Distribution Evolution - April 2006

By FRANK O'NEILL, Publisher

If you haven’t read Santo Torcivia’s article, “Floor Wars: Home Centers vs Flooring Specialist” on page 19, go read it right now, then come back and read what I have to say here. Santo’s story contains some big clues on how you can beat the boxes.

Obviously, the first thing you should do is be bold about the few things that truly set you apart from the big boxes. When you put ads in your local paper, aggressively attack the big boxes. Compare yourself to them in these areas:

Superior service
Better selection
Straightforward and fair pricing

You also want to spend most of your energy on products where you can truly win the war. Yes, hard surfaces have been growing like crazy in recent years, but as Santo points out, you’re going to do a lot better if you concentrate on four categories: carpets, rugs, hardwood and sheet vinyl. By no means ignore ceramic and laminate; just understand that the big boxes are the primary reason we’ve seen such growth in those categories. If you can be very selective in the ceramic and laminate products you sell, you should do fine in those categories, too.

Your secret weapon, though, could be the manufacturers. I’ve never understood why some retail groups continue to put so much emphasis on the buy side. At one time, maybe a decade ago, it might have been a good strategy. But not today. When you squeeze your suppliers, you can only have an adversarial relationship with them.

I think it’s in the best interest of both the manufacturers and the retail groups to form strong alliances. Retailers should be making their money on the sell side, and manufacturers should be very wary about giving too much of their business to the big boxes. It’s just going to come back to bite them. Let me explain.

ARE THE BIG BOXES BAD FOR OUR HEALTH?

I just read the story of Jim Wier, the former CEO of Simplicity and Snapper lawn mowers. Wier’s company bought Snapper, one of the highest quality mower manufacturers in the U.S., several years ago. At the time, Snapper had been selling its mowers at Wal-Mart for three years, but shortly after the sale, Wier began wondering if it was a good idea. The company wasn’t making money at the prices it was giving to Wal-Mart. So he decided to go to Bentonville, Arkansas to talk about it with the Wal-Mart v.p. in charge of his products.

When he got there, the v.p. tried to talk him into increasing Snapper’s business with Wal-Mart. Wier told him that his lawn mowers were still too high priced for most of the store’s customers.

“At the price I’m selling to you today,” he told the v.p., “I’m not making any money on it. And if we do what you want next year, I’ll lose money.”

The v.p. told him to find a lower-cost contract manufacturer so they could make a separate, lower-quality line with the Snapper name on it just for Wal-Mart.

That was an option, but Wier did something that might be unthinkable to some manufacturers. He said no.

Wier could have continued with Wal-Mart and not gone out of business, because more than 80% of his sales were with independents. But he decided that he didn’t want to compromise the quality of his products.

In the long run, Wier feels he made the right decision. He instantly lost nearly 20% of his sales, but he gained the undying loyalty of the independents who have always bought most of his products. He’s not unaware of the problems that independent lawn equipment dealers face from the big boxes and he’s not anti-Wal-Mart. “Wal-Mart offers reasonably good product at very good prices,” he says, “and they’ve streamlined the entire distribution system.”

But he also feels that Snapper plays a part in the future of the independents. “Can Snapper, as a major supplier, continue to supply the independents with a good product, a product that’s different than you can buy at Wal-Mart?” he asks rhetorically.

I thought Wier’s story bore striking parallels to the problems both retailers and manufacturers in our industry face with the big boxes. A few manufacturers in our industry long ago decided not to sell to the big boxes—and I’d hope they have the undying gratitude of the independents— but most sell to both the independents and the big boxes. Some sell the same products to both, which causes great problems for the independents, who can’t possibly compete on a same product basis with the big guys.

I think it’s time that all the flooring manufacturers take a good hard look at their manufacturing and distribution policies, just like Jim Wier did. It makes great economic sense for the big manufacturers to sell to the big boxes, and no one should expect them to change those policies. But the big guys should also remember that the independent, the mom-and-pop retailer, is the core of their business, and that the more business they give to the big boxes, the less control they have over their future destinies—and their bottom lines.

The manufacturers should be giving the independents distinct, higher quality products that consumers won’t be able to get in the big boxes. And they should be giving them special merchandising programs and lots of other incentives to keep them financially healthy. In return, the retailers should be giving the manufacturers who do so their loyalty.

The bottom line for the big boxes will always be price, and that will ultimately put their suppliers up against a wall they can’t climb over. The boxes are already buying a lot of flooring products from China—because China fits perfectly into the big box blueprint: buy low and sell just a little bit lower than your competitors. Someday soon, U.S. flooring manufacturers are going to really feel the competitive heat from China. Right now, it’s just a slow burn.

I’m reminded of the 80s, when the big fiber producers couldn’t do enough to keep their biggest customers happy with special pricing and special concessions that the smaller manufacturers didn’t get. We’ve all seen where that got the fiber producers.

If the manufacturers give too many concessions to the big boxes, the same thing could happen to them. They should never forget that the independents are their most valuable customers.

DON’T FORGET THEM, EITHER

It’s more than six months since Katrina took her deadly walk through New Orleans and the Gulf Coast, and that area is still reeling. I hope more fortunate people in our industry haven’t forgotten the retailers and suppliers whose businesses were damaged by the hurricane.

I know of at least one group that hasn’t forgotten, and that’s CCA Global, the parent company of Carpet One and Flooring America. Back in September 05, CCA Global set up the CCA Relief Fund, and began collecting donations from members. To date, the fund has taken in $126,000 and given out $109,000 to 43 people along the Gulf Coast and in Florida.

I just heard the other day that reconstruction of New Orleans could take decades—that’s right, decades—so people there are going to need help for a long time. Please don’t forget them.

HARDWOOD MOVES

Shaw Industries’ decision to convert an old yarn mill in Tennessee into its first hardwood manufacturing plant was a bit of a surprise, only because I had always thought Shaw would try to buy Armstrong and its hardwood flooring business once that company emerged from bankruptcy. But I guess a company can only wait so long, and Armstrong’s emergence from Chapter 11 keeps getting delayed.

Shaw’s entry into hardwood manufacturing is a small step toward the dominance that company eventually wants in that sector, with 20 million square feet of flooring—about $60 million worth—projected for its startup year. But it’s actually a terrific training ground for what will inevitably be a much great involvement in the hardwood business. Larry Pryor, who comes from Bruce hardwood, will manage the plant.

Just two weeks after Shaw revealed its plans for the old yarn mill, we got another surprise, when Armstrong said it had acquired two small hardwood manufacturers, the Mississippi firm Capella, and the Pennsylvania firm Homerwood. Almost in passing, the release also mentioned a joint venture in China that will increase capacity for engineered wood.

Why would the bankruptcy court allow these acquisitions? Most importantly, Armstrong Hardwood is profitable, and nearly as important, it has outdated facilities that would have to be updated if these acquisitions hadn’t been made. The acquisitions get that done, and although the price wasn’t disclosed, it certainly had to be as reasonable as investing in existing plants that may already be obsolete. Those arguments would definitely sway the bankruptcy court into allowing the deals to go through.

Capella, a company whose sales are estimated at slightly over $15 million, gives Armstrong the unique capability of making engineered wood boards up to six feet long. Homerwood, whose plant is located in Titusville, a small town in western Pennsylvania, makes high quality, hand scraped Amish style planks. Homerwood’s sales last year were about $25 million. Both companies expand Armstrong’s product line nicely.

The Chinese joint venture is absolutely intriguing. The company hasn’t said anything about it, but when the world’s largest hardwood manufacturer makes a deal in China, you have to sit up and take notice. Chinese wood is already making a big impact on the American market as you’ll see in our hardwood survey on page 31, and this will certainly accelerate the process.

My only question now is: Who’s next? We’ve already seen Anderson Hardwood move into China, and most other big North American manufacturers are already sourcing a lot of product from that country. So are CCA Global, Home Depot and a handful of other U.S. retailers. I think we’re at the beginning of a dramatic change in the hardwood flooring business, but I’m not quite sure what shape that change will take yet. But I assure you, you’ll read about it here first. And I also assure you—it’s going to be interesting.

If you have any comments about this month’s column, you can email me at foneill898@aol.com.

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