fixed mortgage rate is under 4%-the lowest rates in three years. Certainly, one factor is the increase in existing home prices, up 4.5% from last year at $288,900.

The biggest disrupter in the flooring market this year has been the uncertainty created by the threat of tariffs on Chinese-made rigid LVT. When word first emerged about the impending tariffs, suppliers imported as much as they could and loaded up warehouses with product. At first, the tariff was 10%, and then back in June the rate moved to 25%. As Harlan Stone, CEO of HMTX Industries, recounted in his August 12 news story on the cover of The Wall Street Journal, “About 80% of my time and nearly 100% of my energy goes into dealing with [Chinese] tariffs.” His hope-with the help of a team of lawyers in New York, Washington, D.C. and Hong Kong-is that he can get rigid LVT off the list of tariffed products, arguing that U.S. manufacturers can’t meet the consumers ever-growing demand for the product. Both Baugh and Dilks agree that virtually all of the 2019 growth in the residential flooring market has been in the LVT category. And now, saddled with a 25% import tax, the product costs the consumer more as well as negatively impacting suppliers’ margins.

LOWE’S FLOORING RESET COULD REDEFINE STAINMASTER TO THE CONSUMER
During the month of August, Lowe’s is resetting its flooring department, and we understand that the footprint for carpet in its roughly 2,000 U.S. stores has been reduced. The strategy behind this reset is being driven by Thom Dickson, who spent 14 years at the beginning of his career at Shaw, two years at Flooring America, and then 14 years at Home Depot before taking the role as director of merchandising at Lowe’s a year ago. Many of the traditional independent Stainmaster Flooring Center (SFC) retailers are upset because they’ve heard, but can’t confirm, that the Stainmaster brand name is playing an even bigger role as a licensed brand on a broader range of carpet types (nylon, PET and triexta) as well as several types of hard surface products.

The biggest fear is that the consumer will be confused when trying to compare the traditional nylon 6,6 Stainmaster carpet sold at Invista’s longstanding independent SFC retailers with the licensed products sold at the home center. For 33 years, Stainmaster has stood for some of the highest-quality, top-performing carpet on the market, and these SFC retailers, several of which are NFA members, aren’t looking forward to a potentially diminished brand stature, nor do they wish to compete with a home center that offers free installation.

Phil Koufidakis, the owner of Baker Brothers, the leading flooring retailer in Phoenix, offered this statement: “As an independent retailer, I do not see this as a positive move. The Stainmaster brand was built on performance and the nylon 6,6 story, which we embraced because of its validity. A strategy that ultimately diminishes the brand and its value to our company and our consumers. As a long-time Stainmaster Flooring Center, this is not a positive development. We will review our options once we understand their final strategy.”

Jeff Macco, co-owner of six Macco’s Flooring stores in Wisconson and Hadinger Floors in Fort Myers, Florida added, “We’ve been a Stainmaster supporter since its inception in the ’80s and we’ve incorporated their brand with ours in our local advertising as part of our promise of offering the best flooring available. As you can imagine, we’ll be reevaluating whether the Stainmaster brand can continue to offer us differentiation. Our customers want service, and we feel the home center customer is more interested in lowest price.”

Many of these independent retailers have been around long enough to see what happened to the Pergo brand when it shifted much of its focus to Home Depot, and fear the same future for Stainmaster.

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

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