Strategic Exchange - July 2009

By Kemp Harr

The U.S. carpet fiber market has gone through some major changes in the last several years and it’s interesting to watch the evolution. Not only has the backward integration by the larger carpet mills changed the landscape but so, too, has the shrinking size of the overall pie due to lack of demand, the ownership changes of the remaining third party suppliers, and the whole sustainability movement. According to PCI Fibers, demand for carpet fiber in the U.S. at the end of 2008 versus the peak in 2005 is off about 25% in units (3.5 billion pounds to 2.6 billion pounds). And according to industry consultant Thomas Rennie, two billion of those pounds are extruded by the mills, leaving roughly 600 million pounds for Invista, Ascend, Universal, and Aquafil. Much of that third party demand is nylon.

For those of you not familiar with Ascend Performance Materials, it’s the name of the newly formed company that just purchased Solutia’s nylon assets and the Ultron brand name. (You may recall that Solutia sold Mohawk its Wear-Dated brand back in January.) The company’s CEO, Fred Poses, had many years of experience with Allied Signal before leaving the plastics business to become CEO of Trane (HVAC) and chairman of the board for Tyco. Today, 25% of Ascend’s business is derived from the carpet industry but its plan is to grow that number by increasing sales not only in the U.S. but also in Europe and Asia. In a recent interview for Floordaily.net, Poses told me that they’re in terrific position financially and are uniquely positioned as a fully integrated nylon plastics producer. I must admit that buying a business for $50 million that last year had revenues of $1.8 billion does sound like a solid investment.

While at NeoCon last month, the largest of four independent suppliers, Invista, announced a new bio ingredient in its white nylon Legacy product line. This castor bean oil based ingredient can replace up to 10% of the traditional petroleum based oil, qualifying the product to help earn LEED credits for rapidly renewable materials. The Best of NeoCon judges were impressed enough to give the fiber a silver award in the carpet fiber category.

More fiber related news revealed at NeoCon came in the form of DuPont’s interest in selling its Sorona triexta polymer, complete with its 37% bio based content, to any mill that will use it for commercial applications. Apparently, DuPont’s exclusive arrangement with Mohawk only covers the residential market. But since DuPont is only in the polymer business, somebody has to turn that plastic into string, and Pharr Yarns is already doing that for Clayton Miller. Back in April, I mentioned that it would be interesting to see if this fiber could hold up in a commercial environment, and now it looks like it’s being put to the test.

the Threat and promise of the Web
The Internet continues to offer alternative methods of doing business, and the most serious threat to the traditional business models is e-commerce. If a manufacturer or importer can compel an end user to conduct business directly via the Internet, a commerce channel that is available 24 hours a day, then several layers in the traditional mix get cut out of the transaction. No longer is there a need for distributors, retailers, mill reps or even regional warehouses. With fewer parties involved, the supplier can earn a higher margin while the end user enjoys a lower price. And not only is the lower price attractive to the consumer, so is the 24 hour access, especially these days with two income families, hectic schedules, and time such a precious commodity.

This model works well for cameras, toys and jewelry but it’s not well suited for flooring products, which have varying ranges of quality, wide selection, required installation and low brand awareness. Or is it? Lumber Liquidators and the reconstituted iFloor are having some success, especially now, as consumers try to stretch their dollars and buy more for less. But what manufacturer in its right mind would sell to an e-tailer at the risk of damaging its relationship with its existing customer base?

On the other hand, look at the kind of traffic these e-commerce sites are drawing. Last time we checked, Lumber Liquidators was getting 486,000 unique visitors a month, Empire Today was attracting 162,000, and iFloor‘s unique web traffic was over 150,000. With that kind of consumer traffic, who wouldn’t be tempted to sell these outlets with a non-branded or unique branded offering? It’s been interesting to watch the brands that have dominated the home center shelves and how traditional retailers have reacted to that discounted presence. Will the backlash be worse for those who choose to support the e-commerce outlets?

The Internet may also make its mark in the commercial arena. While at NeoCon last month, we were introduced to a new contract brand from Dixie named Whitespace. While it is using the Internet as its primary method of promotion, it’s not a traditional e-commerce business model. According to Ken Dempsey, the president for both Whitespace and Masland Contract, the transactional business model for Whitespace is very similar to Masland Contract. Once the product is specified, it’s purchased by the end user through the contract dealer. The primary difference is Whitespace’s approach to the specifier. Architects and designers can go online to www.whitespace.bz and help themselves to whatever information they need to select the product and write the specification. There are no mill reps, no flashy brochures, no architectural folders, no samples, no lunch and learns—just straightforward product information on the Web 24 hours a day. It does offer pricing, but Dempsey says that price has a margin built in for the dealer. Since Dixie is the first to offer this approach to the market, it may work, both because of the novelty and because the A&D audience is all about eliminating waste.

Tile in all forms is gaining share
In the recently published U.S. FLOOReport, industry analyst and economist Santo Torcivia points out that we have hit the economic trough, are bumping along at the bottom, and should start to see bits of recovery by the end of the year, but nothing substantial until next year. As he evaluates share between product categories, he points out that “tile” products are well positioned for growth. Luxury vinyl tile is taking share from laminate, carpet tile is taking share from broadloom, and ceramic tile is taking share from resilient sheet. He believes this trend will continue as the market recovers and, in fact, the gaps will widen further.

The report also has some interesting findings regarding the fight between the home centers and the independent retailers. Sales at the home centers will continue to be strong with value priced products that do not require professional installation. Those independent retailers who recognize that flooring is a fashion product and offer worry-free professional installation will continue to hold their share of the market and could even pick up share as the home centers recognize their strength in the cash and carry DIY sector of the market.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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