Hospitality Market Update - May 2012

By Brian Hamilton

The hospitality industry began to show signs of life last year after one of the most protracted downturns in decades. The Great Recession was a double whammy of sorts: not only did consumers travel less, but business travel also fell off substantially, which not only lowered hotel occupancy rates and depressed room prices but also resulted in less use of convention centers and other meeting areas.

The problems were also compounded by the fact that financing dried up for many new construction projects that would normally have gotten started in a healthier economy, as financial institutions saw a depressed industry with lowered revenues and decided there was simply too much risk. “One of the jokes was, in order to get financing, all you needed was 100% equity,” says Zachary Zoul, CEO of Hospitality Advisors Group of Pequot Lakes, Minnesota, a consultant for full service hotels and upscale restaurants.

The near-term prospects for new construction are still not good. According to the Smith Travel Research/McGraw Hill Construction Dodge Pipeline Report, as of February there were 2,716 hotel projects in various phases across the country representing 290,989 rooms. That equates to a 5.6% decrease in the total number of rooms in the pipeline compared to the same time last year. Some markets like Chicago and Nashville are seeing triple digit increases in the number of rooms under construction, but in absolute numbers they are still small—1,392 in Chicago and 1,388 in Nashville.

Lack of financing remains a significant impediment for new construction, according to Jan Freitag, vice president of global development for Smith Travel Research, and nothing is likely to change until the middle of next year, which means many projects won’t be completed until two or three years after that.

To understand what a hole the hospitality segment was in, last year occupancy was up 4.3% over 2010 to 60.0% and it’s expected to rise another 1.5% this year, Freitag says. The most recent high was in 2007, when occupancy reached 62.8%.

However, room rates are rising at a faster clip, Freitag says, which is normal for this phase of a recovery, with luxury room rates up 5.7% and economy rates up 2.2%. Revenue per room was up 8.2% last year but won’t be up that much this year. However, it’s a variable situation. Business is booming in New York City, for example, while other parts of the country remain depressed.

Flooring sales in the hospitality sector were cut in half, by most estimates. The industry reached a high of roughly $620 million (wholesale) in 2007-2008 but fell to about $300 million in 2010, rebounding last year to about $340 million. Some in the industry see sales at around $380 to $400 million this year, still well off the most recent highs.

The good news is that both business and leisure travel are rebounding, which means hotel revenues are rising. Consequently, hotel owners are much more inclined to sink money into renovations, which have often been delayed well beyond their normal replacement cycles—around five to seven years in a normal economy.

Zoul notes that there’s a large pent up demand for renovation projects, and when a project is approved, the owners want new floorcovering “yesterday,” in other words as fast as they can get it. This would seem to favor manufacturers, especially domestic manufacturers, that can deliver quickly in an industry that uses a lot of customized product.

“The hospitality industry is not as robust as it was five years ago, but it is dramatically improved over what it was,” Zoul says. “We’re seeing businesses plan meetings. Regardless of the economic conditions, companies can only hold off for so many years.” And that means owners are more likely to spruce up their facilities.

A lot of the new renovation is likely to come after investors buy distressed hotels for maybe $0.30-$0.40 on the dollar, then renovate and flip the properties. This kind of activity could dominate the sector over the next couple of years.

In terms of products, multi-level cut loop, 32 ounce, solution-dyed nylon dominates the sector, especially in rooms, although upper end properties often use 36 ounce or heavier products. Broadloom is still far and away the most widely used product, and there are not many signs that tile is going to take as much share as it has in offices and other commercial segments. Generally speaking, tile is still too lightweight and not comfortable enough for a bedroom application. In most cases it’s also about twice as expensive as broadloom installed, which further diminishes its appeal. Tile probably won’t make much headway in rooms until someone develops a product with the pad attached at a price that compares with solution-dyed nylon broadloom. However, Red Roof Inn is using luxury vinyl tile in its rooms, but around the beds it is using carpet tile to create a rug effect.

Wool carpet still dominates the gaming areas of casinos, especially in Las Vegas, but increasingly nylon is being used in Indian gaming establishments, the fastest growing part of the casino business.

Hard surfaces are finding their way more frequently into boutique hotels and some other luxury properties. Zoul says he’s seeing much greater use of wood in renovated historic properties—a small segment of the hospitality sector that’s seeing strong investment—even in bedrooms, as owners seek flooring that’s more in keeping with the historic nature of the properties. Marble is also frequently used in these properties.

Hard surfaces are also being used more often in hotel common spaces, where wood, for example, might be used as a border around carpet. Wood and tile, as well as decorative concrete, are also showing up in restaurants. Although Zoul says he’s seeing stamped concrete with decorative wood in some convention centers, it’s still only a tiny share compared to broadloom.

Luxury vinyl tile, which has made dramatic strides in terms of its visuals in recent years, is being used in some areas where owners want, for example, a wood look but a product that is nearly indestructible and needs comparatively little maintenance. It’s being used in areas like extended stay hotels that have kitchens, and is more prominent in the economy to mid-scale market.

Another significant trend is that most of the manufacturers that focus in the hospitality sector are finding a good market for their products in retirement facilities. Today, assisted living facilities and even nursing facilities are drawn to the the rugged performance characteristics of hospitality carpeting as well as its more inviting and less institutional designs. This is a market that is destined to grow as baby boomers retire in growing numbers.

Sustainability continues to play a role in the hospitality sector, partly as a way for chains to market themselves but also because it’s increasingly becoming a profitable business strategy. However, flooring manufacturers have to keep the process simple and at least a wash in terms of cost.

THE PLAYERS
Mohawk’s Durkan brand is the market leader in hospitality and Mohawk believes it’s gained marketshare over the last year or so with about 20% growth. Mohawk is the leader in hotel rooms but it has a presence in every area of hospitality, including casinos (not the gaming floor), convention centers, and restaurants, and the firm has a dominant presence in movie theaters.

Styling has been a driving force for Mohawk and the firm has recently added a 25 dpi Spectronics digital print line to go with its two older 16 dpi print lines to produce its Durkan Print products. The upgraded technology gives Mohawk the ability to produce sharper and much more intricate patterns, plus it’s faster and cuts down on water and energy use, and waste. Spectronics printed carpet can include up to 12 colors in a pattern, and repeats up to 100’ long and 60’ wide, a nice capability for convention centers and other areas with large open spaces. Durkan Print is the biggest part of Mohawk’s hospitality business and it flourishes in the limited service sector—midscale hotels without restaurants and bars.

Durkan offers computer yarn placement (CYP) technology that creates the look of woven carpet but at less cost, and it’s prevalent in upper tier properties. CYP offers a faster turnaround than is typical for imported woven carpets.

Durkan’s Merit brand provides tufted carpet in both broadloom and tile and they’re mainly upper tier products. The brand offers custom color options for any pattern. Durkan’s Synthesis is a proprietary system for public space and corridors that offers 12 base textures, any of which can be overprinted with a pattern from the Durkan library.

Shaw Hospitality is right behind Mohawk in the hospitality space in terms of marketshare and, like Mohawk, services hotel chains, country clubs, social clubs, museums, banquet halls, and even military hotels. It works through: hotel brand owners; designers; purchasing managers; furniture, fixtures and equipment (FFE) firms; and others to get to market.

Shaw started to see its hospitality renovation business take off last year, and this year looks to be even stronger as its pipeline has been growing every week. Renovation could grow as much as 30% this year, but 20% may be more realistic.

Custom products make up about 90% of sales for Shaw. It wasn’t long ago that the ratio was closer to 50-50 but customization has gotten so popular because designers can get what they want at good prices. The customization could include, for example, a change in width, color, or backing to an off the shelf product, or a completely new pattern.

Shaw offers both running line and custom products in print, CYP and tufted carpet. It doesn’t offer a woven product, but it does compete for that business with Chromojet printed carpet and CYP products.

One of the trends the company is seeing is a move toward asymmetrical designs in the corridors. In other words, on the left side of the hallway will be a lot of pattern and it will diminish as it moves across the corridor. This allows designers to go all the way down the hall with one piece of carpet and minimize seams.

Shaw’s running line product called Private Line, a multicolored cut and loop product, is one of its best sellers for rooms. It’s also cradle-to-cradle certified.

Shaw also sells engineered hardwood to mid scale and upscale hotels and restaurants. In hotels it’s mostly used in lobbies and other public spaces.

South Carolina based Milliken offers both broadloom and carpet tile for the hospitality sector. Most of its business is in hotels, convention centers, restaurants, casinos, and a variety of public spaces. It sells to the whole spectrum of hotels. Its acquisition of Constantine in 2009 gave it capabilities for high end products through multiple yarn infusion. The firm said it anticipates a better year in 2012.

Milliken continues to have success with tile in public spaces of hotels, casinos, and convention centers, as well as in senior living facilities. The firm does customized jobs that include a large number of 3’x3’ tiles in a single repeat. It makes a registered tile, in which individual tiles are printed individually. It also markets tile for rooms, unlike other players, because its tile is less expensive than other tile, and it can be installed more easily than broadloom and generates less waste in rooms, which aren’t merely large rectangles.

Most of Milliken’s work is custom and the firm has been preparing for the current increase in renovation work. For example, it’s made internal improvements to cut down the timing of samples and it has increased capacity. The goal is to cut turnaround time, which it feels is an advantage in the current environment.

In addition to offering conventional custom design broadloom and modular products, it also offers Etage, a layered custom design in both broadloom and tile.

Dalton, Georgia based Lexmark’s focus is mainly on hotels, three star and higher, although it does serve economy chains with budget products. It also has some casino business, primarily rooms. Its product line is strictly solution-dyed nylon broadloom, with 10% post-industrial content. It sells through FFE firms, corporate accounts, flooring contractors and purchasing companies. Like other players, Lexmark’s business has been on the upswing the last six months. On a side note, Lexmark has just gotten into the residential business and introduced its first products at Surfaces this year.

About half of the firm’s hospitality business is custom, although it has an extensive running line, including several styles developed with hospitality designer Stacy Garcia. All products are tip-sheared.

Last year Lexmark’s business was up about $2 million over the previous year, and business is trending about 25% ahead of last year.

Lexmark believes it has one of the fastest turnaround times in the industry, with a three to four week average. One advantage is it uses in-house yarns, doing all the extruding and twisting internally. It has recently added some metallic yarns to create some different looks. During the downturn, Lexmark invested in a lot of capital equipment, including extrusion equipment, twisters, heat-setting equipment and tufting machines to put it in position to handle the pent up demand it knew was coming.

Lexmark has six new products for the HD Show this month, including agreements with well known designers.

Vertically integrated Signature Hospitality Carpets of Dalton sells primarily to hotels, casino hotels and timeshares. Most of its sales are to three to five star hotels but it does work with all major hotel chains and design firms. Last year its business grew, and it’s anticipating a better 2012. Business next year through 2015 should pick up substantially. Signature has taken its expertise in hospitality design to develop products for the senior housing market, which it sells through another division called Signature Crypton Carpet.

Many of Signature’s customers, like some Hampton and Marriott hotels, can’t afford to renovate their rooms but are refurbishing their lobbies, because the lobby sets the tone for the whole customer experience. In general, hotels in port cities are doing better than those in the interior of the country.

The firm, along with Clayton Miller, another hospitality carpet manufacturer, purchased a Card-Monroe ColorPoint tufting machine in 2009 and that has given it many new capabilities to produce eye catching multicolored patterns. The firm has almost unlimited pattern capacity.

Signature’s products are all solution-dyed nylon broadloom.

J&J Industries made news this year when it announced it was exiting the low margin lodging portion of the hospitality business to focus on convention centers, casinos, restaurants and senior living. The company has discontinued its Templeton brand (J+J/Templeton), which it acquired from Monticello International in 2010, and decided to use the equipment in other more profitable areas. That equipment, which included a one-of-a-kind Card-Monroe cut and loop machine, gave it the ability to extrude fiber, process yarn, and do broadloom and modular finishing. The Card-Monroe machine has the ability to create stunning carpet.

Part of the change in focus is due to the fact that J&J has an emphasis on carpet tile, which isn’t popular in the lodging sector.

The company expects that it will take at least a year to make the transition and reach similar sales levels in its hospitality business as it transitions its new products to the J+J/Invision salesforce.

The company sees plenty of opportunity in its new direction. More casinos, especially those outside Las Vegas, are using carpet tile and nylon in their gaming areas. J&J says tests have shown that there’s little difference between the more traditional wool carpet that’s used in casinos and nylon when it comes to cigarette burns, and with certain patterns the burns aren’t noticeable at all. In addition, many of those casinos are becoming no smoking zones. So this should be a growth area.

Also, convention centers are making more requests for hospitality styling with bolder patterns and more color, and they’re looking for products that perform well and have stain resistance. J&J sells its carpet tile for this kind of application.

California-based Bentley Prince Street’s hospitality business was up about 2% last year but it sees a much better 2012. International sales are becoming a larger part of its business. The firm sells both broadloom and carpet tile to customers like Starwood Hotels (Westin, W-Hotels), as well as small boutique hotels and other higher end facilities. It also provides products for corridors, public spaces, clubs and restaurants. Many of these clients will tweak a running line product and change the colors to align with a brand scheme and since the majority of Bentley’s products are piece dyed, this can be done quickly and accurately. It’s also seeing greater interest in its modular tile carpet, especially in the higher end specified market.

Bentley Prince Street sells a substantial number of custom rugs into the hospitality market, especially in southern markets like Cancun and other resort areas, where rugs are used as accents over the ceramic tile floors. The firm can supply small minimum orders to test a product at one property before the product is extended throughout a chain. Many of these rugs are produced from the company’s Global Vistas broadloom, and most of them are solution-dyed Aquafil nylon, along with some wool.

Casinos are a specialty business for Bentley Prince Street. Its products can be found in suites and other specialty areas like spas, restaurants and nightclubs but generally not rooms or corridors.

Bentley Prince Street emphasizes design, product sustainability and its piece-dyeing capabilities to distinguish its products. The firm is owned by Interface, which is well known for its Mission Zero environmental philosophy.

Resilient maker Johnsonite does a brisk business in rubber wall base in the hospitality sector, thanks to all the long corridors. Wall base is one of the largest pieces of its business in this area. In addition, it sells LVT in hospitality, depending on the price points of the hotel, as well as stair treads and flooring transitions. LVT is generally used in retail spaces and gathering places but it can also occasionally be in rooms. Sheet products are also sometimes used in lower end properties.

Las Vegas casinos are a significant market for Ohio-based Johnsonite. Most of the projects it is working on have been in the mock-up phase for the last two or three years. However, the opening of the massive City Center in 2009 set the bar higher for design and many properties are trying to keep up, which is resulting in more renovation work.

Johnsonite is seeing more interest in sustainability. One of its major customers is now required to provide information on the carbon footprint of all its vendors.

Tennessee ceramic tile maker Crossville is mostly in the top end of the hospitality lodging market, although occasionally its products will be sold to mid tier properties. It also has a major presence in restaurants, including chains like Wendy’s and Subway. In the lodging part of the business, the products are used mostly in hotel public spaces, such as foyers and lobbies.

Recently there’s been growing interest in larger format tiles, 12”x24”, with more minimalist looks. Glass and metallic accents are popular, and more vibrant colors are starting to return after a period of neutral colors. Occasionally tile is replaced because it’s worn, but often a property wants to test a new concept or simply update its appearance.

The firm has a national sales team that calls on larger accounts, and it also works closely with design firms.

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