In the days leading up to Thanksgiving, FCNews publisher, Steven Feldman, traveled to Dalton to sit down with Bob Shaw, CEO of Engineered Floors, to discuss business in the midst of a pandemic. While others may have struggled trying to maintain service levels throughout 2020, many retailers claimed EF and its Dreamweaver brand hardly skipped a beat. The conversation ranged from service, to the state of the world today to one very bold prediction: That the carpet industry in 2021 will experience its best year in 15 years.
Following are excerpts from that November discussion:
Bob, while others struggled with service issues in 2020, this company did not. What decisions did you make to ensure your customers would suffer minimal disruptions throughout 2020?
We made a decision from day one that if we were going back into the carpet business, we had to go with greenfield, offering something that was entirely different, and that entirely different situation was polyester—which we knew by that time was a prettier carpet.
What happened to polyester? Polyester all at once said, “Wait a minute. If we put the proper twist levels in the polyester, it gives us as much wear—if not more wear—than nylon with lower twist levels.” Polyester then said, “We’re not going to do piece dye, we’re going to only do solution dye.” Now, only solution dye says, “That is a way different situation. You don’t make a whole bunch of white and wait for the color. You have 200 colors out there and during off season you have to build inventory. Because if you don’t build inventory in off season, then you’re not going to be able to supply in season.”
The massive situation was determining what inventory we should build. Because we were in a market that was changing. I’ll use Home Depot as an example. When we started doing business with Home Depot, their floor was about 80% nylon. That floor today is about 10% to 15% nylon and the rest of it is polyester—not piece-dyed polyester because we had to open up the dye sites with carrier, so piece-dyed polyester was not going to be the thing. So if you weren’t going to dye the polymer before you made the carpet, then it was never going to be a major part of your business.
What was also happening during this period of time was probably one of the most dramatic things that nobody really recognized. Residential carpet was about 90% solid color. Today, we’re about 15% solid color and the rest of it is a blend of color that allows you to have a better match, roll-to-roll, dye lot-to-dye lot, the whole works.
When this pandemic hit, back in February or March, you said, “We have to beef up inventory.” What did you see that other people didn’t when things started happening in this country?
We were having a pretty good market in January and through the first two weeks of February. And then all at once, we had a panic. Everyone said, “OK, we now have to start operating for cash flow because we have to prepare ourselves where it will be almost as bad as the airplane or cruise ship business. “Everything is going to just go to hell in a hand basket.” But that didn’t make sense to us at all. We said, “Wait a minute, there is going to be more disposable income. The disposable income is not going to be spent at restaurants or on cruises or trips or vacations to Europe, but people will still spend. If they have disposable income, they are going to spend it on something.” If they are going to have to stay at home, where are they going to spend it? They are going to redecorate a room, right?
Now, there was no downstream inventory. Nobody wanted downstream inventory because it was too costly to keep it downstream and their waste factors were too much. But we had already made up our mind. If you were a running back, there was a big hole to run through and nobody was going to tackle you.
So you saw that hole that no one else did?
You can’t see that hole unless you’re going to look at it over a 10-year period. If we didn’t have extrusion machines in place and twisters in place, then we had no chance of buying and building inventory. It’s not because the others didn’t want to; they just didn’t have the yarn. Look at Tesla. The one thing Tesla did was have the best battery in the business. It’s the same thing with the carpet industry. Our battery is face yarns. Without face yarns, we have no carpet.
EF has the best battery?
We have the best battery and we knew that pre-dyed or solution-dyed yarns had to be where we were going. We were using way too much energy, way too much water in dying the carpet plus the challenge of consistently making one dye run after another the same color with a match across side to side, end to end.
Obviously, when you built this facility you didn’t see a pandemic coming. But can it be argued that the fact everything happens in one facility while others were having COVID-19 issues in multiple facilities was an advantage for you?
Yes, it was an advantage. We could work people overtime and we were not trying to match up a yarn mill to a dye house to a warehouse to a cut order. We had it all under one building.
Why do you believe Engineered Floors is the best partner for floor covering retailers?
First of all, we manufacture two-thirds of all the solution-dyed polyester in the business, and if we picked the right horse, it doesn’t do us any good to be the superior nylon producer. We picked a path in residential, which had to be greenfield. Most carpet facilities are 200,000 to 400,000 square feet. They’re all obsolete now. Every time you move a piece of carpet—I don’t care if you don’t do anything but take it out of a rack, put it on a truck and carry it someplace else—it has a cost to it. It’s not efficient.
Do you fear another lockdown on a national scale in 2021? And even if that were to happen, is that such a bad thing for this industry based on the success we had in 2020?
We can’t afford lockdowns. And we’ve got vaccines that will be here en masse, and we Americans, if we really get down to it, are pretty good. We don’t let anything stop us.
We had a good 2020, of course. We had six weeks of slow business and then probably some catch up for a month. Unfortunately, what happened was people got to stay in their apartments without having to pay rent. That’s not good for this industry. But guess what? There’s pent-up demand there, too. There’s no way in the world we won’t benefit from that. Because if I’m owning that building, you’re not going to come to me and say, “Oh, by the way, I think I’ll pay it now.” So, the apartment replacement business is going to be strong in 2021.
But going forward looking at 2021…
We’re going to have the best carpet year that we’ve had since 2006.
Can anything prevent that from happening?
We run out of our motor, which is our face yarn. The industry doesn’t have enough yarn, so we need to get enough dollars for our carpet so we’re really willing to reinvest. We have taken every price down, down, down.
Remember, if we want to put in 100 million pounds, it’ll be two years before we can use it. What we probably need to do is make lighter carpet. If we can make a 20-ounce piece of goods, rather than a 24-ounce piece of goods, we don’t need an FHA on apartment replacement business. And we also have to get enough price for it that we would be willing to invest money for two years down the road.
You might be willing to invest for two years down the road. Will the other guys?
I honestly do not think they will for two reasons. No. 1, if you’re a public company, they don’t pay you for what you return two or three years from now. No. 2, many executives’ retirement plans are based on what they earn over the next five years. So, they focus on short-term decisions. No. 3, if I’m a public company, they are going to judge me on what I do on a 90-day basis. And if I disappoint them, I may have a class action suit against my company. Class action suits thrive off each other. So you really almost never get out of a class action suit.
But didn’t you put through a price increase this year?
Yeah, but our price increase maybe covered our labor costs. And we have a brand new situation: health care. Obamacare didn’t help at all. So all at once with our health care, rather than 20% it became 30% of our cost.
How do we get retailers to sell more carpet to the consumer in 2021?
They already do. It was us who was deciding what the consumer wanted. Have you ever seen any bedroom where someone wants to step out onto a hard surface? It doesn’t feel good on your feet.
So why are people doing it?
First of all, we didn’t make the proper carpet. We needed to make a good piece of carpet. We made a lot of soft carpet and it faded, it squashed, it couldn’t be cleaned, it was a lot of things. We made a poor product. Today, we’re making the best carpet the industry has ever made.
Is your competition making the best carpet they’ve ever made?
No. The problem is they’re trying to convert machines. The right machine, you buy new and it starts with extrusion. If I’m going to take a machine that was designed for nylon and I say, “Now I’m going to start making polyester on that,” well, it was not designed for polyester. You can’t try to make do and convert because you don’t need your nylon any longer.
And what else did we have? Stainmaster and DuPont controlled this industry for years and years, and then they made a reasonably good step with what they call Pet Protect. So who picked up Pet Protect? Lowe’s. Well, Pet Protect at Lowe’s lasted two years. They renamed it Stainmaster, but it wasn’t Stainmaster. The Koch brothers are very simple: They chase dollars. They’re businesspeople. It’s all about a return on moneys. If you don’t get a return on your dollars, you’re not going to be in business. All of this gets down to what I call the quick dollar. I went through it. We were Shaw Industries, we went public, we got on the New York Stock Exchange. We got to be a $3 billion company and we packaged it up and carried it to Buffet and sold it.
How does EF get to that $2 billion mark?
The truth of the matter is I can’t get there right now. I don’t have enough yarn. I don’t have enough motor, nor does the industry have enough motor, because the other thing we’re doing is putting more yarn in the face. So, we’re making fewer yards. Now, prices are going up because supply is not there. We ran into it a little bit last year, but you have to remember the biggest user of our product is apartment replacement. And apartment replacement in 2020 only did 70% of what it did the year before. They’re going to do 120% in 2021 because they are going to kick out a whole bunch of people because that 30% will be required to put new carpet in.
Do you worry that they’re going to replace that carpet with LVT?
No. They’ve had their fill of LVT. It’s not a 10-year proposition. Most apartments will tell you people want fresh floor covering. And 90% of what we’ll do on apartments, when they turn over, carpet’s going to turn over with it. Remember we used to turn over apartments every three and a half years? Now we’re turning them over almost six years. We have 22 million apartments today. We only had 15 million apartments 10 years ago, but we are putting less carpet in 22 million apartments than we did in 15 million because of the turnover.
Can you make more yarn than you’re doing right now?
No. We continue to run every yarn mill we have absolutely full, and we have about 30 million more pounds that we planned two years ago. But we can’t do anything else.
So then is the opportunity for growth on the LVT side?
Our LVT business is growing, but when you get down to LVT, we better find a way that is different from what can be made in Korea, Vietnam or China. We have the same, exact product.
They’re building so many LVT plants around here.
They’re small. It doesn’t cost much to put in an LVT plant, and quite frankly they’re not making it any differently. All they’re doing is putting a plastic on top and printing a pattern on it. And until we get to digital printing where you can change, then you have a much better chance to differentiate.
Somebody walks in the door tomorrow with a vaccine for you, you’re taking it?
Sure. For me, at 89 years old, to not take a vaccine would be ridiculous.