Area Rug Update: Sales should be seen as more than add-on business - Dec 2016
By Jessica Chevalier
The past decade has brought considerable change to the area rug business. The recession pushed many independent flooring retailers to choose between going all-in with the category or bailing out completely, thereby reclaiming both the floor space and liquidity that a quality area rug program requires. Add to that the sharp increase in area rug sales online, which—in spite of many experts’ predictions, or hopes, that area rugs simply must be felt and seen by the naked eye and, therefore, would never gain much traction in e-commerce—are now a staple at major home goods sites like Wayfair, Overstock and Amazon.
Today, according to the U.S. FlooReport, independent flooring retailers account for less than 19% of total area rug sales; however, done right, the category can be a highly successful venture for flooring retailers, especially as hard surface flooring continues to take marketshare residentially.
CATERING TO THE CHANGING MARKET
The area rug market grew by 3% in 2015, and Market Insights expects another year of low single digit growth in 2016 for a total of around $3 billion in sales. Area rug sales are a bit hard to nail down, in part because of cut and bind programs, which are seeing strong growth currently but are challenging to track. As the chart, right, demonstrates, flooring stores (both Top-Ten and “Other” combined) are expected to account for 19.2% of total area rug sales this year, falling to 16% in 2021, while sales in home centers and e-commerce are expected to rise more than 30%.
These many changes challenge area rug manufacturers to think and rethink their strategy to market. Unlike other flooring categories, area rug sales are tied to consumer spending, and that can shift based both on the sentiment of the public and the mindset of the buyer.
For some rug manufacturers, getting into the mind—and pocketbook—of the Millennial buyer is one of the most imposing hurdles, in part because the group is somewhat elusive. On one hand, Millennials have been documented as a generation that values authenticity—embracing farm-to-table concepts, appreciating handmade goods and expressing mindfulness about the economic, environmental and social impact of their purchases. On the other hand, saddled with student loan debt and early in their careers, they might have enough cash to invest in a good wool coat but are unlikely to have the expendable income to sink into a high quality wool rug.
What’s more, essentially digital since birth, Millennials are wired for e-commerce but crave the authenticity of human-to-human transactions with authentic brands. That being said, flooring stores aren’t necessarily top-of-mind for Millennials who set out in search of an area rug—in part because a good portion of them have yet to navigate the purchase of floorcoverings and, therefore, aren’t familiar with what independent flooring retailers offer. They also might not see independent flooring retailers as enough of a niche, as Jonathan Witt, senior vice president of Oriental Weavers USA, explains, “I am seeing research that Millennials, when it comes to investment, want to go to niche stores. They want to be part of something creative and different—not the status quo.”
The fact is also that, while some Millennials might be put off by the idea of throw-away goods, committing to an area rug that might last ten years seems fairly long term to a 28 year-old.
For Jared Coffin, vice president of area rugs at the Dixie Group, which serves the high end of the market with its Masland, Fabrica and Dixie brands, the Millennial buyer remains an elusive and daunting challenge. “They are the elephant in the room,” says Coffin. “They can’t reach our price points yet. Some are purchasing luxury items, but they aren’t the core. The Millennial buyer is looming, and we need to evolve and start addressing them.”
Three years ago, rug producer Kaleen decided to tackle the Millennial buyer—and the changing market—head on. “In 2013, we took a look at the entire product line,” says Blake Dennard, Kaleen’s senior vice president. “We laid it all out in a warehouse and looked at the whole thing together. What we saw was troubling. Ninety percent of our designs were traditional; 90% were red, black, beige and khaki tones. All we had was the same rug that customers had been seeing for years. So we made the decision then and there to go after, one, trying to get into a $299 price point with a quality rug and, two, completely change the direction of the design side of our business. Traditional designs now account for 20% of our SKUs and transitional to soft contemporary is 80%. We’ve done the same in our indoor-outdoor business.”
Has it worked? “We are ten times the size that we were three years ago,” Dennard reports. “That is the culmination of many different things, but it’s mostly design-driven.”
And it isn’t just the Millennial consumer that Kaleen is courting. It’s also the Millennial purchasing agent. Dennard continues, “We also changed all of our showrooms. We made them all bright with clean lines, white leather and stainless steel, a bar in each one. Some of the e-commerce buyers today are 25 years old, and they represent $20 million to $40 million of business.”
In catering to the custom-oriented mindset of consumers today, Dixie has taken its Masland Infinity program—which is fully customizable, allowing customers to choose from 150 different patterns or even submit one of their own—and launched a subset called Infinity IQ, which has the goal of simplifying its custom program for the consumers. “This is a half custom group of products,” says Coffin. “The design work is done ahead of time. It’s a lower price point. The collection of six products has a predetermined design that is available in four to six color combinations, and the size and shape are still fully customizable.”
AREA RUGS & ECOMMERCE
Manufacturers are in an interesting position regarding area rug sales. In fact, some, Dixie among them, have decided not to sell online—or in Dixie’s case to sell only a miniscule percentage online—and simply support the traditional channels, but others believe that could be a hazardous strategy in coming years if e-commerce area rug sales continue to increase at the rate they are going. At the same time, however, Dixie serves the high end of the market, and high-end rugs are not, typically, the products sold online because it stands to reason that if a customer is to invest in a rug that costs $1,000 or more, they would want to see it in person and touch it first. According to Witt, the bulk of online area rug sales are for products $199 and under.
One thing is certain with online sales increasing: area rug manufacturers must be sure there is an even playing field for both their brick-and-mortar and e-commerce partners, being sure neither undercuts pricing. For the most part, manufacturers do this by establishing minimum advertised price (MAP) structures, but simply having MAP pricing does not ensure that e-tailers—or any retailer for that matter—abide by it.
To enforce MAP, Oriental Weavers partners with a company that tracks the Internet in search of MAP violations on Oriental Weaver rug products. If a violation is found, typically a warning email to the offending party clears up the problem, which is often the result of a mistake, says Witt, adding, “If an e-commerce retailer makes any minute indication that it is an Oriental Weavers product, even if there is an indication in the UPC code, and it’s not priced at MAP standards, that is a violation. That holds everyone accountable to the standard. If someone is using our brand as a draw, it will be out there at a reasonable MAP price. There is no Internet discount.”
Kaleen will allow its retailers to come off MAP pricing for promotions. When this happens, the company makes certain that both brick-and-mortar and e-tailers have the same opportunity—even offering the discount if the retailer purchases a single rug. When clearing overstock, Kaleen utilizes a white label program, meaning that the products are not branded by Kaleen at all. “Retailers can help us move surplus product. Every time we do that, the deals are offered to brick-and-mortar as well.”
At the same time, brick-and-mortar businesses are seen by many as having a disadvantage compared to online businesses because of the significant overhead associated with having a building with standing inventory. While that is still the case to some degree, Witt doesn’t believe that view provides a complete picture. “Unlike in the old days, it takes a lot of money, time and people to remain relevant in the search engines,” Witt notes. “In a lot of cases, tasks like advertising and tracking amount to a substantial daily investment.”
Brandon Culpepper, vice president of specialty sales for Mohawk, which sells rugs under the Mohawk Home, American Rug Craftsmen and Karastan brands, agrees and notes that, while independent flooring retailers often feel like e-tailers have it easy, in some cases they are moving toward brick-and-mortar, “Today, omnichannel is key,” adds Culpepper. “An independent retailer had better sell through e-commerce, or they will struggle. But even the e-commerce folks, like Wayfair, want to have immediacy with the consumer that they don’t have right now. They really struggle with that. They want to have a physical space but don’t.”
Today, Mohawk estimates that 10% to 15% of its rug sales are online. Kaleen started developing its e-commerce business in 2013, and, currently, online sales account for one third of total business.
“Rug sales continue, year over year, to have double-digit growth in the online channel,” says Witt. “Some of that number [online sales] is hard to get to because you have brick-and-mortar retailers who have locations but sell as much or more online. When you put it all together, it is an influential and substantial part of area rug business today. Rugs aren’t heavy. They can be shipped and returned easily. Catalog and Internet is the fastest growing distribution channel for us.”
At the same time, Witt acknowledges that for many independent flooring retailers, online area rug sales simply aren’t in the cards, “For a lot of one- and two-store independents, it’s a virtual impossibility to sell effectively online. But they can make sure they are doing the right things with a localized search and make their presence know as a rug source. We have tried to help them do that. For some, rug sales online have been lower than they expected.”
Kaleen’s Dennard agrees that ecommerce presents a steep barrier to entry for small retailers, adding, “What you put into physical inventory and into a building, that kind of investment has to happen on the ecommerce side as well.”
WHAT SETS THE BEST APART FROM THE REST
Manufacturers have a unique opportunity to observe retailers, seeing the differences in how they run their area rug departments, and that gives them insight into what works. “The [retailers] who are successful in rugs stay true to the business,” says Dennard. “The thought process of ‘I can have one 5’x8’ rack and be successful’ is not true. If you had one hardwood rack, you would not be successful in hardwood. To put in one rack is a futile battle. You have to be true to the business or out.”
Along with having a strong assortment, independent retailers must be sure that their sales associates are as adept at selling rugs as they are at selling the other flooring categories. “The biggest key to success,” says Witt, “is making sure that you have a rug champion in the store—someone who is comfortable talking about style, pattern and color. This is most often a woman. A big part of retail training for the traditional flooring categories is based on fiber, longevity and stain resistance—more utility than fashion. If a customer walks into a store with a pillow that they want to match up, most sales associates aren’t comfortable doing that or can’t convincingly provide validation.”
One of the worst things a retailer can do, in Culpepper’s opinion, is to display out-of-date inventory. “The retailers I visit who are doing well have an up-to-date product assortment with the right colors. Area rugs are fashion for the floor. It’s just as hard to sell out-of-style rugs as it is to sell out-of-style clothes. You couldn’t give away clothes from four to five years ago—it’s better to donate them and get the tax write off.” Culpepper also believes that the basics tenets of merchandising must be followed. “Merchandising comes back to the fundamentals: on-trend rugs displayed on rug racks in a clean area where the rugs are tagged properly—including prices and sizes available—and proper lighting,” he says. “Dark showrooms mean that rugs don’t sell, or they come back. Retailers who take the time to light rugs the right way sell more and have fewer returns.”
Of course, area rug manufacturers are always looking for opportunities to help retailers increase area rug sales. Kaleen offers retailers the opportunity to outsource management of its rug program to Kaleen. “We will hang our best 60 rugs, do inventory, keep up with it,” says Dennard. “Many independent retailers don’t have a dedicated area rug department manager. If retailers will let us hang what we know turns and let my guys manage the hang tags, they don’t have to reinvent the wheel.”
One of the reasons that furniture retailers do so well with area rugs is because they take the guess work out of the purchase—displaying vignettes with area rugs, furniture, lighting and even art that both help the uncertain consumer picture the rug in a residential setting and assist with the coordination aspect of home décor. In the battle to earn area rug sales, independent flooring retailers have to merchandise in a way that levels the playing field.
“Having a bunch of rugs up doesn’t mean you’re in the area rug business,” says Culpepper. “You have to invest in it, liquidate stale product, keep after it until you know what to buy, deal with vendors who can support you. Too many times, retailers are dealing with importers who can’t service them well. If you have to wait a month for a rug, it just doesn’t work.”
Most of the manufacturers we contacted grapple with rug prices. “There’s a ton of price pressure,” says Coffin. “The Internet changed the rug industry. It sped the market up and brought price points down. There have been a handful of rug-only or accessory companies that have grown on the back of the Internet and have been very successful in the disposable rug category. This has put a ton of price pressure on the higher end. The core of our business is still doing better quality, better-end products, and we probably won’t deviate from that.”
Dennard reports that the price pressure Kaleen felt early in 2016, following an across-the-board price increase, eased a bit as the year progressed, “Since then, we have tried to create products to fill the price points we left, which eliminated the problem.”
Witt believes that, while price pressure was intense in 2016, the coming year will bring some welcome relief. “Price point-wise, two things have happened. During and after the recession, it was a race to the bottom to get any sales. People weren’t spending much disposable income, and there was a push for lower price points. The thing is, even when there is less traffic in the stores, it takes just as much investment to generate sales. Over the last 18 months, I have seen a commitment to higher price points, and many of our customers are asking us to make sure we have products in the $300 to $500 range going into 2017.”
WHAT’S TO COME
Culpepper summarizes the area rug business over the last year, “The rug business in 2016 was strange. We had a good quarter, then a bad one, then another good one. All in all, we expect to see 1.5% growth for Mohawk Home when it all shakes out. That’s not a disaster, but it’s also not a celebration. It was a real workman year. We tried to grind out all the business we could. Karastan will hit its growth goal. In Mohawk Home, the challenge was tougher, but we still hope to hit our goals—they are within sight. It feels like 2017 will be much better. Rug sales are tied to consumer spending, and the election bred uncertainty in consumers. Historically, when an election concludes, sales pick up, and we believe that will springboard into 2017.”
Coffin agrees that 2016 was a challenging year and also doesn’t think the trend will continue, “In general, I think 2016 was flat to up for the area rug market. Over the last couple of years, unit-wise, we have still grown. As hard surface grows, rugs will too. This was a difficult year, but I don’t think that is a trend. We are optimistic about 2017.” Though Dixie has a substantial area rug business, Coffin emphasizes that, at its heart, Dixie is a broadloom company.
HADINGER FLOORING: COMMITTED TO AREA RUGS
Naples, Florida-based flooring retailer Hadinger Flooring entered the area rug business 17 years ago. At the time, Tom Hadinger was running a successful retail flooring business, and his wife Judy, a seasoned attorney, was ready for a career-change. Tom suggested that Judy open an area rug department, and she enthusiastically jumped in.
In 1999, Hadinger had what Judy characterizes as “one rack of terrible rugs.” Today, that business has grown to include 6,000 on-trend area rugs in a 10,000 square foot space—soon growing to 12,000 square feet—that is attached to but separate from Hadinger’s main showroom.
Hadinger’s inventory is what Judy calls “top to bottom,” from hand-knotted to tufted to power-loomed products, and Judy believes that having such a complete inventory is one thing that sets her apart from her competitors, including the big boxes. In addition, the entrepreneur notes that staying atop trends is crucial and believes that, as the buyer for Hadinger’s area rug inventory, it is very important for her to spend time on the showroom floor, listening to customers and gaining an understanding of their needs and desires. In addition, several of Judy’s staff members have been with her since the beginning and play an important advisory role in buying.
Judy considers area rugs “fashion for the floor” and treats them as such. To stay fresh, Hadinger rotates its inventory frequently, and Judy pays close attention to which rugs are gleaning interest and which aren’t. Dead-weight inventory is donated to local schools, providing a place for students to sit on the floor within their classrooms; Hadinger donates 100 rugs to this cause annually.
Just as important as selection, however, is customer service. To start, Hadinger Flooring has two rug flippers who, literally, flip rugs for customers to view, and a dedicated staff that is both knowledgeable and design-savvy. “You can buy right,” says Judy, “but you have to have people who can sell too. Most customers need guidance. They can bring in a pillow or paint colors, and my sales staff can guide them so that they don’t make a mistake.”
In addition, during the decision-making process, Hadinger will deliver rugs to a customer’s home and set them up as many times as needed in order for the customer to feel certain about their purchase. And it offers a 20% discount on an area rug to customers who purchase hard surface flooring.
While Hadinger Flooring has a sophisticated website, and an online space dedicated to area rugs, Naples remains a newspaper community, and Hadinger Flooring advertises in the paper daily. The store’s in-house ad person creates full color inserts, which feature rugs twice weekly. The retailer also advertises on television. “Tom believes heavily in advertising,” explains Judy, “and especially the fact that we are the largest area rug dealer in the area. Our store is a destination. Customers come here to buy, not to browse.”
As for competing with online area rug retailers, Judy believes that Hadinger’s prices are competitive because of MAP pricing standards. She also believes that manufacturers have a vested interest in protecting her business because she orders rugs in quantities of 50 to 100, as opposed to online businesses, which and often one-off and, thereby, much less efficient.
When asked whether she feels “protected” by manufacturers, Judy responds, “Some protect me better than others. There are one or two rug companies that refuse to sell online, and I support them. I buy all I can from them.”
In addition to the many differentiators listed above, Judy believes that Hadinger’s success in area rugs comes down to commitment. “The area rug business is a full-time job,” she says. “I keep accurate daily inventories of ins and outs. I’m careful and specific.” That is, as they say, a nail hit right on the head: most independent flooring retailers see area rugs sales as an easy add-on business rather than a second venture deserving of significant time and analysis as well as its own dedicated staff. And in a fashion business, that time and attention is crucial to success.
By all accounts, one of the fastest growing categories within area rugs is indoor-outdoor rugs, which manufacturers report are highly valued for their ease of cleaning. “Indoor-outdoor is huge,” says Witt. “It started taking off seven years ago. Outdoor living is just getting bigger. It’s the best performing category among retailers. There is a ton of demand, and these rugs have great longevity. But because people refresh their outdoor décor frequently, we see a lot of repeat business in the indoor-outdoor category.”
Kaleen reports that of its 6,000 SKUS, nearly 2,000 are now in indoor-outdoor rugs. “The indoor-outdoor rugs today don’t look like the old indoor-outdoor category. About 40% of indoor-outdoor rugs are going indoors because they are so easy to clean. Kid spills Kool-Aid? You take it outside and hose it off. It’s a big category for us, and we continue to grow in it at all price points, from $129 to $399.” Though the bulk of indoor-outdoor rugs are polypropylene, Kaleen has also developed an indoor-outdoor rug using PET from recycled bottles.
Copyright 2016 Floor Focus