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State of the industry: Carpet pulse leaves room for growth

by Louis Iannaco

As the third quarter of 2012 came to a close, FCNews spoke with major players in the carpet industry regarding business, particularly this year’s challenges, consumer trends, technological advances, and predictions on how the year will finish up along with projections for next year.

The general consensus is a familiar story, for the most part: Sales are neutral or flat overall with some small spurts and the potential for growth in the future. Mohawk’s president of residential and commercial, Tom Lape, said, 2012 has not lived up to the anticipated demand the industry thought it would see. “Business began a little stronger in the early part of the year, but that momentum has not sustained from an overall perspective.”

On the residential side, he explained, “The higher and lower ends of the market have performed slightly stronger, while the middle portion has remained a bit weaker. We’ve seen the builder segment begin to show some signs of rebound.”

Lape believes the retail replacement business has been a mixed bag. “Existing homes are finally starting to sell and people are beginning to get financing. We’re seeing the home inventory come down, which is giving some stabilization to real estate values, but we’re still not seeing the magnitude of the recovery we all hoped to see.”

For the commercial segment, he said overall demand is trending favorably. “In 2011, we saw a lot of project work that was shelved the previous two years finally released. In 2012, we’ve seen the continuation of that, although, there is a bit of softness on the institutional side. Government spending, in particular, has been tighter. Overall, we believe commercial has outperformed residential, although that gap is narrowing.”

According to Tony Prespitino, executive vice president of sales and marketing at Gulistan, business is “neutral. It’s like a malaise—we stay within a certain range and can’t seem to break out of it. As soon as you think you see some light, something happens to dim it.”

With that, he noted, there are positives. “Housing prices have really come down and interest rates are at an all-time low. The negatives are: Washington is dysfunctional and I believe this plays on people. Europe also has people concerned. You’ve got the unemployment data, then, on top of that, there are a certain percentage of people who are underemployed. So, the positives and the negatives almost seem to cancel each other out.”

For Prespitino the market now is like an hourglass. “You’ve got the high end selling because there are certain people who aren’t affected by the economy—that’s the market we play in. And you’ve got the low end.” When it comes to the low end he wonders, if the industry is doing itself a disservice. “There is a lot of cheap carpet with all these exaggerated warranties, and the younger buyer especially is not going to know [any better], so after it looks like the devil in a year or so my fear is they are going to say, ‘Next time I’m going to go with hard surface.’”

Randy Merritt, president of Shaw, is more optimistic and believes residential is showing signs of improvement with strengthening in both multi- and single-family new home construction. “However, remodel/renovation work continues to be sluggish. We expect to see this business continue to gradually show improvement as we move into 2013.”

The commercial segment remains a bright spot for Shaw, with carpet tile being the highlight, he noted, and “business is expected to continue to grow as the economy rebounds. We believe the industry has seen the bottom and we should see gradual improvement ongoing in the year ahead.”

Dan Phelan, The Dixie Group’s vice president of residential marketing, pointed to a dichotomy in the residential market, as he noted the mill’s residential business through the second quarter was up about 6%. But, “if you factor in our big box business, it’s more close to 11%, as our dealers are experiencing inconsistent business from week to week.”

Since about 2009 Phelan added, “our business is up about 33% with the industry as a whole remaining somewhat flat, if not showing a slight increase this year. We attribute our growth to continued reinvestment in distinctive product introductions, in several different categories, every year throughout this difficult period.”

According to John Wells, president and CEO of Interface Americas, business has been good. “We continue to lead in many areas of our business—within the challenged economy, starting in 2008, we’ve continued to move forward in sales and profits, sustainability leadership plus innovation. Interface had record level sales in 2011 and we expect 2012 to grow above that level.”

 

Challenges

On the topic of the challenges thus far in 2012, Lape cited the upcoming presidential election and the uncertainty it is fueling among consumers and today’s decision-makers. “The fundamental reality of carpet is it doesn’t break. An HVAC system breaks. A refrigerator eventually stops working. Since flooring doesn’t break, it’s a deferrable purchase, so confidence—whether consumer or CEO—plays a big role in the flooring purchasing decision. The overhang of this election has had the impact of creating some concern on the confidence level.”

On the positive side, he added, “We’ve seen the medium to higher-end consumer, who has sat on the sidelines for a while, starting to come back.” The only difference, “She is more value-conscious than in the past. But, these higher-end consumers are buying, they just demand to buy a quality product. Making sure our retail partners are positioned to take advantage of this is Mohawk’s key mission.”

According to Merritt, while the marketplace overall continues to gradually improve, he, like Lape, believes consumer confidence continues to hold back growth. “Housing construction in both single and multi-family is increasing and this is forecasted to continue through 2014. Existing home values in many markets are beginning to increase for the first time in many years. The strength in the stock market has helped rebuild some of the value in individual retirement accounts, which helps consumer outlooks.”

Phelan said, for many it seems like the industry is in a race to the bottom, in both price points and fiber types. But Dixie “sees the upper-end of the business active with that consumer re-entering the market and wanting better goods. That is where we have strength in our style and design offerings in both nylon and wool.”

He added the company’s wool business with Fabrica and Masland is “very strong. We aggressively entered the wool market in 2007 and it has grown each year.”

Wells also sees consumer confidence as playing a major role in 2012. “The GDP is affected by consumer confidence indicators which include new construction, plus housing and retail sales. This then spills over on all areas of business including commercial construction, remodel and design projects, which are a large percentage of our sales.”

To fight this, he said Interface has “worked very hard to diversify our portfolio. This has helped us expand even in difficult economic climates.”

 

Soft sells…

When it comes to what consumers are buying, Lape mentioned even when a market is in a tough spot, consumers still have an eye for innovation and identifying a fantastic product. “A truly great product is most often evaluated by three attributes: Style, design and performance. Mohawk’s SmartStrand platform is a great example of a product that wins in all of these key areas. We see the success of SmartStrand as a clear indication of the consumer’s preference for great product, as is our next-generation soft series, SmartStrand Silk.”

The softness attribute is one “that’s exceptionally compelling to the medium and high-end consumer,” he added, “and has added excitement back into the carpet category.”

Shaw’s Merritt agrees, saying, “We’ve seen a growing trend toward more soft, luxurious carpets. The softer, the better, it seems. Consumers continue to favor soft products in cut pile, more tailored constructions. Our Cradle-to-Cradle Silver certified Anso products are constructed with one of the softest nylon fibers in the industry, and our styles and colors continue to comprise the most versatile collection of soft construction carpets available today.” Tweeds, loops, and loop-cut-loop constructions and patterns are strong sellers, he added.

On the commercial side, Merritt noted, the ongoing growth in carpet tile, “and our Cradle-to-Cradle Silver certified EcoWorx continues to meet the commercial market’s needs for innovative design, performance and sustainability—including true recyclability.”

According to Prespitino, friezes are losing market share. “The popularity of textures and casual textures has experienced a dramatic increase at the expense of friezes,” which used to make up approximately 40% of the market. “The vast majority of the frieze business has gone to casual textures. I’ve never seen it go that fast, especially in solid colors.”

Within Interface’s commercial business, Wells said customers are buying design and sustainability. “We’ve always focused on ‘flooring as fashion’ and offer a broad range of color, textures and patterns plus custom design options.”

Overall, Shaw’s Merritt believes the worst is over and carpet should show some slight growth in units and slightly more growth in dollars this year. “Commercial continues to be stronger than residential, but we believe the growth trends will continue into 2013…gradual yet steady.”