Catalina releases 2019 industry trends report

Catalina releases 2019 industry trends report

Monday, November 18, 2019 from Floor Covering Weekly

According to the latest Floor Coverings Industry Trends Report from Catalina, during 2019, the value of U.S. floor coverings manufacturer sales (shipments minus exports plus imports) could increase by 1.2 percent to $27.6 billion. Square foot sales, however, could decline by 1.1 percent to 23.6 billion. Manufacturer sales were sluggish during 2019 due to an overhang of inventories accumulated from the rush to import Chinese-made flooring in late 2018 to beat rising tariffs, the report stated. At the same time, demand was adversely affected by a weak housing market caused by rising interest rates in 2018. As a result, the residential replacement market could decline during 2019. Higher interest rates also slowed the builder and commercial markets as spending on new residential and non-residential building construction declined. The builder and commercial markets, however, increased in importance during 2019 despite the dip in construction spending.

In recent years, commercial market sales (new construction and remodeling) gained share as U.S. housing demand trended downward. During 2019, commercial market sales are estimated to increase by 3.5 percent to $9.6 billion (in manufacturers’ dollars) or 34.7 percent of total U.S. floor coverings sales. This is up from a 33.2 percent share in 2017. Commercial markets increased at the sharpest rate between 2017 and 2019 since non-residential construction spending was least affected by rising interest rates. Commercial sales were driven by the construction of new non-residential buildings since businesses increased their investment in new facilities due to stronger economic growth in 2018. Selling opportunities are currently increasing at the sharpest rate in the hospitality, corporate office, and public safety building markets, the report stated.

The report stated the builder market also continues to increase in importance despite a decline in housing starts during 2019. Builder floor coverings purchases could increase by 2.3 percent during 2019 and climb to $3.6 billion (in manufacturers’ dollars). This compares to about a 13.0 percent compound annual growth rate between 2012 and 2018, when housing start gains were increasing close to 10.0 percent annually as the housing market recovered from the housing bust. Builder purchases, however, could have inched up to a 13.2 percent share of total floor covering sales during 2019. This is up from a 12.8 percent share in 2017 and only 9.2 percent in 2012. Gains in builder purchases are in line with the increases in total square footage built. The increase in square footage built benefited from stronger single-family home construction between 2017 and 2019, while smaller multi-family completions leveled off. In addition, builder flooring spending per new housing unit is on the rise.

On the other hand, according to Catalina, residential replacement sales (including flooring purchased after taking possession of a new home) have lost share over the current recovery period. This market has been hurt by a drop in existing home sales in 2018 and the first half of 2019 due to the increase in mortgage rates in 2018. In fact, residential replacement sales could decline by 0.7 percent during 2019 to $12.8 billion (in manufacturers’ dollars). This could represent 46.3 percent of total floor coverings sales, however, down from a 47.9 percent share in 2017. Since existing home sales drive residential remodeling prospects, replacement flooring sales have been hurt by an estimated 13.1 percent decrease in residential improvement construction spending during 2019, according to the report.

Market product mix

The report stated hard surface flooring represents over half of total U.S. floor coverings sales in dollars and square feet as consumers increased their preference for luxury vinyl tile (LVT) and ceramic tile. At the same time, floor coverings buyers have significantly reduced their purchases of wall-to-wall carpet. As a result of these trends, hard surface flooring sales continued to increase during 2019 while soft surface flooring sales declined. During 2019, manufacturer hard surface flooring sales could increase by 5.0 percent in dollars to $16.4 billion and by 3.0 percent in square feet to 12.8 billion. Hard surface floorings’ share could rise to 59.2 percent in dollars and 54.2 percent in square feet. This is up from 47.3 percent in dollars and 43.3 percent in square feet in 2012. On the other hand, manufacturer soft surface flooring sales could decline by 3.9 percent in dollars to $11.3 billion during 2019, and square foot sales could drop by 5.6 percent to 10.8 billion. Soft surface flooring’s share has been declining over the past two decades and is down from about a 70.0 percent share of total floor coverings sales in the late 1990s.

According to Catalina, the strongest growing hard surface flooring sectors in recent years have been vinyl tile and ceramic tile. Vinyl tile sales gains have been driven by the increased array of rigid core WPC (plastic composite core) and SPC (solid polymer core) floors that offer consumers an easy installation, superior wearability, and waterproof characteristics. During 2019, LVT sales could increase by 28.0 percent in dollars and 23.2 percent in square feet. LVT sales could climb to $4.5 billion and 3.1 billion square feet during 2019. This could represent 16.3 percent of total dollar floor coverings sales and 13.1 percent of total square foot sales. This makes LVT the second most important flooring material in the United States after wall-to-wall carpet, the report stated.

And, according to Catalina, ceramic tile is the only sector to increase in importance as LVT made significant inroads. During 2019, ceramic tile could account for 14.3 percent of total floor coverings dollar sales and 14.4 percent of total square foot sales. This is up from 11.8 percent and 11.9 percent, respectively, in 2012. Ceramic tile gained share as manufacturers offered improved wood and stone designs in a truly waterproof flooring installation. In addition, ceramic tile price competitiveness increased over the past two decades.

On the other hand, the report stated wood flooring lost share as prices increased sharply. As wood flooring prices rose, consumers shifted to LVT. Laminate flooring also lost share to LVT. Both of these sectors lost share since LVT can offer wood looks in a more water-resistant flooring.

Soft floor coverings lost ground due to a sharp drop in demand for wall-to-wall carpet. Wall-to- wall carpet could account for only about 64.0 percent of total carpet and area rug square foot sales, down from a 73.3 percent share in 2007. Wall-to-wall carpet lost share as homeowners increased their preference for hard surface flooring. Wall-to-wall carpet sales are also being by the product lines’ heavy dependence on the weak residential replacement market. Conversely, suppliers of soft surface flooring increased their dependence on area rugs and carpet tile. Area rug sales made some inroads since homeowners purchase area rugs as a decorative accessory after installing hard surface flooring. Meanwhile, carpet tile has penetrated the commercial carpet market and now accounts for some 60.0 percent of total commercial carpet sales. This is up from a one-third share a decade ago.

Source of supply

According to the report, foreign-sourced products have made inroads in the U.S. floor coverings market during 2019 despite higher tariffs on Chinese-made flooring. During 2019, imports could account for 43.9 percent of total U.S. floor coverings dollar sales and 51.5 percent of total square foot sales. This is up from 43.2 percent and 50.5 percent, respectively in 2018. Foreign-sourced products have made significant inroads over the past two decades due to their growing price advantage, and foreign manufacturers offering innovative hard surface floorings.

As a result, U.S. manufacturers’ share of total U.S. dollar floor coverings sales could decline to 55.6 percent during 2019, said Catalina. This is down from a 61.2 percent share in 2017. U.S. manufacturer share was 74.1 percent in 2007 and 86.3 percent in 1997. Over this period, the strongest inroads were made by Chinese manufacturers. During 2019, Chinese manufacturers could account for 22.8 percent of total U.S. flooring coverings dollar sales. This is up from 22.2 percent in 2018 and only 5.0 percent in 2007. Chinese-made flooring continues to make inroads in the U.S. market due to Chinese manufacturers’ significant share of the soaring LVT market. Chinese-made LVT continues to penetrate the U.S. market since Chinese manufacturers have a technological advantage to produce the WPC and SPC products.

Dollar imports of Chinese-made LVT and other resilient flooring could increase by 25.0 percent, in dollars, during 2019. Meanwhile, imports of other Chinese-made flooring could decline by 22.0 percent during 2019. As a result, import presentation levels have declined somewhat in non-resilient flooring sectors as shipments from China declined. The drop is especially sharp in the wood flooring sector due to the imposition of anti-dumping tariffs on Chinese-made wood flooring by the U.S. International Trade Commission (USITC). These tariffs are on top of the 25.0 percent Trump administration tariffs. The USITC recently announced a similar tariff on Chinese-made ceramic tile.

Rising tariffs on Chinese-made flooring has caused some shift of sourcing to manufacturers located in other countries. There has been some shift to manufacturers located in Turkey, South Korea, Vietnam, and other Asian countries. However, for most non-LVT flooring sectors production can be increased in the U.S. to offset rising tariffs. In the ceramic tile sector, U.S. and foreign-based manufactures have already made considerable investments in U.S. production capacity. European manufacturers have also invested in U.S. laminate flooring capacity. In addition, U.S-sourced wood flooring has a natural competitive advantage since woods sourced from U.S. forests are already compliant with the Lacy Act, noted the report.

World Markets
The world floor coverings market could have declined in 2018 and 2019 as global economic growth slowed. The world floor coverings market is estimated to decline by 1.3 percent during 2019 and drop to 222.9 billion square feet. This follows a 1.9 percent decline in 2018. The weakness is centered in the European and Chinese markets. At the same time, U.S. consumption increased its importance in global markets. The U.S. share of total world consumption could climb to 10.7 percent during 2019, up from 9.9 percent in 2017. The U.S. share of world floor coverings market has been trending upwards since 2012. This could result in U.S. and foreign-based manufacturers moving additional production to the United States, according to Catalina.

Outlook
U.S. floor coverings manufacturer sales could have begun to turn upwards in the fourth quarter of 2019 as distribution channels work off excess inventories and lower interest rates stimulates U.S. housing demand, the report stated. In the third quarter of 2019, housing starts increased by 6.1 percent and existing home sales rose by 2.8 percent. This follows declines over the first half of the year. Based on these trends, manufacturer sales could increase by 2.2 percent in dollars and 0.8 percent in square feet in the fourth quarter of 2019 (Catalina Floor Coverings Quarterly Update, September 2019).

Sales gains could accelerate further in the first half of 2020 since the housing market strengthened further in September 2019. In September 2019, existing home sales increased by 7.4 percent over the same period of the previous year. Meanwhile, new residential permits increased sharply by 13.8 percent. These trends could boost residential demand over the next six months. The strengthening of residential markets comes at an opportune time since commercial markets are slowing along with overall U.S. economic growth.

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