Dixie and Atlas, CRI, WFCA and the S600 standard
By Kemp Harr
As spring arrives and the 2014 floorcovering selling season starts to ramp up, we can only hope that much of the pause in the economy in the last three months is weather related and not tied to other factors like the Affordable Care Act—which so far is proving anything but—or stringent lending practices. Most everybody remains optimistic that the momentum we experienced up until November of last year will kick back in. Last year was a strong year for housing, with starts and permits rising to the highest level since 2007. Specifically housing starts rose 18.7% and permits rose 17.7%.
Much of the slowdown that we started to see toward the end of 2013 was blamed on rising interest rates, which are now starting to moderate. It’s true that last year GDP only increased 1.9% versus 2.8% in 2012. But at this point, the Federal Reserve is still predicting that growth in 2014 will be back up to at least 2.8% and could reach 3.2%. Banks are still being very conservative in their lending practices and median loan growth is still tracking well below long-term averages.
One point of data that tends to reinforce that weather is the primary culprit is the fact that Lumber Liquidators’ same store sales in areas that weren’t affected by inclement weather were up 10% while sales in the Northeast were down 10%.
Other positive signs are the unemployment rate, which is on pace to drop below 6.5%, plus a continued decline in foreclosures, which are now at the lowest level in seven years.
Santo Torcivia with Market Insights LLC is predicting that consumer spending in 2014 will increase 2.7% versus the 2% growth that we saw in 2013. He is also bullish on new home construction, predicting that it will surpass the million-unit mark by midyear, as well as existing home sales, which should climb back to the 4.8 million pace by the end of 2014.
The commercial market, which hasn’t seen real growth for several years, is forecast to grow through 2018, with healthcare, corporate, hospitality and retail showing the most signs of life. Most of the floorcovering volume will be remodel/replacement work as new construction continues to be sporadic. Fortunately, the architecture billings index was above 50 for most of 2013, although it took a brief two-month dip at the end of the year. This index is seen as a leading indicator for construction, and the resulting flooring work most likely lags by as much as a year. So the positive number from last year should result in tangible increases this year.
DIXIE’S ACQUISITION OF ATLAS
The biggest news last month was the Dixie Group’s purchase of Atlas Carpet Mills but I’ve got to admit it wasn’t a surprise. In 2013, Dixie blew the doors off the rest of the market in growth and, as a result, its share price increased 205% in one year. Atlas and Dixie have been working together in the commercial sector for over 40 years. Until the acquisition, Dixie was supplying about half of Atlas’ yarn purchases as well as most of its modular tile offerings. Both Atlas and Masland Contract have similar targets in the commercial market, with Atlas being seen as the higher styled, pricier option between the two.
This acquisition carries several synergies that will benefit both entities. Atlas’ Los Angeles based carpet mill will give Dixie’s Fabrica operation more economy of scale on the West Coast. Dixie has already announced that Atlas’ Saybrook tufting, coating, inspection and shipping operations will continue as normal. However, over the next several weeks, Atlas’ dyeing operations will be consolidated into Dixie’s facility in Santa Ana, California. Prior to the acquisition, both dye houses were under utilized, so this could result in significant cost savings for both operations.
At this stage in the game, Dixie has committed to keeping both commercial brands separate, much as it does with Masland and Fabrica on the residential side of the business. The top three leaders at Atlas, Jim Horwich (also the founder), Mark Nestler and Scott Price, have signed long-term employment contracts and will continue in their roles for the Atlas brand. One small, but noteworthy, benefit to Atlas will be the ability for it to be considered for projects that up until now would have been below its reach due to its pricing model.
This acquisition makes the Dixie Group a more substantial player in the contract commercial market. We estimate that post acquisition its product ratio is 65/35 residential to commercial, which also closely represents the market balance between the two sectors.
As Kennedy Frierson, Dixie’s COO, stated, “We saw this acquisition as an opportunity to add an excellent high-end brand in the commercial market to our company. Atlas has a very strong sales force with a brand heritage that goes back 44 years. This strong market position has been created by the superior design and styling of their product offerings.”
According to documents related to this sale, Dixie paid $17.5 million for Atlas, which had approximately $53 million in sales in 2013. That’s a multiple of three.
If you’ve followed the Dixie Group’s history, then you will recall that it started in the apparel yarn business in the 1920s and started dabbling in the carpet yarn business in the 1950s with the acquisition of Candlewick Yarns. The company’s focus was divided between apparel and carpet until 1997, when the company changed its name from Dixie Yarns to The Dixie Group. Dixie’s first carpet mill acquisition was in 1993 when it bought Carriage Industries. At that point, its focus was on the low end of the business but it wasn’t long before it shifted its focus to higher priced goods.
Dixie’s growth in the carpet business has come from the selective buying and selling of several key brands while it searched for the sweet spot where it now plays in the upper end of the market. Along the way, the company kept and consolidated what it liked and jettisoned the other parts. Dixie now operates carpet plants in Southern California, Alabama and Georgia, focusing on the Dixie Home, Masland and Fabrica brands. Brands that it once owned include Carriage, Patrick, Bretlin, Danube, and Globaltex. Just in the past year, Dixie has added Colormaster, Crown rugs, Robertex and now Atlas.
In 2013, Dixie’s sales were up 29.5% versus the previous year—28.5% in residential and 30.1% in commercial. Today, Dixie can claim that it is the second largest carpet-only company in the U.S., behind Interface.
LEADERSHIP CHANGE AT CRI
While March was a relatively quiet month in the floorcovering sector, we need to make note of the change in leadership for the Carpet and Rug Institute. Werner Braun, who has been president for the last 14 years, is stepping down and Joe Yarbrough is taking the helm. Joe is no stranger to the carpet industry. He has spent the last 20 years in manufacturing leadership roles at Mohawk and was head of manufacturing for Aladdin Mills when Mohawk acquired it in 1994. He spent the early part of his career working with Bud Seretean at Coronet. Werner, who came to CRI in 2000, was a first generation immigrant from Germany who spent much of his career at Dow Chemical but prior to coming to CRI led the Chlorine Chemical Council.
One the primary purposes of a trade association is to attempt to influence public policy in a direction that’s favorable to its members. So in the case of CRI, its core mission is to remove any obstacles that could result in the de-selection or share loss of carpet as a floorcovering material. One of the key areas that CRI monitors is legislation, making sure no laws are passed that would negatively impact carpet. In years past, other efforts have been focused on public opinion leaders in the medical field who felt that carpet contributed to asthma and allergies. And efforts were once focused on the education sector in an effort to prove that carpeted rooms make better classrooms. Back in 1998, under Ron Van Gelderen’s leadership, the CRI spent tens of millions of dollars on a national consumer advertising campaign titled “Carpet: It just feels better.”
But, as the industry has consolidated, so have the membership numbers and, frankly, the annual budget of the CRI. In the last three years, the CRI has cut its employee count by more than half and sold its headquarters building to the local community college. As Joe takes the helm, it will be interesting to see what changes he will bring to the organization.
LEADERSHIP OF CRI AND WFCA
Two of the bigger trade organizations in the floorcovering business are now led by individuals who spent most of their careers at the two largest companies in this business. Last year, Scott Humphrey took over the leadership of the World Floor Covering Association and, as mentioned above, Joe Yarbrough is now the head of CRI. Humphrey spent most of his career with Shaw Industries and Yarbrough spent the majority of his career with Mohawk/Aladdin. Prior to these appointments, the leadership of these organizations had always come from outside the industry. Whether this will have any bearing on their effectiveness remains to be seen.
S600 CARPET INSTALLATION STANDARD
My last mention of the S600 carpet installation standard in this column was back in March 2012. You may recall that the IICRC (Institute of Inspection, Cleaning and Restoration Certification) had been tapped by the CRI and the WFCA to rewrite the standard for the installation of carpet under the American National Standards Institute (ANSI) guidelines back in July of 2009. The goal of this new document was to replace the longstanding guidelines published by the CRI called CRI 104 and 105. The expenses associated with developing S600 were split 50/50 between the CRI and the WFCA and the process was supposed to take three years. Initially Larry Cooper was chosen to lead the process, but he was replaced by Mili Washington, who is certified as Associate Standards Professional with the Society for Standards Professionals.
Now, almost five years later and after more than a quarter of a million dollars has been invested, the standard is still not completed. It’s rumored that the S600 draft document is roughly 230 pages and still needs to go through another round of consensus comment. The CRI 104 and 105 document that the S600 standard is designed to replace is only 21 pages. When I recently called to get a status update, I was told that the CRI had pulled out but that the IICRC and the WFCA still wanted to complete the document and were hoping to get it done by this August.
THE ROLE OF THE INTERNET FOR RETAILERS
As the Abbey convention came to a close, it was clear that one of its core focuses this year involves developing tools that further assist its independent retailer members in efficiently using the Internet to enhance their reputation and increase their store traffic. While different groups offer different solutions, almost every aligned/buying group in the industry is focused on it. With over 90% of all floorcovering shopping sprees starting online, retailers’ visibility on the web can is longer be seen as an enhancement to the process but is now an ante in the game of success. If you’re in this business and haven’t invested in this area, you need to call someone immediately.
If you have any comments about this month’s column, you can email me at email@example.com.
Copyright 2014 Floor Focus