Concrete Moisture Leading to Flooring Failures - Is this an Epidemic?

Sheet vinyl  lifting off concrete substrates that looks like blistered skin from a burn, wood flooring turning up at the edges, carpet tiles emitting foul odors from reactions with “wet” slabs.  All of these failures in floor covering occur daily around the country plaguing flooring contractors and end users.  Is this a flooring conspiracy or something more sinister?  Well, it’s not a conspiracy, nothing so colorful as that, and it’s not sinister unless you consider that moisture lurking in the substrates is skulking around waiting to pounce.

What are the reasons for this outbreak of flooring failures?  Have adhesives changed?  Is flooring material different?  Hasn’t concrete been the same for years?  Why is this all happening now?

Adhesives have changed from when solvent carriers were used but adhesives are actually better now.  Flooring products have changed with the onslaught of non-permeable backings which can trap moisture vapor emissions coming from concrete.  Concrete hasn’t changed much but it is finished faster and harder and this limits moisture’s ability to escape.  Most importantly, construction jobs are fast-tracked meaning the job is rushed to completion without enough consideration for the ramifications of this action.

Moisture in the concrete, missing or improperly installed vapor barrier/retarders under the slab and cycling HVAC systems to save energy are the three biggest contributors to the problem.

When changes in the internal environment of a building are caused by cycling the HVAC system, and moisture of convenience (water used to hydrate the concrete slab) tries to equalize, moisture will move from high pressure to low.  When this happens, anything in the way, like flooring, will be affected.  If the flooring material is non-permeable, meaning moisture vapor emissions are trapped and unable to escape, it will push the material off the floor.  Sheet vinyl will trap the moisture,wood will absorb the moisture; and moisture and alkalinity can affect the PVC in carpet backing and create an odor. 

Failing to place vapor barrier/retarders directly beneath the concrete will allow moisture from beneath to move upward into and through the slab affecting the flooring material installed on top of it.  Fast tracking- installation often means concrete is not allowed to cure for the appropriate length of time. Installing non-permeable flooring material on top of it is a recipe for disaster.

Installing flooring before the substrate is in the proper condition to receive it allows the laws of physics to work against you. This condition is a daily challenge to flooring installations and results in millions of dollars in claims and losses for the industry. If we keep going the way we are, paranoia will certainly accompany every flooring installation of hard backed goods.

Changes in the way flooring is installed and the materials we use have to happen and the buck stops at every level of our industry. Construction supervisors in the building industry must stop fast-tracking concrete before floor installations and specifiers have to call for moisture retarders under concrete before the epidemic will stop.

Fortunately the minds of men feed on challenges and this is certainly so in the flooring industry.  Products do exist to combat problems and make installations easier.  The advent of the new Freelay® backing and installation system, for example, allows for any carpet to be installed without using an adhesive. This system works extremely well on substrates that would typically cause installation failures by traditional means.  The EnviroStix™  installation system for hard surface flooring such as sheet vinyl, vinyl tile, LVT and vinyl plank is designed to be used on slabs that would cause an installation failure by traditional means.  Both of these new installation technologies have been proven under the harshest of conditions.  One of the things we do at LGM and Associates is test products and we have tested Free Lay for years.  I have written about it in my Claims File column that appears regularly in Floor Covering News as well as the Commercial Flooring Report published monthly.

Failure of flooring materials and their installation has reached epidemic proportions but there are ways to prevent this from happening. The technology of these systems work but they have been met with skepticism by many in the industry. The technology will prevail over the disbelief driven by the demand of the end user who, once suffering the pain of a flooring failure, will insist on it.

Lew

Lew Migliore is President of LGM and Associates, a technical consulting firm specializing in all aspects of product and installation performance and education. He is also a consultant with the Floor Covering Institute.

Shifting Home Owner Goals Call for New Floor Covering Strategies

A new “buzz phrase” in the floor covering industry is the “new normal" -  that is what life in our industry will be like following the severe decline in the home building segment. This affects every tier of our industry as well as the goals and needs of our home owning consumers. Post-recession home owners may have new goals when it comes to buying floor covering.

The last couple of posts by the Floor Covering Institute have touched on the changing landscape that lies ahead. Jim Gould talked about how post-recession growth often claims more victims than the recession itself and how to make the most of your cash and assets in  “Avoiding Cash Traps as the Recession Slows and Business Grows."  Stuart Hirschhorn posed the question  "Is Hard Surface Flooring Just a Click Away?" which speculated about post-recession consumer spending habits.

In today's post I want to explore if there is a new normal as it pertains to our home owning consumers and how they will treat, more specifically invest in, their largest asset now that the bubble has burst. The flooring industry depends upon the home building and remodeling industries so we need to be aware of how new attitudes might alter both the products and marketing that will appeal to our customers.

In preparing this post, I came across an excellent article I wanted to share with you -  “5 Lessons From the Housing Bubble Bust” by Tamara Holmes of Bankrate.com, a leading source of information about mortgage rates and consumer trends.

Her article makes the point, among others, that the length of time our consumers will keep their homes is going to change.  They will keep their homes longer.  That point alone will surely influence the way consumers approach their floor covering purchases in the future. Here are three of the lessons she thinks consumers should take away from the bursting real estate bubble with my questions of how our industry should respond. What I hope this post will do is generate some thinking and conversation about whether and how we need to change up strategies to take these new goals into account.

Lesson 1: Consumers can no longer count on a home to be worth more than they paid for it when they are ready to sell. Buying and selling homes to trade up over the last decade or more was the old normal.  The new normal means longer commitments to their home – and by extension the floor covering purchased for it. 

Could this mean fewer turns in flooring or could  it mean that homeowners will be more willing to invest in higher quality products?

Lesson 2:  Timing the market to make quick equity gains will be impossible. When home prices were skyrocketing, many people bought homes they could barely afford thinking they’d ride the wave of rising equity since the market was on the upswing. Those days are gone. Instead, she says that our homeowners should be taking a long-term approach to real estate and looking for a home that will enhance their life.

Should “enhancing lifestyles” be a greater part of your marketing strategy?

Lesson 3: The days of treating a home like a piggy bank, that is refinancing to take out cash - even for home improvements - is gone.  

Should our industry be focusing on new alternative financing opportunities for our consumers?

Post-recession consumers may have different goals when buying floor covering in the future. What I find exciting is that no matter which of these lessons homeowners take on board there is an opportunity for retailers to sell floor covering that meets their needs, and this applies to both new construction and remodeling.

Let me know what you think and as always, if you have, thanks for reading.

David   

David Wootton is President of The Wootton Group, an independent flooring consultancy, and a member of the Floor Covering Institute. He is past executive officer of both Columbia Flooring and Harris-Tarkett.                                                                           

Is Hard Surface Flooring Growth Just a Click Away?

Observing and analyzing flooring covering trends is my business and this year as I walked through Surfaces, the U.S. flooring show,  I couldn’t help but wonder how the proliferation of click flooring across all hard surface categories would affect the industry.

After almost two decades of steady gains, hard surface flooring’s inroads in the U.S. floor coverings market hit a wall during this recession.  In 2009, hard surface flooring’s share of total U.S. square feet floor coverings sales declined to 37.9% from 38.1% in 2008.  This may not seem significant, however, it is the first time carpet and area rugs gained share in almost two decades.  Hard surface’s share would have fallen even more dramatically, if not for consumers growing interest in lower cost resilient flooring.  The drop in U.S. floor covering sales in 2009 was led by the sharp cut in demand for higher-priced laminate flooring, ceramic tile, wood, and stone flooring. 

So how do manufacturers and marketers respond to the adverse affects of this recession? Is the consumer shift to lower priced flooring products just a sign of the times or is there a permanent change in taste?  Are consumers going to use different flooring in the smaller, less costly single-family homes and apartments they are purchasing?

I went to Surfaces to see if any of these questions could be answered from the products showcased in Las Vegas.  What I saw was a widening array of hard surface flooring incorporating click technology.  I noticed more clickable bamboo and cork floors and more laminate flooring with ceramic and stone looks.  Valinge was even displaying a new technology, where a powder based solid layer replaces decor paper and thin gray overlay paper that will initially be used to manufacture ceramic and stone type clickable tiles.  I also noticed a new type of clickable plank that has a vinyl surface with a HDF core and a cork backing.  I call this a hybrid plank, and wonder which category the industry will classify this type of flooring.

As I walked the floor at Surfaces, I began to think about how these new products will change the prospects for the hard surface flooring market and wondered.... 

•    Will manufacturers and marketers just wait for stronger consumer spending gains in 2011 and 2012 or will the industry take action now to stimulate consumer demand? 

•    Will a strategy towards click-able flooring products make it simpler and easier to design and install hard surfaces? 

•    Will retailers target these products to the do-it-yourself first time home buyers, who are driving the current upturn in existing home sales? 

•    Will the combination of touch economic times and consumer’s desire for low prices create a greater need for a low cost retail model? 

We know the low cost strategy is already driving hard surface flooring sales to Home Depot, Lowe’s and Lumber Liquidators. What is your strategy to take advantage of the trend towards click-able hard surface flooring? 

I’d really like to hear your opinions and insights; it’s valuable feedback as I work on Catalina’s flooring reports.

Stuart

Stuart Hirschhorn is a member of the Floor Covering Institute and Director of Research of Catalina Research, Inc. which provides in-depth market research on the floor covering industry.

Avoiding Cash Traps as the Recession Slows and Business Grows

If your business has survived the recession so far, congratulations!  And fasten your seatbelts for the challenge of the recession recovery.  The economy has tested everyone’s skills but it isn’t over yet.  More floor covering businesses fail coming out of a recession than during it. 

Why?  As business slows in a recession, companies shrink inventory and collect receivables creating a positive cash flow.  While sales may struggle, there is cash to pay bills.  As business picks up, sales, inventory and receivables grow and suck cash out of the company.  All of a sudden there is no money to pay the bills even though business has improved.

Avoiding Cash Traps

Businesses need to watch out for common Cash Traps and one of the most common is inventory. As David Wootton said in his post last month  "think of your inventory as a big box of dollar bills."  Those dollars can be tied up in inventory too long if the purchasing decision is based on a faulty premise.  Some premises may sound logical but they are not always good business thinking when the total cost of procurement is not taken into consideration.  

 Examples are:

      • “If I buy the roll of vinyl flooring, I can sell it for less because my cost is less.” 

      • Or, “the margin in ceramic tile is twice that of carpet so I’ll sell ceramic and make more money.”  

      • And my all time favorite, “I’ll buy direct and save the 25% that a distributor would charge me.” 

Think about the value of cash that is tied up in the roll of inventory. Factor in the cost of remnant write downs, style obsolescence, damage, insurance, labor to cut, inventory management and a host of other hidden expenses.  A floor covering mill normally charges a 10 percent premium for a cut which is the exact size, color and style the customer wants now and is willing to pay for even before your payable is due!  Isn’t that worth 10 percent? 

Ceramic tile sells at higher margin because it costs more to handle and sell. Freight and damage are huge cost factors.  Just ask all of those people who went out of business trying to sell ceramic at laminate margins.  If you are not ceramic savvy, don’t go investing in ceramic inventory now.

Flooring distributors charge based on the services they provide and those services reduce the retailer’s cost of doing business.  A distributor’s profit is not the 25 percent difference between the truckload mill direct cost and the distributor’s carton price.  The average distributor’s bottom line profit is 2 or 3 percent.  This is not enough of a return on investment to justify “cutting out the middle man” unless you have completely analyzed the cost of providing those lost services yourself. Acting on this premise without knowing the total investment can be a drain on cash that may be needed to fund a recovering business.

In all of these cases, determining the Total Procurement Cost must be part of the analysis before investing in inventory.  

Consider freight, waste, insurance, obsolescence, inventory tax, claims, warehousing and handling, duty and tariffs, personnel to sell it and in some cases sampling.  And don’t forget the cost of capital.

Another kind of Cash Trap

Another kind of Cash Trap is when the value of  assets are under-utilized; trapping cash in a dormant state. There is a car dealer in St. Louis who has aggravated me for decades.  He advertises, “We own our lot and building so we can sell to you for less.”  What he is implying is that he does not have to pay a bank for a loan on his million dollar real estate investment so he can sell cars for less.  What?

There are two things wrong with his thinking.  First, he is ignoring the Cash Opportunity of his investment.  If he has a million dollars tied up in his lot and building, it has a value whether he is paying the bank or not.  He deserves a return on that investment the same as if the cash was in the bank, bonds or stocks.  Secondly, he has discounted the value of these assets for his business.  Should he consider borrowing on the lot and building so that he can fund a long term consumer credit program or buy more inventory?  If these would produce more sales and more profit, it definitely is worth more than an advertising slogan.  I am not suggesting that anyone overly leverage themselves in this economy; but I am saying that when cash is precious, its value should not be ignored.

There is no room for error now. Thoroughly understanding the cost of doing business is key to survival.

I am interested to receive your comments about hidden costs you've found and how you determine cost and profitability in your business.

Jim

Meet Ruud Steenvoorden, Newest Floor Covering Institute Consultant

I’m pleased to introduce Ruud Steenvoorden, the newest consultant to join the Floor Covering Institute consulting team.  Ruud was born in The Netherlands but now lives in South Africa after a 35 year career with Fetim. B.V.  Fetim is one of the largest wood flooring providers in Europe with channels to retail, commercial and DIY chains.

Ruud began with Fetim in 1975 and actually grew up in the business, starting as a trainee and eventually becoming the Director of Corporate Buying responsible primarily for Fetim’s hardwood flooring products. He has conducted business in China, Indonesia, Hong Kong, and across Europe and has been responsible for wood flooring production from logs to showrooms. His business experience includes mergers and acquisitions, international product sourcing, channel distribution, marketing and much more. He speaks four languages: Dutch, English, German and French.

From 2005 to 2009, Ruud was also vice-president of the European Federation of Parquet Importers (EFPI), a Brussels based association of European importers of engineered and solid wood flooring.

In 2006, after more than 30 years with Fetim, Ruud and his wife “retired” to their summer home in South Africa.  There he continued to manage the strategic side of Fetim’s wood flooring business and began to transition into independent consulting with, Steenvoorden Consultancy. We are thrilled to have him on the team at the Floor Covering Institute. In this interview I think you will find his experience not only impressive but interesting.

SN: Ruud, how did you and Jim Gould become acquainted?

RS: Although we have many common acquaintances, Jim and I did not meet until the SINO US EUROPE Wood Flooring Summit in Shanghai last year. Thomas Baert of China Floors suggested that I would make a good addition to the Institute. I was very delighted with this idea and immediately accepted Jim's invitation. I have the feeling I have entered a completely new world that is very challenging. Now I am part of this prestigious group at the Floor Covering Institute, and like my peers there, I am passionate about the floor covering industry.

SN: What do you like most about this industry?

RS: It is an incredibly big market, worldwide, and the changing trends are very challenging. If you look back ten years you see the changes and I can only say you have to stay awake in order to be able to follow it. I am not only talking about the products but also the facts around it like changing laws and the environment.

SN: You spent over 30 years at Fetim, tell me how you got started in this long career.

RS: Believe it or not, I started at Fetim as a trainee before the company included flooring in their product line. The company was an importer/distributor of wood construction materials mainly in the Dutch area which is where I was born (the Netherlands). I studied wood technology in the early years then learned to design products, find the raw materials and suppliers, get the products manufactured to specification, marketed and distributed.

We learned that commodity products were popular with the customers but didn’t provide enough profit to grow a business so we invested in innovation. Fetim actually was one of the first companies in our industry to have a separate division dedicated to creating new products and product groups. We then split Fetim into two divisions; retail and commercial, and I sourced and marketed for both.

SN: What part did you play in getting Fetim into flooring, specifically laminate?

RS: This is a great story of how relationships and ideas can combine to make great things happen.  In 1986, when we entered the flooring business, carpet was 85% of the market. By 1988 Pergo was just introducing laminate in Europe. Fetim was keen to have a laminate product so I visited my counterpart at Kaindl, who at the time produced particle board and HPL shelving, among other things, but not laminate flooring. They were also looking to diversify and he showed me a Pergo panel. I asked him whether he would be interested to make such products and he said that he was considering it but did not have the courage as yet. I asked him, “if I gave you an order for 100,000 m2 would you consider purchasing the necessary machinery?”  He answered “yes!”.  It was one of my best deals ever and it took only a few minutes. Kaindl, who belongs to the huge Kronospan Group, was the pioneer in their group and later all their factories started to produce laminated flooring. The product became a big success in the Fetim Group and still today Fetim is the main player in this field in the Benelux area (Belgium, Netherlands and Luxembourg).

SN: It’s an interesting coincidence that you sparked the growth of laminate in Europe and Jim did the same in the U.S. when he introduced Pergo. Do you find you have other things in common?  

RS: I think that Jim and I both look further than just the product itself; in fact both of us have a high level view of the total product groups in general. We try to focus more on continuity and the long term strategic approach. I think on a long term basis and take the necessary steps for achieving that.  I say it’s “the continuous drop that finally makes the hole in the stone!”

SN:  What was your experience in the early years doing business in China?

RS: When China became the low cost provider to the world during the 1990's they had a policy to create work in the rural areas and wood flooring factories were set up in the highly forested North east sections of China. It was the business of many Chinese delegations, arriving in groups of 10-15 each time, to ensure that workers were working. By the end of the 1990’s those factories were producing 3-ply engineered flooring and also solid white oak flooring.

But it was not simple. I saw beautiful factories with absolutely top machinery from Germany and Italy, capable of producing a very nice product. However,  just having the machines is no guarantee of success. Management, raw material and staff training were needed to build up a steady product and even after that was realized, a lot of personal guidance from the buyer was needed to keep the quality on a stable level. In fact, buyers like me had to control the production process from the log to the final product. But is was worth going through the process although it was not always well understood by my management. It was the hard way.

After successfully surviving the early challenges, we started marketing solid wood flooring, branded SOLIDFLOOR (r), for the whole European market. We developed our own products, manufactured them in China and became the market leader for imported wood floors in Europe. Fetim is still the market leader today

SN: Did you play a part in the marketing as well as the sourcing and distribution?

RS: Yes. You cannot only be partly active in either purchasing or marketing. you should be able to overlook the whole field of the product line between factory and final consumer, only then you can translate opportunities to both sales' and purchasing sides.

SN: You are co-moderating China’s wood flooring summit with Jim next month.  Why do you think this is important?

RS: It is an initiative to bring parties involved in wood flooring together to discuss topics and general points of improvement required by the global industry. This greatly appealed to my approach to the industry.  My slogan has always been: better to talk with each other than talk about each other. Both EFPI and the summit have proven that it can work when competitors sit at the same table, because at the end of the day, nobody can do it alone.

SN: It sounds like you are very happy to begin a new adventure.

RS: Yes! Now I am going to concentrate my activities on The Floor Covering Institute. I will go to Shanghai in March as moderator of the US-SINO-EU summit together with Jim, with only one goal: bring a long life to the flooring business!

Welcome to the team Ruud!  If you would like to send Ruud a welcome comment, place a post below or send him an email, ruud@steenvoorden.com.

Susan

What's Happening at the Floor Covering Institute?

I can’t believe it’s almost March 2010!  In my past life as a flooring retailer, March was always one of our busiest months and it seems the same is true now. People often ask me what types of things the consultants work on but because they are independent business owners I don’t always know what everyone is doing. I checked in with several of them and this is what they reported. Besides being busy, I find the diversity interesting and hope you will too.


Lew Migliore – expert in technical flooring standards and claims

It seems that no grass will grow under Lew's feet with his speaking events on top of an already busy schedule. Here are just some highlights. Next week he addresses the Floor Covering Installation Contractors Association speaking on recent claims and how they could have been avoided.  The following week he addresses the National Facilities Managers and Technology conference in Baltimore speaking on "The Importance of Proper Carpet Selection and Specification." In April he will participate in a joint INSTALL/UBC Floor Covering Leadership Conference in Las Vegas designed to give contractors and manufacturers hands-on information to keep their business flowing. With others he is currently rewriting the Carpet Inspection Reference Guide and his company will soon roll out a new carpet protector product that they co-developed.

David Wootton – expert in business practices and troubleshooting

David is putting his years of business management expertise to work in both Europe and the U.S. right now. He is advising an Eastern European company on how to organize their business within Europe and helping a U.S. company to secure investment financing. He is often contacted by companies looking for key people and he is presently involved in recruiting for a large U.S. flooring company.



Christine Whittemore – expert in social marketing and marketing to women in retail

In April, Christine will participate at Columbia University’s (her alma mater) BRITE ’10 conference in NYC where bright minds and big thinkers from business, technology, media and marketing gather to discuss how technology and innovation are transforming the ways that they build and sustain great brands. It is this kind of knowledge that Christine uses to help flooring retailers such as Big Bobs Flooring Outlets of America, which she recently addressed as keynote speaker at their annual meeting. She spoke about the importance of delivering a memorable and consistent retail experience, both in-store and digitally. Her interview with e-Floors magazine (their debut issue) was just published where she spoke on the use of digital technology to strengthen relationships with customers and the habits of the flooring consumer of tomorrow. The nuances of selling flooring to women is not just an area of expertise for Christine but it is a passion that Floor Daily captured in their recent interview with her. I highly recommend that you read her highlights of this interview, or listen at FloorDaily.net.

Stuart Hirschhorn - expert analyzer of the global flooring industry

Stuart reports that he is working on the Catalina Laminate Flooring Report and seeing a growing competition from and increasing array of "click" installed flooring.  He will soon start work on the Stone Product Report and the March 2010 Quarterly Update to the Catalina Report on Floor Covering.  As you can see here, flooring is just one of many related topics that Stuart and Catalina analyze and report.


Christopher Ramey – expert in branding and retail in the affluent realm

In addition to consulting with clients who range from inside and outside of the flooring industry, Chris is a popular keynote speaker, speech writer and coach and has recently devoted significant time to sharing his insights with a variety of people including the Palm Beach Chamber of Commerce, The Commonwealth Institute and Young Professionals in Yachting, as well as teaching at Indian River State College.  He just spent a couple days with a private equity firm interested in investing in the flooring industry. He says that regardless of whether you’re in floor covering, the financial world, yachting or serving the wealthiest individuals in the world, the insights are more impactful when they come from a broad and informed perspective. A new article by Chris was just published in the 2010 edition of LUX magazine, another will appear in the Spring issue of .IT, the magazine for Italy-America Chamber of Commerce – Southeast and he just finished a new column for Floor Covering Weekly.


Jim Gould – expert in market development, international trade and distribution channels

Jim recently observed that it seems every one of his clients has a synergistic relationship with another that they don’t know exists. Recognizing those synergies is what he does best.  He just returned from Surfaces where his client, New Zealand wool growers, successfully launched the new Just Shorn wool brand with the International Design Guild, a division of CCA. He is now working on phase two of that project.   He is also organizing, and will moderate, the third annual International Wood Flooring Summit as part of Domotex asia CHINAFLOOR in Shanghai in a few weeks. The international Domotex exhibitions are his clients and one or the other is always at some stage of planning or execution.  At home he is helping both Chinese and European manufacturers expand their markets into the U.S., and counseling a domestic manufacturer who wants to expand overseas. He is developing a Far East sourcing and logistics strategy for a  large U.S. company.  And like most of the consultants, he is always writing and publishing.

Meanwhile, back at the ranch....we have two new members joining the Institute this month and next. Later this week you will meet Ruud Steenvoorden an international wood business expert who will join Jim in China and co-moderate the International Wood Flooring Summit.  And next month you will meet Donato Pampo, of the Ceramic Tile and Stone Consultants, Inc (CTaSC).

I hope you found this summary of what's happening enlightening and maybe it will put some of what we do into perspective. Thank you for reading.

Susan

Susan is the Director of Communications for the Floor Covering Institute, a fancy name for "she who does whatever needs to be done."

Understanding Opportunities in China

In China Has Awakened. Are You Ready? I mentioned that I plan on sharing with you digital resources to help better understand global opportunities. My focus, for now, is China.

Understanding Opportunities in China: AccessAsia

In this post, I introduce you to AccessAsia and Malcolm Moore.

AccessAsia

AccessAsia provides market intelligence to companies wanting to do business in Greater China and Southeast Asia. From their About Us section, they are based in the UK, Malaysia and China and have been in business since 1997. They've also worked with an impressive roster of companies.

Their resources section offers at-a-glance a map of Greater China and Southeast Asia. Click on any country - for example China - and you have a snapshot of the country and some vital links.

The links section captures links to newspapers & media, travel sites, culture, business services, governments and stock exchanges.

Finally, check out the Weekly Update. AdAge describes it as "a snarky weekly update reflecting relevant business, economic and political issues."

Malcolm Moore

Malcolm Moore is the UK's Daily Telegraph correspondent in Shanghai since July 2008 and writes about his experiences in China. His perspectives are fresh, entertaining and insightful. "Chinese man living in airport returns home" is his latest Daily Telegraph article from 2/12/10.

Also check out his Top 7 Chinese Whispers of 2009. Note the references here and in the other China relates resources to "Haibao" - the official blue World Expo 2010 Shanghai China mascot [who reminds me a bit of Gumby...]. Those of you headed to Shanghai for DOMOTEX asia/ChinaFloors may have the opportunity to get up close and personal with Haibao! If so, please do send a picture.

Would you let me know what you think of these two resources?

If you have others, I'd love to share them here in this space.

~ Christine

Christine B. Whittemore
Chief Simplifier, Simple Marketing Now
cbwhittemore@simplemarketingnow.com

Flooring Companies: It's Time for your Annual Check-Up and Spring Cleaning

I believe the year starts when Surfaces is over and manufacturers have announced their plans for the coming year and introduced their new collections. Domotex, Surfaces and manufacturers’ road shows are over and it’s time to push ahead with 2010. However now is also the time to check your company’s health, perform the annual check-up and do some spring cleaning. This applies to all channels in the industry be they manufacturer, distributor or retailer.

By now most of you should be well along in the process of creating new budgets for 2010 but for those who may have just completed your audit or are still in the process here are a few suggestions I hope you find helpful.

The Physical: Examine Your Statements and Set a New Budget

Review your income statement for 2009 and compare it with 2008.

• On a line by line basis compare the number for 2009 with 2008 and make sure you can explain the difference better or worse. This will enable you to keep doing what’s working and fix what needs improving.

• Calculate your average selling price and determine why it has changed since the previous year. Was it caused by a change in the product mix (maybe people trading down in view of the difficult economic situation) or did it increase as a result of some new better margin products you began selling?

• Compare the difference between total sales for ‘09 versus ‘08. Is the difference new customers, customers lost, or simply a change in volumes sold?

Regarding the cost of sales, manufacturers should compare labor and material costs on a “per thousand square feet” basis to highlight differences that need explanation. With distributors and retailers it’s a case of analyzing your margins. Did you have price increases from your suppliers you could not pass on or did you take advantage of any promotions?

Next, take a look at fixed overhead costs, the biggest portion of which is usually salaries and related costs. Calculate total overheads as a percentage of sales and explain the change. If it is higher maybe you should have reduced staffing levels.

Compare 2009's actual with the 2010 budget.

• Determine if the 2010 budget is realistic. The most important questions to answer are: “How much does the market need to improve for the budget to be realistic?” and  “Is it achievable given present market conditions?” If the answers are “A LOT” and “NO” then your business could be in trouble because your budget is showing what you would like to achieve versus what is realistic.

• Do the same comparisons as detailed in the income statement section and this will highlight the magnitude of the task. Having reviewed many budgets over the years it has always amazed me how often the first quarter of a new year is forecast to be so much better than the last quarter of the previous year. Businesses rarely turn around that quickly, especially in today’s economy.

If my comments apply to your budget then revise it so that you come up with a realistic achievable target. It’s okay to have a budget that is a stretch but not one that requires a miracle!

Compare working capital in 2009 with 2008.

This is all about cash flow by which all companies ultimately succeed or fail. I am referring to receivables, payables and inventory and their impact on cash utilization.

• Receivables. The best method to measure receivables is to calculate the number of days sales outstanding (DSO) at the end of the year, or any period for that matter, and see how it compares to the previous period and your published terms. Keep a very close watch on receivables and remember that banks do not sell flooring (at least not yet) so you should not be lending money. Do not be afraid to put customers on hold if they are delinquent. It probably takes more than $10,000 in sales to recover a bad debt of $1,000.

• Payables. It would not be ethical to suggest that you “drag your feet” when paying bills but be aware of discounts available and give those suppliers preference. Always make sure the value of the discount exceeds the interest payable if your business is operating on borrowed money.

• Inventory. Inventories are an especially challenging and sensitive area. Think of your inventory as a big box of dollar bills because that is exactly what it is. It is very easy to be seduced by attractive pricing on bulk purchases but this will probably mean you have to fund this inventory for a significant period by paying for it before you sell it and this can put a strain on cash flow. Purchases from overseas pose a similar problem given shipping times and volumes involved.

So that completes your company’s physical. Spend a day on the exercises outlined above. I am sure you will find it very worthwhile. If you are a member of senior management it’s easy to gain access to these figures, but whatever your “pecking order," you should be able to see the numbers that directly affect your area of responsibility. Sales people can analyze sales by customer and reps and manufacturing people can look at the product mix of items produced to highlight the profitability, or lack thereof, of various products.

Finally, I want to talk about your Balance Sheet and that brings us to . . . .

Spring Cleaning: Review and Revalue Inventory and Receivables

In the same way we can fool ourselves with an over ambitious budget, it is all too easy to fool ourselves with the value of the inventory and the “collectability” of receivables.

Although your inventory may be correctly valued based on the original purchase price you must ask yourself “What can I sell it for today?” If it has been in your inventory for more than a year chances are it's worth less than your inventory listing shows. In the floor covering business, moldings are a prime suspect as are samples, displays and accessories. Do the exercise and spring clean your balance sheet by correctly valuing your inventory.

The same principle applies to receivables. If an invoice is unpaid after 90 days it is usually because there is a query surrounding it. Again, as part of your spring cleaning, get the old accounts cleaned up, resolve queries, and write off what is not collectible so your balance sheet accurately reflects what you can reasonably expect to collect.

After your physical your spring cleaning can now get underway.

I am not trying to teach you to suck eggs but merely pointing out the need to be realistic and having been in the flooring industry for more than 20 years I know it is not as easy as I may make it seem. It is however important because I do not see 2010 being significantly better than 2009.Please read my blog post from October which gave my thoughts about future trends in our industry: Wootton Takes a Look at the Future of Our Industry

If I can be of help to you let me know and similarly if you disagree with anything I have written I would love to hear from you.

As always, if you have, thanks for reading this.

David

David Wootton is President of The Wootton Group, an independent flooring consultancy, and a member of the Floor Covering Institute. He is past executive officer of both Columbia Flooring and Harris-Tarkett.