In Search of Recovery by Jeffrey Steele
 
January 16th, 2012

 
With the dawning of a new year, it’s only natural for businesses to engage in reappraisal.  The last few years have been among the toughest on record for the tile industry, and that fact has many companies taking stock of the recent past, and looking ahead to what will hopefully be a brighter tomorrow.

With this in mind, TileDealer has brought together some of the industry’s brightest minds to give us a sense of where the industry is now, and where it may be going.  While none of them possess crystal balls, the wisdom they’ve gained through long industry experience makes them among the best prognosticators around.   In the pages that follow they assess the economic damage of the recent recession, lay out reasons for optimism and, importantly, consider  how dealers should position themselves for the near future.

The construction field has clearly been the most decimated segment of the entire economy, and that has had profound impact on the entire tile industry, says Al Bates, president and CEO of Boulder, Col.-based Profit Planning Group, a profitability research firm that also prepares CTDA’s Profit Analysis Report. .

“The people in the construction segment have had to work harder than anyone else to be successful,” Bates says, noting tile, like other construction-related industries, has seen revenues plunge 20 to 25 percent since 2008.

The tile industry has recovered slightly since 2010, he adds.  One of the reasons it has is that many tile industry companies no longer exist.  “That’s not a recovery in terms of an entire industry,” he says.  “But it’s a recovery in terms of those businesses who are still there trying to make a profit.”

Steve Rausch, Atlanta-based field marketing and technical services manager for Chicago-based U.S. Gypsum, agrees.  “We’ve flushed out a lot of people — manufacturers, distributors, dealers — who needed to be flushed out,” he opines.  “There were a lot of people who in better times found the business easy.  They made money, but didn’t know what they were doing, or didn’t care.  There were manufacturers who expanded into areas where they didn‘t have any expertise, and they weren‘t legitimate, and now they’re gone.”

For Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies, Harvard University, the whole malaise can be traced back to the decade of overbuilding in the housing market that occurred prior to 2007.  “A lot of units we didn’t really need we’re still discovering.  And five years in, we’re dealing with it,” he says.

“There are estimates we have an additional three million vacant housing units, above and beyond typical rates.  We’re dealing with an industry overhang.”

The Great Recession has “obviously been pretty devastating for our industry, as the new housing market fell off the face of the earth,” adds Donato Pompo, president of San Diego-based Ceramic Tile and Stone Consultants, an international team of consultants performing forensic investigations, providing architectural specifications and quality control, marketing and training services.

“When people buy new homes or purchase used homes and do remodeling, they select ceramic, glass or stone tile for the project.  Lack of confidence and discretionary income has kept folks from spending.

“That’s had a huge impact on our industry.”

 

Signs of hope

Despite the drumbeat of negative news advanced by media, there are signs of improvement, Baker says.  The basic building blocks are household formations, he observes, adding that in the 1990s, 1.1 to 1.2 million households were being formed every year, and that number grew to more than 1.3 million a year in the first five years of the millennial decade.  For the past four years, household formations have averaged perhaps half a million annually, he adds.

But Baker believes that by the time 2011 has been fully tallied, it will be found the country added close to 1 million new households:  an encouraging rebound.

“We need to start eroding that excess inventory” of homes, he says.

“We need to work that off, and start seeing new housing units being built.”

Pompo also cites encouraging signs.  In third quarter 2011, housing permits nationwide increased by 6.5 percent, and existing home sales grew by 17.8 percent nationwide, he says, quoting statistics from Stuart Hirschhorn at Catalina Research.  It’s also been reported that floor covering store sales have increased as well.  They were down 7.9 percent in the first half of 2011, but increased 1.2 percent in the third quarter, again per Catalina Research.

What may be driving home sales increases, Pompo adds, is consumers’ belief that depreciation has finally left home prices at levels they can afford.  They also may be reacting to historically low mortgage rates and slightly rising employment levels.

Share of household delinquencies on mortgage payments fell to their lowest levels since the fourth quarter of 2008, Pompo says, again referring to Catalina Research numbers.  “So the question is how sustainable are these trends?” he observes.  “Catalina Research forecasts are that we may see stronger floor covering sales for 2012, but all bets are off for 2013.”

Mitch Dancik, chairman of the board of Cary, NC-based Dancik International, Inc., reports that while the tile and flooring markets are off 40 percent from their highs, the key story is that tile distributors and dealers managed this downturn more effectively than expected, and more effectively than in past downturns.  That could suggest they’re positioned to rebound well.

Rausch also sees signs of hope, but his indicators are far more anecdotal. “In the past month, I’ve flown into Toronto, Canada, and on final approach into the airport, I counted more than 50 cranes,” he says.

“That level goes back to 2006, when there was a lot of construction demand in that city.  The conditions today are different than they were back then.  Someone’s actually paying for the construction rather than financing it through a construction loan, which speaks to the confidence they have.”

When he was in Phoenix, a city with well-publicized economic woes, in November, Rausch saw notable levels of construction.  In conversations with folks in Atlanta and Miami, he has heard business is not setting records, but it’s better than it has been.  “People are saying I’ve got some extra money this year, and I’m going to remodel my kitchen and bathroom,” he says.  “The remodeling business is going to come back, but it will be different.  It’s not going to be six months same as cash, it’s going to be you have the money and you’ll spend it.”

Baker also seems to feel remodeling may ignite sales.  “[Remodeling is] much closer to its long-term trend than housing is,” he says.  “Tile tends to be in the discretionary category, and it could take a little longer for that to snap back.  But on the other hand, indications are the discretionary projects are seeing some signs of life.  Again, however, the comeback has been a slow one.”

Still, there are other observers who find it difficult to be upbeat at all.  Tom Carr, president of Pan-American Ceramics, a City of Industry, Cal.-based tile distributor, says the last year has been the same as the year before.  “And going forward, I don’t see a difference,” he adds.

“Everyone talks about the economy improving, but we heard that in 2008, 2009 and 2010.  Without the foreclosure situation being rectified, I’m not expecting the next 12 months to be different from the last.

“The only good news is it doesn’t appear to be getting worse.  But if our legislators have any way about it, they will make it worse.”

Particularly discouraging is the environment on his home turf in the Golden State, where unemployment rates stand at 12 percent, vis-à-vis 9 percent nationwide.  “The foreclosure situation is worse, where the rate of new home growth was greatest, in states like Arizona, Nevada and California,” Carr adds.  “Those states were more dependent than others on new home building.”
For his part, Bates says the only reason for optimism in the tile industry specifically is that homeowners have postponed remodeling for some time, and may have no choice but to remodel.  This phenomenon is clearly more evident on the upper end.  “But even at the lower end, when things have become so shopworn you can’t stand it any more, and tile is falling off walls, you remodel,”  he says.  “There’s some demand there that will be in evidence because people have to remodel.  But I see no optimism in the area of new housing starts.”

How should tile dealers be positioned?

Looking ahead, dealers and distributors will surely benefit from the fact that tile is positioned to be a preferred wall and floor covering among consumers, Dancik says.  “However, the tile industry will need to use technology more effectively in order to meet consumer expectations,” he adds.

“Tile distributors and dealers used yesterday’s technology effectively to survive this recession.  They must now embrace today’s technology to stay competitive.”

Without overall growth, tile dealers will be faced with the fact they can only grow their businesses by taking share from their competitors, Bates reports.

“This gets back to really just running the business better,” he adds.  “When things are really good, you don’t look at pricing and say, ’Did I get all I could have from that sale?’  You ignore those things and go with the flow.  And right now, you have to look at all those things really closely.  It’s running the business the way we should have all along.  When things are good, you don’t look at things with the precision you must at times like right now.”

It’s also the time to be consistent, Bates says.  If you are an upper-end dealer, you should be an upper-end dealer now as well as when times are good.  Moreover, dealers can’t cut back their presence in the market.  “When things get better, as they surely will, folks have to know who you are,” he says.  “If you maintain visibility now, you will have an advantage when things get better.”

Rausch agrees.  Tile dealers must offer value, not just low price.  “A lot of people have ducked their heads under their wings, and have tried to survive just by offering low prices, rather than the value the customer is seeking,” he says.

“I was at Total Solutions, and one of the major speakers spoke of tile as art.  Big boxes have been beating the tile dealer because no one is going to beat the big boxes on price.  But what the boxes can’t do is give you a custom tile job.

“They can’t give you any sort of artistic project.  For the most part, their installers are not qualified to go in and do custom layouts and installations.

“That’s where the Ceramic Tile Education Foundation and the CTDA work so well together.  They support each other on the craftsman and artistic end of the business, not just putting in tile.”

Rausch notes only a handful of dealers and distributors are creating blogs aimed at consumers.  There should be hundreds, he says.  “Century Tile in Chicago is out every week putting decorating ideas out to consumers.  D & B Tile in Miami is going to the architectural community for commercial work with some of those same kinds of ideas.  Neuse Tile Service in Raleigh is going to the consumers with the message of quality tile.  Welsh Tile in Grand Rapids, Mich. is doing the same thing, with a blog to commercial and residential markets.”

Baker notes that a couple of arenas within the remodeling sector are stronger than others.  One is the area of green retrofits, which tile dealers should leverage to the hilt, he says.  The other area showing even greater robustness is the rehabilitation of distressed properties.  In the nation’s tidal wave of distressed homes, there has been little incentive for occupants to remodel, until now.

“These homes have been in the same situation for years, where very little money has been reinvested in even basic maintenance,” Baker says.  “If a household purchases that home for 50 or 60 cents on the dollar, the buyers have to go in and do some improvement to areas of the home not maintained in years.

“That provides some opportunity.”

If any additional proof is needed, Baker says the average distressed home is absorbing $4,000 in improvements as it is prepared for sale, about 50 percent more than would be spent by the average homeowner on home improvements over the course of a year, according to figures from Fannie Mae.

For his part, Noah Chitty, the Crossville, Tenn.-based technical services director for Chicago-based Stonepeak Ceramics, says dealers and distributors must make themselves a resource to the end user.

“They need to be the place that offers the education, and has the training,” he asserts.  “If the dealer can be that resource, it heads off the thought of buying from the Internet or from someone who doesn’t really know tile.  I think tile is still something you need to touch and feel to understand the beauty and physical properties.  If you’re buying tile for a residential application, you may not need all the physical properties we build into commercial tile.  But it takes an educated distributor to explain the important differences between the two.”

Pompo agrees.  Dealers must focus on service, he argues, realizing a limited market exists for their products and the one way to grow their shares right now may be to differentiate themselves by providing heightened service.  “That’s always been their advantage over the big box stores,” he says.

Like Bates and Rausch, he argues tile dealers can’t cut their prices overall, because doing so will only make them busier, in turn leading them to compromise their levels of service or be forced to spend more money to keep the quality of service high.

One of the mathematical truths in marketing, he says, is that if a business decreases its prices by 10 percent and its costs remain the same, it has to increase sales volume by 43 percent just to break even.

One way to improve service is by investing in employee training, Pompo adds.  “We provide the CTDA . . . the online training courses for selling ceramic tile and for selling stone,” he says.  “These courses give employees more confidence and credibility, making them more effective salespeople.  Training provides a return on investment that never ends.”

Tile dealers also should make sure their showrooms are up to date and showcase both a good product representation and the features and benefits of the products.  Today’s consumer wants information, the kind provided in detailed features and benefits, Pompo says.

Because the hot button these days is sustainability, tile dealers should also demonstrate a commitment to that objective by featuring recycling containers in the showroom and aligning their business with green-oriented manufacturers that are certified in product sustainability.

Finally, Pompo says, they must ensure they have a presence on the Internet.  “Today’s consumer is so much more inclined to go to the Internet first,” Pompo says.  “Your website should be an extension of your showroom, and a reflection of who you are as a business.”

Above all, it makes good business sense to understand depressed times can’t last forever.  Rausch believes dealers must position themselves for a recovery, whenever it arrives.  “In the past year, USG has again spent money on new product innovation and development,” he says.  “We’ve been doing that consistently, and the reason we have is we want to be prepared for the growth and prosperity that’s coming.  The crystal ball gets cloudy as to whether it’s going to happen this year or next year, but our business is cyclical, and if you don’t invest now, in these times, you’re going to be left behind in the others.”

SOURCES:

Kermit Baker, director

Remodeling Futures Program, Joint Center for Housing Studies, Cambridge, MA

617-495-8879

 

Al Bates, president/CEO

Profit Planning Group, Boulder

303-444-6121

 

Tom Carr, president

Pan American Ceramics, City of Industry, CA

626-961-0051

 

Noah Chitty, Crossville-based technical services director

Stonepeak Ceramics, Chicago

931-210-7500

 

Mitch Dancik, chairman of the board,

Dancik International, Ltd., Cary, NC

919-379-3733

 

Donato Pompo, president and consultant

Ceramic Tile and Stone Consultants, San Diego

619-669-2967

 

Steve Rausch, Atlanta-based field marketing and technical services manager

U.S. Gypsum, Chicago

404-281-2218

 

 

 

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