2012: A carpet odyssey

2012: A carpet odyssey

November 25th, 2011 by Ellis Smith in Business Around the Region

Though the 2007 housing crash tore the flooring industry plank to tuft, officials say they're finally back on track as they cautiously edge toward 2012.

But more hurdles lie ahead.

Regulations have started to tighten in parts of the United States, targeting carpet chemicals like caprolactam and tasking manufacturers with the job of used-carpet disposal.

"The impact of the government, what they are doing has had an impact on consumer confidence," said Jeff Lorberbaum, CEO of Calhoun, Ga.-based Mohawk Industries. "Consumer confidence still remains low, so we're just a little cautious as we look forward."

In addition, the last few months have seen wild fluctuations in the industry's largest fixed cost - oil, which is both a building block of carpet itself and necessary for product transportation, said Ralph Boe, president and CEO of Beaulieu of America.

Finally, a series of plant closures has rippled through the carpet capital. Beaulieu has announced three plant closures in as many weeks, despite the company's efforts to stave off job cuts that officials now acknowledge were inevitable.

"It's something we should have done before, but we finally got to the point where we said, it doesn't look like '12 is going to be that much better," Boe said.

Chattanooga-based The Dixie Group CEO Dan Frierson said that the industry has "seen more plant closings in last two months than we've seen ever in the carpet business," something that "means people are realizing this is the new normal."

Still, the industry has come a long way.

Manufacturers of carpet, vinyl and wood flooring relied on new home construction for a large chunk of revenue in the heady mid-2000s, and the subsequent economic implosion cost more than 20,000 lost jobs and "over 100" shuttered manufacturing plants across the industry, Boe said.

The challenge now, officials say, has been to cut costs enough to make up for drastically reduced revenues without handicapping the ability to ramp up production later.

The Good News

But after years of cuts and decreasing sales, the smaller, more nimble industry is showing signs of solid profitability, even as it faces the prospect of another year of high joblessness, slumping home sales and economic malaise.

Publicly traded Mohawk Industries and The Dixie Group posted gains for the third-quarter, and their CEOs expect continued slow growth through 2012. That growth, however, is coming less from higher sales and more from leaner, more efficient manufacturing.

The luxury and commercial markets, however, have been an exception to this rule, said Dixie's Frierson.

"Whether you look at department stores, Tiffany or Coach, the luxury end is back," Frierson said.

Profits also have flowed in from a series of price increases manufacturers have instituted, making up for reduced unit sales. Another round of price increases is planned for January, Boe said.

"Most of the general economy went through a dramatic downturn and most of it recovered except the things related to housing," said Lorberbaum, Mohawk's CEO. "The residential business is so depressed that the question is, is anything going to happen during the year that it's going to be better off than it has been?"

On the other hand, the multifamily rental market is booming, as families leave behind foreclosed and underwater homes for more flexible rental options. But that market is less profitable, Lorberbaum said.

Margins are shrinking in other parts of the business too, as customers trade down and retailers "use price as a motivation to create value to the customer - that's compressing prices," he added.

Overseas Expansion

Both Mohawk and Shaw Industries have continued to seek relief on international shores, transforming the companies from U.S.-based carpet manufacturers to an international flooring makers with hardwood, tile and vinyl operations on multiple continents.

Shaw alone claims it has spent more than $1 billion to expand its international and noncarpet operations, even as it closed two carpet plants this year.

"The purpose is to broaden out the base," Lorberbaum said. "It's more profitable to ship from low labor areas to high labor areas, even if the distances involved are longer."

Flooring manufacturers also continued to push their noncarpet products, which consumers still favor for some high-traffic areas. Carpet sales now comprise only 45 percent of floorcovering unit sales, down from 75 percent at the height of carpet's popularity, officials say.

Shaw has established what Vance Bell, Shaw's CEO, calls a "very strong" position in the hardwood floor and athletic turf market, playing to the company's strengths even as single-family construction fell to between 15 percent and 20 percent of sales.

"We constantly adjust to the reality of the business environment," Bell said.

2012 Outlook

Flooring executives believe that though a recovery is unlikely to happen in 2012, it's far too early to predict that the industry won't ever come back.

The combination of price increases and the efforts of the Carpet and Rug Institute to fight unfavorable regulation appear to be working so far, they say, and officials are eager to embrace legislation encouraging home ownership.

"If unemployment moved down a little more, that would be a good sign, and it would be great if we could get some fix on what's going to happen with taxation," Boe said.

The industry experienced downturns in 1973 and the early 1980s, Boe said, and bounced back each time.

Frank Hurd, vice president at the Carpet and Rug Institute, said the industry plans increasingly to target the remodel market, which has jumped to 85 percent of sales in recent months.

Carpetmakers also are looking to expand their rug offerings, as statistics show that the first thing homemakers do to a new wood floor is cover it with a rug, Hurd said.

But until the recovery takes hold in 2013, most efforts will go toward treading water, he said, unless lawmakers get serious about job creation.

"Anything that gives the consumer a little feeling that they've got some slack, that not every dollar is tied up, will make people more inclined to buy," Hurd said. "They may be sitting down there holding off on purchasing new carpet. We just need to unlock that."