Flooring Share Shift, Global GDP, Amazon vs Home Depot
By Kemp Harr
I mentioned last month that economist Brian Beaulieu recently presented that the U.S. share of the global gross domestic product (GDP) actually grew in 2012 to 21.9%. The next closest country is China at 11.5% and after that, every other nation’s share of the pie is in single digits. Beaulieu added that now that the U.S. has reached a level of energy independence, our economy and our relative position in the world should continue to dominate.
This is good news for our children. Naturally, much of this is due to our abundant natural resources and to our free market economy, but I also think our collective passion for success is a factor. This passion has an impact on our level of productivity.
On a recent trip to Italy, as I was being driven down the beautiful countryside on my way to a factory tour, my guide told me that in Europe, people work to live and in the U.S. people live to work. I’ve kept this notion in the back of my mind and tried to sort out how a person’s location, group of peers, environment, or the county in which they live could change their level of passion for making a difference and being successful. Part of the challenge with any phenomenon is trying to quantify the essence or secret so that we don’t let it slip away and therefore lose our competitive edge.
So why have the people of northern Europe grown into this level of complacency? Why is just earning enough money to pay the rent and the grocery bills satisfying enough? What has happened to the drive within many of the Europeans where they find happiness in just getting by? Is it possible that this European mentality comes from a frustration that has evolved over time because they’ve seen that folks who work harder don’t get any further? Is this what happens when tax rates go through the roof and essential services like healthcare and transportation are equally provided to all (socialized) by the government?
EARLY PROJECTIONS ON 2013 SHARE SHIFT
Santo Torcivia, who provides Floor Focus with market intelligence, published his December quarterly Market Monitor report and I’d like to share with you his early perspective on floorcovering sales for 2013. I say “early” because we will provide a more thorough and vetted review of the year in our May annual report issue. But at this stage, Santo is projecting that the floorcovering market overall grew 7% (dollars) in 2013. Ceramic tile and hardwood took share last year, while carpet, resilient and laminate lost share.
The ceramic (and porcelain) category was the fastest growing category—growing twice as fast as the market at 14%. Much of that growth can be attributed to the continued innovations in digital printing, thin tile production, and larger formats (which reduces the need for grout lines). Interestingly, per capita consumption of ceramic tile in the U.S. is still far below that of Europe and South America. In fact, Donato Grosser, president of the World Exposition of Ceramic Tile, recently told me that the U.S.’s per capita consumption is one third the level of Germany, Italy, and France and one fifth the level of China and Brazil.
Hardwood flooring is the next strongest category, which grew 10.4% last year. Hardwood got a strong push from housing starts, which saw an estimated 17% increase in 2013; 40% to 50% of hardwood goes into new housing.
Resilient saw an increase of just under 7%, which means that it’s almost keeping pace with the overall market. When you look at the subsets within resilient, most of the category’s growth came from LVT, which accounts for about 40% of the category. The use of sheet vinyl is also down a bit, but VCT has seen a serious decline in 2013. Carpet, which only grew 4%, lost share as well. Modular tile continues to outpace broadloom sales but overall carpet is losing share to hardwood and ceramic tile. Carpet, however, does remain the dominant surface category versus all other surfaces. Laminate didn’t grow at all so it is definitely lost share in 2013.
BIFURCATED MARKET DYNAMICS
As the recession recedes in the rear-view mirror, there continues to be a void in the middle price points. Tom Lape, Mohawk’s president of residential business, calls it a “bifurcated market,” with larger volumes of product being sold at the low and high end of the pricing spectrum.
With residential carpet, for example, which is roughly a $4.5 billion market at wholesale value, the largest sector used to be in the $7 to $12 price range (wholesale price per yard) with $1.8 billion worth of sales, $1.3 billion being sold under $7, and $1.4 billion being sold at $13 and above. Today, that middle price point is off by as much as 50% and the sales on either end have become the sweeter spots in the market. Certainly PET, which many estimate to now be as much as 40% of the market, has contributed to the volume on the low end, and the low-denier ultra soft carpets, and to some degree wool carpets, have contributed to the volume on the upper end. Dixie Group, for example, which serves the high-end of the market, has enjoyed tremendous growth this year.
I’m also being told that Frank Blake, Home Depot’s CEO, told his core vendor group at a recent meeting that Home Depot is seeing this same trend across all of its product lines, so this is not just a carpet dynamic.
It will be interesting to see if the middle of the market continues to be soft in 2014. In the carpet business model, the multi-family and builder segments contribute to the volume on the low-end and the affluent residential replacement shopper is probably the largest contributor on the high-end. Another contributor to the shift on the upper end of the scale might be the continued shift toward hard surface flooring, which tends to be more expensive. Consumers who are comparing pricing across all flooring categories are seeing LVT at $5 a foot and hardwood flooring at $7 a foot, which goes to $45 and $63 when you convert to square yardage pricing—which makes $30 carpet sound like a bargain.
AMAZON HAS HOME DEPOT CONCERNED
Some of you may have seen the 60 Minutes episode on CBS that featured Amazon’s CEO Jeff Bezos as he artfully unveiled his drone delivery system and touted a future world where consumers could buy goods over the Internet and have the package delivered to their home in 30 minutes using flying drones. While that technology may be decades away, there is no denying that, even today, Amazon has changed the way consumers shop. In fact, people close to Home Depot tell me that the home center giant is now more worried about Amazon than it is about Lowe’s.
Apparently, plumbers and other specialty tradesman are starting to tell their customers to order the parts they need on Amazon and they will drop in and install them. This keeps them from having to tie up their assets in a warehouse or service van full of parts and it allows the consumer to pay less for the faucets, toilets or other specialty plumbing parts. While Home Depot has invested heavily in its online presence, thanks to the overhead it has in brick-and-mortar stores, it can’t compete with the razor-thin margins that Amazon is able to live with.
So will there be a day when consumers buy their floorcovering online and just have an installer drop in and install it once the product’s been acclimated? If the home centers are running scared, should the specialty floorcovering retailers worry as well? All of this is definitely worth paying attention to. Starting January 1 in Tennessee, Amazon has to charge its customers sales tax. It will be interesting to see if Amazon will be as popular once that nearly 10% price advantage has been taken out of the equation.
NATIONAL ACCOUNTS GAIN MORE CLOUT
There’s another interesting dynamic developing in the retail floorcovering market that deserves mention. In the last five years, as the total number of floorcovering dealers has declined, a select group of multiple store operators has emerged that now buys a substantial quantity of product. As a result, the suppliers to the industry have fewer customers and yet there are a few dozen that have significant purchasing power.
If you take the home centers, which now command about a third of the retail market, out of the equation, the next biggest group is the category killers like Lumber Liquidators and Empire. Next in line are the national chains like Floor and Décor and The Tile shop. But just below that are the top 10 Carpet One owners and the top 20 NFA members.
As a result, there is greater exposure for share shift to the core suppliers to the industry if they damage their relationship with one of these volume buyers. As a result, product performance, customer service and claims resolution take on new meaning when fewer buyers command a larger share to the market.
If you have any comments about this month’s column, you can email me at firstname.lastname@example.org.
Copyright 2014 Floor Focus