Carpet: Category maintains dominant market position

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Broadloom cedes share to modular tile in commercial

June 20/27, 2016; Volume 30, Number 26

By Ken Ryan

Despite an improving housing market, the U.S. carpet industry ended 2015 virtually flat with overall sales barely edging higher while total volume fell. FCNews research shows carpet sales rose 0.7% to $8.87 billion last year compared to $8.809 billion in 2014. However, total volume—which includes carpet and area rugs—fell 1% to 11.09 billion square feet from 11.21 billion square feet in 2014. Residential carpet sales fell by an estimated 2% in 2015, while units inched up 1.5%. Conversely, commercial sales increased about 2% while units were down 1% year over year.

Despite the drop-off in total volume, the category—carpet and area rugs combined—still represents the greatest share of total flooring dollars, or 43.4%, and an even larger share of total industry sales in terms of volume (60%). Compared to five years ago, the carpet and rugs category accounted for 47.9% of industry sales and 66.6% of total volume.

Industry observers say the pent-up demand that analysts were expecting in the housing market did not materialize despite what appeared to be a more favorable economy and improving conditions. While both existing and new home sales were slightly up in 2015, the numbers weren’t as robust as predicted, especially new home sales.

“Last year started out slow and got stronger as the year went on,” said Ralph Grogan, CEO, Bentley Mills, which continues to outperform market averages. “Most people were happy to see some growth but were certainly expecting to see a little more.”

Moreover, experts say, there was a continued migration to hard surfaces in 2015, which adversely affected broadloom sales but not area rug sales, necessarily. At the end of the day, carpet still commands a dominant bulk of industry sales. Trey Thames, vice president of residential marketing and product management for Shaw Industries, offered this perspective: “If you pegged carpet to GDP [gross domestic product], we’d be right there.”

GDP in the U.S. ticked up 1.4% in the fourth quarter of 2015, indicative of a slow-growth economy still feeling the effects of a deep recession, analysts say. While no one is expecting double-digit increases to return, most experts believe carpet will continue to grow slowly even in the face of a continual shift to hard surfaces.


Residential activity

The residential segment continues to operate as a bifurcated market, with the high end (above $10 a square yard) and commodity end ($5 and below) doing well. Comparatively, the middle ground—particularly in the $6–$10 price range, did not fare as well. Industry observers say the prevalence of PET has driven the move toward commoditization, which accelerated in 2015 as some products experienced 20% declines in prices year over year.

In short, this shift to more commoditized product has taken tens of millions of dollars out of the industry, according to some executives.

Some blame an overcapacity of polyester filament, with too much polyester entering the market, particularly in the multi-family builder segment—a market that has been moving away from nylon base grades. In 2015, builder and multi-family segments outperformed remodel. As a result, revenues were down more than volume. While polyester has become the dominant face fiber in residential carpet, there are signs the industry may be nearing a saturation point with polyester even as it continues to take share from nylon. In some instances, retailers have dialed back their polyester programs, industry watchers say.

The carpet industry, led by Shaw and Mohawk, has launched major programs to fortify positions in the upper end of the market. Luxurious, ultra-soft fibers continue to play an important role at the higher end. “Anyone who says the soft trend is over is delusional,” said Tom Lape, president of Mohawk Residential. “The soft business is very good. If you can make a softer product that is engineered properly, the consumer will always choose that product.”

While carpet tile has achieved great success on the commercial side, it has not made any strides in residential segments, save for highly niche areas such as urban lofts—and only then in small spaces—or some basements. “While a lot of people are making attempts at it, carpet tile is just not selling on the residential side,” one executive told FCNews.


Commercial activity

The commercial carpet segment outperformed residential for the second year in a row, on the order of 1.5% to 2%. The commercial carpet sector, which makes up more than 44% of the overall carpet market, totaled $3.943 billion in sales in 2015, FCNews research shows. Of that total, specified commercial represented $3.26 billion in sales with Main Street accounting for $684 million.

[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; others do not.]

Within commercial, average price points are climbing in large part because of the shift from broadloom to carpet tile. Experts agree that while carpet tile’s price points have come down in recent years, the seismic shift in market share has been able to offset the impact of declining prices.

Carpet tile continues to find a home in commercial settings and is now being marketed in many different shapes and combined with LVT, another hot product in commercial. As such, carpet tile is eating into broadloom’s territory just as LVT is taking share from broadloom in commercial.

Corporate profits are always a good leading economic indicator of business conditions and activity in the commercial sector. Since before the recession, corporate profits have fallen, which has put pressure on budgets. In some cases, projects have been put on hold or scuttled. In other cases, manufacturers have been forced to value-engineer their products to meet budget parameters.

For example, let’s say a product is specified at $25 a yard, in line with the initial budget. As cost overruns occur mid-project, the project manager goes back to the supplier and negotiates a price down to $18 a yard. The vendor is forced to re-engineer the product, perhaps using a less expensive yarn system or a lower face weight to take cost out of the product.

“In a lot of cases there is pressure on budgets,” Grogan said, noting that the value-engineering trend began after the recession and has accelerated in the last two years. “Mills that are nimble or operate efficiently can capitalize on this trend. Unfortunately, there was a lot of that in 2015.”

Not all specified commercial projects face the same budgetary pressures and constraints, however. Senior living project budgets, citing one example, have generally held up better than some of the corporate budgets, industry watchers say.


Area rugs

For the second year in a row the U.S. rug business outperformed carpet, growing an estimated 4% in 2015, FCNews research reveals. Interestingly, rugs have benefited by the surge in hard surfaces as rugs are often sold as an add-on to hardwood flooring or LVT.

The population of custom rug programs is another unique benefit to the rug players. Over the last two years the custom rug segment has grown appreciably, creating more than just a niche business for mills (i.e., Shaw’s Cut-A-Rug program, which provides retailers with an opportunity to offer rugs without having to invest too heavily in inventory).

Many executives expect the custom rug program will continue to evolve as more flooring dealers take advantage of this profitable add-on opportunity.


Carpet decline? Not so fast

The market share shift from soft goods to hard surfaces is not a recent phenomenon. In fact, it has been going on for nearly 20 years—it’s just that the rate of change has been slow to date. And while the migration to hard surfaces has accelerated somewhat in recent years, largely due to the success of LVT, carpet remains a very viable product.

What often gets overlooked when talking about the growing popularity of hard surfaces is the fact that carpet still maintains a dominant share of the overall business. And, from a functional standpoint, the product is a relatively inexpensive way to upgrade living quarters. Furthermore, the variety of colors, stain resistance and more recently the continued penetration of softer polyester fibers has renewed interest in carpet. Yes, hard surfaces have made significant inroads in remodeling but the response by the carpet industry has been strong.

In short, carpet manufacturers believe today’s products are simply better than those of yesteryear. In fact, technological innovation in carpet has outpaced anything seen in the previous 10 to 20 years, and that is expected to continue as mills invest in new technology.

Mohawk, for example, is building new fiber technology into its SmartStrand product to enhance its style and design while adding value. The company is developing natural dye fibers with space dye to mix and match for a multicolor look. Mohawk’s EverStrand uses Continuum, a patented process that takes premium PET from the highest-grade polymer, strengthens the fiber and removes dirt-attracting residue with a multi-step purification system.

Smaller mills such as Phenix and Lexmark are making significant inroads as well. Lexmark’s LCL (loop, cut, loop) technology creates almost three-dimensional looks. Its products are created with tufting equipment that creates patterns with a higher level of definition than a standard cut-loop machine and varies the density in a single piece of carpet.

There is also the continued advancement in built-in stain protection technology as reflected in products such as Stainmaster PetProtect and Shaw’s LifeGuard and Life Happens collection. According to the company, carpet made with LifeGuard is easier to install and maintain and looks better longer.

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