January 22/29, 2018: Volume 33, Issue 16
The year was 2009. The economy was in a freefall. Carpet was losing market share to hard surface. You’re nearly an octogenarian with enough money in the bank to last multiple lifetimes. You’re golf game remains respectable. Conventional wisdom dictates that the last thing you would ever do is launch a carpet mill. But conventional has never been a word in Bob Shaw’s vocabulary. Quite the contrary. Mr. Shaw has always prided himself on pioneering step changes and disruptive technology, much like Henry Ford.
Almost a decade later, Engineered Floors has grown to become the largest carpet mill beyond the two behemoths. It’s a success story in every sense of the word. FCNews publisher Steven Feldman recently sat down with Mr. Shaw for an extremely rare, in-depth discussion on how the mill got from there to here while sharing what was going through his mind every step of the way from day one.
What is the mindset behind the launching of a carpet mill when the economy was anything but robust?
Why at 77 years old would somebody want to go back in a business called carpet when it looked like it was dying? Well, it was a situation where [the industry] was more than just about going to polyester. It was going to a way that we could better control quality. We were going to pre-dyed yarns, solution-dyed yarns. And if you look at the industry, we all have these continuous dye ranges. We still have probably 80% of residential carpet being pieced dyed or continuous dyed. Why? That’s what these yarn mills were designed to do. Most of the carpet was solid color in those days. So you had a hard decision. Are you going to replace yourself with less dollar sales because of PET being cheaper?
But the biggest thing I think we were missing is we had made up our mind that hard surface was going to take over a much larger percentage of the marketplace than it really would over a long period of time. And we had a lot of consolidation in the last 10-20 years. We probably lost at least 10 to 12 carpet manufacturers through purchase or just plain going out of business.
I would say [Engineered Floors] has been in a depression or recession business since we went into business in 2009. So why would somebody go into a depressed business? I saw capital moving away from soft floor covering, and my two major competitors were spending considerably more money moving away from residential. They were moving into the carpet tile business, because one of the biggest problems we always had in the commercial end of the carpet business was how do you install it. Well, to take a square or a plank is a lot easier to install. So we were spending money as an industry moving into the modular carpet business. But on the residential end of the business, more or less no dollars were necessarily being spent, no new products were being presented. And it looked to me like no one cared about being in the residential end of the business because they thought it was going to be replaced.
So, that was the opportunity?
I think the opportunity was there. But there’s another thing that came about. The ownerships were moving beyond the entrepreneurial ownerships into the Berkshire Hathaways, and Warren [Buffett] is a great investor, believe me, that’s what he does. He invests money. And then you take Mohawk, which was doing a fantastic job of assimilating worldwide manufacturers into their $9 billion business today. But they were spending very little money toward backward integration and growing the industry they were in.
We also had no foreign competition. Now that is a very important part of the whole thing. I’ll use LVT. You have to compete with the Chinese and you have to meet the Koreans. Because anybody can take a picture and be in the LVT business. It’s the same thing we had in laminate. So we basically had an industry where people were not spending any dollars to make better. And we knew that eventually, particularly as we got into multi colors, that we were going to be a lot better off with pre-dyed yarns, and I’ll use Pet Protect as an example. Invista said the important part of it was to be solution dyed. So their Pet Protect, their top brand, was solution dyed. They recognized the fact that you made a better product with a solution-dyed yarn.
Tell me about the name Engineered Floors.
That’s what we are. We’re engineering products on a regular basis. It just seems every time we talk about putting a product out we were going to engineer a system that would fit.
Immediate goals and objectives when you launched?
If you really get down to it, and I go way back to my original days with Shaw, we used to say you put a block together and you get up on the block and see a little more of the horizon. Then you put another block together and you see a little more of the horizon. We think that’s what we were doing in terms of what percentage of the business made sense for a small manufacturer to be in. But once we were making the moves, we were being accepted because we were giving products that were different. So we saw more of the horizon. Did I say in 2010 we wanted to be a major player in the carpet business? I think I would have been foolish to make that statement. I was 77 years old.
What about the decision to start only with PET?
We started with something we considered the growth end of the carpet industry. At the time we went in polyester, it was probably 175 million pounds. Today it’s a billion-pound marketplace in residential carpet. It seemed polypropylene was losing its position, and nylon was spending probably more time in the commercial end of the business.
But you eventually expanded into nylon.
Yeah, we’re in nylon a little bit. I think there are certain sections of the country and the builder business with more or less FHA design. Nylon has some advantages; if you want to talk about wear you can probably can get a little better wear there.
Everything we did up to a point was solution-dyed nylon. Nylon also needed the multi colors and the consistency of pre-dyed yarn I think.
The next evolution was into commercial?
If you look at what was growing in the commercial end of the business, we knew years and years ago that piece dyed could not be in commercial carpet. So, we went to pre-dyed, solution-dyed yarns in broadloom. But we also knew the ability to install carpet was the biggest problem in the contract end of the business and it became obvious that carpet tile was going to be the growth area of the industry. And we’ve been changing tiles and backings on tile, and we tried new backings on tiles that we’ve paid a lot of claims on. Well, a lot of this was being looked at by several manufacturers. What’s the best backing? What’s the most consistent backing? We went through two or three different backings and decided on a particular one that we just built the plant for.
But again, you have to look at the old carpet mills. Our buildings were on 20 acres. We thought 20 acres was a great big piece of property and when we built a 200,000-square-foot building on 20 acres we thought it was a big operation. Well, one of our plants right now is a 2.5 million-square-foot building.
But all in all, we had a yarn mill here, we had a tufting mill here and a dye house here. Distribution here. And you were constantly moving units around. We said, what if you can move all within one building where it comes in and goes out as carpet. There were a lot of savings and it also said you had just one person in charge of the quality.
You purchased J&J. What did they bring to the table?
J&J probably has been in business for 60 years. They have a good reputation of quality products. They had a joint venture in a tile plant. We’d known the Jollys and the Joneses for 60 years. They probably needed more product to compete rather than just be in the top end of the business. They needed a bigger market.
But to answer the question, “Why J&J?” J&J was a family business and was going into its third generation. And they probably knew they would not necessarily survive at the size they were. This was not too different from when [Shaw] bought Queen. Julian [Saul] had to make up his mind whether he was going to be a major part of the business. He was not a public company at the time. And you know the reason all of us went public back in those days was to raise capital. Today I think it’s a disadvantage to be a public company.
You don’t need to go public today to raise capital for growth?
Quite frankly, if you have credit and can borrow money, you can do it today for almost nothing. Now, when in the history of business have you been able to borrow money at less than 2%? It’s a lot different than if you’re borrowing money at 10%. Now, if you don’t have credit then you can’t borrow at any price. The opportunity was there for those who were able to either finance it personally or have a reasonable credit line. Money was cheap, money remains cheap—cheap meaning under 6%—and it will probably be cheap for another two or four years.
Now, and we all know this, there was no reason at all for the housing bubble to have been as big. We went all the way from 2.3 billion houses a year down to 600 million houses and now we’re at about 1.2 or 1.3 billion today. Our population is considerably larger. But also, what happened to the carpet business was multi-family turning over every five and a half years this last year. Five years ago, six years ago it was turning over every three years. Why? Because the family would form and have a house. So that bubble stopped a lot of carpet being sold.
You launched Pentz as your Main Street brand.
Pentz started as a division of the company that will be out of the specifying end of the business. There’s just a world of people selling carpet in the contract end of the business that is not specified. So Pentz is our Main Street brand and is doing OK.
The Beaulieu purchase.
We didn’t buy Beaulieu. We bought the assets of Beaulieu. It’s a world of difference.
How does that make Engineered Floors a better company? By taking them out of the market?
They took themselves out of the market; I didn’t take them out of the market. I would say they had some equipment that we considered modern, and we bought it based on what we considered the replacement value of the modern equipment to be. We emphasize we bought assets.
Some people say the backing plant was attractive.
Well, they had a backing plant that goes all the way back. We were not making our own primary or secondary backing, so that was attractive. Beaulieu also had a distribution center that was underutilized, so that was attractive. Their product line was not all that bad. They had some technology that had patents on them that we may capitalize on at a later date. And again, if yarn is going to be our bottleneck… Let me explain that. Remember all the staple markets are more or less gone. And they’re not coming back. We have yarn mills that will dictate how much carpet we can make. So they had a yarn mill that really came from a fire, but they had modern equipment and an extrusion mill that made sense.
I’m not sure they didn’t over-expand at the wrong time. Cheap money is wonderful, but the principal still has to be paid, and banks are not good partners. You probably need to be in a position to tell your banker to go to hell. The bank is your best friend as long as you’re their best customer.
Does the Beaulieu name mean anything to you or the industry?
We won’t keep it. I don’t think it’s any brand name. The market is a funny thing. You don’t have consumers saying, “I buy Mohawk because it’s Mohawk.” Like we used to talk about Armstrong; Armstrong had a brand name. Stainmaster had a brand name. I think brand names come from reputations now rather than from advertising. The consumer eventually makes up her mind.
What differentiates Engineered Floors from the other mills out there? What does this company do better for the customer?
The customer eventually decides who makes the best product. You know, the real dog food is what the dogs are eating. That’s the finest dog food you can have. Now, if you’re making a product the consumer is buying, that means you are going in partnership with your [retailer] customer, and only if he can make money can you make money from selling him that product. So the customer became very important.
We were seeing the big boxes—the Home Depots and the Lowes and all of those—basically going out of inventory of carpet. The Home Depots and Lowes don’t buy rolls of carpet; they buy pieces of carpet. They are a massive distributor of pieces of carpet. They don’t put the money in inventory. So it took a different type of mill. You can’t go in and say I’m going to sell a thousand rolls and I have the cheapest price. We have a little of that still—some people that stock carpet. But most people right now, with the multiple choices they have, want to know they can get a piece of carpet on time, cut order, that’s high quality. So your reputation goes a long way. Now I have to admit that Shaw was considered the best manufacturer in the business, and they still have a very high reputation in manufacturing.
I have a piece of carpet in my hand from Shaw and one from Engineered Floors. Is yours just as good?
Better. It’s better because we are solution dyeing ours. They still are piece dyeing 80% of theirs. So it was a step change in the way we’re manufacturing.
Anything else in the process that makes a piece of carpet from Engineered Floors better?
The difference is in how you go about styling a piece of carpet. Ten years ago, seven years ago, 80%-90% of your better carpets would probably be a solid color. Now your better carpets have some type of subtle tones to them. So 80% of the carpet we make right now is not solid color.
You’re still focusing on selling the neutrals. I don’t see blues or reds all over the place.
The reds and blues never did sell, except if you moved up the Eastern coast a little bit. It was a great ploy of DuPont—let’s make 50 colors of Stainmaster and we could have as much as 5% of our total dollars in samples—and the way we would change the color standards over short and long periods of time. Then we finally understood grays and tones of grays were 90% of the carpet being sold, and the accent colors we were cutting up as rugs after we made the first roll.
So you make what sells?
The answer is if they started demanding gold we’ll make gold. But are we going to try to convince them that gold will be the color of the year? No.
How has the consumer changed in the last 30 years?
I think back then a lot of the carpet we were making was for starter homes and then the upgrades. I think more permanency in homes means they’re buying better carpets. They’re not buying the FHAs. We’re selling better pieces of goods, and then you have the patterns.
So that’s how you respond? Better goods, patterns?
If we take a product out and the product doesn’t sell, we better change the product or change the consumer. I don’t think we’ve changed that much. What’s changed is everything we talk about is LVT, and what’s the first thing you do with LVT? Put a rug over it. We put carpet over our vinyl, not vinyl over our carpet. The rug business has gotten to be an important business.
Is there anything you learned in your past life, your time at Shaw, that makes Engineered Floors a better company?
I started Shaw in 1959, so if I haven’t learned something in 70 years… The biggest thing I think that’s an advantage is you either have a good or bad reputation as a businessman, and honesty plays a big part of that. And if you treat people right then they normally treat you right.
Are you the least bit surprised at how fast this company has grown?
Probably a little bit, but we knew 20 years ago there was a better way to make a tufted piece of carpet. Back then we were more or less being dictated to. “We’re going to sell you a white yarn and you’re going to color that white yarn in the best way.” So you had to have the ability to make your own yarn before you could make the step change in how you were making carpet.
Are you still having fun?