The Facts: Accent & Area Rugs — Sales exceed $5 billion in 2000

Brent Felgner, January 15, 2001

NEW YORK — In the face of a souring economy and a tightening retail environment, the rug business still managed to eke out double-digit sales increases at retail last year.

The developments have been sobering. Some suppliers project more than 1,000 retail outlets will be lost to bankruptcies and liquidations — the current round led by Wards and Bradlees, with other well-known retail names expected to join them. On the flip side, there's hope that retail capacity will be absorbed into the remaining marketplace and that lower interest rates and energy prices will further stimulate the category's growth.

Retail sales of accent and area rugs neared $5.1 billion in 2000 — an increase of about 12 percent — according to exclusive research conducted by Home Textiles Today.

"The Facts: Accent & Area Rugs" is the sixth annual statistical analysis and trend forecast for the industry segment. It presents a snapshot of the industry through a combination of traditional market research and interviews with executives of leading companies. The findings indicated that:

¥ Despite the laggard economy, most companies hit their sales projections for 2000, mostly on the strength of first-half results. While strategies differ moving forward, most suppliers are eyeing future growth more cautiously and, in most instances, adjusting their 2001 sales expectations downward. However, many still forecast double-digit gains in 2001.

¥ Continued retail attrition coupled with further supplier consolidations will have a major impact this year and beyond.

¥ Imports will continue to increase their relative importance with more and more of the business continuing to move offshore. Some U.S. manufacturers will purchase rather than contract foreign production in an effort to retain greater control over their products. Those companies resisting the move to global sourcing will confront both the challenge of the less expensive imports and the opportunity to expand share in the void created by the offshore moves of others.

¥ In a more difficult business climate, the focus for many companies will shift from developing new business to a battle with competitors over market share.

¥ New fashion-oriented product fueled by continued innovation and upgrading of manufacturing technologies will continue to drive the market. However, more emphasis will be placed on sunsetting older items.

¥ Suppliers will further expand their offerings of proprietary lines to specific retailers, thereby offering fashion exclusivity, preserving price points and blunting margin erosion. For some, this will result in shrinking the open lines traditionally introduced at various markets.

¥ While general merchandise discount stores retained their powerful dominance in the category, home improvement centers, home textile specialty chains and warehouse clubs made continued inroads in market share.

The discounters held a steady 42 percent retail market share, while insurgent home centers broached 21 percent and home specialty chains grew to 11 percent of the market.

The developments come at the end of an impressive 10-year run for the business segment, where consumer trends moved away from broadloom toward hardwood, combined with a steady growth economy to produce heady year-over-year results. Tough economy or not, most industry executives believe it can continue, outlasting the downturn.

"Rugs have always run counter to the economy," noted Arnie Stevens, vp sales, Maples Rugs, Scottsboro, AL. "In a recession, rugs, because of price point and sometimes impulse buying, are an easy way to change the look and decor of a room."

"We all have to be better managers, and this economy will force us to be better managers," said Paul D'Huyvetter, vp, sales, Oriental Weavers, Dalton, GA. "We have to constantly be in our customers' back pockets. We have to execute and be fashion forward. Sometimes we miss; sometimes we're too fashion forward. We're no longer analyzing our business by line anymore. Now I analyze turnover by sku."

The industry was also impacted by a number of developments last year, including Burlington's decision to shutter its tufted production and expand its offshore sourcing. It left the company with its bath, scatter and accent rug business and The Bacova Guild.

"Our continuing business is very good — it's significantly over last year," noted Bryan Bogas, business manager, accent and scatter rugs, Burlington House Floor Accents, Greensboro, NC. "We've seen a comparable increase of about 20 percent. With the advent of the Chroma-Jet [printing] technology we will eventually re-enter the room-size market."

One of the key challenges, he said, will be to enhance the price-value equation.

"There's very little price creativity at retail," Bogas noted. "Once a retailer has it in mind that they can't sell something over $9.99 or $12.99, then there's a reluctance to trade up with a value-added product."

Among the other developments, The Home Depot, which already lays claim to being the largest overall floor covering retailer, also opened its Floor Store last summer in Dallas. The test store made a powerful statement about the company's presence in the business.

Additionally, Mohawk completed its acquisition of Crown Crafts' woven business, a strategic move intended to broaden and deepen its product lines across multiple categories.

And Shaw Industries was acquired by Berkshire Hathaway, the holding company owned by financier Warren Buffett. The move, finalized earlier this month, was widely considered to be a vote of confidence in Shaw's ability to grow — and area rugs have been the fastest growing portion of the business, increasing about 30 percent last year, according to Jeff Meadows, vp, sales and marketing.

Reports of double-digit gains and forecasts were not uncommon among executives. While some strategies overlapped, most suppliers had very specific ideas about how they will push the business further.

"One of the reasons we've grown more is that we've taken more of a broad-based approach to [retail] distribution," Shaw's Meadows explained. "We have a sales force that does nothing but sell area rugs. A lot of our competitors focus exclusively on the mass merchant business or home centers. They represent a large segment of the business and we do business with those folks, but our area rug specialists also call on independent flooring dealers and furniture stores. And while it's true they've been under a lot of pressure, it would surprise a lot of people how much business they do."

That's been improved, he said, by the development of specific programs for their special needs.

Other firms, like Oriental Weavers, are taking a multifaceted approach combining trend-right design, enhanced prices and proprietary products for their customer base.

"The key is developing niches and becoming dominant in those categories," D'Huyvetter explained. "There is no dominant [fashion] trend anymore; we're going in five different directions at once. And that will continue as we develop specific products for specific retailers."

Where Oriental used to offer top price points of $199 to $299 in a 6x9, it's now pushing the envelope on $399.

But the business will also turn on suppliers' ability to simply be sharper for their retailers. Enhanced retail margins, value-added services and in-store merchandising programs figure prominently.

"Retailers are asking us to react more quickly to their inventory needs and to switch fashion items quicker," stated Pat Moyer, vp, marketing, Mohawk Rugs, Calhoun, GA. "The pressure is on us to be operationally superior."

Added David Record, vp, sales, Georgia Tufters, Calhoun, GA: "Our thoughts right now are that we have to focus on the healthy customers we're currently doing business with and service them like they've never been serviced before. And in doing so, we can solidify those relationships. At the same time, we'll also be looking to further expand our business."

While many suppliers often viewed the idea of "partnering" skeptically, tougher times are apparently bringing a renewed good faith to the concept. Retailers are bringing renewed credibility, suppliers said, allowing them to fold that relationship into their business plans.

"We've got to come up with innovative fabrications closely following trends and to some degree almost at the cutting edge of design. We're turning product more often but still focusing on the winners that can stay in the line four, five or six years," offered Charles Peck, president, Trans-Ocean Imports, White Plains, NY. "The issue is to have good partners, some stores that will allow you to test new product and find out how it will perform quickly. That minimizes everyone's exposure."

And while domestic manufacturers will be forced to counter the growing number of imports, companies that import will have their own set of challenges, not the least of which will continue to be managing the logistics and lead times of the business.

"We do not have the luxury of downshifting as easily as other companies. Our cycle of product development is so long that we have to anticipate needs and order seven months before delivery," explained Alexander Peykar, president, Nourison Rugs, Saddle Brook, NJ.

Nourison is still projecting double-digit gains for this year, now aided by the return on investment it made over the last several years in warehousing, logistics and technology, according to Peykar.

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