Housing activity is the best barometer for how the flooring industry performed in both residential replacement and builder business. And in 2018, housing activity disappointed. As a consequence, the flooring sales in those two sectors also under-performed, unlike years previous.

From 2015 up to and including 2017, the new home construction industry added an average of 58,000 new homes each year. Average size of the homes had stabilized at around 2,450 square feet. Flooring is placed in the entire area of the home; each year we added an additional 142,000,000 square feet of flooring to the builder sector. But in 2018, new home construction increased by only +1.5 percent or 14,000 new homes. Higher mortgage rates quieted new home sales and Sam Khater, chief economist at Freddie Mac, commented, “We’re in a mental recession. It’s a constant stream of negative headlines for a couple of months, it wears on you.”

Perhaps that also applied to sales of existing homes. The existing home sales experienced a decrease of -2.9 percent over 2017. At the end of the year, the inventory of houses listed for sale was 3.7 months. In other words, if sales continued at that sales pace there would only be enough houses for 3.7 months. That is the lowest number of houses available for sale in the last 10 years. It’s not clear why the supply of homes was so low as it was a seller’s market in many major metropolitan areas. Proof of that is the continued increase in median prices of existing homes. In four years, the median price for all existing homes has gone up +24.5 percent.

The phenomena we have seen recently — older Baby Boomers staying in their current home, regardless of size, and not moving to a new home in Florida, Arizona or somewhere else — might be impacting both housing markets. Those that are choosing this path are opting to buy new and better floors. If this trend continues, it will be a significant boost to floor covering sales in all markets not generated due to a move out of the house.

If 2018 was a mixed bag for the floor covering industry, it can be said that the stunning continued success of luxury vinyl tile (LVT) — and all its multilayer/rigid core cousins — carried the industry. It was the brightest of bright lights and it is the reason the industry had an increase at all. LVT alone has created the mania for waterproof flooring. Now, we’re beginning to see many laminate products promise waterproof (not just water-resistant) and some wood products have now declared themselves waterproof too. So far, the carpet folks have demurred, but who knows?

Some imports were affected by the imposed tariffs in 2018. Some of the tariffs were passed onto the consumer but much of it was absorbed by importers, manufacturers and distributors. However, the increased second round for 2019 up to +25 percent has the potential to hurt all imports. We shall see.

In 2018, the commercial sector fared better than the consumer and builder sectors. Proof? Carpet (modular carpet tiles) had a nice increase (+8 percent) in commercial. Same for ceramic tile and, of course, LVT! However, commercial replacement was the star of the year with a +10 percent increase in sales.

Editor’s Note
Sales at manufacturing are higher than actual consumption. Many manufacturing companies buying from Chinese manufacturers purchased large quantities of LVT, laminate and to a lesser degree ceramic from China to beat the tariffs. Same for some flooring distributors and very large flooring retailers. Some of those goods are in warehouses and did not translate to higher consumer/commercial demand.

Commentary
Housing tumbled and our industry stumbled except for LVT and commercial which saved the industry, tariffs be damned. That pretty much sums up marketwise 2018.

Home Depot & Lowe’s re-merchandise flooring
We covered the weak housing data in our introduction, so on to the retail side. Home Depot did great (+7.1 percent sales increase) whereas Lowe’s did poorly (-2.4 percent sales decrease). Both still beat the free labor drums for carpet and every year they lose market share in the carpet sector to flooring stores. In 2018, Home Depot and Lowe’s re-set their flooring departments; they took space away from carpet and added LVT to give it the dominance it deserves. (They still give more space to laminate than LVT but that will change, and they have reduced wood assortment and space for wood.)

Apparently, Lowe’s did a poor job of making changes in the flooring department. Lowe’s blamed “poor reset execution” for its dismal flooring sales in 2018. Under the new leadership of Marvin Ellison, fresh from J.C. Penney, 13 key executives have been dispatched. Ellison said, “Over the past six months, we replaced two of our three merchandising senior vice presidents, [and] we replaced 11 of our 13 merchandising vice presidents … However, as we transition from legacy merchants to new merchants, there was much more disruption than we anticipated, and this disruption was primarily driven by a lack of visibility in our pricing ecosystem. Our new merchant simply did not have a clear line of sight to the cost increases that were accepted by prior merchants as we transitioned.” (Pricing ecosystem? New bosses did not know what their cost was and failed to price accordingly. Seems incredible.)

Professional flooring installation continues to grow for Home Depot. Unlike Lowe’s, both its in-house installation for consumers and its sales to the Pro customer (installer/contractor) grew in 2018. Home Depot charges around $35 to measure and will refund it if the customer buys. Home Depot’s new hard surface displays are quite great. Excellent visuals for the consumer and perfect for Pro business.

No matter the pricing ecosystem, you still can count on these two merchants to give away labor when it comes to carpet. They can’t help themselves!

Hard surface specialty retailers faired better than the industry on average. The Tile Shop, the smallest national hard surface chain, generated a 4 percent increase in sales. It has 140 stores, averaging 20,000 square feet, with sales of $357 million for 2018. Sales were just OK; their gross profit was stellar at 70 percent.

Lumber Liquidators doing better
Lumber Liquidators is back. Its gross profit was 36.2 percent but it is not back to where it was before all the negative publicity. Lumber Liquidators had sales of $1.084 billion, a 5.5 percent increase over 2017. At the end of 2018, Lumber Liquidators had 405 stores in the U.S.

Lumber Liquidators’ growth came from a $38 million increase in installation services. Initially, it did not offer installation; it had a list of contractors. Customers wished otherwise so Lumber Liquidators responded with a third-party company that’s been a financial asset.

Lumber Liquidators’ sales of LVT (and its cousins) has really taken hold. It experienced a $77 million increase in LVT. Solid and engineered wood took a hit due to folks opting for wood look-alikes. And like our industry, Lumber Liquidators had a net gain overall.

Lumber Liquidators was a very aggressive advertiser. Its ad to sales ratio was 7.1 percent. Our flooring retailers spend around 3 percent on all forms of advertising. Lumber Liquidators’ appetite for lost leaders — 39 cents laminate never stops. A retailer told me that when they advertise 39 cents laminate, he knows the local Lumber Liquidators will get one pallet of that advertised special. He sends in an employee who buys the entire pallet; they, in turn, sell it for around $1. Lumber Liquidators’ customers are unhappy since there is no stock and the retailer and their customers are happy with this special buy. (Even if that is more wishful thinking than actual, we love the idea.)

Floor & Décor outpaces everyone
The real star of the year was Floor & Décor. At the end of 2018, it had 100 stores with sales of $1.7 billion and a +23.5 percent increase over 2017. Same store sales (sales of existing stores, no new stores included) were +9.2 percent, twice the increase for the flooring industry. Its focus continues to be directed toward the sub-contractor/installer. Its entire advertising to sales ratio is less than 3 percent, including all in-store events for contractors, designers, etc.

A review of its product balance shows that laminate and LVT (with their cousins) is only 18 percent of sales, but gaining market share. The fact that they include laminate and LVT together indicates they haven’t really committed to LVT when it should be a category alone. We suspect it soon will be.

Like Lumber Liquidators, Floor & Décor did not initially offer installation but realized that if it wants more end users, not just contractors, it needs to offer professional installation. It’s rolling this out in all stores by using the same contractor as Lumber Liquidators, Home Service Store.

Floor & Décor believes it can get to 400 stores, all 75,000 square feet, averaging $17 million a store with 42 percent gross profit per store. Can Floor & Décor be a $6.8 billion retail flooring monster in our industry? It thinks so, and has the money to make it happen.

Armstrong sells wood division
On the manufacturer side, Armstrong decided to lose weight, Engineered Floors (EF) decided to bulk up and Anderson Tuftex (AT) decided to become the coolest of cool.

Before its self-imposed diet, Armstrong was a $1.2 billion flooring manufacturer with a 150-year-old legacy. Armstrong’s strength has always been in commercial and it has protected that with fervor and great products. At one time, its sheet vinyl had a 60 percent market share. And after acquiring Bruce, it had a 50 percent share of hardwood sales. For whatever reason, it seemed to lose the innovation edge and when a new idea came about, it suffered from paralysis through analysis.

Like all wood suppliers, Armstrong has struggled in the past four or five years — LVT and even ceramic tile wood-looks have taken a toll. In November, Armstrong decided to sell its wood division (sales in 2017 — $425 million) for $100 million and commit to being the best in vinyl. As of the last day of 2018, Armstrong was a $750 million company. It’s a pure vinyl player and is now participating in the most exciting category of LVT. But with that comes competitors, like Engineered Floors (EF).

EF adds to portfolio
Ten years ago, Bob Shaw started EF as a carpet manufacturer. Consider this: 2009 was the worst of economic times in the U.S. since the Great Depression and carpet was in decline. Undeterred, EF had the newest manufacturing technology with the newest idea pre-dyed polyester. Clearly it was the right product for these desperate times. EF is to carpet and manufacturing as Floor & Décor is to retail.

At the end of 2018, EF had 12 manufacturing plants. They expanded into contract and just completed a modular carpet tile plant. They love new ideas:  Kinetex, a patented textile composite flooring system that combines features of hard and soft surface, and PureBac, a residential carpet backing system. And, it added Revotec and Triumph, two LVT collections featuring waterproof and rigid core technology. Our estimate is that EF had sales that exceeded $750 million for 2018. If it gets into any other products, it will only be with differentiated product. It takes seriously its motto, “innovation reinvented.”

AT out cools the rest
La-Z-Boy Furniture Galleries uses this phrase for its Urban Attitudes collection: “What if mixing always matched?” And contends it is so easy to mix and match, “you couldn’t mismatch them if you tried.” Too bad Anderson Tuftex (AT) didn’t use that cool line first, because that’s what it’s all about.

AT products are high end and its goal was to mix and match hard surface with soft surface. It doesn’t matter if the customer buys it that way, what matters is that the consumer realizes the unique design approach — it gives her confidence this is really cool stuff.

AT launched in 2018 and has learned that aesthetics alone won’t carry the line. It has added PetProtect products from Stainmaster and other quality attributes.

LVT is the savior & wrecking ball
LVT continues its sales success. Make no mistake about it, this product is transformative, even more so than laminate. Unlike laminate, LVT sells well in all three end-user markets. In so doing, it has hit the hardwood business especially hard; the bottom value quadrant for engineered wood flooring has been demolished. And just when you think LVT has slowed, it gains sales strength in all end-user markets.

The full report with corresponding graphs can be found in FCW‘s digital 2018 Statistical Report issue.