LVT Capacity, Haines & CMH, Shaw Living, Carpet One: Strategic Exchange
By Kemp Harr
A s luxury vinyl tile (LVT) becomes the latest floorcovering fad and the big guys start adding capacity with a fervor, I feel a bit of nostalgia for the firms that have focused on this business from the very beginning.
Two of the pioneer companies whose singular focus has been on LVT since the mid-1960s are Amtico and Metroflor. Both companies seem to be doing fine at this point. Amtico, which is now part of Mannington, has been ahead of the curve and started investing heavily in additional domestic capacity right after it was acquired in March 2012. Metroflor, which sources its products through long term manufacturing relationships, appears to also have wind at its back with a dual channel, dual brand strategy that’s focused on retailers and commercial contractors through distributors with one brand. And it also has a great relationship in the home center channel with another brand.
What will happen if all this recently announced new capacity comes online and capacity starts to exceed demand? Here in the U.S. alone, in addition to Amtico’s $50 million expansion in Georgia, we’ve also run the news of Armstrong’s new $40 million factory in Lancaster, Pennsylvania, IVC’s new $80 million plant in Dalton, Georgia and Shaw’s new $100 million investment in Dalton. Mohawk has also announced plans for a U.S. plant, though details are sketchy at this point. Additionally, both Mohawk and IVC have both recently added LVT capacity in Belgium, and over the last couple of years, Tarkett has added capacity in its Florence, Alabama facility (formerly Nafco) as well as in its facility in Luxembourg.
Up until now, much of the LVT that’s been consumed here in the U.S. has been sourced out of Asia. And while I was at Domotex–Hannover in January, I was told that close to a billion square feet of additional LVT capacity in Asia is under development. Granted, some of that capacity will be consumed domestically in Asia but with all of this new U.S. capacity under construction, exports from Asia into the U.S. will most likely go down—freeing up even more of that Asian capacity.
So let’s take a look at the current rate of consumption for LVT here in the U.S. Santo Torcivia at Market Insights LLC tells me that last year’s demand for LVT in the U.S was about $727 million (wholesale) or about 383 million square feet. So at this point, LVT is about 3.8% of the U.S. floorcovering market. There’s no denying that LVT has a bright future and its growth will most likely surpass the laminate category, because it’s better suited for commercial flooring applications and also has a better affinity for moisture than laminate.
At this point, the average wholesale price for LVT is $1.90 a square foot. But what’s going to happen to pricing if and when global capacity starts to exceed demand? We’ve seen what happened to laminate in the last ten years and some pundits are forecasting the same type of price erosion. It will be interesting to see if Amtico and Metrofloor have secured enough beachhead over the years to fight off the new competitors—many of which command a leading share of the market in other flooring categories.
PRICE EROSION WITH BASE GRADE PET CARPET
While we’re talking supply and demand economics, there’s another flooring category that could very well be facing the same dilemma and, in this case, the showdown on pricing will most likely become an issue in the very near future. In this case, I’m referring to the abundant supply of base grade polyester (PET) carpet. We’ve all watched as Engineered Floors has built one massive plant after another and expanded its market presence from zero to $300 million practically overnight.
While EF produces a wide range of carpet at different price points, one core part of EF’s business is base grade, solution-dyed PET carpet that’s purchased by large multi-family apartments buyers, single family builders and the home centers.
Part of what makes Engineered Floors so competitive in this base-grade sector is the scale and efficiency of running the newest, most advanced equipment available on the market today.
But Shaw, Mohawk, Beaulieu, and Looptex, which for years have also competed in this base-grade PET sector, have not sat idly by. In the last several years, they, too, have made investments, which not only expands their capacity but also lowers their cost position so they can also be competitive in the bottom end of the residential carpet business.
As the economy continues to recover and more carpet is consumed, we may see demand extend beyond the current level of supply, and prices will stabilize. But if, on the other hand, demand doesn’t increase, and at the same time a few of these mills dig in on maintaining marketshare in this sector, we could see discounted pricing for an extended period. While this won’t be good for the mills, it will mean great margins for the buyers, as they are able to buy 25-ounce carpet for less than $4 a yard.
DISTRIBUTION CONSOLIDATION— HAINES AND CMH
On January 17 it was announced that J.J. Haines and Co., the nation’s largest flooring distributor, purchased CMH Space, which by our estimates is the third largest distribution firm in the U.S. This makes Haines the largest distributor in the nation by far. I recently spoke with Bruce Zwicker, president and CEO of Haines, to discuss the acquisition, and he listed four reasons for the move.
First and foremost, Haines can now better serve its customers. Zwicker believes that flooring retailers need a large scale distributor that can afford to be deep in inventory, that offers a great logistics program, that delivers a lot of products on a single truck, and that can provide them with a streamlined ordering and inventory process.
Second, the acquisition is a boon to Haines’ shareholders. It swallows lots of marketshare in one big gulp, ensuring that the company can survive long term and lowering costs through scale.
Third, the company is developing a multi-division structure, which it couldn’t have achieved otherwise. CMH has a big supplies business and, in the last few years, acquired two other companies—Space in Georgia and Ellis in North Carolina—in the supplies business. Haines will now develop a supplies division with these brands. In addition, Haines, which has a 100-year relationship with Armstrong, will, per its agreement with the company, develop an Armstrong-only division with its own sales force.
Lastly, the acquisition will benefit employees of the two companies (440 at Haines and 355 at CMH), providing them with a stronger company with good benefits programs.
Haines and CMH covered virtually the same geographic territory, so there will be a good deal of time spent integrating the two businesses, which PricewaterhouseCoopers has been hired to facilitate. Full integration is expected by fall. The leadership of CMH will stay on with Haines to serve in executive roles.
SHAW EXITS AREA RUG BUSINESS
If you look back at last year’s May annual report issue, you will see that we placed Shaw’s area rug business in fourth place out of the top five, with an estimate of $119 million in wholesale sales. It’s not every day that you hear that a business with that level of marketshare decides to just turn the lights off. Granted, that’s only 2% of Shaw’s annual revenue but it’s also a substantial market position.
If you’ve read our coverage of the area rug business, you’ve no doubt learned that this business has changed rapidly in the last six years but appears to be stabilizing. As rugs are a cash and carry item, sales through e-commerce have been growing rapidly. Sales through the mass merchant and home center channels have pushed the average price for a 5’x8’ area rug down to around $200. Meanwhile, sales of better end rugs have shifted from specialty flooring retailers to furniture retailers. The department store business and the specialty rug business is seeing some growth, but these outlets are choosing to only carry the rugs that can’t be purchased online or in the mass merchants.
Logic tells us that the size of the rug market is actually expanding as more and more hard surface floors are installed. Homeowners who purchase and install hard surface flooring usually turn around and purchase an area rug within 90 days. Homeowners are also expanding the size of their outdoor living space, which is another great place for a rug.
One growing trend in the rug business is the practice of cutting and binding broadloom carpet to custom sizes. This is often offered as a custom service by the retailer, but Shaw’s Tuftex division also offers this service through its website.
You will read in other parts of this issue that the use of modular carpets in the form of build-your-own residential area rugs is also growing at a rapid pace.
As Shaw makes the decision to exit the traditional area rug business, it will be interesting to see who steps up to fill the gap in the marketplace.
CARPET ONE’S NEW PRODUCTS ALIGN WITH CURRENT FLOORING TRENDS
The product decisions that Carpet One makes offers a window of transparency into the retail trends in the floorcovering business. With 900 full service, well established retailers, Carpet One is the largest buying group in the floorcovering industry. And thanks to that scale, Charlie Dilks and his product team are able to combine insightful market research with member feedback to make product decisions that are well thought out. This year, much of the focus was on LVT, Relax its Lee’s Carpet, a new Tempur-Pedic branded carpet pad and a more elaborate hardwood program that features different styles based on five separate regions across the U.S.
Last year, in the carpet category, much of the hype was focused on ultra-soft carpet, and while that is still a viable sector, much of this year’s carpet introductions were focused on highly styled products in the upper price points. The Lee’s brand at Carpet One is the absolute top of its branding hierarchy in both styling and performance, and after a year of analysis, this whole collection has been re-launched and expanded. Now all of the products in this collection are made of nylon, and a boutique collection of impressive products is being introduced under the Lee’s Studio brand. And from a merchandising perspective, Carpet One has opted to drop the Lee’s color wall and go with a flip card island display.
A second high fashion nylon carpet collection that has been completely restyled is the Tuftex/Stainmaster collection called Color Stories.
Also of interest from a merchandising perspective is Carpet One’s decision to re-evaluate its SelectAFloor display wall, which for the last 13 years has given consumers the option of selecting their favorite carpet style based on lifestyle. This carpet display takes up a large amount of real estate, so it will be interesting to see if the group ultimately decides to drop it. While carpet is still a little more than half of Carpet One’s share of revenue, its share has been on the decline—just as we’ve seen throughout the industry.
Carpet One has never been shy to promote products that offer its members an opportunity to earn a little extra margin, and launching an exclusive Tempur-Pedic line of carpet pad from Leggett and Platt is a perfect example of that practice. This is an excellent extension for this mattress brand that should attract consumers and convince them to pay a little more for added softness.
With LVT, Carpet One has had a strong residential program—sourced primarily from IVC—for several years. But this year, they are adding a collection from Shaw called Core Elements that is targeted at the mainstreet commercial market.
With area rugs, Carpet One has also recognized the rising popularity of customizable rugs made from modular carpet tile. One program that was spotlighted during the general session was Stanton’s Rug Revolution program of colorful PET shag squares that are held together with hook and loop backing.
If you have any comments about this month’s column, you can email me at email@example.com.
Copyright 2014 Floor Focus