Hicksville, N.Y.—Despite a myriad of factors pulling profits from all levels and sectors last year, 2005 was, by most accounts, a good year for the floor covering industry.

Devastating hurricanes and other disasters; soaring oil costs causing increases in energy, transportation and raw materials; supply shortages; increased foreign competition, etc., wreaked havoc last year and caused companies to buckle down and come up with new ways of doing business effectively and efficiently.

Yet, there were a number of positive factors which spurred end users to buy record levels of flooring—the overall economy stayed positive and grew a respectable 3.5%; housing, though having slowed from its record highs, still remained robust; interest rates were still low; the average house in the U.S. not only continued to grow in value but size, and the commercial industry, especially the corporate segment, came on strong.

So what does all this mean? In terms of dollars, industry sales at the manufacturing level in 2005 were $24.232 billion, a healthy 9.1% over the $22.211 billion it did in 2004. While some categories, such as resilient, barely made it to the positive side—a .2% gain—others, like laminate, continued to soar with sales 15.2% stronger. Even the carpet segment saw better-than-normal sales with figures 7.1% higher than last year.

But, while sales figures were strong, in the final analysis, end users purchased roughly the same amount of square footage as they did in 2004—27.15 billion square feet compared to 26.72 billion square feet last year, a mere gain of .016%.

Again, some sectors fared much better than others, namely wood, ceramic and laminate, while others fell way short and even lost ground compared to the previous year. Carpet and rugs were essentially flat, with an increase of .4%—and that was mostly attributed to gains in area rugs, otherwise the category would have been flat. Resilient was the only segment that finished on negative side, though barely, at -.7%. This year, sales and square footage of rubber flooring were calculated separately from resilient as its market share approaches 2% of industry sales. If put back into resilient, the category’s unit volume would have been a hair above flat.

While the overall selling pie continued to increase, the non-carpet and rug categories also continue to gain market share. Between 2004 and 2005 they picked up another percentage point, meaning these products now represent 36.1% of industry sales.

Higher Prices, Smaller Profits

So, what dynamics were at play to allow for sales to rise at such a healthy rate yet overall units remained flat? And, what does that mean for the industry? Both answers are rather simple—price hikes and harder-to-come-by profits.

First, dollar gains can mostly be attributed to the multitude of price increases imposed upon the industry throughout 2005, especially on the carpet side.

In carpet alone, some companies had seven to 10 rate hikes. The vinyl mills fared a little better with three or four increases and each of the other categories faced their own pressures. Among other things, wood supply shortages put pressure on lumber costs; tile companies were faced with extra transportation tariffs and taxes and laminate mills played with pricing all year as selected products were boosted at different times.

The industry-wide total was mostly affected by the carpet/rug and resilient categories, which make up 74% of industry sales and 82% of the total amount of floor coverings consumed.

When it came to both the carpet and resilient categories, industry officials and observers attest the dollar gains were mostly all due to the price increases.

This helps to shed light on one of the most important reasons why companies at all levels and in all segments saw their profit margins shrink: The higher cost of doing business.

Many people with whom FCNews spoke lamented on the fact that the cost for just coming in and opening the business in the morning has doubled and even tripled compared to just two years ago. Electric, heat, air conditioning and basic supplies—such as pens and notebooks—have all gone up and each extra expense eats into the bottom line. So, when the price to have these things starts to dramatically climb, profits start to come down.

To counter that, prices need to be raised to at least offset the increased costs. The thing is, in most cases, a price hike is not in line with all the extra costs a company must pay. So, unless more goods and services are sold, this combination of higher costs and not high enough price increases results in profit margins shrinking.

Each floor covering category had its own issues with which to deal, but, like the oil situation, 2005 had a number of things that affected the entire industry—both positively and negatively.

Oil, Oil Everywhere

As in 2004, black gold was the main culprit behind most of the industry’s woes in 2005. From uncertainty in the Middle East to disruptions in the Gulf Coast because of hurricanes, most notably Katrina and Rita, the cost of a barrel of oil reached all time highs, and sent prices on anything and everything skyward.

In a two-month period, the cost to transport a load of tile, for example, jumped nearly 33% compared to what it cost in 2002.

For the carpet and resilient mills, which are the most affected by oil, the Gulf Coast mess meant supply shortages and/or delays of the necessary raw materials to manufacture their products. One resilient mill executive told FCNews the company had to wait four days for certain supplies while trucks were re-routed along the Southern highways. In today’s world of as needed inventory, these types of delays cost everyone involved in the selling chain business.

But oil was not the only thing causing hardships for the industry. Even though the wood, ceramic and laminate categories posted solid gains in both dollars and units, their margins were pinched by not only the higher cost of doing business because of rising oil prices, but a variety of their own external factors.

In wood, for example, intense foreign competition, increased worldwide capacity and illegal logging of exotics species caused supply problems and pricing pressure. While lower prices were mostly felt along the West Coast, enough of the product made its way across the states to be felt.

Good News

While there were many negative factors pulling at the industry, the year will still go down as “pretty good.” In fact, while many may look back and refer to 2005 as “the year of the price increase,” it actually had more positives in place to keep things vibrant.

Sure, the top line for most was healthy while the bottom line was nerve-racking, but overall, things were good: the economy was solid, existing home sales were strong, the builder market was still rated excellent and the commercial industry continued the strong comeback it started in 2004.

With flooring sales still divided 60% residential to 40% commercial (some may place it at 55/45 or 65/35 depending on how they classify their Main Street sales. For the sake of argument, FCNews stuck with the historical viewpoint), each offered its reasons for good news.

New home construction and existing home sales may have slowed some from the frenzied pace they were at, but not enough to cause alarm. Plus, not wanting to be morbid, many note the destruction in New Orleans and other cities because of hurricane damage will cause a regional building boon.

Bigger, More Expensive Homes

The real good news though comes from the homes themselves as there are two factors many do not consider. First, the national average purchase price from a single-family home continued to rise—8.5% in just one year. And, in some places, such as Boston, house prices have increased a whopping 81% over the last five years.

The second positive factor about all the new home construction has to do with size. Since 1950, the average size of a new single-family house has more than doubled. Back then, the average home was about 1,100 square feet. Today, it is more than 2,300 square feet.

Beyond the sheer size, other things have changed in the house over the years. For example, in 1975, 20% of new single-family houses had 2.5 or more bathrooms; by 2002 it was up to 55%. In the 1980s, less than 15% of new homes had 9-ft. ceilings; that figure grew to 43% in 2004. Even garages, which get converted to bedrooms, living rooms, offices, and so on have grown. In 1967, 48% of new single-family dwellings had garages for two or more cars; it was up to 82% by 2002.

Both these factors should be viewed as contributors to more and better quality flooring being sold. Because the value of a home is more, consumers will spend more on better quality products to furnish it, meaning there is a great deal of up-selling potential.

The same holds true when a family is trying to sell its home. In order to protect and even increase the value, higher quality goods will be purchased to spiff it up for sale. In the case of floor coverings, this has helped the hard surface side, as realtors will tell you products such as wood and tile can increase a home’s selling value.

As for homes having more square footage, this benefit to flooring is obvious.

TV’s Impact

Not many people openly talk about it, but television has given flooring a tremendous lift in the eyes of the consumer, thanks to the plethora of home improvement, do-it-yourself and interior decorating shows. The phenomena started a few years ago but truly hit its apex the past two years.

A number of flooring manufacturers realized the benefit these programs can have on product recognition and sales and signed on to be sponsors.

While not every program focuses on flooring, there is a great deal of emphasis placed on it by the designers and decorators. In addition to television, shelter magazines are using more decorative, stylized flooring in their photo shoots and home make overs. These have had helped consumers have more confidence with their decorating. And, it helps explain why more want carpet that is not plain beige, wood that is not just red oak, tile that is not beige, and so on.

Commercial Takes Off

In 2005, the commercial or contract market not only picked up where it left off the previous year—moving up—many of the important sectors showed signs they are on their way to rebounding back to where they were prior to the events of 9/11.

Since the devastating terrorist attacks, certain segments of the contract side of the economy either crept forward or slowed to a halt, such as hospitality and corporate.

Both began opening up last year. Corporate profits rose, allowing companies to go ahead with projects they had put off for three or more years. This is a big boost to the industry since the corporate sector represents the largest piece of the commercial pie, and it does not just focus on carpet tile. Hard surfaces, such as wood and ceramic are being specified in more projects.

One needs to only visit the exhibitor showcase during the convention for the StarNet Commercial Flooring Cooperative to see the increased use of hard surfaces. Whereas this part of the industry used to be primarily dominated by broadloom and carpet tile, with some resilient thrown in for the breakrooms and cafeterias, today there is a wide range of flooring products, including wood, ceramic and laminate.

In hospitality, people began travelling again in 2005 to where the industry was seeing numbers it hadn’t seen since that fateful day in 2001. Along with vacationers, business travel also took off. Add to this the wireless Internet boon and many hotels, convention centers and others in the field once again had reasons to upgrade and renovate, something they had been putting off with the slowing of business.

Hotels of all shapes, sizes and price points—from Hilton to the Econo Lodge—jumped head first into renovating their facilities in order to provide accommodations that were more comfortable and user-friendly.

Other commercial sectors such as healthcare remained robust as America’s population both ages and does everything it can to remain looking young. Not only are assisted living facilities still in demand, medical centers are opening up as quickly as Starbucks.

And, like the corporate sector, these facilities are moving away from the stale, medical-looking environments to a more homey feel. This has opened up the segment to a variety of new and different products.

These are some of the main reasons hard surface manufacturers had a larger than normal presence at this year’s NeoCon. A number of companies, especially from the wood and ceramic sector made their debuts at the commercial market last month to let designers know they have products to meet their needs.

One final factor that has influenced every sector of the industry—both good and bad—is the Internet. It is estimated consumers will purchase over $200 billion through the Internet. Granted, the industry will see very little of that as the majority of consumers use it for research when it comes to flooring.

But it cannot be ignored. Research suggests consumers rely on dealer and manufacturer sites the most to get their information and decide on a purchase. It is not just dealers as architects and designers use the Internet for research as well, especially with more and more emphasis being placed on environmental issues, such as LEED, recycling, sustainability and life-cycle ratios.

The point is having a proper Web site, along with understanding how to market your business and services are becoming just as vital if not more so as maintaining a professional looking storefront and figuring what your next flyer or brochure will look like.

Within the industry, the Internet is helping make business more efficient, which allows all to keep more money in their pockets through the business-to-business (B2B) initiative. Things really started heating up in 2005 as all the leading software companies had their programs certified to meet the industry standard and manufacturers and distributors began offering incentives for customers to do business in this fashion.

In the end, 2005 may not get a standing ovation and many will want to forget it ever happened, but from a pure business standpoint it will go down as “a pretty good year” for all levels of the selling chain—there were enough positives to compensate for the downside challenges. And while the bottom line might not have been as healthy as the top line, there was certainly a silver lining to be seen.

The year left the industry knowing it has the ability and wherewithal to withstand major challenges so when certain things return to normal, namely the stabilization of oil, much of its woes will be gone.

Methodology

The statistics presented in this study were derived from an extensive research project by Floor Covering News.

Figures were gathered from a variety of sources to develop the most plausible and credible results. Sources included, but were not limited to, published governmental records (both U.S. and foreign sources); filings from public companies, extensive and confidential interviews with top officials from all levels of the supply chain—manufacturer, distributor, retailer, installer, importer, agents, etc.—historical trends and data; reports published by associations along with private conversations with directors, previously published reports and stories in FCNews.

Some of the data comes from such sources such as the U.S. Department of Commerce, Federal Housing Finance Board, U.S. Bureau of Economic Analysis and other federal agencies. Foreign agencies as well as respected international organizations were consulted, including China Wood International, the European Producers of Laminate Flooring, Carpet Export Promotion Council, Tile of Spain, Ceramic Tiles of Italy and other international groups affiliated with the flooring industry.

Data available from U.S. industry associations and groups were also used as part of the evaluation process, including National Wood Flooring Association, North American Laminate Flooring Association, Carpet & Rug Institute, and others.

Some trends and historical data came from sources including the National Association of Home Builders, National Association of Realtors, U.S. Green Building Council, National Association of Manufacturers, etc.

Floor Covering News also held numerous private conversations with high-ranking executives from many of the industry’s leading mills—both overall and by their respective category of business. While these discussions were off the record and confidential, the information gleaned from them was incorporated into our research to help arrive at the final figures.

These figures do not include sundries but represent goods sold at the first point of sale, meaning products that are private labeled from one mill to another are not counted twice. Also, in the case of the ceramic category, only floor covering sales are included, which account for approximately 75% of the segment’s revenues. In some cases, percentages do not total 100 due to rounding.

FCNews does not claim the numbers presented here to be exact and final. Governmental and company data is often revised as much as five years after first being published. These figures do represent what we feel to be the best and most accurate account of what the floor covering industry accomplished in 2005 in terms of sales, volume and other pertinent information.