I won’t say that the internet has changed everything, even though it has. In reality, the internet seems to reinvent itself every year offering new and interesting options every time you turn around. That means more consumers are going to the internet to shop for just about everything. According to Forrester, the number of consumers browsing and buying online will hit 270 million by 2020, driven largely by activity on mobile devices, which is growing at an annual rate of 9.32% over the next five years.
Unlike products like books, clothes, and electronics, floor covering—as a general rule—is not the most internet-adaptable product. Then there’s the question of installation. What is happening with sales of floor covering online, who are the major players in online flooring sales, and what is likely to be happening five, 10 and 20 years in the future?
To answer these questions, we invited Steve Simonson, an internet pioneer and the founder of iFloor, who is now a consultant and managing director at Kyasi Limited, a mobile accessories provider, and Stuart Hirschhorn, research director of Catalina Research on TalkFloor to get their take. By the way, you can listen to this conversation it its entirety on TalkFloor.com. He are excerpts of that conversation.
TF: More and more consumers are buying more and more items online. Recent government sales figures show that overall retail sales were flat, in part because of a drop in gasoline. There is a general lack of sales at brick-and-mortar stores, especially in apparel, electronics and general merchandise. Sales at non-stores, which is primarily made up of online sales, is up over 14% on a year-over-year basis. It appears that consumers are not buying apparel, electronics and general merchandise in brick-and-mortar stores at the rate that they have historically. What about floor coverings?
Hirschhorn: Let me put the number you quoted in perspective. That’s just what the government classifies as online and mail order. That was up 14%, but it doesn’t include online sales of stores like Home Depot, Macy’s, Bed Bath & Beyond, or online sales at brick-and-mortar retailers. The government total is made up of retailers that specialize in online sales. Sales by online retailers and mail order accounted for 8.4% of retail sales in the first half of 2016. However, if one strips out automobile sales, which by law must be sold through franchise stores, gasoline, and restaurants and if we talk about electronics and general merchandise, online retailers account for about 15% of sales. That total is actual higher because online sales at Home Depot, Wal-Mart and others are not included.
In Catalina’s most recent analysis in its Floor Covering Distribution Channels Report, sales through mail order and online totaled only 3% of all retail flooring sales. That’s up from 1% over the past decade and remains a small niche of all flooring sold. Even if you include the Amazons and the other online specialty retailers, flooring only represents about 1% of their sales.
TF: Steve, what is your take on retail sales in general and floor covering sales in particular?
Simonson: Stuart’s stats are dead-on right. The fact is that there is so much going on online compared to the way it used to be and that is a pretty pressing warning of what’s coming for floor covering retailers. It wasn’t so long ago that people considered online shopping unsafe and dangerous, and even though one can make a case that it may be less safe these days, people don’t worry about it. And, we will see growth in floor covering—especially in products that are easy to install when there are solutions for last mile delivery and service. Without a doubt, the evolution of e-commerce versus sales at brick-and-mortar stores will continue to happen. Macy’s recently announced the closure of 100 stores and one can be assured that this will not be the last such announcement. I also expect that we will see continued investment from Macy’s and other brick and mortar players on the online side, similar to what we just saw with Wal-Mart and its acquisition of Jet.com.
TF: Looking ahead, floor covering sales online are only going to grow. What do you guys envision five to 10 years in the future?
Hirschhorn: Steve alluded to the fact that the infrastructure is actually being built now, the last mile of integrating a remodeling project be it a kitchen, a bath or an entire home. Construction of single family homes is well below historical levels. And homes in the U.S. are aging. So if someone is going to buy a home, chances are they will be faced with major remodeling, the replacement of kitchens and baths, and the design is going to have to be integrated. The ability to design, purchase and have products delivered and installed is going to be paramount. Shaw recently announced that it has struck an agreement with Angie’s List so contractors listed on the site can get special discounts and special services from Shaw. Many smaller pieces of the puzzle are coming together. I think we are just at the beginning and we will see tremendous growth going forward. In the last four years, online sales of floor covering by all retailers was increasing at about 10% per year, which is well above the average retail growth rate.
Simonson: There are aspects of flooring that make it a little tougher than selling clothing, books and many other products. It’s more complex and takes a little more execution strength. It’s not just Amazon, Wal-Mart or BuildDirect; there are lots of players that are trying to get their footprint into this space, as well as provide the technological enhancements to make for an improved experience for the customer. And this is what manufacturer and retailers in the floor business— and really any industry—need to look at, engaging the customer in the way in which the customer wants to be engaged.
TF: Who are the people purchasing products, including floor coverings products, online? Are they primarily millennials?
Simonson: Obviously, millennials are becoming a larger portion of online sales and probably as a percentage they outweigh older generations, but without a doubt it is widespread, spread across generations, and today it can be anybody. My sense is that it’s spread across generations, it’s wider than many think and whether the customer physically buys the product online or not they are shopping online. Either way and you better be there.
Hirschhorn: According to the Wayfair.com website, their typical buyer is a female between 35 and 65 with income from $50,000 to $250,000. The funny part of that is that that is the same as the typical buyer of flooring. The market is out there. Consumers are ready for this. Their learning curve has already taken place. The fact that retailers and definitely manufacturers will have to develop the logistics to get products to the end user is more of what will be driving sales than the demographics. The demographics are ready to do this.
TF: Retailers are selling appreciable volumes of floor coverings online—Amazon, Wayfair, BuildDirect, Overstock, Costco, Home Depot and Lowe’s. What are your thoughts on these players and the success that they have found?
Simonson: Home Depot, Lowe’s and every big-box player is marching forward. There is not much there in terms of a breakthrough or innovation; it’s just natural evolution on the part of these companies. There are, however, companies that are doing innovative things. Sales at Wayfair, as I understand, were up 70%. This establishes the fact that there is latent demand in the market and they are capturing that demand with really niche offerings. I feel that that’s what BuildDirect aims to do with their Marketplace and that’s what Amazon looks to do with their various services as well as other various players that are trying to capture some of this latent demand as well.
TF: There seems to be a number of retailers getting involved in floor coverings in a big way. What are your thoughts on this trend?
Hirschhorn: Companies like Amazon and Wal-Mart can get involved in flooring from a logistics standpoint. They can be the handle of the movement from the manufacturer to the homeowner, where maybe the manufacturer, even a Mohawk or a Shaw, can’t saturate the entire country and deliver product in two or three days, where an Amazon or Wal-Mart or some major logistics company could. That may be how this whole effort develops as we move forward. A move like Costco putting laminate in their warehouses and putting it on their website is not a winning strategy.
TF: What has been the stance of the industry’s manufacturers toward selling product online? There originally was some resistance in this area. What has happened lately?
Simonson: With all due respect, some of their strategy has been to put on a blindfold and feel around in the dark. The strategy has not been super clear to me. To me, it still feels somewhat like starts and stops. There will be engagements with certain channels with certain ideas for a period of time, and when the idea gets old with the manufacturer or does not gather the necessary momentum, it goes from hot to cold very quickly. I see manufacturers trying things and engaging players like Wayfair, the BuildDirect Marketplace or Amazon, although I have never seen what I would call a comprehensive strategy, or one that has been articulated. It’s bordering on guesswork for me, but there is no question that the companies that are paying close attention are doing something, I just can’t tell exactly what it will be.
Hirschhorn: We are just at the beginning of this. I'm thinking manufacturers are just waking up. If you go to Wayfair, which is publically listed, where BuildDirect is not, and you look at their numbers over the last five years, the major floor covering manufacturers have to take notice. I think they are primarily reacting to the technology as it develops or as retailers approach them. When one manufacturer learns that a competitor has made a commitment, then they jump in as well. It seems that there is not an overall strategy, but rather reacting to events. Instead of being a leader and taking advantage of this and creating a strategy, they appear to be followers and they may lose margin on this going forward. A similar situation might be when GM was making big, eight-cylinder cars and making lots of money, they did not want to make small cars because they could not make the same margins. Maybe that’s the dichotomy. Maybe they don’t know how they can make money online, but they do know how to make money right now, and until they figure it out, they are either losing market share or someone else will figure it out and move beyond them. But, they are going to have to really engage in this in a big way.
TF: BuildDirect has announced that they would be selling product from Armstrong, Mohawk and Shaw on their Marketplace. Correct me if I’m wrong, but product sold in BuildDirect prior to the Marketplace was private labeled. Product sold through the MarketPlace is not.
Simonson: BuildDirect has used a number of their own private brands, and from time to time, a number of other brands would go through, but to the best of my knowledge, there has never been a brand strategy until the Marketplace, which is really an adaption of the Amazon Marketplace. The Amazon Marketplace has been absolutely amazing when it comes to the numbers they are putting out. BuildDirect and any other retailer including Walmart.com and Wayfair will continue to attempt to build on this Marketplace model, which makes a great deal of sense for consumers and for the platform itself.
Hirschhorn: If you go to different websites that sell online, you will see the floor covering industry’s major brands, although it’s more of a scattershot approach. The question is, as the major industry brands get more involved with these online sellers, by definition, since the consumer market is only growing at about 3% to 4% per year and online sales are expected to grow 10% to 15% per year, more traditional flooring stores are going to be closing. We have already lost about 6,000 of them. The question becomes how is all of this going to play out with this online environment that is being developed?
TF: Is there currently a model that includes local retailers in the equation? A consumer would choose the floor covering she wants on a major online retailer’s site, then a local retailer would become involved and provide the product and the installation.
Simonson: To my knowledge, that is not currently being done.
Hirschhorn: It must be done somewhere, but it has not as of yet shown up on the radar. But, getting back to the base question: who is going to benefit from this? The 10,000 specialty retailers, the big box stores, the online retailers, or the manufacturers? I think that’s still open for question. Since so many retailers belong to buying groups, this could happen through the buying groups. It might be for them to do this. If not, the small retailer might fall by the wayside. The buying groups have done a great deal of online marketing with the local independent retailer. If they picked this up, they could make this feasible for the local retailer to be a part of this scenario.
TF: To sum this up, if we were doing this same conversation 8 to 10 years in the future, what do you think we will be talking about?
Hirschhorn: As I envision this, Wayfair, BuildDirect, Amazon and the other major online retail players sell a great deal more than flooring. As I mentioned, the country’s housing stock is getting older, which means remodeling will become more important. Those that can handle the entire remodeling project, kitchen, bath or the whole house and solve the consumer’s problem will be the winners. I think we would be talking about remodeling companies or home improvement online and home furnishings online to solve the broader problem of remodeling and furnishing a house. In the clothing area, one can buy a shirt a blouse or a pair of shoes, but providing the entire suit or an entire wardrobe is what online players are currently working. It’s the same thing with the house.
Simonson: Looking at a couple of things. As Stuart said, you have to be ready to answer the call of the full remodel or you have to be a super specialist. That means you have to become the best hard surface guy in town, or the best carpet guy in town or the best something. And you better be remarkably better. The question is, what is the next threat to the remaining 5,000 independent retail stores? I see a great contraction coming. Because many retailers have continuously refused to catch up to the idea that technology is coming for you whether you are ready or not. I count hundreds and hundreds of people in the floor covering industry as dear friends, people at all levels of retail, distribution and manufacturing that I would like to see do well. But every stage of the supply chain needs to get on board with the fact that the consumer is going to buy how they want to buy. They don’t care about the livelihood of people up and down the supply chain. They care about their own needs, and until we care about their needs at the same level, we are going to go the way of the dodo bird.
Editor’s note: As mentioned, there is more to this conversation than space permits. Check out the entire interview by visiting www.TalkFloor.com and clicking on the Floor Radio tab.
We’d love to hear your feedback of this and other conversations you’ve watched or listened to on the site, as well as any people or companies you’d like to see interviewed. You can contact Dave Foster at davefoster@talkfloor.com.
