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State of the area rug industry: Price increases threaten to quash any rally

How have suppliers and retailers assessed the 2011 area rug market, specifically the mindset of the consumer? In a word, fragile.

“Has there been improvement in the last six months? Yes, slightly,” said Sam Presnell, owner and proprietor of award-winning retailer The Rug Gallery in Cincinnati. “I wouldn’t get overly optimistic though. It doesn’t take too much for consumers to hold back on a purchase, like negative economic news or a declining stock market.”

Bill Kilbride, president of Mohawk Home, the rug division of Mohawk Industries, said “fragile” is an apt description of the consumer’s frame of mind. “For the great majority that is the situation,” he said. “The unemployment levels, the diminishing of discretionary income against a backdrop of higher gas prices, double-digit inflation of food prices; it’s across

the board.”

When the stock market began its sharp pullback in May, Presnell said customers immediately backed off. In his store, which earned the Gold Standard Award for excellence in retailing by the World Floor Covering Association, the positive signs are seen in customers making multiple rug purchases for new homes or renovating existing rooms. Not enough to call it a trend, however. “Certainly not robust, but improving,” he said.

At The Rug Rack & Home Décor, a Chattanooga, Tenn.-based retailer, the pulse of the customer is cautious, said Miriam Thompson, co-owner. “Potential customers are holding onto their money longer before pulling the trigger and purchasing,” she said. “We have had some customers return to our store after having been in six months prior and make a purchase.”

Aaron Gray, director of marketing at Oriental Weavers, sounded a positive note: “There are glimpses and signs of improvement, and more dealers are starting to stock their floors anticipating a strong finish for the year.”

Steve Roan, vice president of Karastan Rugs, added, “The beginning of the year was very upbeat as pent-up demand started to come to market. The end of the first half has slowed, however, as consumer confidence begins to slide backwards.”

‘Value’ products

In the last two years Gray said Oriental Weavers has seen consumers gravitate toward lower-priced goods, a trend reflected in other home goods categories, including high-end furniture. His theory? “More dealers want to be all things to all people and not specialize in one category or certain price points. Since there is not as much foot traffic in the stores, you want to sell every person who walks through the store and make sure you have products for everyone’s taste.”

Kim Barta, brand manager at Shaw Living, a division of Shaw Industries, agreed the market has been influenced by consumers looking for lower-priced product, driving more business to mass merchants and big box stores.

And Karastan’s Roan added, “All segments of the market are looking for value, particularly at the higher end.”

Issues/price hikes

Any tangible proof of resurgence in area rugs could be thwarted by significant price increases in the market, according to industry leaders. Presnell said he has never witnessed anything like what has transpired in the last six months in his 40 years in the rug business.

The hikes, he said, began last fall and have picked up in earnest in the first half of this year, with increases from 10% to 40%, depending on the supplier. “Prices have doubled overnight,” Presnell explained. “Wool has doubled overnight, cotton has doubled overnight. The cost of tufting has quadrupled in the last six months. There are 40% to 60% fewer weavers in the industry today.”

Presnell called it a “perfect storm” of confluences: rising fuel prices, flooding in Pakistan, unrest in Egypt, fewer weavers, and the growing influence of China as a buyer of New Zealand wool. “It’s a global world now, for sure. These price hikes are coming at the worst time.”

The Rug Rack’s Thompson said her business has already endured several price increases this year. “Some [suppliers] say they have absorbed costs but can no longer do that, so they have to have a price increase. The polypropylene arena has just gotten out of sight and we know what has attributed to that increase: oil. I really don’t understand some of the increases because you know companies are sitting on a ton of inventory. The consumer is already so price conscious. More and more consumers are coming in with a set budget and will not come off it.”

Kilbride said raw material costs have risen almost monthly since last fall. “It started with cotton, and then any material made with petrochemicals is affected. It is all about supply and demand. If demand should fall because of a drop in prices, and prices then drop, there will be some stabilization. But the world supply of oil is tight, and I expect to see more pressure on the upside.”

Presnell said the market dynamics have changed considerably in recent years. “It used to be you brought a high-end design into the market and it would eventually trickle down to the low end. Now the window of opportunity is so much shorter because someone comes out and knocks off your product and the price drops,” he said. “Machine made—from Tibetan rugs on the high end to polypropylene on the low end— it doesn’t matter; we’re all chasing the same thing.”

Trends

The consumer’s interest in environmentally friendly products continues to grow, according to Barta, noting that top-selling Shaw products, including Kathy Ireland Home International First Lady, Tommy Bahama Home, Angela Adams Home and the newly launched Bob Timberlake collection, fulfill this green need. “These products are completely recyclable back into new carpet and area rugs through Shaw’s Evergreen Nylon Recycling facility,” she said.

As for design and color trends, marketers and retailers said contemporary has established itself in home furnishings while transitional looks still dominate fashion and accents because of its casual style and ease of integration.

“Transitional is defined as pairing traditional motifs with contemporary layouts. The result is an eclectic and casual style that can change with the owner’s taste,” Barta said. “Traditional is beginning to come to life once again after a 10-year withdrawal. We’re looking far more modern than before, but traditional will take market share from contemporary and transitional in the coming 24 months.”

Gray said texture is “incredibly important” right now. “Customers want more apparent value in their product. Important colors are gray in all shades as a main color and accents of plum, citrus golds and greens and brighter blues.”

Karastan’s Roan said the entry-level business is being driven by contemporary patterns in bold, bright colorations. “Medium to upper end is moving from traditional to transitional with carryover in the more traditional colorations.

Designs are more open and less intricate, even in the traditional patterns.”

According to industry professionals, specific design trends include:

•Circles and rings that are transparent

•Paisley

•Rustic traditional

•Moroccan onion panel designs

•Leaf and stem silhouettes

•Jacobean inspired

•Graphic scrolls and damasks.

As for specific color trends:

•Mineral grays paired with earth tone neutrals

•Warm and cool grays mixed with clean linen

•Rich, dark, red-based multis

•Hues of bright magenta, burgundy, red, orange, maroon

•Hues of sea foam blue, navy, indigo, periwinkle and bright blue

•Hues of grass green, Kelley green, aquamarine and citrus green

•Peacock blue and apple green paired with ivory and indigo.

The population demographic is changing so rapidly, Kilbride said, that it is easy for marketers to get the latest design and color trends wrong. But one thing is clear: “We’re in the fashion business, and if the product isn’t fashionable to the customer it won’t sell.”

Challenging times

With consumers still spooked by a shaky economy and price hikes adding to their angst, area rug suppliers and retailers have their work cut out. They have put great emphasis on the web via cataloging, advertising and software programs that simulate room scenes. Anything to generate interest and drive traffic.

“We still struggle with how to get customers into the store,” Thompson admitted. “We cut back on new inventory this year and have had to scrutinize where to advertise and we have changed that some. We are trying more Internet advertising so we can alter our message.”

Kilbride said today’s suppliers must pass muster with retailers. “In this environment, one concern is that you want your category to be strong enough to earn its space with the dealer,” he said. “More retailers are adding food products and other merchandise. Flooring and area rugs have to justify their space on the retail floor every day. I am still confident that flooring can carry its own weight.”

-Ken Ryan