Annual Report 2017: Last year saw big changes in the manufacturing landscape - May 2018
Introduction by Darius Helm, Statistics by Market Insights LLC
All the drama and intrigue in our nation’s capital did not deter the economy or the flooring industry last year. The economy hummed along in 2017, GDP grew by 2.3%, the stock market posted big gains and unemployment fell for much of the year, leveling out at 4.1% in the fall. The U.S. flooring industry grew by 3.3%, according to Market Insights. Residential business outpaced commercial, carpet ceded more marketshare to hard surface flooring, and increases in raw material and operating costs impacted margins.
THE 2017 HOUSING MARKET
In many ways, 2017 was the strongest year for the housing market since 2006. Total existing home sales-which account for 90% of total home sales-were up 1.1% from 2016 to a 5.51 million unit sales pace, compared to 5.45 million last year, according to the National Association of Realtors (NAR). The activity levels over the past few years have impacted total housing inventory available for re-sale, which fell to 1.48 existing homes at the close of 2017. Unsold inventory fell to a 3.2 month supply, down from 3.6 months at the end of 2016-and the lowest since NAR began tracking it nearly 20 years ago.
According to Lawrence Yun, NAR’s chief economist, “The lack of supply over the last year has been eye-opening and this is why, even with strong job creation pushing wages higher, home price gains-at 5.8% nationally in 2017-doubled the pace of income growth and were even swifter in several markets.”
Yun warns that, while rising wages and the expanding economy should generate an increase in sales to first-time buyers, “if inventory conditions fail to improve, higher mortgage rates and prices will further eat into affordability and prevent many renters from becoming homeowners.”
Census Bureau data indicates that the new home sales grew 8.3% in 2017, climbing from 561,000 to 608,000, the highest rate since 2007. Also, permits and housing starts hit their highest levels since 2007. Toward the end of the year, permits were above 1.3 million for three consecutive months, which bodes well for those in the builder business this spring and summer.
The bitterly cold December 2017 and January 2018 across much of the country impacted the builder business, particularly in the Southeast, which doesn’t have the infrastructure for snow and arctic winds. It’s likely that the next several months will see higher than normal levels of activity, though labor shortages will make conditions even more challenging.
In terms of where the market currently stands, sales of single-family homes in March 2018 climbed to a seasonally adjusted annual rate of 694,000, according to a joint report from HUD and the Census Bureau, which is 4% above revised February numbers and 8.8% above March 2017. And the seasonally adjusted estimate for new houses for sale stood at 301,000 at the end of March, representing a 5.2-month supply.
Total existing home sales rose 1.1% in March to a seasonally adjusted rate of 5.60 million units, though sales were down 1.2% from March 2017. And housing starts were up in March to a seasonally adjusted annual rate of 1.32 million, led by 16% growth in apartment buildings.
In many respects, last year turned out to be one of the most dramatic in the flooring industry in recent memory. It was a year dominated by a handful of very significant news stories. Two storied carpet mills with hundreds of millions of dollars in sales closed their doors last summer. The larger of the two, Dalton, Georgia-based Beaulieu America, had been languishing in the last few years, particularly after the emergence and rapid rise of Engineered Floors, steadily losing the battle against the wave of low-cost PET carpet running through larger, more efficient machinery.
Royalty Carpet Mills could not be more different. It was a West Coast mill, and it targeted the higher end of the market with a heavy emphasis on Stainmaster nylon. Though there were signs of trouble at the firm relating to margins and costs of production, and there were at least preliminary discussions with some competing mills regarding a buy-out, most people in the industry were surprised when Royalty stopped answering its phones in mid-June 2017.
The vacuum created by the departure of these mills drew a lot of competition. In terms of Royalty, the Dixie Group probably fared best. It quickly moved to fill the gap in product, salespeople got busy strengthening relationships, and within a couple of months, it purchased Royalty’s Portersville, California yarn plant, rehired much of the staff and restarted production. Shaw’s Tuftex (now Anderson Tuftex), also a West Coast mill targeting higher price points, was another significant beneficiary.
In terms of Beaulieu’s share of the market, the firm that benefited the most was by far Engineered Floors, which purchased Beaulieu’s assets in the fall. On the commercial side, it rebranded Beaulieu’s businesses into EF Contract and EF Hospitality.
Engineered Flooring’s continued ascent was another of the big stories last year-because of its purchase of Beaulieu’s assets, which it funneled through its Dream Weaver brand; because of its expansion into the commercial market with its 2016 acquisition of J+J Flooring; and because of the construction of its carpet tile facility, which started churning out product in the first quarter of this year. The firm is also innovating with new fiber and backing systems and diversifying into hard surface flooring, with two rigid LVT programs.
Another top story last year was Shaw’s acquisition of US Floors, which actually took place at the very end of 2016. Prior to the acquisition, Shaw had already established a robust resilient flooring business, both on the residential and commercial sides, relying on sourced products. Then it built its LVT facility in Adairsville, Georgia, starting production about the same time as its purchase of US Floors.
It turns out that US Floors has been a rocket in the last few years, shooting up to an estimated $400 million in sales in 2016, most of that in its signature Coretec line of rigid LVT (WPC) products. The firm, which had been relying on manufacturing partnerships, had coincidentally just purchased equipment for the manufacture of Coretec in the U.S., so the line was assembled in Adairsville, and this year it has started production. The acquisition of US Floors vaulted Shaw to the head of the pack as a domestic resilient supplier, with more marketshare than Armstrong and Mohawk combined.
Over the arc of the last few years, one of the biggest stories has been investment in domestic LVT, and now rigid LVT, production. All of the established players and several new ones opened or expanded facilities. Mohawk has almost completed its domestic SPC facility, which is expected to start making SolidTech by the fall. Mannington will start rigid LVT production next year.
However, what’s just as notable as all of this new and coming domestic capacity is its negligible impact on imports. The market is growing so fast that these new capacities are eclipsed by ballooning consumption and soaring demand. And by and large, domestic LVT producers rely heavily on imports to meet the needs of their markets.
Last year, LVT and rigid LVT helped the resilient category surpass hardwood as the largest domestic hard surface flooring category, despite sub-par activity in sheet goods and VCT, gaining almost 2% in marketshare. The carpet business was about flat in total revenues last year, and marketshare slipped to 36.9% from 38.1% in 2016. Ceramic tile was up over 6% last year, outpacing industry growth, and area rugs were marginally ahead of the market. Laminate business was up 1%, while hardwood flooring experienced a 3.3% decline.
And when it comes to flooring categories, one product often left out of the equation is finished concrete, which has made significant gains in the commercial market in the new millennium, most prominently in the corporate and retail sectors. Best estimates suggest it accounts for as much as 5% of the commercial floor space, generating revenues of hundreds of millions of dollars. And signs point to its continued growth.
Rising costs-in some cases in raw materials, and in all cases in operational expenses-impacted flooring manufacturers last year. There was pressure on some resins and intermediates, impacting fiber costs-mills raised carpet prices three times last year. And crude oil prices crept up as well. But stricter regulations for truckers that limit hours behind the wheel-leading up to regulations that require digital monitoring, enacted in mid-December-are creating major bottlenecks, logistical challenges and increased costs. And it doesn’t help that another ballooning trend, shopping from home, is choking up transportation channels.
Other newsworthy items last year include the move made by Shaw and Mohawk in October 2017 to eliminate discount terms on carpet, which was met with loud resistance from the retailer community. It didn’t take long for the two mega carpet mills to change tack and go with a price increase instead.
The hurricanes that soaked Texas, hammered Florida and devastated Puerto Rico are noteworthy in terms of flooring damage. Hundreds of thousands of homes and businesses were badly damaged, mostly from flooding. That’s a lot of flooring-hundreds of millions of square feet-some that was salvageable, some that needed replacing. Many of those floors have already been replaced, and retailers serving the hardest hit regions felt the boost in their business, some of which has continued into this year.
Finally, there are the labor issues. The shortage of seasoned installers, experienced reps and other critical players in the flooring process continues to plague the industry. The issue is most critical with installers. Too many seasoned veterans have left the industry in the last ten years and not enough younger workers are choosing to train in flooring installation. And a lot of the work is done by immigrants, many of them illegal, many of them nervous and skittish.
As the market strengthens and demand for flooring surges here and there, installer shortages become more prominent and critical, and jobs get delayed even further-ultimately impeding growth. Everyone, from individual retailers to industry associations, is trying to find new ways to recruit craftsmen. It’s not a problem that is expected to resolve itself any time soon.
For the complete Annual Report, see the May 2018 issue of Floor Focus Magazine.
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