Royalty Mills closure, concrete in the commercial market: Strategic Exchange - July 2017

By Kemp Harr

The story of the early days of Royalty Mills is one that any industry should be proud to tell. It starts with the tale of a consummate salesperson named Mike Derderian, who was born in Detroit, Michigan and at the age of 12 did so well selling the Saturday Evening Post throughout his home state that he won achievement awards. After serving time in the Navy, Mike moved to California and worked as a retail clerk selling shoes for an independent chain called Zinkie Shoe Store. While still in his twenties, he worked his way up to vice president of the 57-store chain.

Unhappy with his compensation and struggling with a young family of three daughters, Mike left his shoe sales career and took a straight commission sales job with Dictaphone, and soon he was named salesman of the year-for four straight years. Mike had honed his selling skills and had become a master at building relationships with customers. Dictaphone wanted to promote him to a salaried management position, but he’d already learned at the shoe store chain that an elevated job title does not always equate to more income. 

In 1959, he took a job selling carpet for a small Georgia-based distributor, and in 1963, he formed MD Sales Agency, with three salesmen and four office employees. Growing frustrated with the lack of styling coming out of the carpet mills in Georgia, in 1969 Mike bought a tufting machine and opened his own West Coast carpet mill. In 1973, while taking an afternoon drive, Mike discovered the budding town of Irvine and moved his booming business into a 75,000 square foot building in the new Irvine Industrial Complex. Apparently, he structured the deal where he would end up owning the real estate, and the city named the access road in front of his building Derian Avenue.

Royalty continued to grow its revenue and in December 1998 made the decision to buy Camelot. According to Floor Focus archives, Camelot’s $40 million in sales brought the combined company’s total revenue up to around $150 million at the time of the acquisition. Royalty continued to grow for the next six years and peaked in revenue at around $245 million right before the 2006 recession hit. Around that time, Mike came close to selling the company to Wedbush Capital, an L.A.-based private equity firm, but walked away from the deal when Webush lowered its offer. 

One of Mike’s three daughters, Andrea Greenleaf, who in the early stages of her career taught gemology at the Gemological Institute, heeded her father’s request to join the family business in 1992, and she was running the firm’s commercial PacifiCrest brand when her father passed away unexpectedly in April 2013. He was 86 at the time.

Andrea told me in a leadership interview Floor Focus published after her father died that she had left the gemology business, which she was passionate about, out of love for her father.
Here at Floor Focus, we were encouraged when Andrea took over the entire business as chairman soon after her father’s death. She immediately made some capital investments in the buildings and equipment as well as worked hard to build a sales team. She told us at the time, “I think differently than the good old boys. I am going to cause a stir for the complacent, we’ve-always-done-it-this-way people in the industry.” Andrea felt strongly that the industry was partly to blame for the rapid shift to hard surface, saying, “If a customer buys a carpet that looks like hell eight months later, are they going to buy carpet again? No.” Andrea also felt that the specialty retail channel was the backbone of the business from a channel perspective.

THE JUNE 14 ANNOUNCEMENT
So, what led up to the abrupt Wednesday morning, June 14, 2017 announcement that Royalty Carpet Mills was out of business? According to our sources, the company’s revenue in 2016 was around $82 million, and the business had been running in the black, but margins were thin, not so much because pricing was discounted but because making carpet in California is expensive. Royalty and its sub-brands had great-looking products and happy customers, but when Andrea’s husband died last fall, some of those quality of life questions might have started to enter her mind. 

In 2016, the company hired the Laughlin Group, a management consulting group, to analyze the viability of the business. The end report was positive regarding the outlook for success moving forward, but the process was distracting, and the expenses from the analysis took a bite out of the company’s profits for the year.

In the last six months, at least two competing mills signed non-disclosure agreements and attempted to negotiate a buy-out. For one of the suitors, the Royalty business was a perfect complement to its existing business because today they are mostly solution dyed and Royalty was mostly piece dyed. But as we know now, a deal was never reached. 

One can only guess, but we’ve been told that there were 16 heirs to the real estate, and they were getting restless. One source told us that the Redhill facility in Irvine is already under contract with a neighboring company wanting to expand. We’ve been told that Royalty’s West Coast real estate, both in Irvine and further north in Porterville, is worth about $85 million. The last time I met with Andrea, she lamented that California loved their movie stars but saw no value in manufacturing.

Okay, so the carpet industry just lost a 48 year-old mill with a rich heritage, distinctive products and a solid reputation, producing about 1% of what’s sold in the U.S. on an annual basis. And we also lost the only carpet mill that-for the last four years-has been led by a female CEO. 

The next question is who among the remaining producers stands to gain the most from Royalty’s closing. If proximity to the end-user is a factor, then Dixie’s Fabrica brand and Shaw’s Tuftex are obvious choices for the residential business, and Bentley Mills and Dixie’s Atlas mill would be in line for the commercial business. These four options are a good fit because they focus on the upper end of the market, are fashion forward, and also still see value in selling branded nylon 6,6 carpet. 

I spoke with one of Royalty’s larger homebuilder customers, who is very upset with the prospect of having to replace the mill. He loved its proximity, its styling and its pricing. He wasn’t sure where he would go next for his carpet needs, but one thing he knew for sure was that it wasn’t going to be one of the big guys. When asked why, he said, “I love being able to offer something different to my customers, and I’m also a big believer in the Stainmaster performance story. We build distinctive homes, and our customers appreciate quality.”

For the independent retailers that are also Stainmaster Flooring Centers, Invista was quick to publish a crossover style listing to help its dealers find styles that were similar to Royalty. Invista is also offering a $200 rebate for dealers that pick up a replacement Stainmaster display from a mill that is still in business. Invista also mentioned that Chad McIntyre, the new owner of the Gulistan brand, was launching ten new Stainmaster styles in August. 

Alas, we’ve come to the end of the Royalty story. The demand for carpet continues to shrink, and the bigger mills have economies of scale that some would say make it hard for the little guy to compete. Let’s not forget that Andrea Greenleaf has shown us before that she loves her family, and this decision had to be tough. 

CONCRETE TAKES A BITE OUT OF COMMERCIAL FLOORING REVENUE 
I had an “aha” moment last month as I was sitting at the IIDA Cool event during NeoCon and pictures of the six winning projects were being shown on the screen. Over the course of the previous 60 days, we had analyzed the overall U.S. flooring market for our May issue and then had zoomed into review the commercial sector for our June issue. All of our spreadsheets are linked, and for a while now we’ve been trying to rationalize why the wholesale commercial revenue had fallen well below the normal one third of the total flooring market which has historically been the balance for many years.

Let me explain. In years past, when we added up the wholesale value of all the flooring products sold into the commercial market, that number was about a third of the total industry revenue for any given year. For the last couple of years the commercial percentage has been dropping and for 2016 the balance was 28%. Naturally, there are many variables that could have thrown off the balance, and I considered the fact that LVT has grown, and it’s hard to calculate which market LVT products ultimately end up in. In other words, while carpet construction is clearly different when you compare what’s installed in a commercial market versus residential styling, with LVT there is more of a grey area. Plus, the Carpet & Rug Institute does a great job of tracking the volume as two distinct sectors. I had also considered the polished concrete trend, which is evident even within the Vision Design Awards entries that we receive. 

So that Sunday night at the Cool Event, out of the six projects that won awards, four of them featured flooring that was predominantly concrete. Earlier that same day, a commercial contractor friend of mine had asked me if we were tracking the area of flooring in the commercial market that was specified as polished concrete. He told me that in his area of service, the use of concrete floors as a wear surface has been on the rise. 

As our revenue models in our annual analysis don’t account for flooring that gets no covering, we believe this is likely the answer, and I can assure you that we plan to add a few questions related to this in the A&D survey that we conduct next month.

THANK YOU FOR PARTICIPATING IN OUR RESEARCH
This issue provides our readers with feedback from our annual retail survey, which we started 21 years ago. For those of you who took the time to thoughtfully answer the questions, thank you so much. We make every effort to make sure this research is conducted on a level playing field and that the results are a true and honest reflection of the opinions of the owners of the roughly 9,000 independent retailers in the U.S. 

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

Copyright 2017 Floor Focus