Strategic Exchange - January 2013

By Kemp Harr

With the pending acquisition of Marazzi, there’s no denying that Mohawk, which was already the world’s largest flooring manufacturer with annual revenue of $5.6 billion (2011), will also be the world’s largest producer of ceramic tile. And let’s not forget that, worldwide, ceramic tile is the leading flooring category versus any other surface type and it continues to grow 5% to 6% per year.

>Back in 2002, Mohawk catapulted to the number one position in tile here in the U.S. when it bought Daltile for $1.8 billion. Daltile’s revenue for 2001 was just over $1 billion. At that time Daltile manufactured about 45% of what it sold at its Monterey, Mexico plant and produced another 20% at its six domestic facilities in El Paso, Texas; Conroe, Texas; Jackson, Tennessee; Lewisport, Kentucky; Fayette, Alabama; and Olean, New York. The remaining 35% was imported.

The announced purchase of Marazzi’s worldwide business is for $1.5 billion and its revenue last year was $1.16 billion. According to analyst John Baugh at Stifel Nicolaus, Mohawk is paying 8.3 times 2012 EBITDA. Here in the U.S., this acquisition gives Mohawk about half of the market. We reported in May that Daltile was number one with 34% of the market and Marazzi was number two with 14% of the market. Does that mean this there could be anti-trust concerns over this consolidation? I guess, we’ll have to wait and see.

The biggest news about this purchase is the doors it opens for Mohawk internationally. Marazzi sells tile in over 100 countries and it has manufacturing facilities in Italy, France, Russia, Spain and the U.S. (Texas). Marazzi is the marketshare leader in Russia, where demand for tile is similar in size to the U.S. But in Russia, Marazzi is exclusively sold direct to consumers in 300 retail stores.

The Marazzi Group is currently owned by the Marazzi family as well as two private equity firms. It was founded in Sassuolo, Italy in 1935 by Filippo Marazzi. His grandson and namesake died unexpectedly last November four days after news of this potential acquisition by Mohawk was revealed by Italian news sources. As we’ve said many times before, many of the design trends in the tile market start in Italy and Marazzi has always been a style leader.

A SECOND YEAR OF FOCUS ON ULTRA-SOFT RESIDENTIAL CARPET
It’s that time of the year within the residential flooring business when all the manufacturers roll out their new styles for the coming year. In the carpet category, for a second year in a row, soft, plush fibers continue to be one of the more exciting developments. We’ve gotten a preview of the newest styles from Shaw and Mohawk, and they are impressive. This year, both companies have expanded their offering to include nylon products made from nylon 6 fiber that they can extrude themselves. Mohawk is introducing Wear-Dated Embrace, and Shaw is debuting Caress. You might recall that last year Mohawk’s soft story was centered on SmartStrand Silk—made from triexta—and Shaw’s and Dixie’s were focused on Stainmaster TruSoft—made from Invista’s nylon 6,6.

We’ve all been watching as carpet has slowly been losing share to hard surface products, and one has to wonder if the soft trend will help to reverse this course. I’m sure many of you have heard the metaphor related to dog food, and, along those lines, my question is, will the dog eat it? Do consumers really want softer carpet?

Those of us who live in this business know that a room can perform differently depending on the type of surface that is installed on the floor. Carpeted rooms create a playful environment for playing board games, building with legos, listening to music and watching television. In the winter season, they seem to feel warmer and cozier. But, on the other hand, they do have to be vacuumed and spills can be more difficult to clean up.

I was intrigued to learn recently that there is brand new consumer research about where softness ranks among carpet shoppers’ priorities. Back in September, one of the leading flooring firms that’s heavily invested in the success of soft carpet polled 300 consumers about the importance of softness in relation to other buying considerations.

At a mall, researchers interviewed consumers ages 25 to 64 with a household income over $50,000 annually who had either shopped for carpet in the past three years or planned to do so in the next three years.

The study found that softness falls in the middle among consumer priorities but can be made more important when consumers are provided with more information on the soft attribute. It also revealed the customers initially equate softness with less durability but this perception can be reversed with a convincing pitch on wear data. Based on the research, customers put their priorities in this order: stain resistance, wear resistance, easy to clean, softness, color, thickness and plushness. With all the money invested in soft innovation, it will be interesting to see how this list changes as consumers become more familiar with the product and its benefits.

VACUUM CLEANER ISSUES WITH NEW ULTRA-SOFT CARPETS
Consumers who choose soft carpet may find themselves unpleasantly surprised with the performance of their vacuum cleaner the first time they try to use it on the new floorcovering. Less than a year ago, complaints began to surface regarding the performance of vacuum cleaners on soft carpets. Hopefully customers will realize that this is a vacuum failure, not a carpet failure.

The difficulties begin around the 40-ounce range, when the small wheels of the vacuum cleaner and the suction mechanisms sink so far down into the soft pile that the beater bar and suction area is actually immersed in the carpet.

This immersion significantly reduces or eliminates air circulation. When this happens, the vacuums are difficult to pull backwards and nearly impossible to push forward. And, as a result, they are unusable.

This isn’t the first time we’ve heard of difficulties in cleaning new carpet styles. About five years ago, when California shags were introduced, consumers had problems with the long fibers tangling in the beater bar. This resulted in damage to the carpet. The manufacturers of these California shags issued statements saying it was best to clean the long-fiber carpets with a Shop-Vac type machine or a suction-only vacuum cleaner without a beater bar.

And we are seeing similar statements today, as many of the leading mills are working on this issue from both a technical and communications standpoint.

Ultimately, this may lead to a total redesign of vacuum cleaners. In December, Hoover sent engineers to Dalton to research the problem. This new concept may mean lighter vacuums with bigger wheels so that they don’t sink down into the fiber or, perhaps, no wheels at all. Some experts suggest putting vacuums on mechanisms that enable them to glide over the surface of the carpet, much like those used for moving furniture.

There are a few models on the market that can handle soft fiber carpet effectively. Oreck’s Magnesium models fare well in tests, and Kirby has vacuums with adjustable beater bars. A couple of Panasonic models are recommended as well. We are told that Dyson has failed to pass the Carpet and Rug Institute’s Seal of Approval test and is never recommended for soft surface cleaning because the suction is too aggressive.

HURRICANE SANDY’S SILVER LINING
While no one is pleased to see a natural disaster hit people’s homes and businesses, there is no denying that such events increase flooring sales. As hurricanes go, Sandy was not as large as Katrina in terms of strength when it made landfall (Katrina was a category 3, Sandy was a post-tropical cyclone) or the number of structures damaged or destroyed (Katrina, 1.2 million housing units damaged; Sandy, 380,000 structures damaged or destroyed), but Sandy was three times as large as Katrina in terms of the area that it covered, meaning that damage is spread over a larger zone.

With Katrina the bulk of the destruction was flood-related, due to the levees breaking; however, with Sandy, more structures were damaged by wind. This may mean that fewer of Sandy’s damaged structures will be rebuilt, especially if they have been moved off their foundations. However, many buildings were abandoned or leveled post-Katrina due to mold.

What this means in terms of actual dollars in flooring is hard to determine. Initially the impact to the flooring business was negative as people struggled to take care of the basic necessities and construction projects ground to a halt. In fact, Sandy was one of the factors mentioned when the November housing start numbers turned negative after a prolonged positive trend. Forecasters are predicting, however, that flooring sales in the Northeast should outpace the mean level for the rest of the country for at least the first two quarters of 2013, and some estimate the upside to be as high as 15% to 18% during that period.

VALUE FOCUS—PERCEPTION VS. REALITY
We’re continuing to hear stories about how consumers are still seeking out value priced flooring, in spite of the fact that the recession is behind us and economic conditions continue to improve. Former president of Flooring America Vinnie Virga cited value as a major reason why he chose to invest in Big Bob’s, a value-oriented chain, when I interviewed him for FloorDaily in mid-December. And flooring contractor Jason Ramsay of California Flooring Service is selling a lot of laminate flooring currently, which is cheaper than many other types of flooring that he carries.

But are customers truly seeking value above all else, or are the retail sales associates who are helping them assuming that value is their driver?

A few of the mills that offer better-end goods have seen significant increases recently, which may indicate that consumers are again willing to spend money for more prestigious looking floors. If this is the case, retailers need to educate their sales staff so that the flooring industry once again sees a rise in the average sales ticket.

A higher price is easy to justify if the associate knows how to tailor the product’s enhanced benefits to the consumer’s unique set of circumstances. Price will only become a factor if the consumer does not recognize how a product uniquely meets their given set of requirements. The consumer must recognize that your expertise, your product knowledge, your sense of style and fashion, and your company’s reputation for quality installation and fair pricing are a bargain compared to any other deal he or she might find.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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