Scoring Flooring, Industry Stats for 2007 Article Number : 3400

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Date	7/1/2008 10:12:00 AM
Written By	LGM & Associates Technical Flooring Services
View this article at:	//floorbiz.com/BizResources/NPViewArticle.asp?ArticleID=3400
Abstract	Stuck between a housing collapse like never before seen and soaring materials, energy and transportations costs, the year that was 2007 is one that most people would like to forget...
Article	Stuck between a housing collapse like never before seen and soaring materials, energy and transportations costs, the year that was 2007 is one that most people would like to forget. The recovery that most were hoping for during 2007 not only never happened the overall situation continued to get worse and by year’s end the industry as a whole experienced its worst loses in more than three decades. When the dust settled, industry sales and units at mill level in 2007 were down 9.6% and 13.8%, respectfully, compared to 2006. Sales fell from $24.715 billion to $22.337 billion, while total volume shrunk to 22.719 billion square feet from ’06’s 26.36 billion square feet. Put simply, the losses were so bad, the industry gave back all the sales gains from the three previous years and the level of units were thrown back to amounts not seen since the turn of the millennium. The 9.6% drop in sales could have been far worse if not for the numerous price increases and surcharges imposed by manufacturers and importers in order to minimize the loses. There was one bright spot in 2007 and it also helped to keep overall sales and volume levels from sinking even further. Despite the housing woes, rising costs and drop in consumer confidence, the commercial sector continued to ride the upward momentum it started in 1995 and posted a healthy 7.5% gain in sales over 2006 (see story on page 3 for full details of the contract sector). Despite the contract segment’s growth—nonresidential construction values in the U.S. grew 15.6% in 2007—it was not enough to offset the slaughter that was taking place on the residential side: home foreclosures rose 75% over 2006, with 405,000 households losing their home; the median price per square foot of a new home fell for the first time since 1992— when the U.S. Census Bureau first starting tracking this statistic; housing starts and completions were each off 25%; the total value of residential construction was down 17.9%; new homes sales were down 26.3%; the year ended with consumer confidence at down to levels not seen in three years, and home energy, food and gas prices each took a large chunk of discretionary income away from consumers. Production costs On top of all the negativity affecting the residential market the flooring industry had to deal with escalating costs for everything, regardless of the category. Carpet and vinyl manufacturers faced the most pressure due to their products’ use of petroleum-based materials. Mills in these two categories saw prices for raw materials jumped 20% to 40% depending on the substance. Still, no category was immune to the rising costs of energy, which overall rose 17.4% in 2007. This not only affected the cost to produce a piece of floor covering but delivering it to its final destination. Transportation costs in 2007 were 15% to 20% higher than in 2006. And, if the product was coming from overseas, the cost to ship a container doubled and in some cases quadrupled. Because of the heavy weight of flooring—especially tile, which is mostly imported—those who relied on overseas shipments were forced to pay the most. This extra cost to import flooring hit some categories harder than others, namely tile, which saw shipments to America off 20.3%. This was just part of an overall decline that saw the category’s total consumption decrease for the first time since 1994-95. Chinese connection Speaking of tile and imports, of the top five countries that export the product to the U.S., China was the only one that had an increase in both square feet (1.4%) and dollar value (4.6%). The four other countries— Brazil, Italy, Mexico and Spain—each saw declines in both areas, with some by as much as 38%. Interestingly, while shipments of tile from China continued to grow—in 2006 units were up 54% over 2005 and dollars were up 60% during the same period—they seem to be slowing down when it comes to wood and laminate flooring. In fact, 2007 was possibly the last in a trend that had been taking place for the entire decade. For nearly 10 years not only has the sourcing of wood and laminate products manufactured in China increased every year, so has a wave of goods coming in by the container load through distributors and large retailers. Mainly it had been far cheaper to do business with China, which allowed for great profits by U.S. companies. That all began to change last year and it was not all due to the rising costs of getting the product across the ocean and then around the U.S. Chinese manufacturers were suddenly feeling the crunch of the global market as well as a more liberal working environment within the country’s corporate world. Put simply, like the U.S. China’s factories were faced with growing energy and raw material bills, and employees began asking for higher wages and better working conditions. Plus, the Chinese government began taking away the subsidies these companies enjoyed. Looking deeper within the individual wood and laminate sectors, on the wood side, illegal logging and deforestation in places such as Malaysia caused many of the exotic species to rise in price. On the laminate side, the use of technology allowed Chinese companies to start producing better quality floors, but, in order to obtain these innovations, they were forced to pay license agreements for the use of patented technology. While this weeded out those who did not want to play by the rules, it meant the ones still in the game were paying more to make their products. This meant they had to charge more. Combine this with the increased cost of shipping and the country’s huge advantage to offer products at much lower prices was suddenly taken away. Seeing green Along with the positive news from the commercial side, there was one other piece of good news: The amount of carpet being diverted from landfills and either recycled back to new carpet or used in other applications rose in 2007 (see story on page 18 for full details of the carpet industry’s efforts in this area). In a sense this was part of a larger trend that saw the environmental movement go mainstream in 2007 as manufacturers in all categories began touting the green aspects of their residential products. It also allowed the flooring industry to showcase its decade-long leadership position in the green movement. As other industries were just starting to walk the walk last year, flooring manufacturers were able to point out they had already been doing many of these things for years. From energy conservation to using alternative means of energy and from cradle-to-cradle recycling to recycling other products such as soda bottles, car tires and even drywall into different types of flooring, manufacturers had plenty to talk about and market during the course of the year. Both the carpet and resilient sectors also made big gains in terms of getting national recognition for being able to measure the eco- friendliness of their products. In carpet, NSF-140 achieved full accreditation while NSF-332 on the resilient side was going through the draft process with the hopes by the end of 2008 or early 2009 it will be fully accredited. While these efforts helped put the industry in the forefront of the green movement they unfortunately were not enough to keep it from being in the black in 2007. Carpet, with its huge reliance on petroleum-based products, was one of the categories hit hardest in 2007 with sales down 10.1%. Total units, which are combined with rugs as fiber usage for the two is grouped together, were down 13.7%. Sales of rugs were also down, though they fared better than their broadloom counterparts at 5.2%. Things would have been far worse if not for the contract market as the residential side of carpets saw sales declines upwards of 15%. Looking for a bright spot within the category, you need to go beyond just the commercial sector. In this case, carpet tile or modular carpet. Those companies that are heavily into producing modular carpet actually had a positive 2007. For example, the largest player in this arena, Interface, reported 2007 sales 18% higher than 2006. According to the company’s annual report, carpet tile represents 90% of its sales, and nearly two-thirds of its overall business is done in the U.S. Overall, sales in this sub segment were up in the high teens compared to 2006. And it wasn’t just all in specified commercial jobs. Carpet tile was being used more and more in Main Street America and even residential applications. Soaring raw materials also had a heavy toll on the resilient category, which saw sales decrease 7.6% over 2006 and volume drop by 12.3%. The only real bright spot in this category was the products primarily sold to the commercial market, such as vinyl composition tile (VCT), which accounts for 20% of the category. Resilient was able to benefit from the high end, where overall activity remained strong throughout 2007. Whether it was luxury vinyl tile (LVT) or glass-backed products, sales at the upper end kept the category from sinking even deeper. Rubber flooring, which for statistical purposes has been broken out separately from the resilient category for the past three years, was technically the only segment within the industry that showed some type of gain as sales inched up 1.2%. That was understandable considering more than 95% of all rubber floor sales go into commercial applications. Falling hard Turning to the three “hard” surfaces, each took a beating with units off by double digits from 2006 and actual sales not doing much better. But it was the tile segment that fared the worst as shipping costs slowed imports for the first time in more than 10 years. In total, sales in 2007 were off 15.7% from 2006 and consumption was 18.8% less. Last year also marked the first time since 1994-95 that total volume decreased year over year. As noted, imports took a major hit and were off more than 20%, with the largest slowdowns coming from Brazil, where dollars were off 30.7% and units down 30.8%, and Spain, which saw sales and unit drops of 30.5% and 37.8%, respectively. Of all the categories, wood was especially hit hard by the subprime housing collapse as new home builders had fallen in love with the product over the past 15 years. While a rise in “domestic exotic” species helped offset the drop in foreign exotics and a harder push into commercial sectors opened up more applications, they were not enough as sales in ’07 fell 11.3% compared to ’06 and units dropped 14.4% during the same period. A beacon of light for the category is the green movement. As more companies begin to sprout third-party certifications showing the species they use come from sustainably managed forests and a Yale University study reported wood is one of the greener products on the market, the segment is hoping to get a boost as more and more consumers become educated on what it means to be green. The final category is also the industry’s newest, and 2007 proved to an historic one for laminates. Unfortunately the kind of history it made is one people like to forget. While the laminate segment did not experience as much of a decline as the other hard surfaces, 9.1% in sales and 10.3% in units, 2007 marked the first time the category saw a year-over-year decline in either, let alone both since it became part of the U.S. flooring industry in the mid 1990s. With the cost of importing getting higher and higher, the trend of laminate mills making products in the U.S. instead of Europe or Asia continued to increase. In fact, the European Producers of Laminate Flooring (EPLF) reported that while its member companies saw an 8% increase while in sales around the world for 2007, shipments to North America “continue to record a downturn in sales of ‘made in Europe’ flooring.” A year-on-year comparison showed units going from 68 million square meters to 54 million square meters, a 20.6% drop. Breaking it down even further, the organization said the U.S., which accounted for 34 of the 54 million square meters, was off 32% over 2006. Like others, the environmental movement is helping the laminate category. With manufacturers using recycled content and the fact laminate’s décor is merely a photo, the category has plenty to talk about when it comes to its products being environmentally friendly. Positives to build upon There is no argument that 2007 was a miserable year for just about everyone in the industry. But there are some positives that can be taken from the year that was. First and foremost is the continued growth of the commercial market. While there are signs the overall economy may be taking its toll on the sector, sales are currently ahead of last year and should finish in the black once again. In 2006, the environmental movement started going mainstream; in 2007 it took off like a rocket. And even with the depressed economy, it is not about to run out of fuel anytime soon, if ever for that matter. Beyond the fact that just about every company is promoting a green attribute or initiative, there is even a TV station devoted to the topic. “The Discovery Home” channel recently changed its name to “The Green Channel” with 24/7 programming on the subject. With green being everywhere and the flooring industry positioned ahead of the curve both commercially and residentially, it is an area that the selling chain can wrap its arms around when the economic tide finally does turn for the better. So, in putting the bow on the previous year, many will remark it should be a black one to pay homage to the wreck that was 2007. A year from now, though, they may say ’07 was really not so bad. The reason: The first half of 2008 is signaling the current 12 months may easily trump the previous dozen in terms of losses.