Review 2007 - December 2007

By Brian Hamilton

It’s been a year of upheaval and consolidation in the floorcovering industry. Factors ranging from a slumping housing industry and deteriorating credit conditions to the record fall of the dollar and record high oil prices have all made 2007 one of the most challenging years in recent memory for the residential floorcovering business. The commercial business, meanwhile, continues to be strong, although there are some signs of a slowdown ahead.

After several years of hefty homebuilding, capped by nearly 2 million units in 2005, construction started tapering off last year. This year, housing starts have been in a free fall since March. Housing starts in 2006 totaled 1.6 million, but this year will reach roughly 1.2 million, according to the National Association of Homebuilders.

Publicly traded homebuilders have not only lost huge amounts of money, but many have seen their credit ratings downgraded to just above junk status. The housing slump has been exacerbated by the fall-off in sales of existing homes, which have dived from 6.47 million last year to roughly 5.6 million this year, according to the National Association of Realtors. The effect has been a one-two punch for the residential floorcovering industry.

Retailers say the average home sale results in two or three flooring upgrades, either as the buyer readies it for sale, or the purchaser adds her own touch to a new home.

Most experts aren’t predicting a turnaround anytime soon, and many expect the slump to last into 2009. However, one bright spot for our industry has been the commercial market, which has grown significantly this year. The U.S. Economics and Statistics Administration projects commercial construction spending at $642 billion this year compared to $551 billion in 2006, nearly a 17% increase. The bloom may be coming off the rose next year, however, as McGraw-Hill Construction predicts commercial construction will drop by 7% in 2008.

Oil prices, after starting the year at about $55 per barrel, have also been rising steadily. Demand from the rest of the developing world, as well as a healthy dose of oil market speculation, were pushing prices close to $100 a barrel as this story was written. That affects everything from the price of raw materials for carpet to heating, energy, and transportation costs.

The falling dollar has been a mixed blessing. It’s given U.S. manufacturers a good reason to pursue more overseas business because their products are more affordable. However, businesses that depend on imports have seen their costs rise. In addition, some foreign companies have started to set up or expand manufacturing operations in this country because it’s cheaper than exporting their products here. The $20 million expansion in Georgia by laminate maker Faus Group is just one example. It will give Faus an additional 100 million square feet of capacity.

ACQUISITIONS, EXPANSIONS AND CONTRACTIONS
This year, the big got bigger as the two largest flooring manufacturers made the most significant deals of the year. Mohawk purchased four Columbia prefinished wood flooring plants—three in the U.S. and one in Malaysia—along with its laminate business. The plants had been the largest supplier of wood for Mohawk and together churned out $180 million in wood flooring. The purchase instantly gave Mohawk a solid hold on second place on the list of the largest hardwood manufacturers, with estimated sales of $358 million.

Not to be outdone, Shaw Industries snapped up 61 year old Anderson Hardwood, a fully integrated producer, and will now be the number three supplier in the $2.4 billion hardwood industry, with an estimated $244 million in sales. However, both Mohawk and Shaw are still well behind Armstrong World Industries with $760 million in sales, or 32% of the market. Ironically, Armstrong has been trying to sell itself since the beginning of the year and as we went to press the company was still on the block with no sign of activity.

Another significant deal in 2007 was Pfleiderer AG’s purchase of Swedish laminate maker Pergo for a reported $386 million. It instantly positioned Pfleiderer as the top laminate floor supplier in the U.S., with an approximate 15% marketshare, as well as worldwide sales of $2.4 billion. It’s part of an aggressive acquisition strategy that Pfleiderer is planning for the next several years. By becoming part of Pfleiderer, Pergo also became a vertically integrated manufacturer—thanks to Pfleiderer’s ownership of integrated laminate maker Uniboard Canada, which also has a coreboard plant in Ohio.

This year, the really big in the retail business got a little smaller. Following the resignation of CEO Bob Nardelli in January, Home Depot sold off its HD Supply—including Creative Touch Interiors, flooring supplier for 18 major homebuilders—for $8.5 billion to investment firms Bain Capital Partners, The Carlyle Group and Clayton Dubilier & Rice, thereby dumping about 1,000 locations that supply building materials, tools and installation services to businesses and government. The company also shut down nine Floor Stores and a call center for coordinating installations, as well as 11 Landscape Supply stores. But it’s still the largest flooring retailer in the U.S., and it’s pushing into China with the purchase of 12 Home World stores there.

Hardwood specialist Lumber Liquidators had its long anticipated initial public stock offering, although it sold less stock and the price per share was less than expected, perhaps reflecting the unstable housing market and the skittish stock market. The company, with $197 million in sales through the first half of the year, is planning to open up to 40 stores per year over the next several years. Lumber Liquidators has established its own complete distribution channel, cutting deals directly with mills, a potential game changer in the industry.

There were a few notable expansions in addition to the Faus project. Wool carpet maker J. Mish opened a 70,000 square foot plant in Georgia. Shaw began recycling carpet at its newly reopened Evergreen Nylon Recycling Plant. Unilin is spending $30 million to expand its laminate plant in North Carolina. And Flooring America and Flooring Canada rolled out a shop-at-home service.

The tough economic conditions also forced some companies to take difficult steps. Hoboken Wood Flooring, the nation’s largest distributor, with $400 million in sales, has completely shut down operations and filed for Chapter 7 bankruptcy. The firm, majority owned by private equity firm Code Hennessy and Simmons, is facing a lawsuit from two wood flooring manufacturers and management said it wouldn’t have enough cash for an orderly liquidation. Also, ceramic tile distributor IWT Tesoro filed for Chapter 11 bankruptcy as it was losing money and has a debt load of $47.9 million. Other firms are scaling back. Mohawk is getting out of the woven throws and bedspreads business and is closing two Georgia plants in the process. Shaw is closing a carpet plant in Fitzgerald, Georgia, Beaulieu Group shuttered an Alabama yarn plant, and MeadWestvaco closed a Massachusetts specialty papers plant that manufactured laminate overlay.

THE GREEN MOVEMENT
Soaring oil prices have also played into another major theme this year—the growing influence of the green movement, which is being driven in large part by the commercial flooring market and the growing influence of the U.S. Green Building Council’s Leadership in Energy and Environmental Design program.

The statistics for energy use, just one aspect of the green movement, are sobering. Commercial and residential buildings account for 39% of all energy use, according to the Energy Information Administration. Another 33% is used by industry.

This is the year that the environmental movement found its legs and it was hard to ignore the avalanche of green publicity from virtually every manufacturer. Although we’ve found little evidence that the movement is having much impact on residential flooring sales, it’s quite a different story in the commercial market. Businesses have discovered that going green can help them cut costs as energy prices continue to climb and other resources become scarcer and more expensive. And the public relations value is high, for both business customers and flooring manufacturers.

The U.S. Green Building Council’s very visible LEED program to certify projects that use environmentally friendly products and techniques is helping nudge projects in that direction. The National Association of Home Builders is also developing a National Green Building Standard. Many flooring manufacturers now have formal environmental programs, such as Shaw’s Green Edge and Mohawk’s Greenworks, and Interface’s Mission Zero.

There have been some notable trends. Carpet, which has an environmental profile that’s heavily dependent on oil, is becoming greener all the time. Many manufacturers are making products that contain recycled products, such as ground up plastic water bottles, old carpet face fiber or old carpets reconstituted for new backing. Of note in the residential market, Shaw’s Green Edge program now has carpet that contains post consumer recycled nylon 6 and Mohawk has introduced its SmartStrand fiber that is made with 40% corn, two firsts in the industry. Shaw is also marketing its green products heavily with point of purchase displays and other merchandising items for their retailers.

Many new carpet lines can now be recycled, and a full-scale recycling effort is underway. Most flooring manufacturers are also getting rid of finishes and other products that have high levels of volatile organic compounds that pollute the air. Many are taking the environmental message to heart and are examining every aspect of their business to see how they can eliminate waste. For example, Dow plans to use methane gas from a local landfill to power its Georgia latex backing operation, as Milliken and Interface are doing in their Georgia plants.

The green movement is likely to continue its momentum indefinitely. Market researcher SBI predicts green building will double to $4.7 billion by 2011 and grow at an annual rate of 17%.

For a month by month look at some of the key events during 2007, see the December 2007 issue of Floor Focus Magazine.

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