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Rug Suppliers Struggle to Overcome a Second Year of Setbacks

NEW YORK - Impacted by pricing pressures, the area and accent rug industry's distribution shifted somewhat in favor of discounters and other value-minded mass merchants in 2010.
     As consumers focused on lower-priced goods at affordable retail stores, unit volume remained relatively even, but total dollar volumes fell.
     As a result, according to research by Home Textiles Today the accent and area rug industry took a 5.3% sales hit in 2010, taking volumes down to $3.55 billion from $3.75 billion the prior year, when the industry has just suffered the much harder blow of an 18.5% sales decline.
     By distribution channel, discount department stores continued to lead the pack with a 35.2% share of total sales, or $1.25 billion. In a faraway second place were direct-to-consumer retailers, who took 16.8%, translating to $600 million.
     Mid-price chains occupied third place with an 8.4% share, or $300 million of total sales, followed closely by home improvement chains' 7.5% share, or $270 million.
     Ending the year with the smallest piece of the rug pie were department stores at $30 million, or 0.9% of total sales.
     "Lower price points have caused some markets to shrink dramatically. Most retailers have been focused in the area of $149 or less for a 5-by-8," said Wade Maples, co-owner of Scottsboro, Ala.-based Maples Rugs. The company has long been among the top fi ve category suppliers, reporting $130 million in sales for 2010.
     "Retail price points have come down, and that takes it to where you need to sell a lot more units to do the same in dollars that you had been doing," he added. "And that is the big change in the market."
     Maples said he considers himself "lucky" to have reported a single-digit decline - 7.1% - in sales in his area/accent rug business for 2010 from last year's $140 million in sales.

Area Rugs Distribution Channels                                                  (billions)

2009 total retail sales: $3.55 billion
Down 5.3% from $3.75 billion in 2009
 

 

2010 

2009 

% CHANGE 

Discount department stores 

$1.25 

$1.28

-2.3% 

Home improvement centers 

0.27 

0.28 

-5.3% 

Furniture stores 

0.16 

0.17 

-9.4% 

Mid-price chains 

0.30 

0.31 

-4.2% 

Direct-to-consumer 

0.60 

0.63 

-5.3% 

Carpet/floorcovering stores 

0.18 

0.21 

-12.1% 

Home textiles specialty chains 

0.19 

0.21 

-12.0% 

Department stores 

0.03 

0.03 

-5.3% 

Off-price chains 

0.13 

0.14 

-2.7% 

Warehouse clubs 

0.11 

0.12 

-5.3% 

Variety/closeout 

0.13 

0.13 

-2.6% 

 Gift/home accent stores and single-unit specialty textile stores

0.16 

0.18 

-13.2% 

Other 

0.05 

0.06 

-5.3% 

Total 

$3.55 

$3.75 

-5.3% 

Discount department stores include Kmart, Shopko Stores, Target and Wal-Mart. Home improvement centers include Home Depot and Lowes as well as regional and local home improvement centers.
Mid-price chains include JCPenney, Kohl's, Mervyn's, Meijer, Fred Meyer, Sears, TJMaxx/ Marshalls, Stein Mart and Ross Stores.
Direct-to-consumer includes television shopping channels, Internet and catalog sales Variety/Closeout includes stores such as Dollar General, Family Dollar, Freds, Value City, Tuesday Morning and Big Lots.
Other includes interior designers and military exchanges 

     "Our business was good but not great and it was because of the decline in average price per unit at retail," he explained. Also down was Sugar Valley, Ga.-based Mohawk Home.
     Sales for the company, which is the longtime leading area/ accent rug supplier, saw its sales decline by 5% to $360 million from $377 million last year. To blame: Pricing pressures, noted general manager Bart Hill.
     "We maintain shelf space and retail placement, but like everyone else, we were hurt by retail compression," he said. "And this was against another pretty tough year [2009]."
     Hill said consumers shopped over the year for soft floor coverings, but traded down from better goods like wovens to cheaper price point tufted constructions, among other more affordable goods like polypropylene, that retail.
     "About the same amount of units was sold as last year, but we saw a 15% to 20% price erosion," he estimated.
     Reflecting the year's pricing shifts was the 5% growth in Mohawk Home's tufted and printed rug business, Hill said. Its $49 to $99 retails "held up fine last year."
     However, the company's higher-end wovens in the $149 to $199 range "struggled," he said.
     On the other end of the sales spectrum last year was the smaller and younger yet rapidly growing Surya Inc. rug company, which churned 47% increases.
     Seth King, vp sales and marketing, said the company's growth stemmed mostly from its emphasis on serving furniture stores - big and small - and design firms. "We turned our focus to providing them with the right price points and styles and services on them," he explained.
     But like its more large-scale competitors, Surya was forced to create "a more promotional program" that for the first time in the company's history included $99 5-by-8 rugs, which include machine-made heat-set polypropylenes.
     "Our core has always been mid-tier to high-end, but this year we went more promotional. Now our prices include $99, $129, $149, $179 and $199."
     This new pricing strategy landed Surya a new set of customers, King said: lower-end furniture stores and mom-and-pop retailers.
     Still, the mid-tier market is Surya's strongest sector, despite pricing shifts at retail. "The $299 to $699 price bracket is still the bulk of what we do," he noted, "with $299 to $399 being our most popular price point range."
     After overcoming two challenging years, suppliers surveyed by HTT said they were eager to quickly turn their attention to the New Year, which most are facing with some hope but much appreciation, understandably.
     Greenville, S.C.-based 828 International Trading Co. president, John Shepherd, cited "manufacturing costs, shipping costs, and currency exchange are [three] big areas to watch" in 2011.
     Raw material price hikes pose one of the biggest sources of stress, they agree, even though in the long run they could have positive effects - namely, higher retail price points.
     "With inflation from raw materials, we have got to get retails back up or the industry is really going to suffer," warned Hill. "We feel with raw material prices continuing to go up, that retails have got to go up, too. And we see this across the board, not just in rugs."
     Shaw Living, in Dalton, Ga., expects to "continue to see increase in units sold, but decreases in selling price as consumers continue to look for value," said brand manager Kim Barta, as well as a "continued difficult economic climate and conservative consumer shopping." For this reason, Shaw is forced to "continue to find new ways to create value for the consumer," Barta said.
     Allen Robertson, vp of sales for Troy, N.C.-based familyrun Capel Inc., said the company is anticipating a 3% to 5% sales increase, "and we feel certain that prices will have to be increased as raw materials continue to increase in price. The price of wool and cotton are going to be volatile for the foreseeable future. The middle class market in both China and India are growing rapidly and demanding higher quality. Our clients are looking for upgraded rugs while at the same time requesting low price high volume loss leaders. We are working to supply both needs."
     On the same vein, Robertson said another "significant challenge" in 2011 will be "keeping costs in balance with demand. Hand-knotted rugs will continue to be in limited supply. The trend toward Soft Contemporary and Transitional styling should translate into higher average sales for the mid price levels."
     Dallas-based Feizy Imports & Exports has managed "for some time now to keep from passing [raw material price] increases on to our clients due to our strong relationships," said Leah Feizy, assistant to the ceo.
     She did not say if Feizy would continue that strategy this year. Rather, she said the housing market's "slow recovery" recently is giving the company cause to be hopeful for "some growth within the industry. We have already seen an upswing from our year-to-date 2009 figures, and definitely expect this trend to continue across all of the home furnishings and accessories categories."
     Still, she admitted the country's economic recovery remains slow, posing a danger for many rug suppliers.
     "Another stall in the recovery could really be the nail in the coffin for some of the smaller home furnishing and floor covering stores that have been hanging on with all their might for some time now," she continued. "On the other hand, all of the tougher competition has forced retailers and manufacturers alike to become more creative and inventive with their marketing techniques and product development. We're seeing some of the most exciting new products in years and are coming up with amazing ways in which we can market them with very little investment."
     Also being creative with product development and streamlining business operations to overcome raw material price hikes - now and later - is Port Washington, N.Y.-based Safavieh - a high-end designer rug house.
     "Raw material prices have increased in China and as a result the dollar is weakening there. We forecast that prices will continue to increase in 2011, so we are reducing costs to compensate," said Arash Yaraghi, principal. "Safavieh is doing this by using new materials, new constructions and techniques that provide the values consumer's want without sacrificing quality."
     Social media will be Somerset, N.J.-based Kas Rugs' tactic in 2011 to stir customer interest - and ultimately, sales, said key account manager of sales and marketing Wendy Reiss.
     "We have a new catalog launching now, a new Facebook page just launched with a contest for a free iPad with buyers who ‘friend' us between now and Jan. 17, and also a new website which will be launching just prior to January market."

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