Laminate: Dollars down in category, but volume up

There are pretty much two ways to look at the laminate flooring category in 2010. The optimists will focus on the fact that for the second consecutive year, and in a very tough economic climate, laminate manufacturers moved more square feet of the product than the year prior. Unfortunately, it is happening at the expense of the product’s average selling price. Thus, the category suffered its fourth straight year of declining sales in terms of dollars, although similar to 2009, the dip was only in the 2% range.

Specifically, $1.112 billion of laminate flooring was sold in the U.S. in 2010, off 2.5% from $1.141 billion sold in 2009. In terms of volume, though, the category saw 1.01 billion square feet of product being sold into the U.S. market last year compared to 991 million square feet in 2009, an increase of 1.9%. That comes on the heels of a 2.2% volume increase from the 970 million square feet sold in 2008.

Interestingly, laminate’s overall market share in both dollars and units have actually increased since the recession began for the flooring industry in August 2006. Back then, the category’s sales represented a 5.6% share; in 2010, it had risen to 6.9% of all industry sales. In volume, the laminate segment grew from a 4% industry share to just over 6%—6.1% to be exact. Even looking at just hard surface flooring sales, laminate increased its share from 15.4% in 2006 to 17.7% last year.

So, what exactly is driving these dynamics? You can begin by looking at the product itself. The advent of mechanical locking systems and subsequent improvement in the overall technology that goes in to making the product—from high definition printing that produces the most realistic visuals yet to wear layer protections that keep the floor covering looking newer longer—has lent laminate flooring to be an attractive choice for the DIYer.

As such, the channels of distribution have been altered. Between the home centers, price clubs like Costco and Sam’s Club, and Lumber Liquidators, much of the category is moving toward a cash-and-carry model. In fact, it is estimated that home centers commanded a whopping 53.9% of the market at the end of 2010, and when you add in the price clubs and Floor & Decors of the world, that number leaps to nearly 64%.

While the trend in laminate is more drastic, this shift in retail channels goes along with what is taking place in general. In 2006, home centers had 19% of the total flooring market, in terms of sales, and in 2010 it had jumped to 30%. And, the grouping of price clubs, product specific retailers like Lumber Liquidators, and shop at home services, has doubled its share since 2006 (refer to the complete graphs on P.3 for an overall industry perspective).

Some believe the shift in where laminate is being sold has resulted in the average selling price of the product dropping to under a dollar a square foot, although FCNews research reveals that number is closer to $1.10 per square foot, down a nickel from 2009 and 21 cents from 2006.

Contributing to that drop was the decision by Wilsonart, the category’s highest-end player, to exit the laminate flooring segment altogether. Despite Wilsonart’s exit in 2010, there are still a significant amount of laminate suppliers and brands that play at the mid to higher end of the price spectrum, including Armstrong, Formica, Mannington and Quick•Step.

But at the end of the day, the dynamics that have plagued the category for the past few years have not changed. “Laminate flooring remains price competitive because the demand-capacity ratio was undercapitalized and sales at retail have not grown at the rate many manufacturers thought it would grow,” said Norm Voss, president and CEO, Kronotex USA, which also produces laminate flooring under the Formica brand.

Strong first half

Like the rest of the residential flooring industry, laminate business was much stronger in the first half and slowed significantly during the second half. This was mostly attributed the federal government’s home-buyer tax credit that helped push new home sales during the first two quarters and, as a result, remodels as consumers jumped in hoping to sell their house after a number of years sitting on the sidelines waiting for the market to come back.

With approximately 95% of all laminate sales coming from the residential side, the category holds the highest disproportion of sales between residential and commercial. So, despite the fact the specified contract segment enjoyed a strong end to 2010, it had little to no affect on the laminate category.

Imported product from across Asia, with the bulk coming from China, continued to challenge domestic manufacturers, making up one-third of the product sold here—and it’s no longer just the influx low- end goods. Today, Asian manufacturers can produce items of exceptionally high quality and, in some cases because of their short production lines, they can make certain products that are not cost effective for European and domestic suppliers. As a result, many distributors and large retailers have been private-labeling these imported products, making for a more competitive marketplace.

Domestic dominance

Interestingly, the largest laminate players in the U.S. market are domestic manufacturers and, in most cases, they are vertically integrated. Pergo remains the No. 1 brand in the U.S., followed by Mohawk/ Quick•Step, Kronotex/Formica and Shaw.

Combined, these four companies accounted for more than 60% of the U.S. laminate flooring market in 2010, according to research conducted by FCNews. Add in Clarion, which makes an array of OEM (original equipment manufacturer, i.e., private label) product for a variety of manufacturers (Tarkett, Armstrong, etc.) as well as large retailers (Lowe’s, etc.), and you have 70% of the domestic market accounted for.

Despite the downturn in recent years the prevailing thought is that better days lie ahead for the category. While most admit there are some inherent problems and obstacles to overcome, they feel continued advancements in technology and product design will overcome these. One only needs to look at Kronotex, whose growth came via its 12mil products along with longer, thicker panels, and those are the products that carry higher price tags. “The channels that can handle 7- feet, 2-inch or 6-1⁄2-feet planks, 12mil with attached pad, have the ability to upsell into the better price categories,” Voss said. “Those were what did better for us and will going for- ward.”

Thus, the feeling is that just as every other flooring category has been devastated by the recession so to has the laminate segment. In other words, once the economy starts to move in an upward direction, the laminate flooring category will follow suit.

So, while things may never go back to when the category was still in its raw infancy in the U.S. back in the mid 1990s and was growing by leaps and bounds, many in the segment believe laminate still occupies a spot in the industry with which no other flooring product can compete. And that, they note, will be the differentiator to allow the category to prosper well into the future.

-Steve Feldman