But lack of public funding stalls institutional
by Steven Feldman
It wasn’t too long ago the flooring industry was lamenting a downturn in the commercial market as the re-cession that decimated the residential side of the business began to spread like wildfire. But those days seem to be in the rear-view mirror as commercial flooring posted low-single digit growth in 2011. Knowledgeable observers pinned the growth anywhere from 2.5% to 5% in dollars, a little less in units.
Two segments were commercial’s shining stars: Its largest, corporate, and its fastest growing, healthcare. Conversely, all agree any segment directly tied to public funding, such as government and education, were challenged, particularly in the second half of the year.
“Institutional slowed last year,” said Tom Lape, president of Mohawk Residential and Commercial. “Anything tied to the states had a tough time. The big part is most of the institutional business is funded by state and local revenue sources, and they cannot run a deficit. So you saw a lot of slowdown in construction and renovation in those areas. If you have a choice of books or carpet, you pick books.”
Jack Ganley, president of Mohawk Commercial, agreed. “Any of the businesses that are dependent on public funding did not do well last year, as the tax base is challenged.”
On the other hand, the corporate segment has been coming back for a few years now after a couple of years of lower-than-budgeted earnings, high vacancy rates and personnel cutbacks.
“Private corporations have healthy balance sheets and good cash positions, and a lot of money was spent in 2011 on renovation work,” said Glen Hussmann, CEO of Tandus. “There is good funding available in the private sector.”
With that said, Mark Falanga, president of MMPI, which operates the Merchandise Mart in Chicago, home of NeoCon, thought corporate could have been even stronger in 2011. “There has been a disconnect between corporate earnings and a pickup of employment. During the last two years, S&P earnings have been meeting and beating expectations, and corporate earnings are strong, but the hiring has disaggregated from the earnings, which has never happened before. That does not give people confidence that we are moving forward. I think over time employment will pick up, because companies are sitting on a lot of cash, and there is pent-up demand for flooring products.”
The importance, Falanga said, is there will be competition to retain good employees and attract new ones. “Many of these environments have not been updated in four, five, even six years, so a lot of companies will start improving their facilities to retain great employees.”
There has also been a change in the work environment, he said. “Things have become more collaborative, more causal, more multi-dimensional, more loosely defined. People could work in private offices or very casual areas. This trend has been sparked by many Internet companies—people working on couches or in booth settings like you would find in a restaurant. We are seeing some of those ideas trickle into other settings.”
Industry estimates peg the corporate segment anywhere between 42% and 50% of the commercial flooring market, but healthcare also enjoyed a strong year. Assisted living is the growth area, but there is good investment coming into acute care. Senior living is a lot like the hospital sector—there is a great opportunity for carpet mills because there is so much broadloom there. One manufacturer said, “Soft floor covering makes all the sense, and carpet tiles make more sense. Some of it is bridging the aesthetics. We are finding a lot of applications in hotel rooms that make a lot of sense in assisted living.”
It’s not all about carpet, though. Mannington’s Ganley said its entire portfolio of products—rubber, LVT, heterogeneous sheet, homogeneous sheet, broadloom, carpet tile—are designed for use in healthcare applications. “It’s the one market where people continue to spend money. Our Vivendi collection, a resilient product with a textile visual, really targeted the healthcare market.”
Healthcare continues to do “incredibly well” for Amtico, according to Tyrone Johnson, who runs this and other businesses for parent company Mannington. It is because of a certain dynamic that is unique to this segment: It is tied neither to consumer confidence nor consumer spending. “There is an aging population and there is a need for care. Many facilities in the U.S. are in desperate need of renovation. So the need for cleaner and safer facilities is there. From hospitals and assisted living to adult communities, we feel like we have one of the best solutions in terms of flooring for healthcare. Products that are aesthetically pleasing so they don’t feel institutionalized.”
According to John Stephens, vice president of marketing, Shaw Contract Group, the company saw strong growth in retail in 2011. “With the projection that consumer spending was going to come back coming out of the recession, retailers knew they had to refurbish their stores to compete in the market. There was a lot more renovation in retail last year.”
He added that Shaw is very well positioned to compete in this segment. “One of the critical things about retail is service. Stores have to stay open. Because of our vertical integration, we are able to provide predicatable service. Also, our range of product is an advantage. We are able to bundle carpet and hardwood together and dropship at a retail site. We have the transportational and operational infrastucture to be a leader. We control backing and yarn supply, which allows us to be more responsive than our competitors.”
No matter the segment, growth is certainly coming from renovation and not new construction. There are many reasons for this. First, companies are reluctant to build in these uncertain economic times. Also contributing to the current turndown in commercial construction is retail consolidation, the growth of discount chains (where there are fewer but larger stores built each year) and diminished tax revenues causing governments to hold new construction to a minimum.
However, some segments have reached the point where renovations are no longer an option. Retail falls into this category. “We still see large retailers revamping their spaces,” Johnson said. “Part of it is pent-up demand—when the economy tanked, consumers weren’t spending any money. For us, our Made in the USA story gives us the ability to quickly turn around product. It’s helped us gain a lot of customers. It’s been a huge competitive advantage.”
Hospitality is also coming back somewhat. “A lot of the flagship brands see travel coming back,” said Shaw’s Stephens. “We see pent-up demand to renovate rooms that have blown past their normal cycle, so there is much more renovation work. There is not much new construction; that is happening in Latin America and Asia.”
Broadloom and VCT once upon a time commanded the lion’s share of the commercial flooring market, but times are changing. Carpet tile has been encroaching on broadloom’s market share for the last decade, to the point where it is an even split in dollars, if not even a slight market share lead. Manufacturers are heralding the shift as carpet tiles command a much higher price than broadloom. Carpet tiles find favor in that they can be rotated and repositioned to minimize traffic patterns, can be easily replaced if damaged, are easily installed and maintained, and can facilitate office needs by allowing easy access to flat-wire cable. FCNews estimates the specified commercial carpet market at $2.43 billion, of which carpet tile now commands anywhere from $1.15 billion to $1.25 billion. Of course, in terms of square footage, broadloom has a commanding market share, around 70%.
Vinyl composition tile, or VCT, is another highly used commercial flooring. FCNews estimates VCT use amounted to $368 million last year, although luxury vinyl tile is encroaching on VCT’s turf due to its realistic visuals. Particularly in healthcare settings, where a more homey visual is said to promote healing, LVT is gaining ground. VCT’s main attributes are its low first cost, functionality and ease of maintenance. Education and healthcare are the primary end uses.
Rubber (sheet and tile) has had resurgence over the last several years with the advent of more consumers exercising in home gyms. It is also installed where people are forced to stand on their feet for extended periods of time. FCNews includes cove base and accessories in its rubber numbers, hence the value of $504 million, up 3.5% from last year.
Ceramic tile’s strength is its durability and price, which make it very suitable for institutional, retail and other applications where water can be a factor. These factors along with its functionality and ease of maintenance make it the third most used commercial flooring product.
Linoleum, arguably the most environmentally sound flooring due to the natural properties of its ingredients, is pegged at around $82 million. Linoleum is higher in price than homogeneous or heterogeneous resilient sheet with an average selling price around $2. There are only three players in the U.S.—Armstrong, Johnsonite and Forbo—with Forbo commanding about three-quarters of the market. Advances in aesthetics have helped propel the category, as well as the fact it uses no petroleum and has thus avoided the rising production costs associated with the significant increase in crude oil prices.