Rug Report - December 2010

By Jessica Chevalier

Many assume that area rug retailers have fared well in the recession, since their products offer the possibility of a “soft remodel,” a relatively inexpensive upgrade without the cost or hassle of a contractor. Contrary to this belief, however, area rug retailers have experienced turmoil similar to that of installed flooring retailers. The reason? Regardless of how beautiful or relatively affordable they may be, area rugs are accessory items. And while a consumer might spring for a few new throw pillows to invigorate a tired décor, many still do not feel comfortable investing in an accessory as substantial as an area rug.

At present, however, retailers are happy to report that the rug business is looking brighter, as many buyers have moved from price-only shopping to smart shopping. Ingrid Harazim, co-owner of five World of Rugs stores in Arizona, says, “Customers are now weighing their options, spending more money to get a better quality rug.” In the heart of the recession, rug retailers estimated that their average ticket dropped between 25% and 50%. However, that average is now edging upward as customers are seeking true value—a good rug that will offer a long lifespan in both style and quality. To find that perfect rug, customers are shopping around and taking a longer time to make up their minds. In addition, they are doing research online even before they hit the pavement.

SALES AND STRATEGIES
As it was for some other flooring categories, 2010 provided a bit of relief for area rug retailers, though not as much as was expected. Mike and Miriam Thompson, owners of The Rug Rack & Home Décor in Chattanooga, Tennessee, report that 2008 brought a 50% reduction in store traffic and a 25% reduction in total per invoice sales, and this slowdown continued through 2009 and the first half of 2010. July through October 2010 showed an uptick for the company; however, the Thompsons aren’t yet ready to call it a trend. Overall, the company reports that revenues were off 15% to 20% in 2008, and 2009 and 2010 revenues fell another combined 30%.

Karl Martin, owner of two Ramey Carpet One Floor & Home stores in Florida, notes that while business is off 30% from what it was pre-recession, when his two stores sold an area rug a day, revenue-wise 2010 is ahead of both last year and 2008. Martin attributes this relative success to a number of factors, including his willingness to take an educated risk, his strength in merchandising and the fact that he enjoys a challenge. He says, “When things are good and money is coming in, a monkey can run a business. When business is tough, I enjoy running my business more than ever. It makes me think.” Martin is proud that he has not had to lay off any of his 20 employees in the downturn; however, the employees did take a cut in compensation.

Harazim’s World of Rugs saw its average sale drop by 50% in the recession. The company has experienced slow but steady growth since its lowest point during the summer of 2009.

Interestingly, both the Thompsons and Martin opened new business ventures in 2010. The Thompsons added a second location called The Rug Rack Outlet in another part of town. The outlet store will cater to “price only shoppers” and is dedicated to offering great style at a lower price point. The outlet store’s inventory will consist mostly of mill overstocks and dropped styles.

Martin purchased a previously bankrupt CCA Global ProSource franchise—a membership-only wholesale flooring store—and relocated it to a 15,000 square foot facility. His ProSource is the first to carry area rugs and currently has 300 in inventory.

Retail price points have shifted greatly in the recession. The original Rug Rack location now carries 5’x7’ rugs that start at $189, and the Outlet offers the same size rug starting at $89. Pre-recession, The Rug Rack’s 5’x7’ area rugs started at $249; at the high end, the company sells rugs for up to $5,000.

At Ramey Rug, the average retail price has shifted from between $899 and $1,199 on a 5’x7’ to between $399 and $699. The retailer now also offers a 5’x7’ for $99.

World of Rugs’ Harazim notes that at its lowest point in summer 2009, a 5’x7’ had a best selling price point of $299. Previous to the recession, the best selling price point on that size was $999. Now, customers are comfortable purchasing in the $499 to $699 range.

Besides cutting prices, the retailers we spoke to have employed a number of other strategies to weather the recession. Martin says that he is “advertising better” in mediums that are particularly effective for his clientele, like newspaper and television. He also notes that he’s buying smarter, seeking good deals and discounted products, and passing these savings along to the customer.

Martin says that, in the recession, he has seen a number of floorcovering stores exit the area rug business and reclaim the square footage for other items; however, since area rugs are a complement to tile and hardwood offerings, he believes that floorcovering retailers who do not sell rugs are missing the boat. Most consumers will purchase a rug to accent their hard surface flooring. Why not, he asks, act as a one stop shop and sell primary and secondary items in the same location?

World of Rugs’ Harazim says that it is important to offer the recession customer a variety of quality products at a good value, and she notes that it is vital to communicate this value to the customer. Additionally, Harazim is aggressive in moving old and sluggish-selling styles and collections out of the store—by selling them at clearance rates—to keep the store’s offerings fresh. World of Rugs also notes that good customer service offers added value, which is important to the recession customer. The company utilizes Facebook and Twitter profiles so that “the customer can see and better understand who we are even before they arrive at our store.”

For the Thompsons, The Rug Rack Outlet will provide them with greater presence in the community while also allowing them the opportunity to cross-sell between stores. If a price conscious customer enters the original Rug Rack and can’t find an option affordable to their budget, the Thompsons will be able to direct the customer to the outlet store rather than lose them to a big box or discounter location. The Thompsons have brought in additional products like chairs and throw pillows to diversify their offerings. Miriam notes that, while a customer may be slower to invest in an area rug these days, they may come in to browse and leave with a set of pillows.

STYLE AND CONSTRUCTION
First and foremost, Martin of Ramey Carpet thinks of the area rug business as a fashion business—and he considers area rugs to be pieces of art. While price is a motivating factor, color and style are more significant to the consumer, he believes. Currently, in Martin’s Florida market, contemporary styles are highest in demand, and dramatic dark colors are in. Additionally, for Ramey’s customers, many of whom are of retirement age, American made products are desirable. For this reason, Martin doesn’t seek imported rugs to sell in his store.

Martin notes that when he purchases rugs for his Ramey and ProSource stores, he does not buy only for his own taste. Instead, he tries to find something to suit every décor. There will always be what Martin calls “ugly duckling” rugs that do not fit a particular consumer’s style, but, in merchandizing, you need those ugly ducklings to make the “princes” stand out. Martin’s three stores have a shared inventory base online so that employees can offer a rug from one of the other locations if the desired size or style is unavailable.

Harazim confirms Martin’s assertion that customers are seeking American made products and notes that they are willing to pay more for this attribute. She has also noticed that recession customers are hesitant to special order a product and generally want something that is in stock—perhaps a sign that consumers prefer the option that presents the least amount of risk in purchasing.

In the World of Rugs market, transitional and contemporary are the styles in demand. Most of all, Harazim notes, customers are looking for rugs that are both dramatic and fresh. If consumers are going to spend money, they want to earn fashion credit for their dollars—utilizing something that both makes an impact and is edgy. She also says that while higher end traditional and Oriental rugs have been challenging to sell, interior designers are expressing an interest in them again.

Color-wise, blue is in and green is out with World of Rug customers. White is taking black’s place as a fresh and modern color. And, in terms of design, customers are seeking anything bold with a borderless pattern, textured solid color options, and easy-to-live-with pattern, like geometrics and organic botanicals.

The Rug Rack notes a trend away from traditional styles with a lot of small patterns—even among its older customers. Instead, buyers are seeking transitional looks with more open fields and a moderate sized design. In The Rug Rack market, there is a movement toward the soft washed colors and patterns of rugs from Pakistan and away from structured and defined patterns. Soumak rugs, which offer a design on each side, are particularly popular with The Rug Rack buyers, likely since they offer a greater perceived value for the customer—two styles for the price of one.

Of late, The Rug Rack’s best selling styles have been textural, especially synthetic rugs that mimic natural fibers like seagrass. Customers choose these synthetic versions because they are softer and more cleanable than the natural versions. For the Thompsons, these types of rugs offer a good opportunity for an upsell, as they can be accented with leather or tapestry bindings. Often, these bindings double the total cost of the rug.

The Rug Rack estimates that 80% of its sales are of imported rugs. Of that 80%, hand-knotted and machine made rugs each account for 20% of business, and tufted rugs account for 40%. The 20% of rugs that are made in the U.S. are split between custom cut rugs from broadloom and Wilton machine made rugs.

ONLINE SALES
Because area rugs require no installation, online shopping would seem to be a significant threat for the brick-and-mortar retailer. After all, an online retailer is likely to have less overhead and fewer employees than a store location, resulting in fewer expenses. While many retailers believe that online shopping for area rugs is inferior to in-person shopping, as we all well know Internet shopping is here to stay. So are brick-and-mortar area rug retailers in a sort of “if you can’t beat them, join them” position?

The Rug Rack does not believe so. Though the store has a website, it does not sell its rugs online and does not intend to do so in the future. The Thompsons believe that “colors have to be seen in person and textures have to be touched.” In addition, an in-person sale allows Rug Rack staff the opportunity to offer their design expertise, helping the customer coordinate colors and patterns.

If asked, however, The Rug Rack, World of Rugs and Ramey Rugs are all willing to match or beat online rug prices if it is possible for them to do so. The trick is getting customers to open up and discuss what they’ve found online. Often times, those who are comparison shopping will slink into and out of the store without speaking to the retailer. In that case, the retailer never has the opportunity to match the price or explain the benefits that buying from a brick-and-mortar location can provide, specifically in regard to service.

Though buyers are looking for bargains, Martin notes, “If you don’t sell service, you won’t survive.” And service is a definite leg up for these retail locations. Martin’s customers can return any product within 30 days if they are unsatisfied. And all three retailers are more than happy to allow clients to take rugs into their homes to try them out.

The retailers also note that many manufacturers enforce their pricing with both online and store retailers, so an online search is unlikely to yield cheaper results anyway. Martin notes that Karastan, for instance, does not even allow its rugs to be sold online, though retailers are permitted to show the company’s area rugs online at their published price.

Though the recession has not treated area rug retailers kindly, there is no doubt that many will emerge from the trial stronger, whether because of increased product diversification, smarter buying, greater attention to customer service or a combination of all of these. However, if predictions of a fundamentally changed consumer, concerned with quality and cost first and foremost, are correct, the area rug retailers may experience a windfall as consumers seek affordable yet dynamic “soft remodel” options in 2011.

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