Floor Focus 2008 Year in Review - December 2008

By Brian Hamilton

This is a year that some in the floorcovering industry will be happy to see end, with an eye toward an improving 2009. While there was some good news—the commercial side of the business performed reasonably well, and floorcovering, especially carpet, continued its determined march toward sustainability—it’s hard to imagine that anything more could have gone wrong.

Oil prices went through the roof, driven by demand in Asia and other developing areas, as well as at least a little speculation, and by summer crude prices were nearing $150 per barrel. That increased the price of everything from transportation to raw materials, and caused many manufacturers to implement price hikes of their own, sometimes at a dizzying pace. Laminate and vinyl manufacturers raised prices, some more than once. Dow Chemical, a supplier to the industry, was forced to implement a pair of double-digit price increases over a two month period for all its products. Also, the three largest carpet mills pushed through three price increases this year, an unprecedented action. As this is being written, the price of oil has fallen to less than half its peak, to under $60 per barrel, but we haven’t heard of anyone lowering prices on raw materials or finished product just yet. Flooring manufacturers say their price increases didn’t come close to covering their additional costs.

But that paled in comparison to the housing and credit crises, the evil twins that conspired to send the economy into a tailspin. While housing cooled in 2007, by the middle of this year it had collapsed. The major home builders like Toll Brothers and others were suffering huge losses and now have nearly a year’s supply of houses to sell before things can really start to pick up. Existing home sales also plummeted and by October falling prices left about 7.5 million homeowners owing more on their homes than they were worth. In addition, many subprime adjustable rate mortgages reset higher, and many homeowners could no longer afford the payments, which has led to a record number of foreclosures. Some lenders, like Citigroup, have a moratorium on foreclosures, but it remains to be seen what kind of aid the federal government will offer.

And then there was the turmoil on Wall Street, where speculators who had bet on mortgages through derivatives had nowhere to turn except the U.S. government, or, in at least one case, deep pockets like Berkshire Hathaway. The shock of seeing major financial firms like Lehman Brothers go out of business, and, others, like Bear Stearns, being sold for pennies on the dollar, as well as the government’s willingness to spend more than $750 billion to fix the problems, has left many business owners and consumers stunned. Given this scenario, bankers don’t know whom to trust when it comes to lending money, so, generally, they aren’t making many loans.

With equity in their homes gone, the outlook for employment uncertain, and many consumers maxed out on their credit cards, consumer spending has also tumbled, which doesn’t bode well for our industry, at least for the short term.

All these factors have created an anomaly in residential flooring—both the builder and remodel businesses are sinking at the same time, leaving many in the floorcovering industry struggling. There are also signs the commercial market is following the housing market into what Big Bob’s Flooring Outlet founder David Elyachar calls “the black hole.” There are a lot of guesses, but nobody really knows when business conditions will improve, or how fast they will improve.

CONSOLIDATION, CONTRACTION, RENEWAL
We’ve also seen a lot of contraction among flooring manufacturers. Virtually every major player has cut back its capacity. For example, Shaw and Mohawk have both closed yarn plants to cut costs, and more cost cutting is on the way. Mohawk sales fell 9% in the third quarter and the company said things don’t look especially good for the fourth quarter, either. Shaw’s income fell 61% in the third quarter and it’s projecting slower sales into next year.

There was also some consolidation this year. Shaw bought Zickgraf Hardwood, its second significant wood purchase within about a year, to add another dimension to its hardwood offering. Linoleum specialist Forbo acquired Bonar Floors, a major player in the U.K. commercial market that specializes in vinyl and high end carpet tile. Mannington Mills added rubber flooring maker Burke Industries. Gerflor acquired Architectural Floor Systems of Chicago.

Anderson Hardwood Floors, fresh off its purchase last year by Shaw Industries, signed a licensing and manufacturing deal with PowerDekor, the largest manufacturer of laminate flooring in China. Anderson plans to create about 45 hardwood SKUs for China’s domestic market and they’ll be sold in 2,000 PowerDekor stores.

Also, ArborCraft was born this year after New Stream Capital, a Connecticut-based private equity firm, purchased the assets of Tarkett’s two Johnson City wood flooring plants, and an Indiana facility late last year. ArborCraft began emphasizing the Harris Wood brand at Surfaces and other trade shows.

However, things are a little more uncertain for other firms. Wilsonart’s parent company Illinois Tool Works said it plans to sell the company. Propex entered Chapter 11. Solutia, which emerged from bankruptcy this year, announced its intention to sell its nylon business. But it remains to be seen what effect the sale will have on its carpet fiber business.

GREEN MOVEMENT
Things were more upbeat on the environmental front, as the flooring industry continues to lead the country’s growing push toward sustainability. Mohawk’s Greenworks program got the kinks out and is now running smoothly. The program recycles everything from tires to plastic bottles to carpet and reuses the material in a variety of products.

The new LoMax technology, introduced by Dow Chemical, is allowing several carpet makers to use landfill gas as the energy source to produce latex for carpet backing. Other companies, like Interface, keep progressing toward a zero carbon footprint through a variety of innovative efforts. And several carpet fibers received cradle to cradle certification from McDonough Braungart Design Chemistry.

Mannington Commercial became the first floorcovering company to be awarded NSF 332 Draft Standard Gold Certification for Resilient for all of its commercial inlaid resilient flooring.

Beaulieu Commercial’s Nexterra was the first carpet product to be certified under NSF International’s new sustainability standard, NSF 140.

For a month by month look at some of the key events during 2008, see the December 2008 issue of Floor Focus Magazine.

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