State of the carpet industry: Category ‘stable’ as market share gains continue

State of the carpet industry: Category ‘stable’ as market share gains continue
September 27, 2010

Sales of carpet, like that of just about any other product, remain sluggish during the first eight months of 2010 though in comparison to most floor coverings the sector continues to gain market share as end users search for products they believe add more value for their money.

While the year so far has been described by many carpet executives as that of a roller coaster, going into the final quarter of 2010 they believe the category has “stabilized” to where they at least feel confident in their strategies and budgets going forward.

Confident may not be a good term to use considering the category will most likely end the year at roughly the same levels as 2009 in terms of overall dollar sales and units. And 2009 was widely touted as one of the worst anyone ever saw.

Based on FCNews research, the carpet category overall is on pace to end 2010 roughly flat in both dollars and units when compared to last year’s sales figures of $7.875 billion and 11.19 billion square feet. Because the residential sector once again is struggling as foreclosures rise and new construction stalls, some industry executives feel the year will probably end down in the low single digits—from 1% to 4%.

But, with the economy riding a four-year downturn and the first eight months of 2010 taking everyone on an emotional ride of good news/bad news, ending the year steady is actually comforting to most.

This up and down was more due to the residential market than commercial as the latter continued the slide it started last year, albeit at a slightly slower pace. Plus, most companies had planned for the contract market to be down since it entered the recession two years after the residential side did. And, based on the size and scope of what happened residentially, along with what has historically happened, many figured the commercial market would be a drag for the better part of 2010 and beyond.

In fact, many of the executives with whom FCNews spoke for this story indicated the commercial market has actually fared far better than they anticipated going into the year. As a number of them said, 2009 was the first year commercial sales declined so they expected it would follow residential, meaning they hardened themselves to at least two more years of dramatic slides.

As such, most pegged the commercial carpet market to be slightly down, anywhere from 1% to 3%. But with this segment representing approximately 28% of all carpet sales, the biggest affect for the category to be where it is, comes from the residential sector.

Residential ups/downs

So what happened from the start of the year through August on the residential side to cause the industry to experience an up and down year? Possibly more important, was it something in which the industry can counteract so as to not let it happen going forward? One needs to start by looking at what happened over the first eight months of 2010. Things began with most in the industry optimistic the recession would start to ease as the year wound on. This was buoyed by 2009 seeming to end on a relatively high note and 2010 starting out that way as many businesses—from retailers up through mills—reported having some of their best Decembers or Januarys in three years.

Unfortunately, the optimism for the carpet industry was short lived as January, February and most, if not all, of March proved to be equally as tough as 2009 had been for most of the year.

Then came spring and with it consumer pocketbooks seemed to have sprung open as sales suddenly reserved a three-year trend of comparative period declines in both sales and units. Even commercial showed life after experiencing one of its worst winters on record.

Over the next three months, “Things were coming up,” “We started feeling good,” “We thought things had bottomed out and we were finally heading in the right direction.” These were the general comments from mill executives.

In fact, things were going so well—by some estimates sales for the period were up 4% to 5% over 2009—many companies actually adjusted their budgets up, thinking the long, uphill climb back to prosperity had finally begun.

But as spring turned to summer “it seemed like we dropped off a cliff,” was how one executive put it. Another described it to FCNews like a faucet being suddenly turned off. Still another said, “it felt like hitting a wall while accelerating.”

In a way, it was the same feeling felt when the building market first collapsed in the summer of 2006. Back then, when FCNews was compiling data for its annual “Industry Statistics” issue, officials described the end of July and early part of August akin to running into a wall as sales went from a record pace one day to nothing the next.

While no one was expecting the advances this past spring to amount to a record-breaking year, all economic indicators were pointing up, and so were the hopes of companies large and small.

Tax break

Though no one will say for certain, most peg the shifts for both the good and bad times to the federal government’s tax credit for new and existing home buyers.

The Worker, Homeownership, and Business Assistance Act of 2009 offered a tax credit up to $8,000 for qualified first-time home buyers and, later on, a $6,500 one for move- up/repeat home buyers, which gave the housing industry a major boost during this period. While the credit was put in place for the start of 2009, many feel its affects were felt in early to mid 2010 because all the provisions of the act kicked in later in ’09. For example, the existing buyer credit actually began Nov. 6 and, at the same time, the income limits for new home buyers were raised to $125,000 for single taxpayers—a 40% increase from the original $75,000 limit established by the Act—and $255,000 for married couples—up 50% from the original $150,000 threshold.

Taking into account the holidays and the actual timeframe to close a home sale, be it new or existing, it was most likely near the end of winter by the time most people began moving into their new homes. And since flooring is one of the first things a person will replace when moving, sales began to pick up during the spring months. Unfortunately, the tax credit applied to sales occurring before April 30. After this date it was gone and so was the scramble to purchase a house, thus causing the residential market to once again spiral downward.

In the carpet industry, executives said the gains made in the early part of the year were quickly given back during the dog days of summer.

Interestingly, some provisions were extended by Congress or the Act itself in hopes of keeping the momentum. But, as a few executives said, the extension was not highly publicized so most consumers did not take advantage of the benefits. For instance, consumers who had a signed binding sales contract by April 30, were given until Sept.30 to complete the home purchase in order to qualify.

Also, military personnel who were on official extended duty outside of the U.S. for at least 90 days between Jan. 1, 2009 and May 1, 2010, may qualify for a one-year extension. In other words, they need to have a binding sales contract in place on or before April 30, 2011 and closed by June 30, 2011. This extension also applies to service people forced to return to the U.S. prior to 90 days for medical reasons.

Despite the housing credit being gone and sales remaining stagnant, the carpet sector remains active and optimistic. Active, in that mills continue to invest in new technology to not only produce a more attractive, better performing product, they continue to spend money to reduce their overall environmental footprint. And optimistic because they feel the bottom will soon be hit and by the second half of 2011 things will slowly start to move toward a true recovery.

Looking ahead

“We’re being cautious in our thinking for 2011,” noted Ralph Boe, president of Beaulieu of America. “There are many factors that will affect how the year starts, such as the elections this November. That said, we still anticipate growing as we have a strong product line due to investments we’ve made to give them added value, such as Magic Fresh. Consumers gravitate toward products with these kinds of extra benefits and we will continue to ride that strategy.”

While the economy has meant consumer buying decisions are more influenced by value than green attributes, David Wilkerson, Shaw’s corporate director of sustainability and product stewardship, said the company feels this will not last. “As we look down the road, we believe environmental benefits will have more influence on consumer buying decisions as market conditions improve. [As such, and] in spite of less than favorable economic conditions, we have not cancelled or postponed any of our key sustainability/environmental initiatives.”

Werner Braun, president of the Carpet & Rug Institute, said considering how bad the recession hit the industry as a whole because of its tie-in to the new and remodel housing market, and new construction, overall the sector is in good shape moving forward.

Yes, there have been plant closings (some were already earmarked for closing but the schedule was moved up as a result of the economy) and staff reductions at all levels but, for the most part, the carpet industry has remained both competitive and stable.

“That’s saying a lot if you think about it,” he explained. “Since the recession started, I have not heard of a mill going out of business or into bankruptcy protection or liquidation. That speaks volumes to the way the mills have been able to manage a recession of biblical proportions.”

Even more, Braun concluded, not one carpet manufacturer has gone to the government asking for help. “No one has had held out their hand asking for a bail out like other industries have done.”

-Matthew Spieler

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