Tuesday, October 26, 2010

Wootton's Outlook on the Flooring Industry

October 28th is a milestone day for me and my family. It will be 20 years to the day since we came to America and the floor covering industry. The headlines that day were shared with two major issues:
•    America was fighting a war in the Middle East.
•    The nation’s economy was in a very poor state.
Fast forward 20 years and the headlines are the same with little sign of the war ending or the economy improving in the immediate future.

I find myself asking how 20 years have passed so quickly and how so much could have happened and yet so little has changed, and more importantly, I wonder what the future holds. For me personally, life hopefully will mean travel, enjoying my family, working on interesting projects and doing all the things we have been unable to do during the years when work came before everything else. As for the future of the floor covering industry, well that’s a little more complicated.

Although the stock market is currently trending upwards, unemployment remains high, there is much political discontent and the fall-out from the banking chaos of the past couple of years continues to raise its ugly head and it’s likely to continue. Here's a look at the current major dynamics affecting our industry.
New home construction, which like it or not, is the major driver of our industry remains depressed. September's figure for single family units was down nearly 14% over the same time last year. The overall numbers may be improving slowly but we are still light years away from the heady times between 2005 to 2007.
It used to be when home sales declined the repair and remodel segment stepped up to offset the slack. This time it has not been the case.  Even though the report from the Joint Center for Housing Studies at Harvard released recently forecasts remodeling growth in 2011, this outcome remains very much to be seen, and a remodeling survey released this fall confirms that homeowners plan to scale back the size and scope of their remodeling projects.
Both new home sales and remodeling rely greatly on the ability of consumers to borrow money from banks. Despite historically low interest rates, lender’s requirements for a 20 percent deposit lessens the number of qualified buyers and often means those who are qualified will have insufficient funds for remodeling after the purchase - and that’s traditionally been a major source of activity in floor covering.
We have not yet seen the end of the foreclosure mess; short sales continue (they were 12% of sales last month) and inventories of unsold homes are still high. Some estimates put the excess supply at between 1.4 and 2.5 million units now.
The average size of new, single family homes is decreasing as consumers trend towards downsizing. The National Association of Home Builders reported earlier this year that more than 95% of builders surveyed planned to build lower-priced, smaller models this year. This trend will obviously impact the demand for floor covering.
 Uncertainty surrounding job security and the inability to viably fund the home sale and purchase process means employees are reluctant to relocate their families to different parts of the country; again affecting the housing market.
Although the unemployment numbers are not rising dramatically they are not declining and current forecasters expect unemployment to remain above 9 percent in 2011.  Many companies are not hiring, and indeed much of the improvement in earnings of public companies is a result of reduced operating costs (including labor) rather than increased sales.
Home Centers and some large retailers, like Lumber Liquidators, report their sales are increasing as they take market share way from specialty retailers because price conscious consumers are focused on price alone.  
Consumers are trading down in the floor covering purchases.  Before the recession they invested in floor covering and appreciated Lifetime or 50 Year Warranties; now they are looking for something that will look good and get them through the next five years. This is partly because big box stores and retailers like Lumber Liquidators have “commoditized” flooring and in the consumer’s mind every ¾” oak wood floor and every wool carpet are equal.
Meanwhile, prices for floor covering have increased because large scale manufacturing and distribution efficiencies enjoyed a few years back have been lost with declining sales.

Here is what I believe we will see in 2011.

Continuing slow improvements in the housing market as foreclosures, existing inventories and banking rules slowly get sorted out.
The “big fish” manufacturers who offer carpet, vinyl, hardwood, laminate and ceramic continuing to fight for a bigger slice of a smaller pie.
Continuing uncertainty for distributors as domestic manufacturers continue to search for cost reductions in the supply chain.
At retail, home centers continuing to grow and the remaining “unattached” specialty retailers seeking the comfort and benefits of belonging to one of the groups as they strive to fight off the “big boxes.”
Globally (with the possible exception of carpet) I do not believe the US flooring industry will secure significant additional business overseas.
Overall, I do not expect to see a major improvement in 2011 vs. 2010  - although I will be happy to be proved wrong. I am not being pessimistic merely realistic and I urge all of you, irrespective of size and position in the supply chain, to continue to monitor operating costs and cash flow so that when the industry really starts to improve you are still here to enjoy it.

Finally as we near the end of 2010 let me thank you for allowing me to be part of your industry for the past 20 years. It has been, and still is, immensely enjoyable and rest assured as the economy improves the floor covering industry will improve with it to the benefit of us all.

If you need my help let me know and 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 CEO of both Columbia Flooring and Harris-Tarkett.

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