November 20/27, 2017: Volume 32, Issue 12
By Reginald Tucker
Colorado Springs, Colo.—If current business trends persist, the next few years should be prosperous for floor covering distributors. That’s according to ITR president and economist Brian Beaulieu, who delivered an enlightening economic keynote presentation at the North American Association of Floor Covering Distributors (NAFCD) conference, which was held in conjunction with the North American Building Material Distribution Association (NBMDA) meeting here earlier this month.
“The economy continues to grow and the consumer is in great shape,” he told attendees in the packed ballroom. “We don’t see anything that can go awry. We see a lot more growth than anything else in our future.”
Beaulieu made it a point to allay attendees’ concerns about the contentious political climate, assuring distributors and manufacturers that the sky is not falling. “Beyond 2022 it’s going to get a little bumpy, but we don’t foresee any recessions. We don’t spend a lot of time listening to politicians.”
Looking at business conditions at this point in time in 2016—when his brother, Alan, addressed the group at last year’s convention—Beaulieu says the U.S. economy at present is rising above year ago levels. He describes it as a “flywheel effect.” In other words, things that happen in the last year—i.e., the Presidential election, policy changes, etc., affect what happens the following year. Still, he noted, conditions are ripe for distributors to prosper. “Whether it’s blue [state] or red [state], you can still make green,” he told attendees. “Stop relying on a tax break to make things better for you. What you do in your business every day has more of an impact on business. Stop worrying about who’s in the White House.”
Indeed, virtually all the major economic indicators point to an economy in recovery. “The stock market, which sees activity six months in advance, is going up,” Beaulieu stated. “The fact that it’s rising in November means we’re looking at positive activity through May of 2018. Based on forecasts, investors can expect a rate of return between 1%-2% over the next five years. You can’t time this market in terms of the lows and highs, but you can decide when you’re going to put fresh money in the market. You just have to be patient.”
Another positive indicator is the bond market, which Beaulieu says is currently higher than the stock market. “We saw the same thing when Ronald Reagan was elected. U.S. Treasury 10-year bond prices went up when Trump was elected.”
Looking at macro-economic trends, Beaulieu expects the Federal Reserve—under a new chairman—will be far less aggressive about interest rates than initially projected. “My message to you is to take advantage of these low interest rates.”
Another trend moving in America’s favor is its standing in terms of global industrial products. Beaulieu cited statistics showing the U.S. leads the pack, representing 24.7% of the world economy. “The U.S. is No. 1 and will be the leader for the next 100 years. Plus, a growing population almost ensures continued economic growth.”
But Beaulieu didn’t paint a rosy picture all around. He cited data showing the U.S. market will likely face a severe labor shortage in the next 15 years. The good news, he said, is this is not relegated to the U.S. but is rather a global phenomenon. His advice? Become more innovative in the hiring process. “Recruiting is the first part of the battle, but there’s also retainment.”
All in all, though, he told attendees that businesses predicated on consumers who demonstrate an increase in confidence will be in good shape for the foreseeable future. The only caveat: If retail sales dip below the 2.5% growth rate, then it’s time for concern. “You should be very bullish about your outlook for 2018. The consumer looks strong and you should be planning on this growth. This is the best economy on the planet, and there is no better time to be us in America.”
Overcoming challenges
Despite ongoing issues with labor, tighter profit margins and retail store closings amidst a rise in e-commerce, distributors remain optimistic about the future of floor covering in the U.S. In particular, many point to the fact major retailers are closing stores at a record pace, with announced store closings this year double what they were over the same period in 2016. Some statistics show retailers will close almost 9,000 locations this year, surpassing the number of closings during the 2008 recession.
“The flooring industry is not immune to the shakeout,” said Torrey Jaeckle, vice president of Jaeckle Distributors, a Madison, Wis., distributor. “According to the most recent Census Bureau data, the period of 2007 to 2014 saw a 26% drop in the number of flooring retail establishments across the nation, resulting in a 34% decrease in employment at those businesses.”
Jaeckle blames two culprits: Overbuilding and the rise of online shopping. Overbuilding of retail storefronts, he said, has made the retail landscape intensely competitive, leading to a surge of downward pricing pressure. By that same token, online shopping has had its own effect on pricing, due to the ease with which it facilitates price shopping.
His advice to flooring retailers and distributors? “First, stay on your toes. The changes happening now in our industry are tremendous. It is critical industry participants, including flooring retailers, stay on top of these changes and develop solid plans for their businesses.”
Within his own territory, Jaeckle expects to see robust growth throughout 2018 on the commercial side. He expects a different outlook for residential. “I think overall the industry for our region is going to see more lackluster growth compared to 2017 as GDP growth slows as the year progresses.”
Other major floor covering distributors are positioning for growth amidst economic challenges. Santa Fe Springs, Calif.-based Galleher, the No. 5 ranked flooring wholesaler, recently secured an investment deal with Quad-C Management, whereby the private equity firm will take a majority stake in Galleher. According to Jeff Hamar, president and CEO, the investment will provide Galleher with the financial strength to pursue growth opportunities both organically and through acquisitions.
In the last seven years, Galleher has averaged 20-plus percent growth year over year to nearly 250% in that time. However, 2017 saw only a 7% gain, Hamar reports. While California was hit very hard by the 2007-2009 recession, he said the state bounced back stronger than the rest of the country. Now the wholesaler is looking to drive that momentum with Quad-C’s infusion.
“Nobody in distribution has grown like we have,” Hamar told FCNews. “It has been pretty remarkable.”
Other highlights
NAFCD/NBMDA organizers reported attendance was up about 15% over last year’s event in Chicago. Combined with NBMDA members, the total turnout entailed about 800 industry professionals.
“We are thrilled by the interest in this year’s event,” said Kevin Gammonley, NAFCD/NBMDA executive director. “The joint event between the two organizations continues to be a rich setting for distributor professionals to make business connections and learn from educational sessions addressing relevant industry trends and distribution management challenges.”
Organizers also based the show’s success on the number of first-time exhibitors, which totaled 47 (out of 196) this year.