June 26: Volume 32, Issue 1
By Ken Ryan
The carpet industry, facing the onslaught of exponential growth in hard surfaces in both the residential and commercial sectors, saw scant growth in units in 2016 while overall dollars fell.
FCNews’ research shows carpet sales slid down 1% in 2016 to $8.78 billion compared with $8.87 billion in 2015. However, total volume—which includes carpet and area rugs—gained 1.2% to 11.22 billion square feet from 11.09 billion square feet in 2015. Rug sales were up 3%, marking the third year in a row in which the segment outperformed carpet.
Within the category, residential carpet sales declined an estimated 1.5% in 2016 while units were up 1.3%. Commercial sales, meanwhile, dropped 0.5% in sales and volume fell by an estimated 1.5% year over year.
Despite the falloff, carpet and area rugs make up 58.8% of the flooring industry in volume—the largest percentage of any flooring surface. There’s no doubt, though, that carpet’s dominance is waning little by little. In 2006, for example, carpet/rugs made up 66.8% of the flooring market in units.
“As an industry we have to do better,” said Tom Lape, president of Mohawk Residential. “Will it go back to where it once was? That is a longshot. Will it grow? Absolutely.”
Tale of two markets
Carpet still has its strengths regionally—in the upper Midwest and Northeast—and at both the low and high ends of the market. Engineered Floors, which is now the No. 3 carpet company in the business by market share, is flourishing in the lower-end polyester arena. Conversely, experts believe Shaw and Mohawk are operating at some of the highest profitability levels ever experienced within the industry at the high end.
Therein lies the rub in this hourglass market. The treacherous soft middle is in the $8 to $13 price range, which is dormant; below $8 and north of $13-$14 is resonating with consumers who are more style and design conscious. Meanwhile, at the upper end, soft is still percolating. Mohawk is in the fifth or sixth generation of Silk, which means consumers continue to validate the importance of soft fibers in their homes. Mill executives agree the industry must push innovation to the highest levels possible to at least forestall the continued growth of LVT/WPC and other hard surfaces. “Rather than building products that fit your assets, the industry needs to build products that fit the customers’ needs,” Lape said. “We have to figure out a way to create compelling products for our retailers, even if it is hard.”
Residential sales have lost some ground on price largely due to the influx of polyester. Price erosion is occurring in the builder and multi-family segments by virtue of the fact the average selling price is lower in these areas. Brad Christensen, vice president, soft surface category, Shaw Floors, said the shrinking dollars in carpet could be attributed to what he calls “the continuation of the race to the bottom in terms of PET pricing and overall devaluation of the category.” Observers believe the industry collectively needs to do more to promote the benefits of soft surfaces, even comparing its value to other surfaces. “We don’t need to give it away,” Christensen noted.
In examining carpet’s loss of market share in recent years, it’s worth noting that 10 years ago the segment was mired in a deep recession, with double-digit losses in both sales and volume. While the recovery has been painfully slow, there have been signs of positive activity.
Improvement in units can be attributed to a fairly robust builder market in both multi- and single-family dwellings as well as in the return of home equities in the retail remodel sector. Builder/multi-family continues to outperform the overall market, with builder the stronger of the two. “We are cautiously bullish in the single-family builder segment for the foreseeable future,” Christensen said.
Others noted that with the overall residential carpet market fairly flat, that means the residential replacement carpet business is declining. The culprit? The increased popularity and consumption of hard surfaces, which continue to encroach on soft surface territory. Experts say this trend might not be reversible, at least for many years. Blame it on demographics and an aging population that is moving south and west to warmer climates. This is not a new trend; it has been going on for decades. But what has changed, to some degree, is the fact that builders are constructing homes and apartments in these markets with less carpet than they have installed in the past.
Adding to the challenges facing the residential replacement segment, the home center channel has been successful in driving volume with heavy advertising and promotions that offer “free installation” as long as consumers spend a certain dollar amount. For example, Lowe’s is currently offering consumers “free whole home deluxe installation” when they buy Stainmaster carpet and pad. While this free installation may be viewed as a gimmick (the price of installation is often built into the product, experts say), it appears to be working. Recent financial reports from Home Depot and Lowe’s confirms the floor covering department has been a growth area for big boxes.
Commercial carpet, which makes up 44.6% of the overall carpet market, was estimated at $3.923 billion in sales for 2016, with specified contract sales coming in at $3.23 billion and Main Street business at $698 million.
[Note: For years a large percentage of mills considered level loop polypropylene a Main Street product, mostly installed in rental space/tenant improvement and low-end apartments and basements. Today much of this business has been lost to low-end polyester cut piles. These cut pile sales are reported as residential, not Main Street. As well, some mills break out Main Street from their specified business; others do not.]
After two consecutive years of the commercial market clearly outperforming residential, soft surface commercial backed off in 2016. The positive news is that carpet tile is growing, and in most cases at better average net selling prices than broadloom. But just as in the residential segment, soft commercial has felt the impact of hard surfaces—with LVT and its subsegment products infiltrating most sectors of the specified market. The consensus among executives is that commercial soft surface sales fell 0.5% in 2016 vs. 2015 while units dropped 1.5%.
Where is the softness? Institutional, government and clearly the independent retail segment were down. One executive said of commercial retail: “They are looking at survival budgets, not five-year projections.”
Healthcare and corporate were moderate to strong. In both segments carpet tile flourished. “Everyone loves carpet tile, from specifiers to installers,” said Ralph Grogan, CEO of Bentley Mills. “There are so many advantages out there vs. broadloom. When we introduce products we rarely ever introduce product that is just broadloom.”
At one point Bentley was predominantly a broadloom company. Today, nearly 75% of its business is in carpet tile. The company has also added LVT, albeit just 5% now but expected to grow.
For the third year in a row, the U.S. rug business bested carpet, growing by an estimated 3% in 2016. Experts believe the segment was clearly buoyed by the growth in hard surfaces, which led to add-on sales. The popularity of custom rug programs was also a driver. Most broadloom companies now offer some variation of a custom rug program in which rugs are cut from broadloom and can be specifically tailored to the needs of consumers. Executives said they expect the custom rug trend to continue to evolve as more flooring dealers—and non-flooring outlets—get involved.
What’s preventing more flooring dealers from reinvesting in rugs is the online world as well as the space commitment. The ecommerce channel is still small but is growing double digits. Some flooring dealers have stepped up and are now selling rugs strictly online. In this way they are competing with home goods sites such as Wayfair, Overstock and Amazon. The bulk of online area rug sales are said to be mostly in the $199 and under range, although that is anecdotal; if so, online sales are not likely to impact the better goods mills just yet.