2014 Annual Report: Carpet, area rugs, hardwood, laminate, resilient and ceramic

Introduction by Darius Helm, Statistics by Market Insights LLC

Last year, the domestic flooring market posted its highest growth since 2005. The industry was up 7.1%, according to Market Insights LLC, to an estimated $18.54 billion. Back in 2005, however, the market was more like $24 billion, so there’s still plenty of room for organic growth. And 2014, despite the glacial pace of its first quarter, is primed to take the market up even further.

Last year, the economy strengthened through the first three quarters, with GDP growth steadily climbing from 1.1% in the first quarter to 4.1% in the third quarter. Expectations were for a stronger close to the year than where it ended up, at 2.6% growth for the fourth quarter, leading some to wonder if a dip was on its way. And a frigid winter across much of the nation threw enough noise into the picture that prognosticators have had a hard time determining what will happen this spring and through the balance of the year.

Globally, a moderation in China’s economic growth is not yet cause for concern, but the other BRIC nations are also underperforming, with continued stagnation in Brazil, deceleration in the Russian economy and lackluster results in India, and one has to wonder about the impact of a loss of momentum among so many key global economic engines. And this year has also brought geopolitical tensions in Eastern Europe, with no clear resolution in sight.

In the U.S. last year, the residential sector outpaced the commercial sector, as growth in both the multi-family and single-family markets drove business at the lower price points, and strength at the upper end of the economic ladder has helped drive the higher price points.

In the commercial market, it has been a mixed bag. Corporate business, which is the biggest part of the commercial market, was fairly flat. In general, hospitality has been strong and retail has been rebounding, though not across the board. Healthcare business seemed slower last year. Some manufacturers reported that K-12 business was strong, while others said it was weak, but that’s likely because K-12 projects often have long time lines, and they’re subject to the vagaries of municipal policies and budgets, so they don’t necessarily trend together.

Luxury vinyl tile seems to have topped carpet tile as the fastest marketshare gainer in the commercial market, even as carpet tile continues to make solid gains. We’ll have a full report on commercial floorcoverings in next month’s Commercial Market Report.

HOUSING ACTIVITY
Last year, existing home sales were the strongest since 2006, when the housing market started to stall. Total existing home sales, including condos, co-ops, townhomes and single-family homes, hit 5.09 million last year, according to the National Association of Realtors. While that’s a far cry from 6.48 million in 2006, those high rates during the housing boom were unsustainable, and nobody is really interested right now in flying that close to the ceiling. Last year’s sales were 9.1% higher than existing home sales in 2012.

Median existing-home prices rose 11.5% to $197,000, and that’s the biggest gain since 2005, and part of that is from a fall in distressed homes from 24% of sales in December 2012 to 14% of sales in December 2013.

Despite falling new home sales through November and December, sales for the year were up 16.4% to 428,000. That’s two consecutive years of growth, and those are the highest sales since 2008. At the unsustainable peak in 2005, new home sales topped 1.28 million.

Housing starts, single-family and multi-family combined, were up over 18% last year to 923,000, and that’s the fastest building rate since 2007.

Coming into the new year, the market was expected to moderate but remain strong in 2014, with some factors, like rising mortgage rates, constrained inventory and rising home prices, reining in growth. However, the housing market has so far underperformed.

This year started off hampered by the harsh weather, and as the frigid temperatures continued, the expectation grew that the spring thaw would yield a rush of activity. However, so far that hasn’t happened. Business is picking up, but it isn’t surging yet. And it may not, at least when it comes to flooring.

The problem is that it was an expensive winter. People spent a lot on energy and on labor. And in countless other ways, the weather ate up disposable income, perhaps enough to impact larger projects like flooring, that are often deferrable, at least for a while.

The silver lining, if you can call it that, from the extreme weather, was that it damaged floors. It may not be possible to quantify how much unanticipated revenue will be generated as a result of wear on flooring due to the winter, but it will lead to more business. Along the whole East Coast and across the upper Midwest, flooring had to contend with high levels of salt, grit and moisture—and more wear and tear in general. And wearing faster shortens lifecycles, which translates to higher flooring revenues.

Despite optimism from the builder community, housing numbers so far this year are not generating a lot of hope. March single-family home sales, for instance, fell 14.5% from February’s numbers and, more significantly, were down 13.3% from March 2013. Existing home sales were about flat in March, but down 7.5% from March 2013. And pending home sales were up 3.4% from February to March, but that’s down 7.9% from the previous March. In other words, so far there are no clear indications of a surge in activity and, in fact, the market may even be slower than was anticipated before the tough winter.

The market may be uncertain, but the general long-term trend is still for growth in single-family housing along with continued strength in the multi-family market, though at a moderated pace, and this should continue until the market approaches healthy levels, at which point the single-family and multi-family markets will more closely inversely correlate. But for now there’s still room for growth in both markets.

FLOORING HIGHLIGHTS
The most significant movement in the flooring industry is arguably the investment in domestic capacity. Right now the industry is at the front end of a three-year period of large-scale development in production capacity, mostly for luxury vinyl, polyester broadloom and carpet tile. The firms building new facilities or expanding existing facilities include Shaw Industries, Engineered Floors, Mannington, IVC US, Armstrong, Tarkett, Mohawk’s Dal-Tile and Del Conca. In addition, other manufacturers are moving various processes in-house and vertically integrating.

Last year the fastest growing flooring category was ceramic tile, followed closely by hardwood. However, hardwood’s revenue growth does not reflect the sawmill capacity problems and attendant price increases that ate away at margins. Raw material problems have continued into 2014, but it looks like they won’t be as severe. Ceramic tile imports grew faster than mill shipments last year, but that’s likely to change as new capacity comes on line in Tennessee and Texas.

The carpet market was up overall by over 5%, led by residential growth in polyester carpet at the lower end and ultra-soft carpet at higher price points. Both have helped drive sales for the last couple of years. Polyester will slow because the multi-family sector, which is its biggest market, is moderating. The ultra-soft trend probably won’t slow that much, and mills are also coming out with more affordable soft carpets to try to cast a wider net.

Rug business was down 2%, with import increases not strong enough to lift reduced U.S. mill shipments. Earlier this year, Shaw Living exited the area rug business, and now it’s turning its Ringgold, Georgia rug plant into an LVT facility.

Resilient business was up 5%. Like carpet, vinyl flooring has been losing share over the years, but LVT has helped rejuvenate the category, even as VCT takes it down. Sheet goods are also losing ground. About $250 million in investments in domestic capacity will help boost LVT and buoy the category for several years to come.

The hard surface category that fared worst was laminate, which these days must compete against LVT and its better visuals, durability and ease of installation armed only with better price points. Laminates were up 4.2% to just over a billion dollars, with imports growing faster than U.S. mill shipments.

For the complete Annual Report, see the May 2014 issue of Floor Focus Magazine.

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