Slowing sales reflect sluggish housing market in Q3

As reported in Issue: FCW Global October 2016, Posted Date: 10/06/2016; Author(s): Catalina Research:

[Highland Beach, Fla.] According to Catalina Research, U.S. manufacturer floor coverings sales are slowing in the second half of 2016 after increasing at relatively strong rates in the first half. The slowdown reflects weakening gains in builder purchases as housing starts level off. Residential replacement sales also remain sluggish despite increases in personal income. In addition, government purchases continue to lag overall market gains. Meanwhile, the commercial market is showing healthy gains benefiting from continued sharp increases in nonresidential building construction spending and rising Main Street commercial sales.

During the third quarter of 2016, total floor coverings dollar sales is estimated to increase by 2.7 percent over the previous year, and square foot sales could have risen by 2.3 percent. This is down from 3.9 percent and 4.2 percent, respectively, in the first half of 2016. During 2016, weak material input prices and increased competition from low-cost foreign-sourced products held down dollar sales gains.

The slowdown reflects a maturing of sales gains to builders. In the second quarter of 2016, new residential permits declined by 8.8 percent and housing starts increased by only 0.7 percent. This compares to gains of 6.2 percent and 16.1 percent, respectively, in the first quarter of 2016. The rise in larger single-family home construction made up for some of the drop off as the building of smaller multi-family housing units declined.

Sluggish consumer purchases gains also adversely affected industry growth. Consumer purchases continue to increase closer to 2 percent, which is below overall industry trends. This has hurt specialty floor coverings store sales. In the second quarter of 2016, specialty floor coverings store sales increased by only 0.9 percent compared to a 3.8 percent gain in the first quarter. Sales actually declined in July. Meanwhile, home centers and other value chains increased their share of total retail sales, as consumers remain cautious despite continued gains in personal income and employment.
These trends caused floor coverings manufacturers and marketers to increase their emphasis on commercial markets. The industry is benefiting from double-digit gains in private nonresidential building construction spending in the first half of the year. These relatively strong gains continued into July. July gains for residential construction spending were only 1.7 percent, while government building construction spending declined by 7 percent.

The growing importance of commercial markets has contributed to the shift to hard surface flooring since commercial markets are heavier users of hard surface flooring. This is true in the growing ceramic tile and resilient flooring markets. Consumers are turning to the offerings of ceramic tile and resilient flooring producers to satisfy a desire for stone and wood looks. Hard surface flooring also continues to improve price competitiveness as foreign-sourced products increase their share. Wood flooring prices declined along with the drop in lumber prices. These trends contributed to an estimated 7.1 percent increase in hard surface flooring dollar gains over the first nine months of 2016, while square foot sales could have increased by 8.9 percent. Soft surface flooring sales declined by about 1 percent in dollars and square feet.

During the fourth quarter, U.S. floor coverings’ sales growth could weaken further. The builder market could slow while consumer purchases remain sluggish. In addition, consumers and businesses could reduce spending due to the uncertainty caused by the Presidential election. In response, distributors and retailers will be working down inventories since manufacturer sales outpaced final demand over the first three quarters of 2016.