Focus 100 Retail: The residential market has underperformed this year

By Darius Helm

After encouraging growth last year, retailers and residential contractors had high hopes for 2014, but a winter of historic proportions checked any early momentum, and spring and summer didn’t bring the expected surge of activity. Builder and multi-family business has been outpacing residential remodeling, and it looks like the residential flooring market overall will end the year up by low single digits, below expectations.

While some retailers have expressed optimism about a strong finish to the year, most of the key economic indicators suggest that consumers are likely to remain fairly cautious. Since topping 17,000 in July, the Dow has been less stable and more skittish in general—about a month ago, it fell 1,000 points over 14 trading days, then in short order took back two thirds of those losses. the Consumer Confidence Index and the Michigan University Consumer Sentiment Index are finally trending in the same direction, though it’s still unclear what this will mean for the holiday shopping season.

It’s worth noting that many of the fundamentals are strong. For now, the economy is moving in the right direction, unemployment numbers are down, and jobless claims recently fell to a 14-year low. And when it comes to energy, costs have stabilized, and there are signs of dissent in OPEC, whose power has been diminished by shale oil and natural gas developments. Nevertheless, the global economy remains fragile, and it seems as though there’s always something new to be nervous about.

Around the country, conditions have been mixed. No market seems stronger right now than Texas, where both builder and retail business have been outpacing most other regions. Many of the markets that fell the furthest have been driving growth. Florida is coming back, though not all at once. Colorado has been strong. There’s solid activity in parts of California. But in Arizona, for instance, one of the markets that experienced the steepest declines, builder business has been down recently.

HOUSING MARKET UPDATE
Part of the reason for stalls in market rebounds relates to foreclosures. Foreclosure sales have helped drive the housing market since it started to grow again, but foreclosure volumes are falling—and they’re falling at different rates in different regions, causing ebbs and flows in activity. Realty Trac reports that third quarter foreclosure filings were down 16% from the third quarter of 2013. Numbers for September were down 19% from last September, to the lowest level since July 2006, which is right when the market turned south. And over the last four years, every single consecutive month has shown foreclosure activity declines.

Existing home sales, which have a big influence on residential remodeling numbers, have been sluggish this year. They started off the year slow, then showed month over month gains from April to July, according to the National Association of Realtors. But August sales (single-family homes, condos, co-ops and townhomes) were down 1.8% from July, and, more significantly, down 5.3% from August 2013, with increases in the Northeast and Midwest wiped out by declines in the West and South. September increased 2.4% over August, but sales were still down 1.7% from last year.

Condos and co-ops sales through September are about flat with last year, while single-family homes, which are a much bigger piece of the pie, are down 1.9%.

Regionally, existing home sales in the Northeast and South are strongest—both are down about 1.4% over September 2013—while the West is down 4% and the Midwest is down 4.9%.

Inventory has also marginally declined. In September, there were 2.3 million existing homes for sale, representing a 5.3 month supply, and that’s 6% higher than the inventory of 2.17 million homes in September 2013. And properties are staying on the market 12% longer than they were last year. Also, home price appreciation has slowed on average from a year ago.

DEALER PERSPECTIVES
Redi Carpet’s Jerry Hosko, whose $205 million firm has 21 locations and a strong position in the multi-family market, offers perhaps the most critical insight into market conditions when he says that “pent-up demand was absorbed in 2012 and 2013.” He’s speaking to the state of property management, but the same applies to the market in general. The market growth of the last couple of years may not have been dramatic and may not have felt driven by any kind of rebound effect, but pent-up demand had to play a role—in the housing market, in the residential replacement market, in the property management business. In today’s economy, this is what pent-up demand looks like—weak growth.

However, it’s still growth, and conditions are a lot better than they were just a few years ago. During those lean years, installers abandoned the industry because there wasn’t work. And now that the market has rebounded somewhat, the flooring industry doesn’t have enough qualified, experienced craftsmen to install its floorcoverings. And the problem isn’t limited to flooring installers; it’s also framers, carpenters, masons and other trades. A good deal of that labor comes from south of the border, and that’s increasingly true the closer the market is to the border. In Texas, for instance, it’s enough of a problem that it’s causing delays in starts and impacting timing cycles in home building.

It’s a problem in both the residential and commercial markets. Flooring installation is not drawing enough talent, so there’s a risk of a growing gap between older, experienced installers and younger workers lacking in experience and perspective. It’s not a glamorous job and it’s not as highly paid as some specialty trades, even though installers in many markets can do fairly well. And it’s worth noting that hard surface flooring is the more lucrative side of the flooring installation market.

Most retailers report that hard surface sales are outpacing carpet—and in fact there are signs that the residential carpet market will end 2014 with a marginal decline in total revenues. Hardwood seems to be the strongest category this year, with retailers and contractors generally reporting solid gains. LVT is clearly growing very quickly, but for many dealers they’re still using more of it in mainstreet commercial (or specified commercial, if they’re in that market), than they are in residential remodeling. 

LVT is crushing laminate flooring for most retailers, but there are several, including some huge players like RC Willey and Great Floors, for whom the laminate category remains a strong and steady business. And what distinguishes these retailers from many others is that they have always emphasized the higher end of the category. They sell all price points, but put their best efforts into selling it as a quality product. The strategy has also kept them out of price wars with home centers and other commodity-oriented retailers.

In terms of carpet, the two dominant trends are lower end polyester carpet and higher end ultra-soft carpet. There’s no doubt that both of these products have helped drive the category, with ultra-soft fibers helping to balance out the low unit costs of the polyesters that have been flooding the market and pushing nylons out.

While many retailers are full of praise for ultra-soft carpets, there are detractors. Some say they are problematic because they need specialized vacuuming equipment. Others say they’re already too soft, and Stainmaster Tactesse was as soft as carpet ever needed to be. Regardless, ultra-soft carpet is a trend now, but it will not trend indefinitely. The issue is whether it has passed peak acceptance, and by next year the numbers will tell the story. 

RETAILER AND CONTRACTOR UPDATES
One of the largest flooring retailers in the nation is Nebraska Furniture Mart, a member of the National Floorcovering Alliance (NFA) and a subsidiary of Berkshire Hathaway. Berkshire Hathaway also owns retailer RC Willey and Shaw Industries. 

Nebraska Furniture Mart sells furniture, appliances, electronics and flooring, and it has two massive stores—its original store in Omaha, Nebraska and its store in Kansas City, Kansas, which is about ten years old—along with a smaller operation in Des Moines, Iowa that mostly sells flooring and appliances. And this coming spring the firm is opening up a fourth location, this one in a northern suburb of Dallas called The Colony. 

At 1.9 million square feet, including a 570,000-square-foot showroom, the Texas store will be twice as big as Nebraska Furniture Mart’s Kansas City store.

Despite the tough winter, Nebraska Furniture Mart is headed for a growth year, with sales up an estimated 6% to $103 million. Hardwood and LVT sales have been strong, while laminates are getting squeezed between LVT and wood, and ceramic sales are also soft. But carpet, which accounts for nearly half of the firm’s flooring sales, is up for the year. 

RC Willey, another NFA member, has 11 operations west of the Rockies, over half of which are in Utah, along with three in Nevada, one in Boise, Idaho, and another just outside of Sacramento, California. This year, flooring sales should be up by high single digits, to about $68 million. Like Nebraska Furniture Mart, the bulk of RC Willey’s flooring sales are in residential remodeling, with only a small volume in builder, multi-family and mainstreet.

Earlier this year, RC Willey opened a new 160,000-square-foot store in the Salt Lake City valley, replacing an older, smaller operation. And next year the firm will replace a store that’s a little south of the valley with a location, formerly a Nordstrom, which is attached to a mall at its back end. That’s a new type of retail environment for RC Willey stores, and the firm intends to see what sort of sales it can generate from mall traffic.

Hard surface flooring sales are outpacing carpet sales at RC Willey. And laminate flooring is its strongest hard surface category, in part because it’s well suited to the cold, dry climate, and in part because the retailer has always maintained a strong higher end laminate business. So while LVT is growing, driven by higher end products like USFloors’ Coretec, laminate business remains robust. Hardwood sales are also strong, and that’s all engineered.

RC Willey invests significantly in its brand presence. It’s been around for 82 years, so it has a lot of brand recognition, but it also does a ton of advertising—billboards have been a big focus recently—and it has a dedicated social networking department. In addition, the store constantly gives back to the community through food drives and donations to local charities.

Along the densely populated corridor between New York City and Washington, D.C., Airbase Carpet & Tile Mart has ten locations—seven in Pennsylvania and three in Delaware. The firm, which also has a wholesale operation in Dalton and another, called Carpet Wholesalers, in Charleston, South Carolina, is also a member of the NFA. Last year, Airbase sales were flat, at an estimated $49 million. The frigid winter hampered sales in the first half of the year, but the summer was very steady.

The bulk of Airbase’s products are in the middle price points, but it has a broad offering at the high and low ends as well. Nearly half of the firm’s revenues come from carpet, and area rugs make up another 10%. On the hard surface side, vinyl flooring (both sheet and tile) account for the largest chunk, followed by hardwood and ceramic tile. Laminates make up 5% of flooring revenues. LVT is a big growth category, as are ceramic tile and hardwood.

Great Floors, which has 17 locations in Idaho and Washington, generates most of its revenue as a traditional flooring retailer, but it also does builder and multi-family work, commercial projects and insurance work. The firm, headquartered in Coeur d’Alene, Idaho, hit its peak in 2006 at about $125 million and has spent the last few years climbing back from a low of about $80 million in 2010. In 2013, it crossed the $100 million mark, and it’s headed for $115 million this year. 

Like RC Willey, Great Floors’ strongest hard surface product category is laminate flooring, and part of its success is from not just focusing on the low end but also having a strong higher end program. Imports make up the biggest part of Great Floors’ laminate offering, with both high end and value priced products, though Shaw and Mohawk are also big suppliers.

The higher end has been strong for Great Floors this year. In carpet, ultra-soft fibers have helped drive business at the upper price points, along with volume from PET carpet at the low end. For Great Floors, LVT growth has mostly been in the builder, property management and mainstreet commercial segments, taking share from laminate. And sales of hardwood have been very brisk this year. 

The firm also sells a lot of ceramic tile, which has synergies with its seven-year-old granite slab fabrication business and its recent foray into cabinets. Kitchen and bath remodels are fundamentally different from other interior remodels, requiring expertise that’s both broad and deep, and Great Floors is looking for ways to leverage that expertise in the marketplace.

Builder and commercial business has been strongest this year, and retail has been lagging behind, though that’s up as well. This year, the firm opened an operation in the southeast corner of Washington, serving the Tri-Cities metro area encompassing Kennewick, Richland and Pasco.

Cap Carpet, headquartered in Wichita, Kansas, is an increasingly diversified business with a range of flooring operations in Kansas, Missouri, Iowa and Nebraska. In all, the firm has 14 locations offering flooring to the residential market. Several Cap Carpet businesses are affiliated with CCA Global, including ProSource operations, Floor Trader stores and Carpet One stores. The firm also has a Big Bob’s Carpet Outlet in Wichita, as well as The Floor Project, a retail concept created by Cap Carpet, in Wichita and Topeka.

Cap Carpet also has an aviation interiors business and a high end carpet mill called White Oak, and both are growing parts of the Cap Carpet corporation. As these businesses grow, the firm is cutting out some of its less efficient retail operations. This year, it closed two retail locations. Overall, business was brisk in the early part of the year and has slowed since then. Retail flooring sales will likely end the year about flat, even though same store sales are up by double digits.

H.J. Martin and Son has been a Green Bay, Wisconsin fixture for over 80 years, and six years ago it opened another location in Neenah, less than 40 miles away. In addition to retail, the firm also serves the builder and multi-family markets—and it does a lot of commercial business. Its retail business, which is focused on the mid to higher end of the market, has been strong, while the builder and multi-family segments have been even stronger. 

The firm’s expertise extends beyond flooring, particularly on the commercial side, and its total sales are over $100 million, but flooring sales this year should be closer to $33 million, reflecting strong growth.

According to the firm, the market has been rebounding, both in new construction and remodeling. Higher end apartments are in a growth mode. And the region is popular with Chicagoans establishing second homes, and that’s another higher end market. Luxe goods like wool carpet are in demand in that market, along with carpets with ultra-soft fiber, but even polyester carpet has been doing well. Ceramic tile is making big gains, as is LVT. The firm’s laminates are at the higher end of the spectrum, and they’re holding their own. The firm also sells rugs, and it just came out with a smaller display that is easier to handle than the traditional towering racks.

Primera Interiors, headquartered in Tempe, Arizona, is another retailer and residential contractor that sells other major product categories beyond flooring. The firm’s total revenues are closing in on $90 million, with flooring sales at an estimated $28 million, up double digits from 2013. In addition to flooring, Primera sells cabinets and countertops. 

Primera has locations in five states—Arizona, Colorado, California, New Mexico and Nevada. Last year it purchased a cabinet business in southern California between Los Angeles and San Diego, and it intends to add flooring to that location. Earlier this year, the firm added a cabinet business in Albuquerque, New Mexico.

For now, cabinets are the biggest part of Primera’s offering, followed by flooring and then countertops. The firm is a member of KBX, the cabinet group that, along with FloorExpo’s Home Solutions and MultiFamily Solutions, makes up CCA Global’s FEI Group. Builder business accounts for about 70% of flooring sales, with the balance split between retail and specified commercial.

Edison, New Jersey based Worldwide Wholesale Floor Coverings, which operates out of three locations in central and northern New Jersey, does most of its business in the residential replacement market. The firm, which is a member of the NFA, anticipates around 4% growth for the year, taking revenues over $37 million. That’s below early expectations, which were dashed by a winter so brutal that on some days retailers couldn’t even open their stores.

A small part of Worldwide Wholesale’s business is in the builder and multi-family markets, but builder business has been growing faster than retail. And multi-family activity has been steady.

The firm covers most price points with its products, but its strength is in the mid to upper end of the market. Worldwide Wholesales is a Stainmaster Flooring Center, so it sells higher end nylon carpet, and now it’s working on adding Stainmaster polyester. The firm already does a good business in polyester carpet at lower price points. 

In addition to flooring, Worldwide Wholesale offers window blinds—it’s only a small part of the business. And it also offers flooring maintenance in the form of crews for carpet cleaning and dustless hardwood refinishing.

Another major player is Rite Rug, which has been in operation for 80 years. The firm was founded by the father and uncle of current CEO Michael Goldberg in 1934, and his son, Mickey Goldberg, is COO. Rite Rug sells the full range of floorcoverings, with half of its revenues coming from hard surface flooring and the other half from mostly carpet along with area rugs.

Rite Rug has dozens of retail locations, showrooms, warehouses and design centers up and down the East Coast, with businesses in 11 states, stretching from Illinois and Indiana through Ohio and Pennsylvania and down to Kentucky, Tennessee, Virginia, North and South Carolina, Georgia and Florida. In all, the firm has 38 locations that do business, including about 28 retail and wholesale operations.

Rite Rug has been in an accelerated growth mode since around 2008, and so far this is another year of strong growth. Michael Goldberg attributes much of the success of the firm to its entrepreneurial spirit, and he encourages his team to embrace that approach. Another notable strategy is the firm’s emphasis on warehousing. Rite Rug is able to handle a lot of inventory because of its warehouses, most of which are bigger than 20,000 square feet.

Builder business makes up the bulk of revenues. Retail and property management, which are about the same size, make up most of the balance, along with some specified and mainstreet commercial sales. This year, the firm has opened a location in Chesapeake, Virginia, along with two in Florida—one in Tampa and another in Orlando. The firm is also in the process of moving its headquarters and central warehouse to a 300,000 square foot location just outside of Columbus, Ohio. The location will also serve as the firm’s hard surface distribution center.

Florida based Bob’s Carpet Mart operates 16 locations, mostly in the greater Tampa area, and that includes a new store opened earlier this year. The firm, an NFA member, does all of its business in retail. Other than a little mainstreet business, all of its flooring goes for residential remodeling. 

The year started off slow for the firm, then it picked up steam, and, after a pause in the summer, fall business has so far been brisk. Sales for the year should end up around $28 million, as the Tampa area continues to rebound. 

The firm reports that customers have been focusing on higher price points. Hardwood and LVT sales have been strong—Bob’s has even done a couple of senior living jobs using LVT—while laminate business is flat at best.

Bob’s Carpet Mart is a Stainmaster Flooring Center, so it sells a lot of Stainmaster nylon carpet, but it also sells polyester from entry-level price points to the category’s high end. Ultra-soft carpet has been a driver as well. In all, carpet accounts for roughly half of the firm’s flooring revenues. 

Another NFA member, Macco’s Floor Covering Center, has six retail locations and one commercial operation in Wisconsin. The firm, headquartered in Green Bay, also has a store in Fort Myers, Florida that it bought from Hadinger Flooring two years ago. About 40% of the firm’s revenues come from its commercial business. Its residential business includes both builder and retail. And there’s multi-family in both its residential and commercial divisions.

This year, Macco’s anticipates double-digit growth, with revenues approaching $29 million. Commercial business has been stronger than residential, though both are up. Builder business has been good, particularly in Florida.

In terms of products, LVT just became the firm’s largest hard surface category. Hardwood sales are strong, and that’s mostly engineered, even more so in Florida. Carpet is still strong, though ultra-soft products are not driving sales. Just a few years ago, Macco’s carpet offering was virtually 100% Stainmaster nylon (it’s also a Stainmaster Flooring Center), but the firm has since embraced polyester at the low end of the broadloom range, and it will also be offering a Stainmaster polyester.

Looking ahead, Macco’s is considering the possibility of expanding in Florida, going north along the coast.

GROUPS & SERVICES
The biggest group, and becoming a universe unto itself, is CCA Global Partners. It’s one of the largest privately held companies in the U.S., and it is made up of 13 groups whose members have total sales estimated at close to $11 billion. Most of those groups relate directly or indirectly to flooring. 

CCA’s flooring groups include Carpet One, Flooring America, Flooring Canada, GCO Flooring Outlet, International Design Guild, Floor Expo’s Home Solutions and MultiFamily Solutions, ProSource Wholesale Flooring, the Floor Trader, and Stone Mountain’s Flooring Outlet. And in the last couple of years, the firm has strategically added two new groups: Lionsbridge Contractor Group and Innovia Community Management Cooperative. Lionsbridge is a general contractor group serving the property insurance market, while Innovia is an association of companies that manage everything from condo associations to planned communities. Currently, Innovia members manage a total of about 420,000 single-family units, and this is already 15% of the way toward CCA’s goal of three million units, which would equate to a 12% marketshare.

In terms of member sales from the flooring groups, overall numbers are up, but they fall short of what had been anticipated coming into the year. Those on the builder side of the business went in anticipating growth of 25% or more and are coming out with something closer to the mid teens. Less growth was anticipated for the residential remodel market, so the decline was less severe.

Carpet One Floor & Home is CCA’s biggest group in terms of membership, with over 850 member retailers, followed by Flooring America and Flooring Canada, with over 500. However, Floor Expo is probably the most valuable group. It’s comprised of two flooring contractor groups, Home Solutions for the single-family market and MultiFamily Solutions for the property management market. At its peak in 2006, member revenues were in excess of $3 billion. In the years following the housing crash, the multi-family side of the business began to surge, and that segment continues to be strong this year, even though the builder business has been showing sustained growth for two or three years. 

Currently, one of the biggest issues facing FloorExpo’s members is labor availability. As the industry ramps back up, finding qualified flooring installers is becoming a significant problem, made worse by the exodus during the recession, when so many installers went in search of new trades. It’s an issue facing not just flooring contractors but traditional flooring retailers as well.

FloorExpo’s member revenues will be up by double digits on average, but that’s off the pace of 2013, as the market has generally underperformed this year. Some regional markets have been hot, like Texas. Others, like Arizona, appear to have stalled. 

Another major group is Abbey Carpet Co., whose Abbey Carpet & Floor and Floors To Go account for about 650 members—and most of that is Abbey. Total member revenues will probably be up marginally for the year, with many retailers suffering through a cold winter, followed by a spring and summer with only lukewarm sales.

Member attrition rates have slowed at Abbey and Floors To Go, while new members have been added. Since June, every week has seen meetings with potential new members.

The initiatives at the annual meeting last spring focused on connection, with programs like Advertising Connect and Credit Connect. Customer Connect, the firm’s proprietary pay per click program, was also introduced. The theme for the upcoming March meeting is, “Be the best that you can be.”

Abbey members cover all regions of the country, and reports back from them suggest that conditions vary a lot around the U.S. The Sunbelt, for instance, has been generally strong, Texas has been very active, along with the Midwest and parts of the West Coast. Overall, May, June and July were stronger than August and September, and it’s not yet clear how the year is going to close out.

Carpet has been a strong category for Abbey members, with the best selling products at the higher price points. The group also has a proprietary Infinity fiber broadloom, produced by Shaw since 2012, that as been driving sales. Hardwood and LVT have also been strong.

Alliance Flooring, founded 17 years ago by industry veterans Ron Dunn and Jon Logue, is composed of two retailer groups—CarpetsPlus ColorTile and Carpetland—along with Floorco, which sells to the trade. Total member locations are about 389. The biggest group is CarpetsPlus Color Tile, with close to 350 member locations. Floorco has eight, and the balance is Carpetland. This year, seven new members joined the groups, and most are sizeable operations. Total member revenues will be up this year, though by less than had been expected, following, for many members, a surprisingly strong first quarter. But it slowed in April and has been up and down since then.

Every year, Ron Dunn and his wife travel across the country as summer turns to fall to visit with members. This year, Dunn’s tour took him to parts of the Midwest he had not visited before, where he saw members starting to put money back into their stores, upgrading designs and generally sprucing things up. He also observed, among other things, surprising levels of activity in Michigan.

Dunn reports that baby boomers are buying higher end goods while millennials, many of whom are just starting out, are all about value, and part of the challenge is to get them to stop relying on home centers.

The biggest focus at Alliance has been on digital technology. First, the group upgraded its website, which was only four years old but wasn’t mobile ready, and it upgraded its SEO. Alliance also turned its focus to social media, with two dedicated associates working with member retailers to find out what efforts generate the best responses, how to balance between promotion and oversaturation, and other key issues. Alliance exhorts its members to take advantage of the available technologies to target and tailor messages to specific groups, rather than blasting out blanket messages.

The smallest group of them all is the National Floorcovering Alliance, but, like Floor Expo, it has many large and powerful members, most of whom populate Floor Focus’ Top 100 list. The term of outgoing president Phil Koufidakis of Arizona’s Baker Brothers ends in December—it’s a two-year cycle. Incoming president Dave Snedeker is division merchandise manager of flooring for Nebraska Furniture Mart.

The group has 42 members. The newest, DeGraaf Interiors, operates out of three Michigan locations. New members must have at least $10 million in annual sales and a dominant market position, and they must be voted in unanimously by existing members.

This year, total member sales should be up by high single digits. Most NFA members are also Stainmaster Flooring Centers, and this year many are introducing Stainmaster polyester products.

Related Topics:Redi Carpet, Creating Your Space, Shaw Floors, National Flooring Alliance (NFA), Shaw Industries Group, Inc., Carpets Plus Color Tile, Mohawk Industries, Great Floors, Carpet One, Lumber Liquidators, Nebraska Furniture Mart, FEI Group, The International Surface Event (TISE), Coverings