Commercial Flooring Headwinds 7 implications

Commercial Flooring Headwinds and 7 Implications for 2021

We have worked and spoken with many commercial flooring companies and identified new business patterns having significant ramifications for owners in 2021 and beyond.

Here’s a summary and the 7 biggest implications for your business.

 

Market Dynamics

 

1Q 2020 was booming before the advent of Covid.  12 months on and there has been a major dislocation in our markets and deal flow. The obvious impacts:

  • Backlogs have been depleted by 20-25%
  • Cashflow was severely challenged but PPP saved the year for most flooring companies who now have a healthy balance sheet with robust cash on hand

The market dynamics we are now seeing:

  • Earned revenue is down significantly (20-25%) (For clarification, Job costs incurred drive our earned revenue, our billings equates to cash)
  • Traditional customers that many multi-generational flooring companies guarantee year after year have been severely hit. Their contribution to the portfolio dropped precipitously.
  • The dip in earned revenue and depletion of existing customer business has most organizations aggressively seeking new work with new customers
  • For over a year, end-users have been less accessible than ever.  Now, as those accounts are revisited, many new faces exist, from Facility Managers to Project Managers. The people we used to know as the decision-makers at key end-user accounts are taking advantage of a hot labor market and making lateral moves or leaving their communities altogether in pursuit of new opportunities elsewhere. We know our prospects less well
  • A & D billable hours plunged 20 – 40% over the last year. This has driven a huge rise in re-bids and a need for vendors to hold pricing.  Each new round of bidding opens the doors to new competitors and the risk of value engineering.

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Consequences

 

a) Competitive activity is much much higher.

 

More people are chasing less projects. We see as many as 10 bidders on new GC work where there we used to see 3 or 4. Desperation, short-sightedness and naivety lead to bids at crazy low margins (we discuss this in Episode 2 of our Flooring by the Numbers LIVE! Show which you can watch here Flooring by the Numbers LIVE!)

It is certainly getting harder to win new work at a reasonable margin.

 

b) Our relationship equity has fallen.

 

Many salespeople (and their leadership) acquiesced to the notion they could not sell as they had limited or no access due to imposed lockdowns and health protocols.  “We are in the relationship business.  If we can’t meet face to face we can’t sell to win”.  FYI Carvana managed to increase its sales 42% in 2020 by fundamentally changing the car buying experience. We saw some flooring companies double their backlog in 2020.

A laissez-faire attitude to sales activity combined with many end-users and decision-makers changing jobs means our rolodex has gotten very thin.

 

c) Project delays. 

 

Many are pushing out a little.  In past years, most companies expected bumper revenues in their second and third quarters.  Today, this business is pushing out to later in the year and some into 2022 and beyond.

 

d) The ripple effect of extended project delays creates outdated budgets

 

Let’s say a normal lifecycle is approximately 12 – 18 months and COVID delayed them a further 12 months. It’s likely that many of the budgets we are chasing now are 24 – 30 months old

 

So, if a $1.50 SF product from 2019 is being bid now, it likely sustained:

a 3 – 5% increase in 2020 due to inflation

7 – 25% due to Chinese Tariffs

5 – 15% increase due to shipping / raw material impacts.

 

That means the cost of that product, which was budgeted originally at $1.50 SF is at a minimum worth $1.73 SF a nearly 15.7% increase!

 

Your vendors are unlikely to honor the old prices so margin erosion is on the horizon

 

e) Receivable Days are increasing

 

Even your customers are feeling the cash pinch.  We see receivables days rising. They are hanging on to your hard-earned cash

 

This has created significant cash depletion and many flooring companies saw net negative cashflow through 1st quarter and this trend is continuing.

 

Implications

 

1. Change is the new normal

 

We will never again reach a new “normal”.  There will be less stability, higher competitive pressure, more disruptions to come.  The rate of change has increased.  Flooring companies need to adapt.  Quickly.

 

2.  Current project pipelines are fraught with risk related to stale budgets

 

GC’s can wield their might among the bevy of bidders.  They are trying to deliver these delayed projects to the same cost profiles to their customers. They are holding their subs to prices that were negotiated with their vendors up to two years ago.  The prices of old were seldomly budgeted appropriately in the first place.

 

Vendor reps who were asked by a designer, “what does that LVT cost?” were too scared in a commoditized environment to provide a realistic budget, complete with install, prep, base, etc.  Instead, they provided a budget that was equitable with other commoditized “like and kind” finishes of comparable value.  The resultant material price was provided without a systemic understanding of usage and scale.

 

Net net, GC’s are knowingly and unknowingly passing along unrealistic pricing demands to their subs

 

3. Forecasting has burst to the front as one of the top competencies you will need to master

 

The first thing is dealing with uncertainty.  Our backlogs used to be consistent.  Our trusted relationships solid, delivering perhaps 75% of our portfolio every year.  That surety has gone.

Project start dates move (mostly delayed) seemingly at a whim.

 

It will be too late if you enter third quarter with a depleted backlog, poor sales pipeline and low job activity and only discover that fact then, as one of your major projects slips.  You need earlier prediction and pipeline robustness to protect you. The ability to forecast better (It can never be perfect) is key.

 

4. We are now well into the Cash is King 2.0 era

 

Revenue is Vanity, Profit is Sanity & Cash is King.

The consequence of poor forecasting in these current conditions is poor, or potentially, fatal, cashflow.  Your cash management disciplines need to be honed.  Flooring Companies need to destroy the pervasive belief system that drives poor cash behavior.  That belief is “we gat paid when the GC gets paid”.  No.

 

The title over your door or on your website says “Commercial Flooring is our business”.  It does not say “we are a bank”.  This belief, as I say, is pervasive and deeply embedded and manifests in acquiescent contract negotiation and wimpy collection behaviors.

 

This will be compounded by your ability to master different types of work that have dramatically different cadences

 

5. Sell & Deliver 

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Remember the old highway robbers—they’d chase down a horse and carriage and demand:

 

“Stand and Deliver—your money or your life!”

 

Flooring companies must “Sell and Deliver—your money (cash) or your (flooring company’s) life”

 

 

 

We know

  • earnings are down
  • backlogs are depleted
  • cashflow is going negative
  • probably not another PPP coming
  • projects are delaying
  • old budgets are stale as costs continue to rise

 

Third and fourth quarter will be problematic.  What will not save you is selling large projects to GC’s that start in 2022 and beyond.  There needs to be an immediate thrust on sell and deliver work.  That is work sold in 2021 and delivered (and therefore earned) in 2021.

 

Our benchmarking has shown that 85% of your sell and deliver number needs to be sold by July 31st.  This gives you a window of just over 3 months (May, June and July) to get it.

 

Here’s the biggie: You have come to terms with backlogs being down 20-25%.  Your bigger risk is that we see sell and deliver goals are down 40-60%

 

It is concerning to us that many companies do not even have a target for this shorter cadence work. It must be addressed. And rapidly

 

6. Build a predictable growth engine

 

We heard a great expression the other day.  “We hire sales carnivores.  They are hungry and hunt large game.  The problem is we can’t control them. They go where they want”.

 

We often see “random acts of selling”.  Teams of 6-25 salespeople acting independently.  We cling to the (errant) belief that they will do the right thing as they are motivated by their commission, often based on gross profit contribution.

 

Your successful hunters (of which there are few) are not stupid.  They have seen their existing accounts shrink and their incomes go down.  So they chase big game.  This will not help you with your sell and deliver requirement.

 

 

Our benchmarking study found commercial flooring salespeople only spend 6% of their time prospecting for new business.

 

An industrial factory could never make money if one step in their process was only at 6% capacity.

 

Companies will need to migrate the artisanal craft of selling into an industrial revenue production method.  It requires some standardization, specialization and management.

 

7. Your business strategy should shape your sales strategy and not vice versa

 

We have highlighted many risks to winning profitable work:

  • Traditional relationships are not delivering the same revenues
  • Our relationship equity has dwindled as we have not met as frequently, and many old contacts have moved on in the last 12 months
  • Sales portfolios that are not balanced between long term and quick turn work present challenges
  • Strategic partnering with key vendors is minimal
  • Salespeople march to the beat of their own drum

 

We have written many times on our observation that most salespeople only have a number.  They lack a plan.

 

That plan should be derived from your strategic business objectives:

  • What type of work do we make the most money at?
  • What segments do we want to target?
  • What is our backlog goal for 2022?
  • What is our sell and deliver goal for 2021?
  • How do we grow our strategic relationships?
  • Who are our strategic vendors and how do we partner with them?

 

You will fail if you leave your sales talent to self-navigate and self manage

 

Immediate Suggestions

 

The year is at a pivot point.  What you do in the next 30-60 days will define the rest of 2021.  Some quick things to focus on

 

Identify your sell & delivery target to be sold by July 31st

Apportion this target across your sales resources

Have your salespeople deliver to you a written plan to achieve it

Be clear about your backlog build target so 2022 will be a success

Revisit your forecast

Sit with your vendors to revisit those old costs and then work with your GC’s to reduce your cost risk

Implement greater cash discipline.  You will need it

 

Other Resources

 

We help owners develop and implement these strategies as part of our membership program.  We’d be happy to discuss it with you. Click here to talk to us: http://speaktomick.com