Area Rug Report: Rug producers discuss what drives sales - Dec 2018
By Beth Miller
Floor Focus reached out to a handful of area rug manufacturers to find out what trends they are seeing with regard to sales, demographics, design and style, economics, and issues that impact their bottom lines, as well as their plans to keep consumers shopping for rugs.
Brandon Culpepper, chief revenue officer with Orian; Blake Dennard, senior VP of sales and marketing with Kaleen Rugs; and Kelly Moore, VP of sales with Mohawk Home and Karastan, provide insight into what retailers and consumers can expect for the upcoming year.
Q: What level of growth are you seeing in the area rug business in 2018 and what price points are seeing the most activity? What construction and styling trends are you seeing?
Dennard: We will wrap up 2018 with single-digit growth, which is encouraging considering we lost a major outdoor source early in the first quarter. This was a serious hit, but we were able to recover and make up the lost business and then some.
We are seeing movement toward the machine-made side, and our competition is flooding the market. This has left a nice gap in the handmade supply side, and we are filling it. We are working to introduce more handmade collections than we have in the past. While the demand pie is shrinking, the supply pie is shrinking even faster [due to Chinese tariffs], which creates opportunity. The overall market is definitely moving lower when it comes to price points.
Culpepper: The area rug category is down…home sales are down year over year, and interest rates are up. We also had an intense, late hurricane season that affected the fall selling period. In addition to that, retailers are tentative as they factor in the anticipated effects of tariffs on their rug programs. Store traffic is down at larger retailers.
The most active retail price points for a 5”x8” are $149 to $399, and the trend is toward machine-made in transitional and distressed traditional design.
Price points are about the same, if not down a little bit, from five years ago. More quality is packed into those price points than five years ago; therefore, the value is better.
Moore: Area rug growth is flat to up 2%. Historical buying patterns seem to continue to be disrupted by the shift to e-commerce. This has placed stress on the retailers with their inventory positions. Retail price points have continued to slide down as buyers are shifting where they place their discretionary cash. This change is pulling velocity into rugs under $500.
Handmade rugs lost more ground in the past 12 months as vibrant colors, softness and texture have created great value in machine-made rugs. As for styling, transitional is the winner with the other segments still relevant and strong but appealing to fewer people today.
Q: What triggers the sale of an area rug-home purchase, room remodel that may include the transition to hard surface flooring, purchase of new furniture, or economic factors, such as an increase in home values, a strong uptick in stock market or high consumer confidence?
Dennard: A combination of all of the above. However, the uptick in consumer confidence we have seen over the last year is a huge help in driving customers into stores and online. It has gotten the cash flowing again.
Moore: All of the above are influencers, with new home purchases lingering towards the bottom of that list.
Culpepper: Consumer confidence and home sales are triggering area rug sales.
Q: Which channels are performing best?
Moore: Home centers and discounters have maintained strong traffic, translating to continued growth. E-commerce, while still growing, has felt the impact of increased costs associated with transportation and freight. Specialty boutiques are well positioned when product offerings span across many home décor categories. Department stores are still trying to find solid footing.
Dennard: For us, the growth is coming from furniture stores. While e-commerce business is still strong, it has leveled off a bit.
Culpepper: E-commerce continues its growth. We also see growth with furniture retailers and discounters.
Q: What are the demographics of today’s rug buyer?
Culpepper: Millennials are out of mom’s basement. They now make up the majority of home buyers, which equates to about 36% of all buyers and about 66% of all first-time home buyers. The average Millennial home buyer’s FICO score is 721. They tend to buy smaller homes, and they do not use revolving credit as much as other generational groups. This means that the people most likely to buy rugs are 37 or under, and they mirror the generation that came of age during the Great Depression-they are educated buyers that are intent on paying less than they can afford for their homes and the furnishings that go in them.
Dennard: Younger and younger…that’s why we see the demand for lower priced rugs increasing. The young e-commerce buyer wants to buy it this year and change it next year.
Moore: With the ability to be inspired at the tips of your fingers on your smart phone, everyone is becoming trend savvy and knowledgeable about their own personal style. This increasingly educated consumer base makes everyone a potential buyer for the right construction and solution.
Q: Where do you make your products? How important is the made-in-the-U.S. story to consumers?
Culpepper: Orian manufactures in the U.S., Belgium and Turkey. Ninety-five percent of our rugs are made in the U.S.; it is important. People want to know where products are made, how they are made and who made them. The “Made in America” story ties nicely to that. The biggest benefit, though, is things made in America are now a better overall value.
Dennard: Of course, on the handmade side, we are 100% imported; the consumer expects that, and, in some cases, that is a selling point. On the machine-made side, it’s a mix of imports and domestic. We tend to stay with imports with the lower price points and domestic for the step-up price points. When we introduce a U.S.-made product, it’s for inventory management advantages rather than a demand in the marketplace for U.S.-made goods. It’s still color, design and price that sells the rug, not country of origin.
Moore: Ninety percent of Karastan Rugs are made in the U.S. We have seen a strong appeal for this, given the recent global conversations surrounding trade, tariffs and inventory pressures.
Q: When it comes to direct Internet sales, who is winning the game-Amazon, Wayfair? What is the benefit to the consumer for buying online, especially if the price is the same?
Culpepper: They all have opportunities for growth. The economy is shifting so rapidly toward e-commerce that it is hard to say who is “winning the game” at the moment. We see aggressive growth with these kinds of retailers, but also with Walmart.com, Target.com, etc. And convenience is certainly the biggest benefit for consumers shopping online.
Moore: The big three have held their position at the top of digital volume: Amazon, Wayfair and Overstock. Buying online has always been about product selection and convenience; this is still true today. However, negative online experiences are starting to push shoppers back into brick-and-mortar stores.
Q: What kind of growth are you seeing for area rugs in the commercial market? Which sectors primarily?
Dennard: We stick with the residential side of the market for our direct U.S. distribution. We have a key import partner that focuses on the commercial and hospitality markets for us.
Moore: Karastan, as the most recognized brand in rugs, has always had a strong offering in the commercial market sector. We continue to see growth here, which adds to our portfolio.
Q: What new technologies are being introduced or implemented to enhance the retail shopping experience?
Dennard: Augmented reality (AR) is becoming more important for the retailers, and we see investment dollars flowing there. It’s not as important on the wholesale side. In retail stores, the demand for private label programs is becoming more important to help brick-and-mortars separate themselves from the e-commerce retailers.
Culpepper: AR will have a big impact on rug sales. Giving the consumer the ability to see how a rug fits into their room will increase sales and cut down on returns.
Moore: Providing information and making an emotional connection are as critical today for consumers as they’ve ever been, whether that is in a brick-and-mortar store or online. Videos, in-store POP and fixtures all create a better shopping experience.
Q: Where do rug brands stand in the eyes of the consumer? Do they buy your brand or a licensed brand?
Moore: Licensed products have had success making those emotional connections, and we foresee that to continue with the help of social media reaching larger customer groups. Scott Living-Jonathan and Drew Scott’s line of indoor furniture, home décor and accessories-is reaching a new customer base today for Karastan through style and value. Karastan is the top brand but may also be one of the only brands recognized by consumers today. Brand is important when factoring in the overall experiences a consumer has with a product (i.e. quality, service, warranty).
Dennard: Color, pattern and price sell rugs. Consumer awareness of brands in the rug industry is limited to some licensing names. Some can be the tie breaker for a consumer purchase, and others are not useful at all. Picking the one that can push the consumer in one direction or the other is the trick. But nothing sells, no matter whose name is on it, if it’s not the right color, pattern or price.
Culpepper: Consumers buy color, design, touch and value.
Q: What are the biggest challenges for achieving your goals?
Dennard: Eroding price points. Today, we must sell three times as many units to generate the same dollar volume and profit that we did five years ago. With this necessity to sell more units, the increase in warehousing, shipping costs of handling the additional units and labor eats into profits.
Moore: It’s still too early to fully understand the impacts, pro or con, that the global trade talks will have on our country. All raw material prices are increasing, and the undisciplined practices (competitors with unsustainable pricing) of the industry are compounding issues today and in the future for bottom lines.
Q: How will the new Chinese tariffs impact this business?
Dennard: We have been working for the last two years to reduce our imports from China and produce those products in our own factories in India.
However, if the second round of tariffs does go into place and no one blinks, it will force the market into other countries. While the products still coming in from China will see cost increases, the opportunity for other manufacturing countries will be huge, and I am sure you will see us all move where the opportunities take us. We see it as a major opportunity to pick up more import customers around the world, and we are increasing capacities to capitalize on the opportunity.
Culpepper: It will have a significant negative impact on many importers as they transition from Chinese product to other manufacturing points (or pass on large price increases). It should have a positive impact on domestic manufacturers like Orian.
Moore: Karastan is in a strong position to help customers replace any products with American alternatives; this is a positive.
Q: What plans do you have to keep folks buying rugs?
Dennard: The two main areas we focus on are design and sales trends. The market is moving faster than ever and if you don’t stay as close as possible to new trends in color and pattern, you can miss a full cycle in a matter of months. Once we identify a cycle, we analyze sales trends in color, pattern and size to allow us to manage our top-selling inventory levels more efficiently. The goal is to be 100% in stock in our top sellers.
Culpepper: We will continue to bring product to market that is trend-right for color, design and value. We will use new yarns, new fibers and new manufacturing processes to get that done.
Moore: Innovation, quality and service have been at the core of our 90-year history of making area rugs. These traits will remain in focus for Karastan and continue to separate the pretenders and short-term in-and-outs in the competitive field from the established leaders of the industry.
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