The floor coverings industry represented a $26.9 billion market in 2018, according to Statista in manufacturer dollars. It’s a stable market that managed to eke out a mere 5.1% growth from 2010. Growing less than 1% year-over-year for the last eight years, the flooring market is not predicted to grow more than .5% year-over-year through 2023.
Translating manufacturer sales into retail dollars is complicated by the labor component, which makes an important contribution to many retailer revenues. Jonathan Trivers, contributor to Floor Covering Weekly, puts the total retail market size at $66.2 billion in 2017 including labor. Retail sales by his estimation grew 5.1% year-over-year in 2017.
To the outsider, the flooring industry looks boring and predictable, but to those in the industry, it is anything but.
Creating a dynamic retail market for flooring are changing consumer tastes from soft floor coverings to hard surfaces and their willingness to invest more money on premium flooring. To that demand the industry is responding with innovative and style-forward options, including luxury vinyl tile, which is the industry’s fastest-growing category according to Catalina Research.
The manufacturer flooring market may not be growing overall, but consumer spending is shifting, with carpet and rug’s share dropping from about 53% of total manufacturers revenues in 2012 to about 45% today.
But more than the change in consumer preferences in flooring, the industry is facing a change in how consumers shop for floors. It’s given rise to a structural shift in flooring retail away from local independents toward bigger competitors who through scale can be more price competitive, such as Home Depot and Lowe’s.
Disruption in floor retail
By my rough calculation, in 2010 the big boxes accounted for some where in the neighborhood of 15% to 17% of the retail flooring market. In 2017, thanks to full reporting on flooring sales by both companies, they commanded 21% of market. Their gain has been independent’s loss.
Complicating matters further in the independent’s space has been the rise of aggressive specialty flooring retailers that leverage expertise in the flooring category against the big boxes’ more generalized home improvement positioning.
In 2017 Floor Covering Weekly’s top 50 flooring specialty retailers held some 12% of the total product market. Sitting on the top of that heap is Floor & Decor with 100 stores. It bumped Lumber Liquidators with $1 billion in 2017 sales and nearly 400 locations out of its first-class ranking in 2016.
Floor & Decor wins the war for the floor
Floor & Decor is the category killer in specialty floor retail. Like Lumber Liquidators, it sells only hard floor coverings, as well as hard surfaces for kitchen and bath, so it is focused on what’s hot in flooring today, not dragged down by carpet like so many other independents.
But unlike Lumber Liquidators with its heavy discount/promotional positioning, Floor & Decor aims for a more discerning buyer. Its stores are beautiful and shopping there feels more luxurious. As a result, it does more business than Lumber Liquidators, $1.7 billion in FY 2018, with about one-fourth the total number of stores.
And while Lumber Liquidators expects to generate mid-to-upper single digit growth and mid-single digit comp store sales growth in FY 2018, Floor & Decor killed it with 23.5% net sales increase and 9.2% comp sales growth over 2017. Floor & Decor would have ended 2018 with double-digit same-store-sales growth, continuing a 10-year winning streak of double-digit CSS growth, but for the impact of Hurricane Harvey on its Houston market.
“We remain highly confident in the long-term momentum that is building at Floor & Decor,” CEO Tom Taylor said in a statement. “We enter 2019 in a strong position and remain committed to and building on the same strategies and investments in our business that have made us successful for almost two decades.”
Floor & Decor’s ambitions are aggressive, but achievable, believes Donovan Royal, contributor to Seeking Alpha. “I feel confident that FND can continue to grow while opening up boxes and achieving its goal of 400 warehouses nationwide,” he wrote. “ Ultimately this will be a company that can achieve somewhere between $5 and $7 billion a year in revenue and likely returning a lot of cash to shareholders.”
In 2018 Floor & Decor achieved a net income of $96.8 million, up 13% over 2017, after opening 17 new stores in the year.
Floor & Decor’s secret sauce
In its latest earnings call, Taylor, along with CFO Trevor Lang and chief merchant Lisa Laube, shared the four pillars on which it is building its business. It is back-to-basic retail at its best: find the best locations, design the best stores, sell the hottest products at attractive prices and satisfy the customers at their point of need.
It is just what you’d expect from an executive team with this much depth. Before joining Floor & Decor in 2012, Taylor started his career on the floor of Miami Home Depot store in 1983, working his way up to executive vice president of operations with responsibility for all 2,200 Home Depot stores and then executive vice president of merchandising and marketing, also for all stores. Lang held vice president finance and CFO positions with Zumiez, Carter’s and Blockbuster and Laube was president of Party City and vice president of merchandising at Bath and Body Works and Linens ‘n Things before that.
Here’s Floor & Decor’s secret retail sauce:
New stores, new markets and expand footprint in existing ones
In 2018 Floor & Decor opened 17 stores, making the 6th year of at least 20% unit store growth, Taylor shared in the earnings call. Distinctive in 2018 was opening in four new densely-populated markets, including Boston, Long Island, Seattle and the San Francisco Bay area.
In 2019 it plans to open 20 more stores, but unlike 2018, these stores will largely expand its footprint in existing markets. The shift will be from 65% new markets in 2018 to 35% in 2019. Taylor expects its 2019 class to build upon greater brand awareness in existing markets and benefit from more highly trained and knowledge employees there.
“We expect a faster ramp up in sales and profitability for our 2019 class relative to class of 2018 stores,” Taylor said, predicting that its 20 new locations will continue to contribute to +20% overall company growth.
Trend-right product and serving customer needs
With beautiful in-store displays of trend-right products, including hot categories beyond classic wood and stone to innovative luxury vinyl tile, water-resistant laminates and water-proof rigid core vinyl, Floor & Decor has what customers want now.
“We have known over the last ten years, we can grow at or about market rate regardless what trends are driving demand, as long as hard surface flooring is growing.” Taylor said. “We believe we will continue to take market share.”
But under the surface of its excellent merchandising is in-store sales strategies that turn lookers into buyers. Its stores are staffed with designers that practice consultative selling strategies focused on what its largely DIY customer base needs. It results in higher-ticket sales and ultimately more satisfied customers.
“When one of our designers engages with clients, the average ticket can be four-times larger than when they are not involved,” he explained.
Adding to that ticket is a focus on selling not just flooring but everything soup-to-nuts that customers will need to complete their project.
“Every product involves installation tools,” Taylor said. He explained the in-store staff is trained to make sure every customer leaves with the extras needed, like mortar, grout, glue and underlayment. It is an automatic upsell which customers actually appreciate.
Connected customer strategies
Floor & Decor is also not ignoring customers’ shift to online engagement either. Its connected customer strategy is designed to fully integrate the instore and online shopping experience. The goal is to make sure customers have all the materials, tools and know how to get their project done right.
While ecommerce only represents about 8% of total sales, it is growing fast. Its connected strategy helps cross-pollinate sales and engagement however the customer chooses to interact. Over 70% of its customers visit the company website during their buying process, Taylor reported.
“Our goal is to be informative, inspirational and give people the ability to shop how and when convenient,” he said and added content on the website is provided to “demystify and build confidence for the customers so they can complete their project.” In addition, the stores offer customers’ installation classes too.
And ecommerce customers are further supported with BOPIS convenience. “About 77% of e-com customers pickup in store,” Taylor shared, “demonstrating the synergy in our physical footprint and the ecommerce experience.”
Investing in pros
Floor & Decor’s fourth pillar for growth centers on the flooring professionals and contractors. Unlike Lumber Liquidators which provides installation services, Floor & Decor has gained a leg up with the professional community by not competing directly with them. As a result, Seeking Alpha’s Royal maintains, “FND has the edge with the pro.”
Floor & Decor has just rolled out a Pro Premier loyalty program that rewards professionals not just with merchandise discounts, but also a wide range of products like Callaway golf clubs, Weber grills and experiences like tickets to live concerts, sporting events and travel. The rewards program shows that the company thinks about professionals not just within the context of their flooring business, but as people too.
But Floor & Decor also understands the business needs of its professionals customers. To that end, it launched a mobile app offering 14 services to help small business owners be more successful, including payroll processing, uniforms, email marketing tools and low-cost health insurance programs. To date it counts 50,000 professionals as members of its rewards program and support services.
Cleaning up in the flooring business
To give perspective across the entire retail flooring industry, I reached out to Chris Ramey, president of The Home Trust International, contributor to Floor Covering Weekly and past president of International Design Guild, owned by CCA Global Partners, which also operates Carpet One and Flooring America.
Being deeply embedded in flooring, Ramey sees Floor & Decor poised as a serious disrupter to Home Depot and Lowe’s where flooring is but a sideline, to the major specialty retailers like Lumber Liquidators, Empire Today and The Tile Shop, and most especially the legions of local independents.
The problem for local independents, as Ramey sees it, is they shifted away from being stocking retailers to featuring only samples in their stores, requiring customers to wait on delivery.
“Flooring dealers moved from inventory on the floor to sample displays. At the same time, the importance of convenience and DIY increased for consumers,” Ramey said. “Floor & Decor took the gimme and filled the void.”
Because Floor & Decor buys direct from suppliers – and buys big – it has more leverage in pricing. Most independents buy through middlemen which adds costs. Seeking Alpha’s Royal sees this advantage gives Floor & Decor the ability “to offer better pricing than its big box peers and has demonstrated an ability to take share from big and small [retailers] alike.”
In the final analysis, Ramey shared, “Flooring is now a category of niches. All others will fail to thrive.”
Floor & Decor has found its niche – supplying DIY customers with the materials and know-how to create the kind of floors they want and supporting professionals in their mission to satisfy their customers – and has the management, strategies and ambition in place to fill it.