Strategic Exchange: Q1 is challenging, but outlook is still strong for growth in 2018 - Apr 2018
By Kemp Harr
It’s April, and the first quarter of the year is behind us. The outlook for growth in 2018 is still positive, but the weather in many parts of the country, coupled with volatility in the stock market, has held flooring sales for the first couple of months below what we had anticipated. What we’re hearing from our contacts in the business is that Q1 2018 is only slightly better than 2017.
In the residential replacement sector, we’ve been told that January and February were flat to down, but March numbers are much better. The home center channel’s carpet business is off substantially on a YOY basis-most likely because the novelty of the free install has worn off. Home Depot and Lowe’s are still offering free whole home deluxe installation, but the type of gullible consumer who still believes in free lunches has lost interest for one reason or another. Sales in the residential builder sector are also softer for the first quarter of this year versus the previous year, but in this case, it’s not as much a demand issue as it is a rhythm issue based on the timing of price increases in 2017. It’s no secret that the dealers who focus on the builder market are the best at placing large orders just before a price increase to balance discounts with terms.
Speaking of price increases, most of you know by now that the big three carpet producers announced a 5% to 7% carpet price increase, which kicks in on orders placed after April 9. Shaw and Mohawk are also increasing freight rates at the same time. This increase is being driven by rising oil prices but is also due to a shortage of ethylene-thanks to the lasting impacts of Hurricane Harvey down in the Houston, Texas area.
Another factor in rising carpet costs is the shortage of PET polymer due to the Chapter 11 bankruptcy production filing last October by Italian plastics giant M&G USA. The firm’s financial issues surfaced after its proposed $1.1 billion plastics manufacturing plant in Corpus Christi went significantly over budget. Apparently, this shortage of supply could be remedied later in the year by a firm that plans to take over and finish the new plant.
On the topic of leading indicators, it’s great to hear that the consumer sentiment reading in March is tracking at the highest level since 2004, but when you do a deep dive on those numbers, you discover that households on the bottom third of the income range are feeling better than the folks on the top third. Obviously, this latter group are the ones that are more heavily invested in the stock market, which has been more volatile in recent weeks due to concerns over tariffs, national debt levels and inflation.
Santo Torcivia, our economist and the source for many of our statistics, recently published his latest Market Monitor report-offering an initial read on the year-end statistics for 2017 by surface type. We plan to delve further into these numbers for our May annual report issue, but, preliminarily, it looks like the total flooring business grew 3% in 2017-slightly better than 2.3% GDP growth. It’s no surprise that LVT (and rigid core LVT) grew nearly 30%-taking the broader resilient category up 14%. This leaves the remaining flooring categories flat to down with the exception of ceramic tile, which grew nearly 5%.
CARPET’S CONTINUED LOSS OF SHARE
We are closely monitoring the share shift between various types of floorcovering. One recent report is telling us that carpet production numbers are down significantly in units for the first two months of the year; we’re trying to determine if this is based on a decline in consumer demand, or if it’s just production fluctuations based on dealers building inventory right before a price increase. I’m thinking the answer is somewhere in the middle. In the March issue, we pointed out that broadloom carpet sales have been declining for the last ten years, but at $5.8 billion (wholesale value), it’s still the largest single flooring category.
As we mentioned earlier, if the market is only growing at a 3% clip, and LVT is growing at nearly ten times that pace, LVT’s share take is certainly a factor. Another big factor is the loss of promotion directed to consumers, telling them that carpet is a lifestyle-enhancing flooring surface. The Carpet and Rug Institute (CRI), which at one time had its own marketing department focused on mitigating the deselection of carpet, is now much smaller, and its staff is primarily focused on preventing extended producer responsibility legislation like California’s AB-2398. In CRI’s defense, their size and focus is dictated by the membership, which in today’s consolidated scenario is a handful of decision makers.
If you look back at the history of the carpet industry, it was the fiber producers that communicated to the end-user and created the demand for carpet. But now that the mills have vertically integrated, it’s up to them to reverse this shift away from carpet by reminding the consumer of the benefits. Consumers should have more motivation to select carpet other than that it’s the cheapest option. And if you’ve watched any HGTV lately, you probably noticed that they’re always ripping out that “dirty” carpet.
If you have any comments about this month’s column, you can email me at email@example.com.
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