Carpet: Tough first quarter slows residential

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June 29; Volume 30/Number 1

By Ken Ryan

If you had asked a carpet manufacturing executive for his 2014 outlook back in the fall of 2013, his prediction would have been overwhelmingly bullish based on the strong push the category made in the latter half of the year.

As we now know, 2014 was the carpet version of the “best laid plans of mice and men;” instead of a momentum-building 2014, the industry stumbled out of the starting gate and never really regained its footing.

“Many thought ‘14 was teeing up pretty well but the weather in the first quarter really affected the industry and we never seemed to catch the consumer by the end of the year,” said Tom Lape, president of Mohawk Industries’ residential business. “The industry did come back—but not enough.”

Randy Merritt, president of Shaw Industries, said, “Compared to 2013, which looked like a solid beginning to the recovery we all looked forward to, 2014 was disappointing.”

Indeed, 2014 got off to a rough start. Housing starts were slowed due to a harsh winter in many parts of the country; recovery was slow to get going and any revival was unable to keep the segment from posting a red number for the year.

FCNews research revealed that carpet sales barely moved the needle, inching up 1.3% to $8.808 billion from $8.696 billion. The category’s high water mark was 2006 when carpet checked in at $12.587 billion, which means carpet is down 30% from its peak. When combined with 4% growth in area rugs during 2014, soft surface now stands at $11.209 billion, representing 44.9% of total floor covering sales.

While carpet continues its sales growth, hard surface is taking bigger and bigger bites out of its share of the total floor covering market. To put things in perspective, carpet held a 46% market share in 2013, 47.4% in 2012 and as much as 51.3% in 2008.

Rugs performed better than carpet in 2014, a reversal from 2013 when they lagged behind. “I think there were several factors that contributed to this growth,” said Jonathan Witt, senior vice president, Oriental Weavers. “First off, we saw a return to slightly higher price points and better goods. There was also an uptick in new home development and remodels. Both of these things confirm the increases we’ve seen in consumer confidence of late, and the overall increased willingness to spend on home accessories.”

In another departure, commercial carpet outperformed residential in 2014 after residential had the upper hand in ’13. While residential dollar sales were down 0.6% in 2014 and residential volume was down 0.2%, estimates of commercial sales were up an estimated 4% in 2014 to $3.881 billion, or 44.1% of total carpet sales.

What happened?

A year ago, top executives were pointing to 2013 as a very good year, perhaps the beginning of an upward swing for carpet. That momentum took a hiatus in 2014, however, with the brutal winter blamed for killing the rally. Unlike the 2015 winter, which was particularly brutal in New England, 2014 cut a large swath throughout the country including the Southeast region that was paralyzed by several storms.

However, weather was not the only hindrance. Consumer spending for remodeling was slower than expected, and the residential mix continued to shift with lower-priced PET polyester growing faster than other fibers.

Lape said the consumer wasn’t “peeking out” as much as expected, a reference to holding back on purchasing. “It’s an improved environment but still a tough business out there. I sound like a broken record when we talk about a bifurcated market, but it’s there. The upper end of the market continues to be strong and the low end was strong—it is that middle ground that is tough.”

At the high end, the factors that drive the economy were favorable in 2014—real estate prices came roaring back, bonuses improved for top-tier executives, and that translated into higher-end remodels seeing strong activity. “All those tick marks were pretty good for the upper end but it did not cascade across the whole market,” Lape said. “There was a lot of hand-to-hand combat in ’14 collectively.”

The commercial story

FCNews research suggests the specified commercial carpet market came in at $3.14 billion, while Main Street accounted for another $669 million in the mix, giving commercial total sales of $3.881 billion.

[Editor’s 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, while others do not.]

Carpet tile continues to be a hot product in the commercial space. 2014 marked the first time mill executives estimated carpet tile surpassed broadloom as a percentage of the business by a 52-48 margin; in 2013, that margin was reversed in broadloom’s favor. Carpet tile’s growth has been taking share from broadloom in Main Street as well as higher end specified.

“The commercial business in 2014 fared better than residential primarily due to the continued growth in carpet tile,” Merritt said. “As for the average selling price of carpet tile, we are seeing more activity in lower-priced carpet tile but that is being offset by more higher-end business as well. Over the last three years neither our broadloom nor tile average prices have moved very much.”

There were parallel factors affecting both residential and commercial in 2014—a weather-influenced first quarter, a better second quarter, a disappointing third quarter, and, at least on the commercial side, a strong fourth quarter.

John Wells, president of Interface Americas, said the commercial segment really got going in August of 2014, with the corporate market serving as the catalyst. “The corporate office market had been choppy, really good in some places—like the tech sector on the West Coast or where there are pockets of energy interests such as Texas. What you began to see was fairly across-the-board improvement. We finally saw things catch up; office vacancy came back.”

An improving job market in 2014 encouraged corporate rally. To attract worthy job candidates and keep them away from rival companies, corporations invested in their physical structure to entice recruits. That, in turn, stimulated the market. “Corporate is more than 50% of the commercial market,” Wells said, “so any positive movement in corporate bodes well for the entire segment.”

Fiber/yarn systems

The pace of technological innovation in the last five years has dwarfed anything seen in the previous 20, according to mill executives. Lape said the carpet industry is in the midst of a “fiber engineered transfer” from chemical companies to the mills.

“At one time, the fiber expertise in this industry rested with BASF, Honeywell and DuPont; now the fiber expertise is with the manufacturers. What you are seeing is the innovation of fiber engineering coming up more on the manufacturing side.”

These innovations in intricate processes have created truly differentiated offerings than what existed just a few years ago. “We, as an industry, are creating better performing, softer carpets that relay back to fiber, which fundamentally makes better carpets,” he added.

Merritt offered that manufacturing innovations in polyester fiber have allowed mills to make aesthetically appealing products that will perform in the right applications. These innovations include new heat set technology to lock in twist. “All of this is improving product performance while still living up to the more value-driven sales proposition polyester provides.”

Nylon is still the dominant fiber used in commercial and remains the best performing fiber for carpet overall. “We are seeing a lot of consumers and dealers asking for more nylon,” Merritt said. “Over the past several years, fiber innovations have enabled us to create a softer product for the consumer without sacrificing performance.”

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