It was the best of times, it was the worst of times. No, this is not a tale from Charles Dickens. Rather it is the story of how the year 2006 was for the flooring industry. Similar to the author’s classic novel, the chronicle of the previous 12 months could easily be called “A Tale of Two Years.”

The year 2006 started with a bang and ended with a fizzle. Eighteen months ago, the industry as a whole was riding a wave of prosperity that carried over from 2005. It continued throughout the first half of 2006 and industry executives across the selling chain were forecasting a record-breaking year for flooring in both sales and units sold.

Then, in mid July the industry hit a wall, at least the residential side, as the building market suddenly tanked and consumer spending on replacements and remodels fell with it. Luckily, the commercial sector not only continued the good fortune it inherited from 2005, it maintained and, some would say, even carried the entire industry when the residential market screeched to a halt the second half of the year (see related story on page three).

Mixed results

When the dust settled on 2006, the results were both mixed and not very good depending on which part of the business you were involved with. Overall industry sales at the manufacturing level rose a miniscule 1.99%, reaching $24.715 billion.

The gain was the smallest the industry has seen since 2001, when the terrorist attacks on 9/11 put a halt to just about all consumer and commercial spending. Discounting that year as an anomaly, one would have to go back more than a generation to see such slow growth. Some industry veterans went so far as to say the second half of ’06 was as bad as they had seen since the recession years in the early 1980s.

In terms of just how slow the year’s sales growth wound up to be, consider since specialty carpet retailers switched to flooring dealers—in the early 1990s when hardwood, ceramic (tile) and, eventually laminate hit their stride—industry sales grew at an average of 6.7% per year.

While the industry can take solace that sales did grow in 2006, it still cannot be too pleased with overall consumption.
The total amount of product sold last year fell 3.1% to 26.36 billion square feet compared to 2005’s 27.18 billion square feet. This drop in units actually set the industry back a couple of years to pre-2004 levels.

Cost of production

So in the end, the flooring industry took a step back as the slight boost in sales can be attributed to two main factors. First, most categories had at least one type of price increase in 2006 to help offset the continued rise in raw materials, energy and transportation costs. This was true for all categories, not just those that are highly dependent on oil- based materials. For example, lumber shortages forced certain wood prices up. Then there is the added cost to transport the heavier hard surfaces.

As for those dependent on petroleum to make their products, it has been well documented how the cost of a barrel of oil reached previously unchartered heights in 2006—going as high as $75.

In the Organization of the Petroleum Exporting Countries’ (OPEC) December “Monthly Oil Report,” the organization stated, “The current year is likely to be remembered for strong upward price trends.”

In fact, it is estimated the industry’s raw materials, energy and transportation costs rose approximately 7.7% in 2006. So, for example, the 5% to 8% price hike tacked on to numerous products last year were done just to cover the extra costs to produce and deliver them.

While the cost to produce and deliver products was the main culprit for the sales and volume number discrepancy, the second factor was consumers purchasing more higher-end and low-end goods. The upper tier allows for higher margins on the same amount of goods sold, but the lower end is what eats up those very same profits.

The actual numbers don’t lie: Upper-end carpet mills reported sales two, three and even four times the category; in wood, the more expensive exotic woods increased their market share by 80% in 2006; tile is actually outselling resilient, and the more expensive resilient goods—LVT and glass-backed—now account for approximately 20% of the category’s sales, and in laminate, executives have been saying for nearly two years how sales resemble an hourglass, meaning the upper and lower price points are capturing the market’s attention while the mid range goods are getting squeezed out.

The high end might allow for higher margins, thus allowing those who sell the product a chance to earn money, but the fact remains there is still plenty of low end, cheap goods infiltrating the market. And for those consumers who have been forced to tighten their budgets, they are turning to these low-end products for their redecorating needs.

Categorically speaking

Individually, the various flooring categories had their own reason to both smile and sulk.

Carpet, which still accounts for nearly 51% of all flooring sales—63% when rugs are factored in—mimicked the overall industry with a slight sales bump (1.2%) and lower units sold (-3.1%) compared to last year. In sales alone, rugs fared a bit better than its softer counterpart, with a 2.7% gain over 2006.

The resilient sector continued its trend of being the hardest hit. In 2006, both sales and square feet recorded the largest decreases of any category, minus 3% and 5.4%, respectively. There were a couple of bright spots: commercial sales were up over 2005, and both glass-backed and luxury vinyl tile (LVT) products continued to sell well among residential consumers.

For the first time in many years, the hardwood category was spotty with overall sales up 2.2%, but total square feet falling 4.3%. The large difference was mostly due to a shift in end-user preference from traditional oak floors to more exotic species. Brazilian cherry alone now accounts for 10% of wood floors distributed.

The three categories that enjoyed the most overall success last year were tile, laminate and rubber. In each case, there were year-over-year gains in both yearly sales and units sold.

Sales of ceramic and porcelain tile actually surpassed resilient, hitting $2.464 billion compared to $2.377 billion. Compared to 2005, tile grew an impressive 5.1% in sales and 3% in volume. While these numbers are very positive in comparison to the other flooring categories, those within the sector will note tile factories were on pace to produce more product than every before prior to the second-half slowdown. Some mills in the U.S. actually cut production by 40% late in the year.

For the first time since entering the U.S. flooring market in the mid 1990s, sales and production of laminate fell below double-digit growth. Nonetheless, the category still enjoyed a healthy 8.7% increase in sales and a 9.4% gain in square footage. With the gain in units, the segment was able to surpass the one billion square foot mark for the first time.

Thanks to the continued boon in the commercial arena, both sales and units of rubber flooring were up in 2006. Sales for the segment actually topped half a billion with a 4.2% gain, while volume grew 2.9%.

Another highlight for the industry as a whole last year had nothing to do with actual sales or square footage. Rather it was the continued development of environmentally friendly products and initiatives to keep goods out of landfills.

While these efforts have been happening for years, as the story on page 12 shows, 2006 will probably go down in history as the year everyone in the selling chain got involved to make it a reality.