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What Lessons Should We Learn from Floor Covering Leader, Lumber Liquidators?

The most successful floor covering retailers of late are those that seemingly remain outside the traditional industry; Home Depot, Lowes and Lumber Liquidators.  Home Depot and Lowes, along with their lesser home center competitors, have taken about 25% share from independent floor covering dealers.  Most independent "Mom and Pop" dealers aren’t aware of the amount of business they’ve lost because the Lowes and Home Depot customers never darken their door.


The newest competitor diverting customers from traditional floor covering stores is  Lumber Liquidators.  With a 180 stores and growing, they’ve made a substantial impact on the hardwood and laminate industries.  Again, most traditional floor covering stores don’t know it because Lumber Liquidators’ customers don’t bother shopping around nor are they part of the traditional floor covering community.  To date, Lumber Liquidators owns an 11% share of the hardwood category and 6% share of the laminate category.

A private equity firm recently asked me whether there was a risk that another competitor would start a chain of stores in direct competition to Lumber Liquidators.  My response was “Who will fund a chain of small stores in less than ideal locations managed locally by guys that look like they belong on a fork lift?”  His response was “Point well taken.”

Forbes recently named Lumber Liquidators the #1 Small Public Company in America.
Lumber Liquidators' (NYSE: LL) market value as of February 20th was over $621 million.  To put in context, that is over 20 times the market value of Dixie Group (NASDAQ: DXYN).  Is it possible LL could be worth more than the combined value of all American independent floor covering stores who have been bleeding for three years?  Not bad for a little store started by a building contractor in 1994.


Sun Trust Robinson Humphrey tells us that Lumber Liquidators will have 224 stores averaging $3 million by the end of their 2010 fiscal year.What is the magic that makes Lumber Liquidators so successful?  They break all the rules of retail success.  Or do they?  Their assortment is concise with only 350 skus; they don’t confuse customers with selection.  Their gross margin has been hovering around 36%, and their pre-tax margin is bumping 9%.  Assuming they’re buying properly (and we all believe they do) and eliminating most distribution expenses, their value proposition is very strong.  Controlling costs and supply, and investing in marketing are elements of Retail 101.

During their most recent conference call with investors they claimed they had the highest quality and the best guarantees in the industry.   I wonder what you think ?

Here are some more Lumber Liquidator facts:
•    They buy direct from Asia and claim to control 90% of the output from most of their suppliers.
•    They believe they compete head to head with independent retailers – not home centers.  
•    Most showrooms are between 800 and 1,000 square feet.
•    The average transaction is $1,570.
•    It costs about $50,000 to open each new store.
•    New stores average $2 million their first year of operation.
•    Their focus is retail consumers – not new construction or builder work.
•    Half of their customers install the product themselves.

Their success is not an anomaly in the flooring industry.  The nation’s leading tile company, with a 25% share of the market, is Dal-Tile. The obvious similarity with Lumber Liquidators is remarkable; hundreds of small stores in warehouse locations.

So, the retail leaders of three (hardwood, laminate and tile) of the five major floor covering product categories operate in small warehouse locations.  Why not carpet and vinyl?  Who will be first?  Is this the future of floor covering?

I’d like to know your thoughts.

Chris

Chris Ramey is president of Affluent Insights and a member of the Floor Covering Institute.

Comments

  1. One thing is for certain, businesses in the floor covering industry, like any other industry, need to be constantly looking at their positioning in order to stay in the game. Positioning against competitors is just as important as positioning to clients.

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