Residential carpet, Asian LVT, Aquafil, biophilia: Strategic Exchange

By Kemp Harr

As we reach the midpoint of the year, 2015 is feeling much like the previous year in the residential market, while the commercial sector is giving us a little more reason to smile. Let’s not forget that we still have half the year in front of us, and several key indicators are suggesting that the second six months could push floorcovering sales ahead of the meager gains we saw last year.

The June consumer sentiment reading shows the strongest economic optimism among consumers since 2004. And even better, this positive optimism is being felt at all income levels, according to a recent study by the University of Michigan. Personal consumption expenditures are also on the rise. It appears that for the first half of the year American consumers wanted to build up their savings accounts with the windfall from lower gasoline prices, but they are now starting to loosen those purse strings. U.S. consumer spending rose 0.9% in May—the largest increase in nearly six years. Home values are also continuing to rise, as the Case-Shiller index shows, with a year-over-year gain of almost 5%.

Naturally, there are some distractions, driven in part by the 24-hour news media that wants us to continue tuning in for an update so we can also listen to their “ask your doctor” commercials. There is the loan default situation with Greece; recent decisions by the Supreme Court on social and healthcare issues; and the ever-increasing rise in healthcare costs (citizens at all income levels now understand that there is no free healthcare). And let’s not forget that interest rates will probably be going up later in the year. So, while the outlook is favorable, especially for home-related and commercial interior investments, we’ll just have to wait and see how much growth the market will bring us.

CARPET’S LOSS OF SHARE IN THE RESIDENTIAL MARKET
If you think about it, stretched-in wall-to-wall carpet was the first real floating floor. Prior to that, hardwood had been nailed in, ceramic tile was set in mortar, and resilient flooring, whether it be sheet or tile, was glued down. Then along came click laminate, followed up by click engineered hardwood, loose lay LVT, and now click wood polymer composite or engineered LVT. The builder and the homeowner now have a vast stable of options that can be installed over the plywood subfloor or concrete slab in a home, and floating floors are certainly easier to install than glued or nailed floors.

As many retailers have discovered, carpet continues to be one of the more profitable products to sell, but, despite that, these relatively new and innovative products are slowly stripping broadloom carpet from its pedestal as the marketshare leader here in the States. Consumer research tells us that hardwood is the most desired floorcovering, and those who can’t afford the real thing have several great alternatives to choose from, especially now that digital printing and embossed in register graining makes it harder to tell the difference between the imitator and true hardwood.

Multi-family housing, which until just a few short years ago was predominantly carpet in every room but the bathrooms and kitchen, is also switching over to the resilient wood look in almost every space except the bedrooms.

So where are we today, and where does it all end? Recent statistics from the carpet industry indicate that total carpet production is down as much as 3% this year—in a year where demand for commercial carpet is healthy—so residential carpet demand may be down as much as 5% so far this year. Before you become too alarmed, the next closest category from a marketshare perspective is hardwood, followed by ceramic, and if you combine those categories’ residential sales volume, it is still lower than where carpet is today. In most other developed countries around the world, ceramic tile is the marketshare leader, but we’re a long way from seeing that type of shift.

There is no telling where this ends up, what exactly is driving the shift or whether the shift might reverse itself. We do know that consumers today are looking for low maintenance options, and pets are certainly more prevalent in American homes than they used to be. Some might say that we drove the consumer away from carpet by selling her something that didn’t perform; others might theorize that in a consolidated market with fewer competitors, we stopped romancing the product with consumer advertising; and still others may believe that technology made the other surface types in the same price range more attractive.

A GLIMPSE AT THE ASIAN LVT SUPPLIER STRATEGY
For many years, the production base for the LVT business has been centered in Asia. This is where the product was first developed and refined, and there is a huge amount of capacity that is firmly entrenched in both China and South Korea. It is only in the last couple of years that major investments have been made both in Belgium and here in the U.S. to bring LVT production closer to the customer. As we’ve covered the news of these investments, we’ve wondered how the Asian suppliers would react, and now we are starting to see their strategy.

Novalis was the first company to produce LVT in China over 30 years ago and remains one of the top five producers. The firm, which has a massive production facility 150 miles outside of Shanghai, is taking a dual approach—coming to the U.S. with its own brands, Novalis and AVA, as well as setting up new OEM relationships with well-established brands that up until now have not offered a line of LVT products. The firm also has an exclusive licensing arrangement with Invista to produce and sell Stainmaster branded LVT.

Nox Corporation, the largest LVT supplier in South Korea, has been making LVT since 1994 and boasts an annual capacity of over 400 million square feet. The company also claims to be the first to develop an LVT click system. Nox is the OEM supplier to an impressive list of major brands here in the U.S., some of which have either acquired or are building their own U.S.-based LVT facilities. Last month, Nox announced its plans to open a domestic LVT plant in Fostoria, Ohio, which should be operational by the end of 2015. In a recent meeting I had with Nox’s CEO, Dan Koh, he revealed that Nox has no intention of entering the market with its own brand but is building a plant in the U.S. so that his OEM customers can put a “Made in the USA” label on their LVT products, and also to shorten lead times. Fostoria, for those of you who aren’t familiar with Ohio, is a rural town of about 13,000 people, 45 miles south of Toledo. The town is also the headquarters for Don Miller’s Roppe Holding Company.

AQUAFIL HOLDS SWEET 16 EVENT
Just over a month ago, Aquafil USA held an anniversary celebration that ended up being quite a cultural affair. Yes, it’s been 16 years since the Italian yarn producer decided to diversify its focus beyond Europe. Its Cartersville, Georgia venture was the first of what is today 15 different foreign operations in North America, Europe and Asia.

This was a pretty aggressive and risky undertaking for a privately owned company that got its start making nylon raincoats, but it’s paid off. Today, Aquafil USA is the largest Italian-based company operating within the state of Georgia, and the only company that produces nylon filament yarn on three continents.

A second purpose for this recent celebration was to inaugurate the opening of Aquafil’s second production facility in Cartersville, which was necessary to satisfy the company’s continued growth. And for the roughly 100 guests who thought they were simply going to eat lunch and get a plant tour, this event proved to be much broader in scope. Not only was the celebration attended by several dignitaries, such as the Italian ambassador to the U.S., Claudio Bisogniero, and Georgia’s secretary of state, Brian Kemp, but the group was also entertained by a student choral group from Cartersville Elementary School that sang “Sweet Georgia Brown,” as well as an extremely talented Juilliard student tenor named Ryan Brideau.

As part of the program, Giulio Bonazzi, CEO of Aquafil, announced from the podium that Aquafil had future plans to build a nylon depolymerization plant in the U.S. as part of its global sustainability mission.

SHIFTING PERSONNEL WITHIN THE FLOORING BUSINESS
I mentioned a couple of months ago that several of the top companies in the floorcovering business are bringing in new leaders, who are not only new to the flooring business but who also have more sales and marketing credentials as opposed to a manufacturing background. Just as a reminder, those companies are Armstrong, Crossville, Interface and Tarkett North America.

We are also noticing more than the normal churn in personnel at all ranks within the industry. Some people are retiring, and others are finding new companies or new positions within the same company. I’m not sure if this is being driven by companies trying to follow Jim Collins’ Good to Great advice or by employees who are seeking new challenges at firms that are willing to pay them more money or give them more purpose within which to focus their passion. Regardless of who’s driving, if you watch closely you can tell which companies seem to be attracting the most talent.

MORE FOCUS ON HUMAN ENGAGEMENT AT NEOCON VIA BIOPHILIA
As we’ve watched interior work spaces shrink and evolve into what today is called the collaborative office, I’ve often felt that the decision makers have had very little regard for how employees felt about the new design, with the focus more about reducing the amount of real estate it takes to accommodate the task at hand. But this year at NeoCon, it does appear that designers are putting more emphasis on the human engagement within commercial environments. Biophilia is a new buzzword, especially in the corporate sector. Based on the premise that humans are instinctively drawn to and calmed by nature, a design movement to bring natural elements indoors has taken root in recent years.

Product designers are taking note, including using more natural elements in everything from textiles to furniture. Countless flooring introductions this year incorporate nature inspired patterns, textures and visuals. Some products offer realistic stone, grass and wood visuals while others simply have textures and patterns that one would define as organic, but don’t so closely mimic nature.

The effect of natural light on employees’ well being has been scientifically proven to be beneficial, leading to more open spaces in the corporate environment. Privacy and noise become issues in these spacious modern interiors, however, and manufacturers displayed a myriad of products to bring quiet and personal space back into the mix. Softer materials along with small personal work furniture surrounded by high backs and sides were prevalent at the show.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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