Executive forecast: Industry shows signs of life; 2013 to be better

Home Inside FCNews Executive forecast: Industry shows signs of life; 2013 to be better

By Matthew Spieler 

Volume 27/number 15; December 3/10, 2012

While 2012 saw the industry hold its ground—improving better than expected in some areas—the end result left little to cheer about and even less to get excited about going into next year.

Nonetheless, there is still an overall feeling the bottom has not only been reached but, for the first time in a handful of years, is actually in the rearview mirror. This year may not be ending as strong as most would like, but there are numerous positive signs giving executives some hope this year’s modest gains will be followed by better ones in 2013.

FCNews spoke with some of the industry’s more diverse manufacturers—those who make and/or sell products from most segments—to get more of the “big picture” point of view on how 2012 ended and where things are going in 2013.

Ken Holm

President, Manning Residential

2012 was a rebound year for the industry and for Mannington. The overall industry on the residential side should be up 5% to 6% in 2012, with Mannington doing a little bit better due to success in some non-traditional areas.

We felt improvements throughout the year but not as much as we hoped. We came into 2012 bullish based on the forecast model. Unfortunately, the remodel market did not bounce back like we wanted. Housing prices may be going up but they are still depressed so hopefully this will help in the remodel market going forward as this is our main arena. People are holding their money tight to the vest as there is lots of uncertainty coupled with a lack of progress by the government.

We also felt the housing collapse was over and started to rebound, just not as much as we had hoped it would. Multi-family housing is doing very well and new home building is starting to get better.

So, for 2013, we are optimistic on how the year will be, just not as bullish as we were going into this year. The economy is continuing to improve— new housing is expanding, the retail market is growing, and the value of homes are going up. We’re feeling more improvements than we have in the last five or six years.

As a result, we think the industry will do even better in 2013 than it did in 2012, with residential growing 6% to 7%. Even with the elections over, we unfortunately anticipate more of the same when it comes to government— stagnant. It does look like something will be worked out to avoid the fiscal cliff, which will help with overall confidence but right now everyone is taking a wait-and-see approach.

Margins and pricing will continue to be issues moving for- ward. There was so much capacity put in place between 1999 and 2005 as things were growing like crazy. Now we are fighting for every square inch and every consumer dollar. We think the bottom has been reached when it comes to factory closings in the industry. There will continue to be some closings and restructuring due to consolidation, of which there will be more. We just had Mohawk buy Pergo, so there may be a facility closed and its production absorbed into another one. Mannington purchased Amtico earlier in the year and that has been wonderful for us. Amtico is now making product for the Mannington brand. We are positioned very well; we’re very balanced with commercial accounting for 60% of our total business and residential making up 40%. We anticipate this ratio continuing in 2013.

Regardless of the category, reality/realism is the foremost characteristic of any product and they are getting better and better each year. This is one area where Mannington continues to invest because we know products are the winning tickets in business. We’re even investing in wood technology that allows us to do more unique distressed looks. Laminate is starting to improve and LVT continues to gain share, as are sheet products.

Porcelain and wood are rebounding at the expense of laminate and carpet, which continues to lose market share. One reason for carpet losing share is because multi-family housing has been strong and more LVT is being used where carpet was previously installed.

Mannington continues to support the independent retailer channel. Our primary focus is on this area and most of our efforts are geared to making independent retailers more successful. We will be launching a series of e-learning modules focused on the salesperson and “Why Mannington.” These will be five-minute videos with a little test at the end. We’re working on a spiff for people who finish the videos and pass the tests.

This is where things will be as the industry is still depressed. It will not be loosening up its purse strings for advertising and marketing like it had been doing a few years ago. As things improve, you may start seeing more but not at the start of the new year.

We both encourage the use of and try to find the right key for social media, as it’s not taking the right foothold for the flooring industry in general. It will play a roll but not yet as the consumers who are actively engaged and using it as a growing part of their shopping experiences are not yet in a position to purchase flooring. When they become homebuyers it may get that way, but not right now.

Kevin Biedermann

Senior vice president, Armstrong Residential Floor Products 

This was an odd year. It met expectations but we got there in a dramatically different way. We expected the industry to be up about 4% in units and up 2% to 3% in dollars.

There were some very good positives in the year—new construction was up, and property management (up 20%) and single family homes were terrific— not only better than expected, but so far, have continued. Builder was up in the low double digits.

On the negative side, the remodel market, which typically moves with new construction, remained depressed. This is a big area for many in the industry so it hurt. Retail was flat to maybe slightly up as the product mix is not back to where is was due to consumers not spending much on remodeling. Plus the new key for shoppers is finding value, as people are very price conscious.

Compared to the industry, though, Armstrong did better in 2012. That’s partially due to our partnering initiatives, which have been positive for both sides as margins are up dramatically. We’re part- nering deeper with people in all ways. Our Elite Dealers are up over 20% since we started this five years ago. It takes investments on both sides and we’re expanding on this.

In general, our independent retail business is up double digits as is our mid- to high-end products. Armstrong got out of the low-end commodity game such as 6mm laminates and inexpensive fiberglass resilient. This has also helped with increasing margins.

For 2013 we think things will be a little better than 2012 was for the industry with gains around 5%. Our hope is new construction continues and there will be less skittishness like there was this year. For example, in September traffic vanished. Then in October business was OK. So we’re hoping for more consistency in the marketplace and more confidence with end users and businesses. We need to remember, 90% of the population is employed and there is pent-up demand as people have been sitting on the sidelines waiting to see if disaster happens so they’re not spending.

One of the industry’s challenges is the need to drive features and benefits and explain why things cost more. We saw no inflation in 2012 but the cost of producing products continues to go up as does the cost for retailers to sell them. Like in wood, we need to show why at 5% more they are still getting a stunning product and a great value. As wood prices are going up, so are resins for the resilient category but even here products are getting better and providing more overall value.

Manufacturers have to provide the products consumers want and dealers have to have the tools to be professional, but doing this takes some money. The industry can’t be afraid to talk about features and benefits as reasons to charge more. There are a ton of opportunities and people are winning—some are up double digits—by selling features and benefits and wrapping them around a known and trusted brand like Armstrong or Bruce.

Consumers today are more educated than ever and they are using their own money; they’re not going back into debt. As such, they are seeking solutions that add value, which means they are not necessarily shopping on price, but rather on style and performance, and trust in the brand and retailer. Customers are going to spend significant amounts on any project so they want to get a product that meets their needs and gives them enjoyment as opposed to feeling like they didn’t get their money’s worth.

LVT continues to take share as it is a great product and fits right in with the whole value proposition. Laminate is stabilizing overall, but the mid- to upper-end will grow slightly.

From this, it’s clear that products with meaningful features and benefits will win. That is why Armstrong is driving hard in LVT with Alterna. It’s up over 50% and continues to increase every year. It retails between $3.50 and $6 a square foot and provides a stunning look compared to real stone. We call it an engineered stone with premium grouting. It’s much easier to install, especially compared to the process involved with natural stone. Once Alterna is presented in the right way it is an easy sell and why we are seeing it in everything from multi-million dollar homes to $600-a-month rentals.

The same can be said with our Luxe product, as well as our new wood looks where we are now No. 1 in solid. We went from a 0% share to a leading position thanks to the value proposition they offer, as well as being made in America and because our brands each have over a century of trust.

Beyond product, we continue to invest in web development in order to be the leading educational resource.. We sent out over four million leads to dealers and we’ll continue to educate and drive to retail where we continue the process of helping educate sales forces. Floor covering is still a complex, confusing process and it is still one of the most costly things consumers purchase in their lifetimes after a home and car, so the more a retailer can guide customers to the proper product for their needs, the better chance of capturing the sale.

We feel overall there is a lot of opportunity out there. The market is picking up and people want to do something. They want solutions and want to know what is different about the price ranges. In laminate, for instance, good luck competing at the lowest end. That is a no-win situation for everyone. But if you stay focused on the project you can talk customers into why a better product is best for their homes. In the end, you want them to say, “Thank heavens I didn’t go with that 60-cent product and spent a little extra for something I can live on and be happy with.”

And I think we can start getting back to that now that the uncertainty is out of the way on who will be in charge the next few years. Hopefully we can have a consistent, stable environment so that it falls back to the consumer and what they do, as opposed to them sitting and waiting to see what happens. Now they can go back to figuring out what they want to do with their homes.

Tom Lape

President, Mohawk Residential

Though general market demand in 2012 ended up on the disappointing side of the spectrum, the consumer is still coming back—just at a rate slower than we initially anticipated. Uncertainty of an election year, unemployment and income growth are the three most important factors for this business, and they are not [stabilizing] as quickly as anticipated. It’s not that 2012 was a bad year; it just didn’t live up to expectations.

We did see the market continuing to gain strength, and in the second half of 2012 the consumer replacement market has not only stabilized but improved. The builder market, though, is bouncing off the bottom at a 12% to 15% rate.

We have a firmer foundation in 2013 to build upon. Super storm Sandy will probably give you a bit of a dividend, even though it’s just one region, as it continues to rebuild.

The biggest challenges are the ones outside of our control, such as removing the uncertainty on the horizon for consumers. We have a consumer product that doesn’t break, so we are beholden to the confidence of the consumer. So anything that would pull away from the elements in the market creates uncertainty, which stalls people on making purchases.

Right now we have the fiscal cliff. Anything that creates uncertainty with the consumer is a problem. There is a tremendous replacement cycle that lurks below the surface, but we just need the uncertainty of the daily news channel to calm down. That will bring consumers back into the store for this product.

Speed of execution is also a challenge for everyone in the industry. For example, both Mohawk and the rest of the industry is putting so much product innovation into the carpet category for the first time in many years. However, we need to make sure our efforts are in complete alignment with our retail partners so we can both maximize on this trend.

This speaks to the balance of manufacturers putting the right amount of product onto retail floors in a manner that can be sufficiently absorbed in retail operations. Too much and they get overwhelmed, too little and they don’t have confidence you are giving them what they need to be successful.

One of the things that will help remove consumer uncertainty is the fact the elections are over. Half are upset and half are happy, but it removes uncertainty on both sides, which is a net good for everyone.

We want to see the market stabilize and consumers get back to the order of business and once again see the demand strengthen.

Randy Merritt

President, Shaw Industries

We were cautiously optimistic and committed to continued investment in 2012 to position Shaw for the future. The year shaped up about as expected with an increase in commercial demand and a leveling off of the downward economic spiral.

We also expected and had some benefit from the increase in new residential construction. We’re cautiously optimistic about our residential business as housing demand and price levels continue to improve. Our builder and multi-family business is growing from new construction. Residential replacement continues to be challenged but is expected to improve as the new home market improves.

Shaw’s hard surface business is continuing to grow and we expect this trend to continue into 2013. Our commercial business continues to exhibit strong growth. Carpet tile along with our Lok Dots installation system continues growing, and our resilient offerings are gaining momentum. We expect commercial progress to continue into 2013. This all bodes well for 2013 as we expect an improving year. But it doesn’t mean there won’t be challenges that could easily sidetrack a company. Almost across the spectrum, raw material prices remain a challenge, as they are constantly moving. Also, in certain hard surface categories as well as area rugs we continue to face stiff import competition from lower priced, lower quality product.

All businesses and investors need certainty, and hopefully the large questions around the fiscal cliff and the nation’s debt will be dealt with. This would improve business and consumer confidence. Housing is going to be a positive next year, which will make for a much better flooring market in comparison to the last five years.

It’s safe to say housing will remain positive for the next few years and flooring should see a steady recovery.

Our industry is investing in technology, advertising and social media as consumers find and learn about products in new ways. Shaw has invested most recently in several products and services, including our Shaw Web Studio and Shaw Ad Studio, which enables our dealers to have a strong web presence and effective, targeted advertising.

Throughout the recession, we have been investing in equipment, technology and systems, and logistics. We’re continuously adapting to respond to changes in consumer demand and trends.

We continue to invest in our people, and have a strong organization focused on the customer. Products and marketing are designed to build consumer preference for Shaw and our customers.

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