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Area Rug Makers Adapt as Sales Slide

Cecile Corral, Staff Staff -- Home Textiles Today, January 12, 2009

Area and accent rug makers came in for their share of pain in 2008, as the strained consumer economy and a store count undercut by the demise of Linens 'n Things, Mervyns and Value City exacted a toll on the category. And the somewhat bigger price tickets of area rugs compared to some other home textiles classifications may have cost rug suppliers a bit more share at retail.

Based on supplier and retailer estimates, Home Textiles Today research shows the industry's total sales fell about 4% to $4.62 billion in 2008, from a 2007 when the industry's sales had peaked at $4.81 billion, which then represented a modest 1.3% rate of growth from the year prior.

Among suppliers, "I don't think anybody is even trying to report flat sales for 2008 — it's impossible," said Mike Riley, president of Oriental Weavers USA, based in Dalton, Ga. "If you live and work here in Dalton, then you know who is and isn't running their machines, and you'd see how tough business is. Sales are definitely down for this industry."

Riley is talking about the many major U.S. rug manufacturers that over the past year have streamlined their production to help cut costs and adjust to the shrink in demand and slowed sales at retail for area and accent rugs.

The distribution channels that suffered most in 2008 were home improvement chains, furniture stores — not surprising, considering the downtrend in housing development nationwide — and the small independent retailers. Home centers declined the most, with area rug sales down roughly 30% to $370 million, while furniture stores saw a decline of approximately 18% to $280 million. The small gift and specialty textile shops saw a slump of some 19% to $510 million.

Because much of the middle-class found itself strapped for cash and low on credit, these shoppers traded visits to mid-tier department stores increasingly for direct-to-consumer channels and discount department stores for their discretionary purchases.

The discount channel grew considerably, up 8% to $1.29 billion, for a 28% of total area rug sales in 2008. Direct-to-consumer channels, including e-commerce and catalog retailers, showed an even more robust rate of growth, jumping 19% to $690 million, or 15% of 2008 industry sales.

"It was an extremely tough year and, of course, consumers definitely bought down at retail," observed Kim Barta, brand manager for Dalton, Ga.-based Shaw Living. "Where they might have gone to several different stores in the past to buy what they needed, shoppers last year instead focused mostly on one or maybe two options — places that carry everything they need so that they don't have to get back in the car and go somewhere else. We've seen this shift in our distribution points."

This shift in shoppers' buying behavior triggered with it a rise in demand for the synthetic promotional and affordably priced rugs carried largely by discounters.

Suppliers scurried to provide more of these goods, but early in the year they were met with a new hurdle — a shortage of polypropylene pellets, said Larry Mahurter, director of advertising and marketing for Fort Lee, N.J.-based Couristan.

"Halfway into last year, it was hard to get the polypropylene pellets we use to manufacture some of our rugs," he said. "The cost for those rugs was up, but demand was up, too."

He said achieving a $299 retail price for a similar product in wool is "hard," since wool pieces typically sell considerably higher. But Couristan turned some of its focus to wool, until the fall when polypropylene pellets again became available via new sources in previously untapped countries. Today, Couristan's sharpest price has hit that $299 point.

In that same vein, Somerset, N.J.-based Kas Rugs has seen parts of its more affordably priced assortment, comprising some machine-made styles, "taking a larger slice of the pie," said Wendy Reiss, key account manager. "We still do a large business in hand-tufted goods, but our machine-made business has gone up about 10%."

Roughly, Kas' ration of machine-made rugs vs. handmades has shifted to a 40%/60% ratio in 2008. The prior year it was a 30%/70% mix, she said.

"We do offer machine-made New Zealand wool rugs in this category, and they can sell for more than a handmade, depending on the rug," Reiss acknowledged. "But because typically machine-mades tend to hit a sharper price point than handmade rugs, they have grown lately."

Reiss said the company's "sweet spot" in price for its average 5-by-8 machine-made rug falls between $199 and $299.

Mohawk Home is growing its printed, tufted and lower-priced woven rug categories for 2009 in response to this trend. "Price points did come down in 2008, and it really provided additional growth for our printed and tufted rugs and our low-price point wovens," said Jim Quist, vp, sales. But lower priced goods were not the only success story for Mohawk in 2008. High-end rugs had a heyday, although short lived, in the year, he noted.

Up until a few months ago, many suppliers who as a rule included higher-end rugs in their assortments — such as Saddle Brook, N.J.-based Nourison; New York-based Safavieh; and Troy, N.C.-based Capel Inc. — said they leaned on their top ticket goods to get them through the hard times.

"Our high-end rugs, which we sell for $1,500 to $3,000 for a 9-by-12, was a growth area for us for a while there," said Allen Robertson, vp sales, Capel. "It was great."

Not anymore.

"When the gas started to go sky high, that business slowed," he said. "It's still OK, but it's flat now for us."

It was about two months ago when Nourison also saw its wealthy customers start limiting their spending. "Since then, the economy has affected a lot of the very wealthy families, giving them no other choice than to put their big purchases on hold or concentrate on shopping lower price points," said Alex Peykar, principal, Nourison. "The highest bracket of consumers was the real estate brokers and the bankers, and now they are the worst hit."

Still, Safavieh said it is ramping up its assortment of top-of-the-line rugs — with a new batch of high-end designer collections launching in January — to build on its success this year, when the company grew its sales by 30%, said vp Cyrus Yaraghi. "We don't want to just sit back and do nothing," he said, explaining that the company's Martha Stewart-branded collection proved to sell "very well," at Macy's and Home Expo and that similarly, "sales were up" for its high-end Thomas O'Brien collection of rugs at Bloomingdale's.

"We're continuing with the same strategy we had in 2008, and we're going to expand and increase our high-end, handmade offerings for this year," Yaraghi said.

That's not to say Safavieh doesn't have a keen eye on its developing mass merchant customer base, he added. The company is expanding this year its mid- and low-end machine-made assortments to court its growing customer base of home centers, warehouse clubs and off-price chains. "In January, we are introducing a lot of machine-mades, tufted and hooked rugs for our 'big-box' retail customers," Yaraghi noted.

Also tapping new customers are the accent rug companies Home Comfort and Homefires, owned by The Cresc Corp. The sister suppliers have carved a new design niche over the year that proved profitable. "We made specific design choices, adding more garden designs and animal looks that helped us get into new retail venues, like nurseries, hardware stores, pet shops and grocery stores," explained Renee Ringstad, vp merchandising, Cresc Corp. "We added artwork or designs to our lines that would specifically fit into certain retail venues, and we made sure to have enough of a certain category of designs to encourage these retailers to bring our products into their stores."

Bracing for 2009 — a period that is expected to bring a residue of challenges through the first half — most suppliers remain "guardedly optimistic," and by that they mean projected flat sales.

"We're in a new world where things aren't going to return to where it was," said Wade Maples, president and owner of the eponymous company. "In this new world, you'll have higher taxes, more regulation, tougher access to credit, which means individuals will be borrowing less money, and on and on. The past year was the most difficult we ever had, and what I think everyone learned from it was that the 'reality' of the U.S. economy wasn't real. Now is when we are returning to reality."

Added Riley, "We all have to change the way we do business. The world will not go back to the way it was. And we will be lucky to get area rug sales going back to where they were three years ago."

Riley warned that, by his estimation, consumers are no longer "going to spend like they used to. When times were good, people redecorated every three to five years. Now, things have changed, money has changed, and in turbulent times design trends go back to traditional and away from ultra-contemporary because they figure they can live with it for a long time. They want to play it safe."

Area Rugs Distribution Channels
($billions)
2008 total retail sales: $4.6 billion Down 4.0% from $4.8 billion in 2007

2008 2007* % change
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, Fred's, Value City, Tuesday Morning and Big Lots.
Other includes interior designers and military exchanges.
* 2007 channels have been revised based on better data received from retail sources.
Discount department stores 1.29 1.20 7%
Home improvement centers 0.37 0.53 -43
Furniture stores 0.28 0.34 -21
Mid-price chains 0.32 0.34 -4
Direct-to-consumer 0.69 0.58 17
Carpet/floorcovering stores 0.32 0.34 -4
Home textiles specialty chains 0.32 0.34 -4
Department stores 0.05 0.05 -4
Off-price chains 0.14 0.14 -4
Warehouse clubs 0.14 0.14 -4
Variety/closeout 0.14 0.14 -4
Gift/home accent stores andsingle-unit specialty textile stores 0.51 0.63 -23
Other 0.05 0.05 -4
Total $4.62 $4.81 -4.0%


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