Strategic Exchange: What’s next for coronavirus — March 2020

By Kemp Harr

At the end of February, we focused our attention on how the coronavirus that started in Wuhan, China might affect the supply chain of flooring products that are imported from the country. In the past decade, China’s share of the flooring consumed here in the U.S. has grown to roughly 25%, so this is a valid topic for a trade publication to home in on.

Our interviews with stakeholders operating factories in China told us that we shouldn’t see any disruption in supply until at least May. At that time, with only 60 known cases of the disease in a country of 328 million people, we weren’t as concerned about the likelihood of a pandemic-just whether we might run out of the hottest-selling products in the flooring market.

But as the last week of the February progressed, we started getting unnerving signals from the stock market and the mainstream media. The virus started popping up in new countries, including Italy. While the U.S. president was telling us that everything was under control, the Centers for Disease Control and Prevention (CDC) was saying that it’s not a matter of if but when this disease will sweep through the U.S. population.

As we often see in these situations, some people and publications seemed hell-bent on overreaction, such as the Chattanooga Times Free Press, which reminded local citizens that in 1918, the Spanish flu swept through the city killing 1,000 people. The fact is, we’ve survived SARS and MERS, and we will survive COVID-19 too.

The reality is, of course, that there are factors beyond our control, and we need to be prepared for the unexpected. But at the same time, we must stay focused on what is within our control, knowing that this too shall pass. To that end, we recently hired two new employees at Flooring News Corporation, the parent company for Floor Focus magazine and FloorDaily.net.

And we must keep our perspective: the CDC predicts that 12,000 Americans will die from the flu in any given year. We live with this reality, and yet we continue to fly, gather in large meeting spaces and dine in public restaurants. Just because the 24-hour news cycle is covering something on heavy rotation doesn’t make it a more significant threat than anything that came before. Educate yourself, use common sense and proceed with your life.

But back to business. Late February’s correction in the stock market was driven by what might happen, while the drop in 2008 to 2009 was triggered by what had happened-the failure of Lehman Brothers and the reality that lending within the housing market was overextended. Stock market statistics tell us that the S&P 500 has seen 37 corrections of at least 10% in the last 70 years, and yet the market over that same period has provided an average return of 7%. Warren Buffett’s letter to his shareholders came out at the end of February. At age 89, his advice is to buy and hold shares of companies you trust because he still feels that equities will outperform bonds.

Ultimately, it’s important to remember that both life and business are long games. And in those games, storms like COVID-19 will come and go, and blue skies will follow. Our supply chains will kink and unkink, and the stock market will rise and fall. Fear for fear’s sake does no one any good, so keep your eye on the horizon-and wash your hands frequently.

AIP’S SUCCESS IN CABINETS BODES WELL FOR AHF
There is big news in the cabinet business that’s worth mentioning because it overlaps with flooring. Masco is selling its cabinet business to ACProducts for $1 billion. You may remember that when Armstrong exited the cabinet business in 2012 for $27 million, it sold that operation to a private equity firm named American Industrial Partners. Prior to the sale, Armstrong had not turned a profit in its cabinet business since before the 2008 economic downturn. I ask you to take note of what AIP called the business after it bought it. Can you guess what the AC stand for?

Six years later, AIP went back to Armstrong in November 2018 and committed to buy its hardwood flooring business for roughly $90 million, and when that deal closed in January 2019, the hardwood business was named AHF Products.

Clearly, AIP was able to turn the profitability of Armstrong’s cabinet business around, and now with this acquisition, it has become the second largest firm in the U.S. cabinet business. This is encouraging news for the potential outlook for AHF Products. I’m not a fan of its simplistic naming scheme, but apparently the firm knows how to turn things around.

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

Copyright 2020 Floor Focus