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Anonymous

Former Purchasing Director at Balta Group

Victoria, Balta Group, & UK Soft Flooring

Victoria PLC, Balta, & Flooring Manufacturing

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:01} Can you provide a short introduction to your role and responsibilities while you were at Carpetright, please?

{audio:0:00:08} I was with Carpetright for seven years. My responsibility was as a regional manager in sales looking after around 25 stores in the north of England, kind of York to the northeast. Secondary to that, I was involved in several projects working with the buying teams’ head office. I was primarily a sales manager for the territory and was part of very different working groups around product development and range profile.

{audio:0:00:48} Can we take a typical sales process. Say I’m a residential customer, coming to the store, looking to order a carpet, what’s the process of how you organize and plan delivery, availability and so on?

{audio:0:01:08} It’s generally a considered purchase because you'd probably be doing a degree of online research. Particularly for younger customers, that's very much part of the decision process. When a customer comes into a store, the sales process at that point was establishing the customer’s needs. Understanding how the flooring needed to perform, the lifestyle of the customer, and what was important to them on the products in terms of do they want a particular durability, do they want a luxurious carpet. What was the expected life cycle of that product? Maybe they wanted a 10-year wool product? That was quite a steer in terms of where they would go. We would have a fairly advanced computer system that would look at the available stock so we'd be able to advise a customer on the availability of their choice, agree on a time that would be delivered to store. Then Carpetright offered a fitting service so they would then look to introduce the customer to a fitting service from selecting a product. Everything was kept in-house at Carpetright, so the customer would have to pay a total price for flooring and fitting.

{audio:0:02:29} Would you have a pre-agreed date for installation?

{audio:0:02:32} Yes; we’d work with some contractors and fitters. Each store would typically have four or five fitting teams. They'd have their diary available, and we would work out when the customer needed the products fit as part of the initial description. It would typically take around five to seven days to get the product into the store from Carpetright's head office and, generally, guys would be bookable within a week of that time. You probably saw a best-case scenario of two weeks, depending on the customer's needs. If the customer wanted some flooring timing with some building work in three months, Carpetright would have the ability to control that as well.

{audio:0:03:22} How did you think about stock at the store level versus at the central office you mentioned?

{audio:0:03:32} In Carpetright, in a store physically, you'll have probably 50% of the store's premise on roll stock and available stock, but roll stock would only account for around 3% of the total sales; 50% of the space but, bizarrely, 2% or 3% of the off sales. Most sales would come from sampled carpets. We would have weekly reports on stock that was green, as in high availability, with no problems. Amber was on watch, and red was either on delay or discontinued. The sales team would understand their best-selling advantages, what was in good stock, and what was a concern, so it would also shift that sales process initially. 

{audio:0:06:10} Why were the sales kind of disproportionate to the fit in the stores? 

{audio:0:06:23} Historically, 20 to 25 years ago, the mix of people taking their own carpets away would be much higher, probably about 50-50 in terms of roll stock. In other words, instantly available stock versus ordered in samples. That’s probably changed over the last 20 years for a number of reasons. One of the main reasons is that very few people now have the experience or the desire to fit their own products, so they'll want a fitting service. Ordering sample carpets is as easy as physically taking stock there. The teams at Carpetright, Tapi, or ScS and now very much geared toward sample products you order. It's much easier to order it that way than to physically hold stock in stores, which is committed revenue. Carpetright is moving massively away from roll stock stores to smaller high street stores where they don't have to hold the stock that, 20 years ago, they would have done by a big roll stock presence. 

{audio:0:07:34} You'd just have a buying team centrally that purchases from Victoria and the big manufacturers, and they ship centrally or to some warehouse?

{audio:0:07:43} That's right, so Carpetright would probably go direct to the manufacturer. They wouldn’t use Victoria Group massively. They would go direct to the Turkish manufacturers, on most core ranges. They do a lot of significant business with the Victoria group on better-quality wool products. For the entry-level bread and butter core products, as Carpetright would call them, polyprop, value-led, they would go directly to the manufacturers. Still, they would lean on distributors like Victoria Group for the better end branded products.

{audio:0:08:23} Carpetright effectively offered their own private label carpets at the lower end?

{audio:0:08:33} Yes; it's pretty typical that the manufacturers would supply flooring to retailers direct and distributors. The bigger retailers – with Carpetright being the biggest with over 300 stores – have economy of scale, and they have their own distribution center. They would take flooring in direct from manufacturers on key volume lines, but they would also use the Victoria Group for more premium products that didn’t have that economy of scale and that volume tool in their tool kit.

{audio:0:09:08} Those brands that are kind of higher-end – like Abingdon and Westex – you'd go to Victoria for those, but you'd go straight to Turkey and get your own private label for lower end.

{audio:0:09:21} Yes, absolutely. Turkish products are typically polypropylene, low volume twist; the £10 to £12 a meter product versus much better products sold by the Victoria Group.

{audio:0:09:42} What will be the impact of this shift from Carpetright in terms of moving towards the smaller high street stores, no rolled carpet, and more centralized buying?

{audio:0:09:52} I think that the value customer is not being targeted by the big retailers for several reasons. The main reason is the significantly increased fitting cost in the market in the last couple of years. Two or three years ago, you'd probably pay £3 a meter for your carpet to be fitted, and now it's anywhere up to £5.50 to £6 a meter. If you compare the price point on the value products, you're almost paying as much for the fitting service as you are for the product itself. In my opinion, Carpetright is now intentionally moving the price point to focus on a higher RRP transaction value, higher margins, and leaving the value customer for the independent retailers to take that customer segment.

{audio:0:10:52} Why is the fitting cost so high?

{audio:0:10:54} Scarcity of fitters. Going into fitting is not seen as the most glamorous of trades but it’s one of the easiest trades to learn. It's not like being an electrician, where you do a three, four, five-year course. You can become a fitter quite easily. But it doesn’t seem to have the attraction of being a joiner. There’s just this lack of people coming into the industry and scarcity that's prompted all the big retailers to offer higher rates to attract more fitters, so the rate across the industry has gone up significantly.

{audio:0:11:34} That’s effectively pricing out Carpetright from the lower end.

{audio:0:11:37} Essentially, yes. If you’ve got a customer that wants to spend £300 on a carpet and the fitting costs are £250, then sometimes they might decide to go somewhere else like an independent, for example, who will generally have in-house fitters. They'll create a total price that will be the cost of goods plus fit in the total price, and actually, they've got a bit more room to maneuver in terms of the cost of goods or the fitting. Generally, the independents on lower-end products are more competitive than Carpetright, Sapphire and ScS. 

{audio:0:12:15} Because they can play with the margin between the fitting and the carpet?

{audio:0:12:19} They might make less money on the fitting but more on the carpet or vice versa.

{audio:0:12:23} What's typically the gross margin target you have for the lower-end carpets?

{audio:0:12:29} From a retail perspective, generally, in multiple accounts, you're probably talking about a return of about 60% gross margin. Independents won't have the cost base, the rent, and rates on an independent site versus being on a premium retail site. With the margin expectation, the markets are completely different in terms of cost to serve. For independents, their operating costs will be significantly less. They’ve got a very different model from the big players, such as Carpetright and ScS.

{audio:0:13:14} They're trying to earn a 60% gross margin. If they're buying a low-end carpet from raw materials from Turkey, with the distribution and inflation, it’s going to be tricky to keep it low-end retail price. 

{audio:0:13:33} The trouble I see is that the retailers are trading up on quality. They face up to the fitting challenge, target higher transaction value customers, better quality products, products that perform better; fitters enjoy fitting better-quality products because they're generally easier to fit and there's less recall on them. You see the average price point in flooring going up fairly significantly in the last 12 to 18 months.

{audio:0:14:07} What's roughly the mix of carpets you have between, call it, low-value end or private label versus mid-and high-end that's typically Carpetright? 

{audio:0:14:17} At Carpetright, the floor space, floor sales, and entry-level products, would probably be about 60% of the business.

{audio:0:14:30} Is that below £400, £500?

{audio:0:14:34} Yes, around that price point. RRP price, £15, £20 would be entry. Around £20, I would say, is probably about 20% of the market. Then the top end, the sort of Westex products is probably about 10% of the market, the absolute premium quality wool. It’s kind of split along those lines.

{audio:0:15:08} How do you see that changing?

{audio:0:15:11} Again, I think the retailers want to push the price point up and get the margin on the better products. It's very competitive at the entry-level with the fitting challenge part, which is a real issue. Independents still dominate the market, and independents have the lower cost base to operate at probably lower margins and bigger volume on those products.

{audio:0:15:39} You think the independents are going to take the market share on the lower end of Carpetright and ScS?

{audio:0:15:48} How do you think that positions Victoria, given their brands?

{audio:0:15:53} Victoria’s strategy is about mid to upper quality. There is still demand for British-made products, so we'll talk about the cost of living challenges. The businesses that are into exclusively value customers will find it the most difficult as the cost of living will generally have a bigger impact on the value customer. Whereas, in our current role, our better brands, our higher-margin products outperform the value. The challenge of the cost of living will be an issue, and independents will pick up on that. I'd also say that Abingdon is probably well placed because they’ll be less exposed to the cost of living challenges because of the quality of products they sell, where typically people buying flooring for £700 to £800 plus are probably still spending. 

{audio:0:16:57} At Abingdon, is that roughly the £20 a meter range?

{audio:0:17:04} Let's say I come into Carpetright and I want to order an Abingdon carpet. How do you work with Abingdon to get that stock in the right place at the right time?

{audio:0:17:16} At Carpetright, a lot of the sales have to do with Abingdon. Carpet is not the most dynamic industry, and there are not many new products always coming into the market, so it's quite static. I'd say 90% of the volume sales at Carpetright have probably been in place for some time; it doesn't change that often. Where you can get some influence in Carpetright as a regional manager is some stores, you'll have a guideline, but within better retail parks or in more affluent parts of the UK, you'd have some kind of influence on what your product mix might be. So, for example, potential value ranges might be bigger in a relatively more deprived area, whereas in a more affluent region, you might give more space to Abingdon products. Some flex can be agreed upon. For example, in new store launches, you would be involved in the sales mix, so it might typically be 50%, 60% on value, whereas in the sort of store I open at Carpetright might be 20% or 30%, so you’d have some flex on the better-quality products. Abingdon or Victoria products might be given more space or presence in those stores. 

{audio:0:18:32} But when I, as a customer, place an order in the store, do you place the order with Abingdon, and I get shipped directly? How does that work?

{audio:0:18:42} It goes to Carpetright’s head office; an order will be generated by EDI, and it will all be automated from the Carpetright system to the Abingdon system and delivered electronically. If they had supply issues for whatever reason, they would then alert Carpetright, who would then alert their stores. You have a moving piece of the availability of those products.

{audio:0:19:18} When you're thinking about selection in that higher-end, with the mid to higher-end, the Westex, and Abingdon, what makes you choose Victoria brands versus the other brands?

{audio:0:19:32} History is important regarding their presence in flooring and reputation. One of the key things that is often overlooked is how that brand communicates. Having the quality of products is important. Being commercial versus other products in the market as well as the presence from reps and core support help your teams understand the products. It used to be the case where you could just buy the product at a price, and the deal was done, but now often, retailers such as Carpetright expect a value add. So they want some online content, they want some in-store training. Ideally, they want people to be invited to an Abingdon training day or a Victoria training day, so they can understand it. Because of the history or the quality and the terms, the products are important, but the value-add for retailers like Carpetright is to help me train my team to understand those products and what you can add differently. Suppose a product from Victoria versus a competitor was the same perceived quality and price. What would make the difference to the retailer and a client is that value-add in terms of communication and training support.

{audio:0:20:54} To drive sales, ultimately.

{audio:0:20:55} Yes. One other thing would be around when things go wrong. If there’s an issue with the carpet or the products, do they make it easier for the retailer and the store to accept returns and deal with them quickly? If they're perceived as having a high ratio of faults and not being particularly easy to help with returns, you’ll find that retailers will also pull away from them, just from things like that. 

{audio:0:21:24} How are Abingdon or Westex perceived on returns?

{audio:0:21:29} Good. The Victoria Group is generally very good. Westex, particularly in my experience, is very reactive; they want to fix things quickly, making a difference. It’s not just someone behind a keyboard just advising on it; they’ll go to a customer’s house and help the team find out why that’s happened, and if it's a problem product, they'll put their hands up quickly and resolve it very quickly to the customer’s satisfaction. That is the real value in that in flooring.

{audio:0:22:04} How do you measure quality?

{audio:0:22:07} We’d get stats for fault rate per 100 carpets, then we'd benchmark. More so an issue on hard flooring where the propensity to fault is higher. Certain brands within hard flooring, for example, are flagged as having a higher complaint rate, and you'd quickly see that brand get minimized or exit from the business.

{audio:0:22:35} How would you compare Abingdon's quality versus its competitors?

{audio:0:22:40} I would say ahead they’re in response to issues and well above the bar in fixing and resolving and supporting teams with issues. If a new range of Victoria was introduced into Carpetright, there would be confidence they've actually got the backing of a well-established business, quality product, and that support on low number of faults and they will resolve complaints quickly, so that’s a real advantage.

{audio:0:23:15} I’m just thinking of me going into the store again. What incentives are the sales associates or people in the store given to sell certain brands over others? 

{audio:0:23:36} In Carpetright, it’s the general sales incentive. Salespeople like to sell products that they believe in, that perform as promoted, that are available quickly, and that they're not going to get any issues with, hence why Victoria would win in some of those areas. Other businesses like ScS, for example, I've got a good insight into it. They would have specific manufacturer-led sales incentives, so perhaps a manufacturer might sponsor an incentive, so you'd see an uptick in their sales during these promotional periods, and that's not something that Carpetright ever did.

{audio:0:24:23} What do you think is the biggest risk for brands like Abingdon, mid and high-end Victoria brands, of losing their position in the big retailers like Carpetright?

{audio:0:24:36} I think the challenge is that big competitors of Victoria Group would be looking to replicate the specification of Victoria products in different manufacturers around the world. There are always new players in the foreign carpet manufacturers, and the technology is better. Five years ago, there might have been a handful of people that could deal with these products; now, there might be double or triple, so the challenge for Victoria is maintaining that point of difference. The products being maintained in that quality and being able to buy off people that want to replicate those products in terms of specification, better margins for the retailer. The retailers have had almost two years of supply challenges, price increases, and significant increases in costs and prices. Now the world's open to travel, there will be people trying to find like-for-like spec products that Victoria offers at better margins to the retailer.

{audio:0:25:46} In contrast, the retailer would traditionally be inclined to partner with Victoria. The challenge that I see in the short to medium-term is due to the supply chain being as challenging and the price increase so significant. They're probably more open to conversations with different competitors to understand whether I am getting value from the Victoria Group. You've got to be very clear on what's happening around them in the market.

{audio:0:26:15} You mean the retailer going straight to the manufacturing in Turkey?

{audio:0:26:19} Yes, possibly. The retailer might go direct. They might hypothetically say, these are my top 10 volume lines; how close can you get to these in specification? What's the cost. It's well known in flooring what Victoria ranges are supplied to people like Carpetright. So new competitors in the market, such as Likewise and Furlong, they’ll all be looking at that and probably leaning on an open door with Carpetright to say, look, let’s have a conversation about alternatives to those products. That’s probably the biggest challenge for the Victoria Group at the moment.

{audio:0:26:57} How closely can you replicate Abingdon's carpets today?

{audio:0:27:00} Yes, that’s the point. Five or 10 years ago, a handful of people could probably get close. Now with advances in technology and new people in the industry, there are probably genuine people that can get very close, if not exactly to the specification. It's not like someone trying to replicate an iPhone. That's a very technologically advanced product; flooring less so. The Victoria Group is probably buying components of that flooring from different parts of the world that other people have access to. You can get the yarn and the backing, and there are ways of finding similar products. Also, the other side of the coin is that a retailer that has their margins squeezed over the last two years will have their specification at Victoria. They might be open to slightly less specification products that perform similarly that they can achieve a margin on. Victoria being on a pedestal for quality is great. Still, if the retailers also invoke 20% less margin on their products, and can buy a product that’s very similar and performs the same in the eye of the customer, then they can increase their own margin, that's a conversation that they will explore.

{audio:0:28:26} You mentioned the retailers are also moving up the quality spectrum though because they’re being squeezed on the value end?

{audio:0:28:34} So they're going to reduce the spec and increase the price.

{audio:0:28:38} Yes, it’s like in the supermarket. Here, you go to the shop and buy a bar of chocolate, and it's probably a third the size it was five years ago, and it's the same price, if not more expensive. People are doing different things to maintain the margin. They might reduce the quality to hit that same margin perspective. There’s a shift from polypropylene to polyester, as an example. Polyester might represent better value versus polypropylene, so suppliers and manufacturers are looking at different things there that can either maintain the margins at the moment by despeccing the products, or they can go for something that is a wow product at better margins. Higher margin, higher price point.

{audio:0:29:23} How likely do you think it is that the retailers are going to miss out Victoria and go for it?

{audio:0:29:30} I think there's a risk. In my view, I link flooring to other kinds of products in other industries. If you think fashion retail, the guys struggling are the ones in the middle, and if you think of the people like Debenhams and the Arcadia Group, they're the ones that have caught a cold. There's a value conversation or there’s a top-end conversation and the middle guys have the challenge. People either want Primark or Prada but they don’t want Debenhams because they think, I'd rather save my money and get value, or I'd rather aspire to get something much better. I think flooring will be caught up in that, and I'm seeing it in hard flooring now. Carpets are slightly different because the more traditional customer that wants a wool or an 80/20 wool, that’s all there is now, but younger customers coming in and buying a house for the first time or second house buyers, maybe that's less important, so that’s potentially a risk.

{audio:0:30:28} Let’s walk through that then. Let’s say Carpetright have been squeezed, and they're effectively forced to go straight to source or go to someone who will give them a better deal. How would that look? Would they go directly to a manufacturer, effectively replicate the spec of Victoria or Abingdon, take a bigger margin, and organize the logistics around that?

{audio:0:30:56} Yes, that’s exactly how it would work. Also, Carpetright is the only retailer in the UK that buy direct on roll end, so if you think of Tapi, ScS, they buy from distributors that cut length, so they pay more for that product because they’re buying by cut. Carpetright is buying the volume by the roll. In Purfleet in Essex, they would have a 150,000 square foot warehouse with rolls of carpet that they cut and wrap for customers. Say I sell you a 5X4-meter cut of whatever product, it then goes into Carpetright's head office, they can cut that off the roll, put it back into stock. The other guys in flooring would buy the cut length directly from either the manufacturer or a distributor because it's a different model.

{audio:0:31:47} Because they haven’t got the scale?

{audio:0:31:49} Nobody else has got the scale of Carpetright. If Carpetright was to start again now, they probably wouldn’t have the investment of Purfleet and the infrastructure; they wouldn't need it. Previously the margin you would make on doing your own cuts and buying by roll was hugely significant versus buying on the cut length. Whereas over the last 10 years, the difference has been minimal. Carpetright has got the challenge, a minimal margin benefit, and huge operating costs doing that model themselves.

{audio:0:32:21} Why has the margin been different between buying by the cut and buying by the roll?

{audio:0:32:28} As a manufacturer, it's always in their incentive to sell. So they make huge rolls of carpet, and it's much more cost-effective for them just to sell 400 rolls to Carpetright over a period of time, whereas holding them in stock themselves and doing the wrap and deliver is a logistical cost. It's difficult for them as well. Hence why nobody other than Carpetright does it.

{audio:0:32:56} They must be able to get a discount when purchasing from manufacturers.

{audio:0:33:01} Yes, that's the point. 10 years ago, the difference between buying on volume on roll versus buying on cut would have been significant to a 20% or 30% margin difference. Because now Carpetright has a competitor in Tapi, they're probably making as much revenue. The Tapi model is very different. They'll be speaking to a manufacturer saying, we can give you this volume; however, they're quite aggressive on the cost price that they will pay. So the money factor is important. Carpetright is declining, and people like ScS and Tapi are increasing. The money factor's got to hold the nerve and maintain the margins and hope Carpetright win the battle or accept there's going to be a conflagration of the roll volume to Carpetright on the cut length business to others. Tapi is, in fact, very aggressive about negotiating better margins because the guys that own Tapi used to run Carpetright, so they know the prices that they used to pay.

{audio:0:34:08} Tapi’s models came in, and they've got to such volume that they’ve changed the dynamics of buying by the cut, and it's changed the game.

{audio:0:34:20} Why are they gaining so much market share, Tapi versus Carpetright?

{audio:0:34:25} Carpetright has had its own challenge. They went int a CVA a few years ago and were a PLC company that almost went bust. They’re now privately owned by a guy called Talal; he’s got obscene wealth, he kinds of sees it as an opportunity that they were the market leader. It's almost Carpetright’s battle to lose because they were twice as big as Tapi at one point. But their model is changing; they don't need 350 stores, and they don't need three stores in every town. Their business is challenged because they’ve got legacy issues of rent and rate deals done in the 80s that are still alive. They can't get out of some of the 25-year and 30-year leases they signed at the turn of the century. Tapi is quite nimble. They can go to the right sites. They've got a blueprint of how many stores they need in an area. They'll have one, whereas Carpetright will have two or three, and Carpetright will be quite slow to move on to digital. They do more, but Tapi is certainly better at that, in my opinion. 

{audio:0:35:37} How much does logistics matter?

{audio:0:35:40} Flooring was built on the need for the flooring to be delivered the next day or within a fixed period, so the logistics build up value in that most customers want that commitment. When my home improvements are made, the last step is the flooring, and it's something that you get fit pretty quickly. I'd say 80% or 90% of people who buy flooring want it fit reasonably quickly, within a couple of weeks. Very few people would start to build an extension and think about flooring in the early days. It will generally be towards the latter end, at which point, having been through some building work myself, you just want the product done. You've gone through the hardship of building and materials and tradespeople and flooring is the final piece of the jigsaw, and you just want it fitted. So the logistics and the ability to turn things around pretty quickly from a retail perspective are very important.

{audio:0:36:48} I ask because Victoria claims they have an advantage because they own the distribution in-house, so they tend to get the product to retailers quicker than others.

{audio:0:37:06} I’ll add value to why that is right and why I believe in that strongly. A competitor to Victoria would be the AW Group. The AW Group doesn't have the logistics set up that Victoria does. It's a good brand, all produced in Belgium, and their problem is they can’t get the stock in the UK to the customer as quickly as required. They don't communicate with the retailers, and AW as a brand is probably losing market share because they don’t have the distribution network that Victoria Group does. I’ve seen it first-hand where it’s a great brand, product, and commercial proposition for retailers, but without logistic support, it will fall flat.

{audio:0:37:56} I guess they distribute it through distributors in the UK?

{audio:0:38:02} Yes, but not with the same infrastructure of people like Victoria, Headland.

{audio:0:38:09} So whomever they're using is much smaller.

{audio:0:38:12} If you went into a flooring shop and ordered an AW carpet today, the lead time will be anywhere from six to 12 weeks. In contrast, a Victoria product you ordered today has a decent chance of being available on Monday.

{audio:0:38:30} Why is it so long for AW?

{audio:0:38:33} People at Victoria and Headland exist because manufacturers are very good at making products, but they’re not very good at logistics and the operational side. So generally, people at Victoria are a good fit for manufacturers because they'll hold stock in volume to service customers. A customer is getting a better service while paying a slightly higher fee because they're not going directly to the manufacturer. Still, ultimately they're going to get the product that they want when they need it for pennies extra per meter.

{audio:0:39:08} Why doesn’t AW just use Headland or a bigger distributor?

{audio:0:39:14} That's a great question, and it's something I know has been explored and discussed, but at the moment, I guess they wouldn't want the AW Group to lose their margin on using their distribution as well; this is essentially the deal.

{audio:0:39:36} So they effectively use local distributors from which they take a bigger margin?

{audio:0:39:42} Yes, and AW has a retailer product and distributor proposition; they try to keep them very separate. In reality, the product range is very similar, if not identical. They do try and differentiate between here's what I'm going to sell to Carpetright direct; I'll service it badly via Headland logistics, and here are products I can supply to distributors such as Headland of which Headland will hold all stock available to sell better.

{audio:0:40:15} In a slightly worse spec, I'll keep the margin the same.

{audio:0:40:19} This is what I find fascinating, and I don't really understand. The projects are fungible; you can replicate each other’s products. The customer doesn't have a clue about the brands.

{audio:0:40:34} Yes, there’s no brand knowledge.