The Carpet Industry: Present Status and Future Prospects [Reprint 2016 ed.] 9781512803037

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INDUSTRIAL RESEARCH REPORTS MISCELLANEOUS SERIES REPORT NO. 17

THE CARPET INDUSTRY PRESENT STATUS AND FUTURE PROSPECTS by ROBERT W . KIRK

Published by INDUSTRIAL RESEARCH U N I T , D E P A R T M E N T OF INDUSTRY

Wharton School of Finance and Commerce University of Pennsylvania Distributed by

University of Pennsylvania Press Philadelphia, Pennsylvania 19104

Copyright © 1970 by the Trustees of the University of Pennsylvania Library of Congress C a t a l o g C a r d

Number

M A N U F A C T U R E D IN T H E U N I T E D S T A T E S O F

ISBN:

0-8122-9065-8

74-140576 AMERICA

FOREWORD

In 1967, the Wharton School of Finance and Commerce received a continuing grant from Aldon Industries, Inc. for the study of management in the carpet industry, which was assigned by the Dean of the School to the Industrial Research Unit for administration and research. A preliminary report issued in February 1969 traced the history and recent developments in this industry. This study analyzes the current status of the industry, discusses recent developments, and attempts to estimate what the structure of the industry is likely to be in the coming decade. The author of this study, Robert W. Kirk, did the study originally as an advanced study project in partial fulfillment of the degree of Master of Business Administration, for the Graduate Division of the Wharton School. He is currently employed by a management consulting firm. He wishes to acknowledge the assistance of numerous executives in the industry, in trade associations, and in companies supplying materials to the industry for their generous assistance and gracious willingness to spend much time with him. Mrs. Veronica M. Kent typed the manuscript, Mrs. Rosamond J. Sanderson edited the manuscript, and Mrs. Margaret E. Doyle handled the administrative details. Errors or shortcomings are, of course, the responsibility of the author.

R. NORTHRUP, Director Industrial Research Unit Wharton School of Finance and Commerce University of Pennsylvania HERBERT

Philadelphia September 1970

STUDIES OF THE CARPET INDUSTRY BY THE INDUSTRIAL RESEARCH UNIT WHARTON SCHOOL OF FINANCE AND COMMERCE UNIVERSITY OF PENNSYLVANIA GEORGE

M.

Flooring: $1.50.

et al., The Economics of Carpeting and Resiliennt An Evaluation and Comparison, 1966. Cloth $5.00, p a p e e r

PARKS,

C. S T E W A R T , Economics of Carpeting and Resilient Flooring: AÄ Survey of Published Material and a Questionnaire Summary, 19 666. Mimeo $1.00.

DAVID

The Carpet Industry in the United States: History and Recent Developments, 1969. Mimeo $2.00. Future studies of the carpet industry will examine personnel and employee relations, marketing, and other aspects of the industry. A list of publications of the Industrial Research Unit is found on the back cover.

WILLIAM S. SWIFT,

TABLE OF CONTENTS PAGE

FOREWORD

iii

CHAPTER I.

II.

INTRODUCTION

1

HISTORICAL OVERVIEW

3

The Beginning

3

Technical Innovation in the Early Years

4

The Demand for Carpets and Rugs 1825-1941

4

The Emergence of Oligopoly

5

Impact of World War II

5

The Search for Freedom from Wool's Dominance

6

The Tufting Process

7

The Resurgence of Demand

9

The Emergence of New Markets

III.

13

CURRENT INDUSTRIAL STRUCTURE AND THE R O L E OF MERGERS

15

Industrial Structure

15

The Merger Movement

20

The Reasons for Merger Activity

25

Implications for Future Merger Activity

28 ν

vi

Table of

CHAPTER

IV.

PAGE

Effect of Merger Activity on the Industry

29

Further Considerations

30

T H E R O L E OF R E S E A R C H AND D E V E L O P M E N T

31

The Fiber Suppliers

32

Historical Perspective

32

Carpets—One Market Within a Broader Framework

36

Current Research Design

37

The Search for Other Market Areas

38

The Carpet Manufacturers

V.

Contents

39

Research Efforts Before World War II

40

The Post-War Period

41

The Importance of Market Orientation

42

Scope and Magnitude of the Research Effort

43

Impact of New Participants

45

MANUFACTURING—TECHNOLOGY IN

AND

ENVIRONMENT

TRANSITION

Growth of Output and Capital Expenditure

47

48

Printing and Continuous Dyeing

48

Impact of the Diversity of Tufting Equipment

52

Future Importance of the Flocking Process

53

The Growing Need for Product Standards

55

Plant Design and Location Considerations

56

Integrated Information Systems Requirements

58

The Prospect of Emerging Barriers to Entry

59

Table of Contents

vii

CHAPTER VI.

PAGE E L E M E N T S OF D E M A N D AND P R O D U C T M A R K E T SIZE

61

Income and Price Determinants

61

Other Market Forces

62

Product Differentiation and Carpet Brands

63

Historical Perspective

64

Effectiveness of Product Differentiation Efforts

66

Conclusions and Future Outlook

69

Market Forecasts and Determinants

70

Total Market Outlook

70

Private Residential Market

72

Contract-Apartments and Tract Homes

73

Contract-Mobile Homes

74

Contract-Offices

74

Contract-Educational Buildings

74

Contract-Hotels/Motels

75

Contract-The Medical Market

75

The Market for Indoor-Outdoor Carpeting and Carpet Tiles

75

Indoor-Outdoor Carpeting

75

Carpet Tiles

77

The Fibers Market

79

Prospects for Fiber Brands Summary

VII.

A S P E C T S OF THE CHANGING

79 82

DISTRIBUTION/SELLING

PATTERN

84

Current Retail Distribution Pattern

84

Changes in the Retail Distribution Pattern

86

viii

Table

of

CHAPTER

Contents PAGE

The Integrated Merchandising Concept

87

Inherent Changes in the Nature of Retailing

87

Impact of Contract Market Growth

88

Selling the Contract Market

88

Manufacturer's Contract Merchandising Efforts— Historical Perspective Current Contract Merchandising Efforts

VIII.

INDEX

89 90

The Need for New Merchandising Systems

91

The Basic Problems at the Retail Level

92

What the Dealers Want

92

Implications for the Future Role of the Wholesaler

93

The Giffen Industries Program

93

The Manufacturer's Role

94

CONCLUDING R E M A R K S

96

99

LIST OF TABLES TABLE

1

PAGE

U.S. Residential and Commercial Broadloom Carpet and Rug Shipments, 1950-1968

10

Wholesale Value of Domestic Broadloom Carpets and Rugs, 1951-1967

11

3

Broadloom Carpet Shipments by Type, 1951-1968

12

4

Concentration Ratios for the Carpet and Rug Industry, 1963 and 1966

16

Selected Financial Data for Carpet Manufacturing Companies, 1967 and 1968

18

6

Number of Employees in the U.S. Carpet Industry, 1958-1966 ....

19

7

Large Mergers in the Carpet Industry, 1948-1968

22

8

Acquisitions of Carpet Manufacturers by Textile Companies

24

9

Acquisitions of Carpet Manufacturers by Resilient Flooring Producers

24

10

Acquisitions of Furniture Manufacturers by Carpet Producers

25

11

Principal Manufacturers of Man-Made Carpet Fibers

33

12

Production Man-Hours and Value Added, 1958-1966

49

13

Capital Expenditure for New Plant and Equipment, 1958-1966 ....

50

14

Carpet Tufting Equipment in Place, 1963-1968

54

15

Replacement vs. New Use Purchases of Carpets and Rugs,

2

5

1966

63

16

Carpet Shipments by Type, 1968 and 1973

71

17

Demand for Carpets in Specific Market Areas, 1968-

71

18

Projected Growth of Indoor-Outdoor Carpet Market, 1968-1973

77

19

Fiber Consumption in Broadloom Carpets

80

20

Projected Fiber Consumption in Broadloom Carpets in 1973

81 ix

CHAPTER I.

Introduction The United States carpet industry, emerging from nearly two decades of technological revolution, and perhaps on the verge of a marketing revolution, has changed dramatically in the past several years. Indeed, even the name is a misnomer, for the products of this dynamic industry can no longer be adequately defined as soft floor coverings. As new materials extend the home interior into the external environment and appear increasingly on walls, ceilings, and in other areas not considered appropriate just a few years ago, the "soft surfaces" industry becomes a better definition. Such a redefinition, however, does not adequately convey the extent of the transformation. In the ten year period between 1958 and 1968, the value of shipments of tufted carpets and rugs increased 280 percent to rank tufted carpets as the fourth fastest growing United States industry behind such growth products as computers and aircraft. 1 Although many of the events which shaped the rebirth of the carpet industry have been accurately characterized in previous studies, contemporary forces which will determine the industry's future have not been so clearly defined. As one industry observer has stated: There are profound changes taking place in the tufted carpet business today— and the familiar recital of annual sales increases, new fibers, new technologies, new styles, and new end-uses only begins to tell the story. The carpet industry is in an age of transformation. The full implications of the changes affecting it will not be measured and understood completely for some time to come. 2 This study is concerned with the assessment of the future direction of the United States carpet industry. It attempts to define the significant factors which have contributed to past developments and will influence the industry's future, to weigh these variables in terms of their relative importance, and to investigate the nature of their interrelationships. 1 Susan Margetts, "Masland's Magic Carpet," Dun's Review, 1969), p. 77.

Vol. XCIII (April

"Robert J. Saunders, "Objective Self Appraisal," 1969 Carpet Industry (Dalton, Ga.: Carpet and Rug Institute), p. 91.

Review

2

The Carpet Industry

Such a study is of interest not only to the numerous carpet manufacturers that the layman traditionally associates with the industry. The industry's dramatic growth has attracted a rather diversified complex of new participants. In recent years, a growing number of resilient flooring producers, wholesale carpet distributors, diversified conglomerates, building materials manufacturers, and large integrated textile firms have entered the industry through the acquisition of existing carpet manufacturers. In addition, the industry's future growth is of concern to the numerous suppliers for whom it is a major market. In 1968 alone, broadloom carpet manufacture consumed an estimated 598 million pounds of man-made fibers produced by the nation's large chemical corporations, in addition to huge quantities of synthetic latex and carpet backings. 3 Therefore, the range of corporate interest in the industry has broadened significantly in the past decade and will continue to expand as the industry's products penetrate into new market areas. The objective of the study becomes one of documenting and interpreting the changes occurring in the separate functional areas of the industry within the framework of the prevailing economic environment and assessing the impact of these changes on the future industrial structure. The factual material for this purpose was drawn from a variety of primary sources: public documents, plant visits, and interviews and correspondence with industry leaders. T h e professional viewpoints and projections of industry leaders are invaluable to any study concerned with the assessment of that industry's future. In the course of this project, personal interviews were conducted with numerous individuals at ten major corporations engaged in carpet manufacture, with leading fiber suppliers, and with other industry representatives. It is believed that the firsthand information thus obtained accurately reflects the situation in the industry today.

3 Carpet and Rug Institute, Inc., Basic Facts About the Carpet and Rug 1969 Edition (New York: Carpet and Rug Institute, Inc., 1969), p. 22.

Industry,

CHAPTER II.

Historical Overview The present chapter is designed to provide a brief historical review of the major developments in the American carpet industry since the early nineteenth century. An exhaustive analysis of the history of carpet manufacture is not germane to this study. A research report recently completed for the Industrial Research Unit of the Wharton School of Finance and Commerce by Mr. William Swift entitled "The Carpet Industry in the United States: History and Recent Developments" does, however, offer a more comprehensive treatment of the subject. There are a number of other sources listed in Mr. Swift's report and in the bibliography of this study.

THE

BEGINNING

Carpet manufacture first appeared in the American colonies in the late eighteenth century. The basic styles and weaves had already been established in Europe and, hence, bore the name of such European cities as Axminster, Brussels, and Wilton, where they originated. 1 However, Cole and Williamson note that rug manufacture did not truly evolve to industry status in the United States until after 1825 when the factory form of organization developed on a large scale.2 Philadelphia became the center for carpet manufacture although there were other producers (such as the Tariff Manufacturing Company which later evolved into the Bigelow-Sanford Corporation) who were located elsewhere in the Northeast. This era in the industry, lasting until the late 1840's, was characterized by the manufacture of carpets on machines which were entirely hand operated and little changed from those in use at the turn of the century. 3 1 John S. Ewing and Nancy P. Norton, Broadlooms Harvard University Press, 1955), p. 3.

and Businessmen

1 Arthur H. Cole and Harold F. Williamson, The American (Cambridge: Harvard University Press, 1941), p. 12. 3

Carpet

(Cambridge: Manufacture

Ibid., p. 24.

3

4

The Carpet TECHNICAL

INNOVATION

IN THE EARLY

Industry YEARS

It was through the inventive genius of Erastus B. Bigelow that powerdriven equipment first appeared in the industry. Bigelow, now known as the " F a t h e r of the Modern Carpet Industry," obtained his first patents on the power-driven ingrain loom in May, 1842. 4 In addition to further inventions by Bigelow, other individuals developed and patented the powerdriven Axminster loom in 1874 and, by the end of that decade, a complete range of power machinery was in operation."' Productivity increases with this new equipment were substantial. However, once this period of innovation had run its course, further major inventions and resultant productivity gains were not forthcoming, and the state of the arts in the industry remained basically unchanged until World War II."

THE DEMAND

FOR CARPETS

AND RUGS

1825-1941

T h e carpet industry was well established in America by 1830. Although Wilton, Venetian, and Axminster weaves were produced, ingrain carpeting held the largest market share for the remainder of the century. By the early 1900's, however, the mass demand for carpeting had shifted upwards to the more expensive Axminster weave and production of ingrain carpeting had ceased by 1933. 7 This shift in demand to more expensive weaves was accompanied by the growing acceptance of wide-width or " b r o a d l o o m " carpeting. T h e popularity of broadloom has continued and, in 1968, broadloom shipments accounted for 81 percent of industry dollar volume. 8 Production of carpets and rugs prior to World War II reached a maximum of 83.2 million square yards in 1923.'' In subsequent years, the industry encountered increasing competition from other consumer durables (especially the automobile) and this factor, in conjunction with the Great Depression, resulted in a generally declining demand until the war years. ' Ibid., p. 55. Ingrain carpeting was an inexpensive, flat weave fabric which supplied the mass market of the nineteenth century. r ' Ibid., p. 73. "William A. Reynolds, Innovation in the United States Carpet Industry: 1947-1963 (Princeton: D. Van Nostrand Company, 1968), p. 29. 7 American Carpet Institute, Inc., Basic Facts About 1962 Edition ( N e w York: The Institute, 1962), p. 5.

the Carpet and Rug

Industry,

'Carpet and Rug Institute, Inc., Basic Facts About the Carpet and Rug Industry, 1969 Edition ( N e w York: Carpet and Rug Institute, Inc., 1969), p. 1. "U.S. Bureau of the Census, Biennial Census of Manufactures: 1923, p. 316.

Historical

Overview

5

THE EMERGENCE

OF

OLIGOPOLY

By 1939, five companies (Bigelow-Sanford, Alexander Smith, James Lees, Firth, and Mohawk) accounted for more than 60 percent of industry sales.1" The primary factors contributing to large company size arose mainly from the intensely competitive nature of the industry. Price competition sustained industry profits at low levels and, with the ensuing decrease in demand after 1923, the small, under-capitalized firms could not economically survive. Also, the highly capital intensive nature of the industry, in conjunction with a declining demand, prevented the entry of new firms. In addition, the diversification and change in consumer taste, which developed in the late 1800's, place increased emphasis on style. 11 Therefore, the large concern wih an experienced and well paid design department held a definite advantage over the small plant operation.

IMPACT

OF WORLD

WAR

II

In the years between 1830 and the inception of World War II, wool had been the basic fiber for carpet manufacture. However, during the war years, wool was declared an essential commodity by the government and placed on allocation. In addition, a price ceiling was placed on carpeting to prevent inflation. These factors forced the mills to curtail much of their carpet manufacturing operations and convert their facilities to the production of war goods such as blankets and cotton duck. 12 Fluctuating prices for wool had been a constant inventory control problem in the 1930's and, with further restrictions placed on its supply, there were efforts made by various mills to find acceptable substitutes. The major emphasis was initially on cotton substitution, but later shifted to wool-rayon blends. The first rugs composed of this wool-rayon combination were offered for sale in 1940 by Firth and Bigelow-Sanford. 13 It is interesting to note that the major research effort required to render these synthetic fibers acceptable for use in carpet manufacture was conducted by the carpet manufacturers and not the fiber producer. Ewing and Norton, op. cit., p. 300. " Ibid., p. 92. Ibid., p. 299. 13

Ibid., p. 287.

6

The Carpet

Industry

The pent-up demand and rising disposable consumer income following the termination of World War II insured an initially expanding market for carpets and rugs. Wool and other raw materials, the majority of which had generally been imported from overseas, again became readily available as the producing countries had been forced to stockpile these items during the war years. Manufacturers' shipments of broadloom carpets totaled 85.7 million square yards in 1950 14 and in the process 197.9 million clean pounds of carpet wool were consumed. 15 Although no one company clearly dominated the industry, by 1947 a "big three" had emerged. This group was composed of Bigelow, Smith, and Mohawk and accounted for 43 percent of industry sales. 16 Faced with increasing demand and an adequate supply of raw materials, their future seemed secure.

THE SEARCH FOR FREEDOM WOOL'S DOMINANCE

FROM

This happy situation did not exist for long. In December, 1950, wool imports from China, a primary supplier, were prohibited under the "Trading with the Enemy Act." 17 Subsequently, both India and Pakistan placed restrictions on wool exports. As the demand for carpet wool exceeded supply, "the weighted average price . . . rose from 68.1 cents per pound in January 1950 to 213.4 cents per pound in March 1951." 1 * Since carpet wool was the largest single element in a mill's raw materials cost and raw material cost represented 50 percent of production expenses in the carpet industry, the mill was forced to raise the price of its finished goods. The average price of carpeting rose 20 percent in the first nine months of 1950. 19 As a direct result, sales volume fell off sharply and profits suffered. For the remainder of the 1950's and even into the next decade, the industry fought a constant battle against the rising cost of wool. 14

Carpet and Rug Institute, Inc., note 8, supra, p. 4.

" U . S . Department of Agriculture, Wool Statistics and Related Data Statistical Bulletin No. 363, 1965, p. 86.

1920-1964,

"Stanley M. Sava, "An Economic Analysis of the Carpet and Rug Industry in the United States." (Unpublished Advanced Study Project, Wharton School of Finance and Commerce, University of Pennsylvania, 1953), p. 106. "U.S., Code of Federal Regulations, Title 31, Paragraph 500.101-500.808. 18

Reynolds, op. cit., p. 60.

""Carpets Go Synthetic," Business Week, January 19, 1946, p. 79.

Historical

7

Overview

Interest in synthetic fibers had decreased substantially after the war, but the cost-price squeeze with wool stimulated the mills to return to their work in this area. In 1950, the industry, led by Lees, introduced carpets made from cellulose acetate rayon and blends with wool.20 Rayon usage increased steadily until the late 1950's at which time nylon became the industry's second most important fiber. In 1958, du Pont introduced "Type 501" continuous filament nylon yarn specifically for carpets. The advantages of this product were immediately obvious. It required no spinning, pilling was substantially reduced, and the carpets produced from it could be piece dyed, thus reducing the need to carry large inventories of colored yarn or finished carpet. It enjoyed phenomenal market acceptance from the time of its introduction. In 1955, the Chemstrand Corporation, a joint venture between Monsanto and American Viscose, introduced "Acrilan" acrylic fiber to the carpet manufacturing trade.21 The acrylics were a bulky fiber which offered excellent cover with a texture and appearance very similar to wool. They displayed excellent resilience and, in addition, were slightly more durable than wool. By 1960, the man-made fibers (nylon and acrylics) accounted for 23 percent of total surface fiber consumption in broadloom carpets and were well on their way to future dominance in the industry.22 Therefore, with the advent of man-made fibers, the carpet manufacturer finally managed to escape from the traditionally fluctuating price and supply situation of the wool market and adopt pricing policies which were more nearly attuned to market demand. "It is probable that 1958 marked the turning point in carpet pricing"23 as, at that time, the wool supply situation eased somewhat with the passage of legislation to permit duty-free import of carpet wools and the rigid price policies of the fiber producers served to stabilize factor prices. THE TUFTING

PROCESS

The technological revolution which swept through the industry in the late 1950's was not solely the result of the efforts of the fiber producing Annual

Report,

1950, James Lees and Sons, Inc.

Robert Sheehan, "Turnaround Year for Monsanto," Fortune, ber 1964), p. 250. 22

Carpet and Rug Institute, Inc., note 8, supra, p. 22.

23

Reynolds, op. cit., p. 131.

Vol. LXX (Septem-

8

The Carpet

Industry

oligopoly for the tufting process must be given major credit for the industry's rebirth. Indeed, it is highly probable that either innovation could not have been so dramatically successful were it not for the other. T h e process itself is basically akin to a sewing operation. Face yarn is inserted into a woven backing by thousands of needles working simultaneously and the inserted tufts are permanently fixed in place by the addition of latex to the carpet back. It is an inherently faster and more economical method of manufacture than are the traditional weaving processes. T h e tufted textile industry originated in the vicinity of Dalton, Georgia, in the late nineteenth century. Use of the basic tufting principle in the manufacture of carpets did not, however, seriously occur until after the close of World War II. 24 Since that time, equipment for the production of carpets and rugs has been substantially improved and modified and pattern attachment devices developed which permit styling versatility previously only possible in woven goods. T h e firms who initially adopted the tufting process were not the older established producers but rather a number of new firms who entered the industry after the war years. Between 1946 and 1950, mills such as Cabin Crafts, Georgia R u g Mills, Ε. T. Barwick Mills, and Aldon Rug Mills, most of whom were based in the Dalton, Georgia area, began the manufacture of tufted carpets and rugs. It was not until the early 1950's that the established mills began to move into the tufting field. By that time, the new, innovating firms were already established and other new firms were entering this expanding business at an increasing rate. Between 1951 and 1955, forty-one new producers of tufted carpeting entered the industry and, in the process, the old oligopolistic industrial structure of the forties ceased to exist.2"' T h e rapid entry of new firms in the 1950's signified that those barriers to entry which were operable in an earlier period no longer existed. With the advent of the tufting process, reduced capital investment was required because of the greater productivity of the tufting machine. It has been noted that tufting machines produce broadloom eight to ten times faster than Axminster or Wilton looms and also reduce the labor component in the total cost structure from 33 percent to an average of 12 percent. 211 As a result, the optimal plant scale was significantly reduced. Furthermore,

21

Ibid., p. 80.

25

For a comprehensive analysis of the entry of new firms and their effect upon the market structure, see Reynolds, op. cit., pp. 89-95. M

"Flying Carpets," Barron's,

February 21, 1966, p. 3.

Historical

9

Overview

the high degree of skill necessary to the operation of weaving equipment was not required in the case of tufting and training requirements for the workers were minimal. Finally, the lower production costs of tufted products enabled the new firms to pursue aggressive pricing practices. Such a policy permitted them not only to capture a share of the existing market, but also to open up new markets among lower and middle income groups. Market acceptance of tufted products is evidenced by the fact that by 1958, over 50 percent of broadloom carpet shipments were tufted. 27 The new firms had the additional advantage of a southern location where labor was plentiful, less expensive than in the North, and free from union influence. Also, these firms started with new facilities which possessed definite advantages in more efficient plant layout and materials handling than existed in the northern mills. As the woven carpet manufacturers began to enter the tufted carpet industry in the early fifties, they did so either by acquiring firms which were located in the South or by building new production facilities in that area. By 1963, nearly 63 percent of total carpet mill locations were in the South .- s

THE RESURGENCE

OF

DEMAND

As evidenced in Table 1, the demand for broadloom carpeting began to accelerate rapidly by 1958. One of the principal reasons lies in the interrelationship of the tufting process and man-made fibers. In the early fifties, the tufters were faced with the same fiber supply problems as the producers of woven carpeting. Tufted carpets were, however, generally made of cotton and were considered inferior to wool carpets in most product performance areas. Had the tufting producers been forced to rely solely on the factor market in existence at that time, their success would probably have been much more limited. Such was not the case. The innovators in the tufting field, firms such as Ε. T. Barwick and Coronet, immediately committed themselves to the use of man-made fibers to a much greater extent than the producers of woven products. This marriage of a less expensive processing technique and the inherent price stability of the man-made fibers served to drive the price of tufted carpeting steadily downward, thereby opening up new markets for the product. The effects of this technology on the price structure are clearly obvious

" Carpet and Rug Institute, Inc., note 8, supra, U.S. Bureau of the Census, Location pp. 20-21.

p. 5.

of Manufacturing

Plants

1963,

MC63(5)-3-2,

10

The Carpet TABLE 1.

U. S. Residential and Commercial Carpet and Rug Shipments

Industry

Broadloom

1950-1968 Estimated Dollar Value (millions)

Square Yards (millions) 1950

85.7

1951

64.7

449.2

1952

73.1

421.8

1953

79.7

446.1

1954

82.9

434.0

1955

98.3

520.9

1956

110.3

569.3

1957

112.2

567.6

1958

122.6

559.4

1959

144.5

670.1

1960

148.2

667.1

1961

160.9

686.8

1962

194.0

782.7

1963

223.4

882.6

1964

263.8

1,034.5

1965

301.9

1,135.0

1966

331.3

1,208.5

1967

358.1

1,294.4

1968

435.0

1,636.7

Source: C a r p e t and Rug Institute, Basic Industry, 1969.

$

Facts

About

536.7

the Carpet

and

Rug

f r o m T a b l e 2. In the period between 1951 and 1960, the average wholesale price of broadloom carpeting fell f r o m $ 6 . 9 4 to $4.50 per square yard. Also, in this period, the percentage of the total market controlled by tufted products went f r o m 9.4 percent to 67 percent, as noted in T a b l e 3. T h e inevitable result of such economics has been the continued growth of tufted's market share to a high of 90.7 percent in 1960 and the subsequent decline of d e m a n d for woven goods. T h e r e were also other, more subtle factors which contributed to this

Historical

Overview

TABLE 2.

1951

11

Wholesale Value of Domestic Carpets and Rugs 1951-1967

Broadloom

Average Wholesale Square Yard Value (dollars)

Wholesale Price Index for Carpet (annual average)

6.94

117.5

1952

5.77

98.0

1953

5.60

99.6

1954

5.24

95.8

1955

5.30

98.8

1956

5.16

101.7

1957

5.06

104.1

1958

4.56

97.7

1959

4.64

98.2

1960

4.50

100.0

1961

4.27

97.3

1962

4.03

96.1

1963

3.95

94.3

1964

3.92

97.7

1965

3.76

94.4

1966

3.65

93.9

1967

3.61

89.5

Source: Average square yard value from Carpet and Rug Institute, Basic Facts About the Carpet and Rug Industry, 1969. Wholesale Price Index from U.S. Bureau of Labor Statistics, Wholesale Price and Price Indexes, Code No. 1231. resurgence of demand. A product may be technically sound and attractively priced and, yet, experience little demand at the retail level if consumer awareness has not been adequately stimulated. T h e innovating firms in the tufted field were mostly new enterprises with little available capital for promotional activities. Into this void stepped the fiber producing oligopoly, firmly committed to establishing a consumer franchise for their products. The success of such firms as du Pont with " 5 0 1 " nylon and

The

12 TABLE

3.

Broadloom Carpet 195]-1968

Shipments

Carpet by

Industry Type

Percent of Total Yards Woven*

Tufted

1951

90.6

9.4

1952

85.7

14.3

1953

79.6

20.4

1954

67.4

32.6

1955

64.0

36.0

1956

57.9

42.1

1957

49.7

50.3

1958

41.9

58.1

1959

40.5

59.5

1960

33.0

67.0

1961

27.4

72.6

1962

25.4

74.6

1963

21.4

78.6

1964

16.4

83.6

1965

13.8

86.2

1966

12.8

87.2

1967

11.2

88.8

1968

9.3

90.7

* Includes Axminster, wilton, velvet, chenille, and knitted carpets. Source: Carpet and Rug Institute, Inc., Basic Facts Industry, 1969.

About

the Carpet

and

Rug

Monsanto with "Acrilan" are well known. Also, through fiber licensing programs, they tied the carpet manufacturer into their consumer advertising campaigns. In mid-1964, there were fifty franchised carpet producers using du Pont " 5 0 1 " and thirty-four using Chemstrand's nylon and acrylic products.- 1 ' The end result of this intensive promotional effort was a new glamour image for the carpct industry and its products, and a resultant level of consumer interest never previously attained." 0 28

Barron's,

3,1

T h e subject of branded merchandise is discussed in a later section of this study.

July 6, 1964, p. 19.

Historical

Overview THE EMERGENCE

13 OF NEW

MARKETS

As prices moved steadily downward, the consumer no longer looked upon carpeting as a luxury product beyond the reach of his income. The design and styling versatility offered by the new man-made fibers and their technological contribution to products with improved performance characteristics further whetted the consumer's appetite. The result was a demand for carpeting for use in other areas of the home in addition to those areas where the product had been traditionally accepted. Carpets increasingly appeared in bedrooms, bathrooms, and family rooms. One of the most dramatic examples has been the growth of indooroutdoor carpeting. Initially composed of chemically resistant polypropylene fibers and manufactured by a process known as needlepunching, the product revolutionized traditional thinking on potential end-use areas for carpets in the m i d - s i x t i e s . I n d o o r - o u t d o o r carpet not only found applications outdoors on patios and walkways. The greatest percentage of the product went into indoor use in basements, recreations areas, and kitchens. Recent product offerings based on the tufting process and the use of solution-dyed acrylic yarns have added new style dimensions which promise further to expand this market. While new markets were developing for residential carpeting, dramatic growth in the commercial market went almost unnoticed until the early 1960's. Representing less than 10 percent of total yardage sold in 1956, some estimates place current volume at nearly 33 percent and note that sdes to this area have increased 700 percent in the 1960-1968 period. 82 This market, composed of motels, hotels, office buildings, etc., was not obtained on the basis of decreasing price as in the case of residential demand. Higher priced woven goods have traditionally dominated the market. The principal selling point has been carpet's functionality in such areas as acoustics, insulation, maintenance and safety. Recently, expanded product research into these areas is aimed at supporting greater sales increases to this market in the future. Equipped with increasingly sophisticated production techniques in carpet printing, construction, continuous dyeing, and flocking, and utilizing improved fiber technology, the industry is presently considering entirely new markets. Serious effort has already been expended in the development of carpeting for walls and future end-use markets could include ceilings, roofs, lawns, and a great many other outdoor surfaces. 31

"Now You Can Have a Wall to Wall Lawn," Business Week, July 16, 1966, p. 89.

32

"Spring Signals," Home Furnishings Daily, January 2, 1969, p. 10.

14

The Carpet

Industry

Associated with this phenomenal growth and transformation, however, are a host of new and challenging problems. Management today faces decisions the consequences of which will probably again change the face of the industry. One of the more visible harbingers of this change lies in the nature of new participants in the industry. This topic is considered in some detail in the next chapter.

CHAPTER ΙΠ.

Current Industrial Structure and the Role of Mergers While limited capital requirements allow for ease of entry into the industry, there is a substantial turnover rate among the smaller firms. This high turnover complicates any effort to derive an exact estimate of the number of firms in the industry at one point in time. According to the Tufted Carpet and Rug Institute estimates in 1968, 225 companies were at that time engaged in carpet manufacturing. Of this total, approximately twenty-five were ranked as major manufacturers.

INDUSTRIAL

STRUCTURE

Preliminary data on concentration ratios permit some insight into the relative importance of these major firms. In order to interpret the data as published by the Bureau of the Census, however, it is necessary to understand the definition of "carpet and rug industry" advanced by the Budget Bureau in 1957. Under this definition, the industry is comprised of two four-digit Standard Industrial Classifications. Standard Industrial Classification No. 2271 included those firms primarily engaged in weaving carpets and rugs from any textile yarn and whose basic products are Axminster, Wilton, and Velvet constructions.1 Standard Industrial Classification No. 2272 is comprised of those firms primarily producing tufted carpets and rugs from any textile fiber and important products are tufted carpeting, scatter rugs, and bathmats.2 It is significant that finishers of these products are also included, as much commission or contract finishing exists in this segment of the industry. The concentration ratio data which have been developed under this definition of the industry are based on value added in the case of SIC 2271 because of the extensive duplication which exists in product trans1 U.S., Bureau of Budget, Standard Industrial Classification Manual (Washington: U.S. Government Printing Office, 1957), p. 57.

'Ibid.

15

16

The Carpet TABLE

4.

Concentration Industry

Ratios for the Carpet 1963 and 1966

Industry

and Rug

Value Added Percent Accounted for by Four Largest Firms

SIC

Date

Total (dollars)

Eight Largest Firms

2271

1963

120,004,000

67

88

2271

1966

115,678,000

75

88

Value of Shipments 2272

1963

801,804,000

25

41

2272

1966

1,206,422,000

26

43

Source: U.S. Bureau of the Census, Annual Survey of Manufactures: Value-of-Shipment Concentration Ratios by Industry, M66(AS)-8. Government Printing Office, Washington, D.C., 1968, p. 7.

1966, U.S.

fers in the w o v e n g o o d s s e g m e n t . D a t a f o r t u f t e d p r o d u c t s are based o n v a l u e of s h i p m e n t s . T h e s e figures are p r e s e n t e d in T a b l e 4. T h e high degree of c o n c e n t r a t i o n in S I C 2 2 7 1 is, of c o u r s e , a t t r i b u t a b l e to the relatively few firms r e m a i n i n g in this declining b u s i n e s s a n d b a r r i e r s to e n t r y r e f e r r e d to in C h a p t e r II. It is also o b v i o u s that the level of c o n c e n t r a t i o n in t h e t u f t e d c a r p e t i n d u s t r y is q u i t e low. A s p r e v i o u s l y n o t e d , this s e g m e n t of the i n d u s t r y , c o m p r i s i n g o v e r 9 0 p e r c e n t of b r o a d l o o m c a r p e t s h i p m e n t s in 1 9 6 8 , is highly c o m p e t i t i v e a n d n o single c o m p a n y e n j o y s a d o m i n a n t p o s i t i o n . Ε . T . B a r w i c k I n d u s t r i e s , Inc., t h e largest single p r o d u c e r of t u f t e d c a r p e t s , e s t i m a t e s t h a t "its sales of t u f t e d c a r p e t s d u r i n g 1 9 6 7 c o n s t i t u t e d a p p r o x i m a t e l y 11 p e r c e n t of t h e total sales in t h e U n i t e d S t a t e s of t u f t e d c a r p e t s a n d rugs." : i A c t u a l l y , t h e i n c l u s i o n of finishers in S I C 2 2 7 2 , t h e division of the industry into t w o distinct segments, and other related definitional problems s o m e w h a t u n d e r s t a t e s t h e d e g r e e of c o n c e n t r a t i o n w h i c h o n e c o u l d arrive at if w o r k i n g f r o m a d i f f e r e n t set of a s s u m p t i o n s . If the i n d u s t r y ' s p r o d u c t s are c o n s i d e r e d relatively h o m o g e n e o u s a n d if only b r o a d l o o m s h i p m e n t s

'Prospectus,

August 8, 1968, Ε. T. Barwick Industries, Inc.

Current

Industrial

Structure

and

Role

of

Mergers

17

produced by carpet manufacturers are included, the ratio statistics become much higher. Some observers have recently estimated that as few as five major carpet manufacturers may account for almost 50 percent of total industry volume. 4 Regardless of the actual statistics, the larger firms have not recently enjoyed any significantly effective barriers to competition. In comparison with the larger sized companies found in other primary manufacturing industries, the major carpet producers are not giants. Only one of the top producers, Mohasco Industries, was included in the listing of 1968's 500 largest industrial corporations as compiled by Fortune magazine. There were, however, ten other corporations in the list who own carpet manufacturers among their subsidiary operations. 5 If automotive carpeting is included in company sales, Ε. T. Barwick Industries challenges Mohasco Industries as the largest manufacturer in the business. Lees Carpets (a division of Burlington Industries) and Bigelow-Sanford (a subsidiary of Sperry and Hutchinson), respectively, round out the list of the top four manufacturers. Because of the fact that a number of the more important producers are either privately held corporations or subsidiary operations within larger firms, it is difficult to rank industry members in terms of size. A list of other major public corporations would include Coronet Industries, C. H. Masland and Sons, Trend Industries, Ozite Corporation, Aldon Industries, Ludlow, Sequoyah Industries, and Berven. Other leading private and subsidiary companies are Cabin Crafts, Crown Tuft, Callaway Mills, Magee Carpet Company, World Carpet Mills, Gulliston Carpet, Ε and Β Mills, and Painter Carpets. Selected financial data for a number of these firms are given in Table 5. The carpet manufacturers are process integrated to various degrees. A majority, probably in the vicinity of 80 percent, own dyeing facilities. The cost savings over contracting this operation out to commission dyers is approximately 35 to 50 percent. Relatively few firms have their own yarn spinning facilities however. The tufters who entered the industry in the early fifties depended heavily on continuous filament yarns (which did not require spinning). In addition, the cost savings generated through internal ownership of spinning facilities are not nearly as significant as for the dyeing operation. Only one major firm currently produces its own man-made fiber and that firm does so only for a small portion of its total yarn requirement. The industry sells its product either direct to the retailer or through wholesale distributors. In 1968, it is estimated that approximately 70 'Modern 6

Floor Coverings, Vol. LXXXII (January 1969), p. 44.

Fortune, Vol. LXXIX (May 15, 1969), pp. 168-184.

18

The Carpet

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Current

Industrial

Structure

and

Role

of

Mergers

19

percent of all yardage was distributed directly to retailers." T h e percentage of distributors owned by carpet m a n u f a c t u r e r s is very low and ownership of retail outlets is practically nonexistent. TABLE 6 .

Number of Employees in the U.S. Carpet 1958-1966

Industry

Year

Woven (SIC 2271)

Tufted (SIC 2272)

Total

1958

18,151

11,528

29,679

1959

19,746

12,487

32,233

1960

18,404

13,272

31,676

1961

16,410

14,787

31,197

1962

14,476

17,528

32,004

1963

13,398

19,589

32,987

1964

12,113

24,852

36,965

1965

10,584

26,620

37,204

1966

9,676

28,212

37,888

Source: 1958-1963, 1963 Census of Manufactures, Woven Carpets and Rugs; Tufted Carpets and Rugs, Report MC63(P)-22 D1 and 2, Table 1, p. 1 both reports. 1964-1965, U.S. Bureau of the Census, Annual Survey of Manufactures: 1964 and 1965, General Statistics for Industry Groups and Industries (U.S. Government Printing Office, Washington, D.C., 1968), pp. 34-35. 1966, U.S. Bureau of the Census, Annual Survey of Manufactures: 1966, General Statistics for Industry Groups and Industries, M66(AS)-1 (U.S. Government Printing Office, Washington, D.C., 1967), p. 6.

"Carpet and Rug Institute, Inc., Basic Facts About the Carpet and Rug 1969 Edition (New York: Carpet and Rug Institute, Inc., 1969), p. 18.

Industry,

20

The Carpet

Industry

Any analysis of the manufacturing cost structure must be cognizant of the three distinctly unique processes currently utilized in carpet manufacture. Reference has already been made to the relatively high labor and capital costs involved in the weaving process. In contrast, the average cost breakdown for the tufting process is essentially 70-78 percent raw materials, 11-18 percent labor, and 8-11 percent overhead. Those tufters who are currently utilizing recently introduced finishing technology, such as printing and continuous dyeing, are, however, encountering higher capital costs. T h e needlepunch or needlebond process requires no yarn spinning nor carpet backing operation. It is a high speed, automated process in which raw materials account for approximately 90 percent of production costs. 7 In general, carpet manufacture is a high variable cost industry, a fact easily verified during periods of slack d e m a n d — w h e n the carpet producers are prone rapidly to suspend operations and drastically to reduce their inventories. T h e lower labor requirements of the tufted process in conjunction with the dramatic increase in tufted carpet production at the expense of woven carpeting has resulted in a relative stabilization of the total number of employees in the industry when compared to the increase in total volume of shipments. As shown in Table 6, there were nearly 30,000 employees in the industry in 1958, 39 percent of whom were engaged in the tufted segment. In 1966, 37,888 people were employed of which 75.5 percent were in the tufting sector.

THE MERGER

MOVEMENT

Although the foregoing statistics characterize the current structure of the industry, the basic elements of structure cannot hope to convey the capacity for the inducement of further change which exists among a number of the firms in the industry. Previous reference has been made to the diversified interests represented by large organizations who have entered the industry via the acquisition route over the past several years. Also, a number of leading carpet manufacturers who have retained their ownerships have recently been diversifying into other industries. In order to explore further

7

Standard and Poor's Industry Surveys: "Home Furnishings, Basic Analysis," March

21, 1968, p. H9.

Current

Industrial

Structure

and

Role

of Mergers

21

the implications of such movements, it is necessary to define more carefully the identity and nature of these firms, their effect on the industry to date, and their plans for the future. A list of acquisitions in the industry in the 1948-1968 period is shown in Table 7. The Federal Trade Commission compiles such data for all fourdigit SIC industries in which the acquired firm had assets of ten million dollars or more. This includes 70 percent of all mergers which were consummated in the period stated. s Unfortunately, no such comprehensive data are published for firms under the ten million doliar asset category, a range in which a very large percentage of carpet industry activity falls. In order to compensate for this paucity of data, a supplementary listing of mergers and acquisitions has been prepared. Table 8 shows the major acquisitions made by textile firms and the date of consummation. Table 9 shows the acquisitions of carpet producers made by large resilient flooring producers. As these data point out, the merger movement has gained momentum in the past few years. In 1968, there were 27 significant mergers in the floor coverings industry. In addition, there were a number of important merger attempts which failed to materialize. A m o n g these were the proposed mergers of Ozite Corporation with Berven Carpets, M o h a s c o Industries with American Standard, and of Aldon R u g Mills into Ling-Temco-Vought. The merger movement can be divided into four distinct periods. T h e first period, extending approximately from 1964-1967, involved a substantial influx of textile firms into the carpet industry. T h e second period, beginning in 1967 and continuing to the present, is characterized by the movement of resilient flooring producers into the industry. T h e third and fourth dimensions of the merger movement are largely occurring today. These are the acquisition of furniture companies by carpet manufacturers and the movement by a number of leading private carpet firms to go public. Some of the more important acquisitions of furniture firms are shown in Table 10. They are important in the respect that the acquiring firms are leading participants in the carpet industry. Also, at the time of this writing, another leading carpet manufacturer, Ε. T. Barwick Industries, was conducting negotiations for the purchase of its first furniture firm. The movement by the major tufters to go public was initiated by Coronet

s Federal T r a d e Commission, Large Mergers 1968, « - 6 - / 5 - 2 , April 1969, p. 10.

in Manufacturing

and Mining:

1948-

22

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Manufacturing-—Technology

& Environment

in Transition

51

carpets were printed. In 1969, an estimated 8 percent of the broadloom market will consist of printed carpeting. Conservative estimates project a further penetration to 15 percent by 1975.3 More optimistic forecasts place printed carpeting's share of the market in excess of 30 percent by 1972.4 Although printed carpeting is perhaps a natural evolutionary product of the tufting industry, there are a host of factors involved in its current level of acceptance. Technical factors include the availability of continuous wet processing equipment, the increased utilization of fine gauge tufting equipment which allows for greater pattern definition, the introduction of new man-made backings, and the availability of new dyes and brighter colors which set up more quickly. Market forces involve the current fashion trend to bold, bright patterns and interior decorating trends in the commercial market, the relative ease of maintenance of patterned goods, the growth of new markets such as indoor-outdoor and kitchen carpeting characterized by easily printable flat pile fabrics, and increased availability and product promotion. Economics, a major determinant, has been mentioned previously. Further stimulus to its acceptance in new market areas is insured by the fact that a large number of carpet manufacturers have invested heavily in the equipment and must now find outlets for the necessary volume. There are several printing machines available that will perform the basic function. Two major types, however, dominate the market. At present, the Zimmer machine predominates. This system utilizes printing screens and is capable of printing up to twelve colors at a time. Its initial cost is between $1,000,000 and $1,500,000. The initial space requirements involve an area 80 feet in width and 85 feet in length; however, when steamers and washers are added, approximately 350 linear feet of floor space is required. 5 Therefore, the total capital investment can be prodigious. In the author's discussion with a member of one firm which had recently installed such equipment, it was pointed out that few firms can meet the space requirements with existing facilities and, in this case, a new plant addition was necessary. In utilizing the equipment as a continuous dyeing range, a running speed of 600 yards per minute represented 50 percent capacity operation, the minimum acceptable rate. Since color changes re3

R. Burnett, "Printing," Modern

Textiles Magazine,

Vol. L (September 1969), p.

59. ' Carpet and Rug Institute, 1969 Carpet Industry Institute, 1968), p. 184.

Review

(Dalton, Georgia: The

5 "Carpet Printing Techniques Improve As Demand for Carpet Prints Grows," America's Textile Reporter, Vol. LXXXIII (March 6, 1969), p. 11.

52

The Carpet

Industry

quire significant down time, long runs are desirable. Productivity of the printer was approximately 15 feet per minute. It was stated that the economics of continuous dyeing were at least ten times more favorable than batch dyeing and, even when operated at 60 percent capacity, could produce the equivalent of five dye-becks of 150 yard capacity.® The other major machine is the Stalwart Pickering System manufactured by E. Pickering Ltd. of England. It operates on a relief printing principle and costs approximately $600,000 per unit. Although, in comparison to the screen printer it occupies far less space, it does not offer the flexibility of the Zimmer system. With the exception of the application of color, both techniques are similar and require investment in washers, steamers, and drying ovens. Recently, a number of firms adding new printing capacity have installed the Stalwart roller printer in lieu of the high cost Zimmer equipment. There is also strong evidence that future carpet printing machines will utilize rotary screen printing mechanisms. 7 Regardless of the equipment purchased, the expanding field of printing and continuous dyeing represents a tremendous capital expenditure on the part of the carpet manufacturer. Although the work can be contracted out to commission finishers, the costs of doing so are high, as previously referred to in Chapter III. In addition, flexibility is lost in the process. Additional incentive for owning the equipment lies in utilizing it in other areas, such as space dyeing, and in developing and refining the machinery to suit individual needs. There is no question that the major carpet producers must own their own facilities in the future.

Impact of the Diversity

of Tufting

Equipment

The investment decision has an added dimension in the rise of new markets which have generated a demand for increasingly finer gauged tufting equipment. In late 1966, the Lewis Card Company and Β & J Machinery Company in the United States introduced the 5 / 6 4 tight gauge machine." Because of the types of carpet constructions prevalent in the contract market, this type of equipment has found instant acceptance and a variety of fine gauges have proliferated. When the additional possibility of owning needlepunch equipment is also considered, potential equipment costs can be considerable. There were 58 needlepunch looms in place at the end of "Field notes from interview conducted by the author in August 1969. 7 "Carpet Printing Techniques Improve As Demand for Carpet Prints Grows," note 5, supra, p. 23.

'"Dateline Dalton," Home Furnishings Daily, March 17, 1969, p. 38.

Manufacturing—Technology

& Environment

in Transition

53

1968.° Costs of such equipment average $400,000 per unit and possibly more if equipment for fancy blending and waste picking is included. As shown in Table 14, the number of units in place has grown considerably since 1964. Although the percentage of this growth relative to finer gauges is not known, approximately 80, 5 / 6 4 gauge tufting machines have been put into operation since 1966. 10 This proliferation of equipment styles is expected to continue and will force the carpet producer to become more definitive in his market segmentation relative to equipment needs. With the ownership of a wide range of equipment which is orientated toward specific end use markets, the scheduling problem is magnified and the need for precise marketing plans is increased.

Future Importance

of the Flocking

Process

Industry observers have stated that the flocking process of today, i.e., the present state of the arts, is not the important consideration. What is important is the concept of delivering surface fiber to a substrate via a mechanism considerably different than the conventional textile process. The flocking process itself is a relatively old method having progressed in the textile industry from air pressure application to mechanical techniques and finally to the present methodology known as "electrostatic flocking." This process involves the projection of positively charged fibers onto a negatively charged backing fabric. The fiber, generally precisely cut lengths of nylon, is held in place by an epoxy adhesive. An obvious advantage of the process is that it puts 100 percent of all of the fiber on the face of the carpet versus 25-30 percent which remains on the back in the tufting process. For this reason, it offers superior abrasion resistance in comparison to the tufted product on the basis of ounces of fiber per square yard. Also, it is not necessary to produce a yarn and the product produced requires little finishing. Although the epoxy adhesive is expensive, there has been a marked decline in epoxy prices in recent years and the reduced materials handling potential, as well as lower face fiber requirements, are sound economic advantages. The major disadvantages of the present process are the styling limitations, since only flat pile surfaces can be produced, the serious limitation on flock length, and soiling of the carpet because of its high density. In " U.S. Department of Commerce, Bureau of the Census, Current Industrial Series MO-220(68)-4, May 2, 1969, p. 5. 10 "Claim Rug Mills Give Public What It Wants," Home Furnishings 1969, p. 13.

Reports,

Daily, July 8,

54

The Carpet TABLE 14.

Industry

Carpet Tufting Equipment in Place 1963-1968 Number of Units in Place

Width of Machine

1963

1964

1966

1967

1968

76

72

131

148

114

76

Over 15 feet

81 335 46

356 64

121 494 40

96 532 64

89 670 46

Total

538

568

786

840

919

9 feet 12 feet 15 feet

Source: 1963-1967, American Carpet Institute, Inc., Basic Facts About the Carpet and Rug Industry, 1968. 1968, C a r p e t a n d Rug Institute, Inc., Basic Facts About Rug Industry, 1969.

the Carpet

and

Note: 1965 data not reported. essence, the styling limitations are similar to needlepunch fabrics and must be overcome before flocked carpets will achieve broad market acceptance as a floorcovering product. In 1968, only one commercial broadloom carpet manufacturer, Ε. T. Barwick Industries, was producing flocked carpets in the United States. Unlike the printing process, flocking has gained only minimal acceptance on the part of carpet manufacturers and the consumer still views it as a novelty. It is highly possible, however, that flocking will be successful in the wall covering market which is currently evolving. Its superior pile density and resultant high abrasion resistance could be major factors in commercial applications. One manufacturer who has evaluated wall covering products rates flocking first in performance followed by tufted and then needlepunch fabrics. The economics, however, follow in the same order. Performance measures were scuff resistance, thermal properties, and acoustical considerations. 11 It is sheer speculation to project the evolutionary path of flocking as a floorcovering material. Its main contribution, perhaps, is that it represents a significant break with conventional manufacturing methods. There are others now working along the same lines. A firm in England, for example, is developing a process whereby fiber tufts are blown to the carpet backing through hollow tubes. Such concepts potentially represent the techu

Author's field notes from interviews conducted in August 1969.

Manufacturing—Technology

& Environment

in Transition

55

nology of the future and merit the continued surveillance of industry members. THE GROWING

NEED

FOR

PRODUCT

STANDARDS

There are many forces currently existing in the marketplace which are giving increased impetus to the demand for product standards. The opening up of the commercial market and use of carpets in areas such as schools and hospitals has created concern over acceptable levels of fireresistance, static buildup and noise abatement. In addition, the contract market is more highly orientated toward evaluation of a flooring product on the basis of maintenance and wear life rather than esthetics. There is, therefore, an awareness that the contract market, which represents an enormous new area for carpets, could easily be jeopardized by relatively few cases of poor product performance. The use of carpets as wall covering products and their inclusion as an integral part of new structures makes them susceptible to building code regulations. Finally, the proliferation of new fibers and constructions has led to considerable consumer confusion. As stated recently by the American Society for Testing and Materials: "It is becoming increasingly difficult for even the best informed buyers to select the proper floor coverings for specific performance needs." 12 To date, the industry itself has done very little to construct such performance standards. Most of the effort in this direction has come from the fiber producers in their programs to control fiber content through licensing programs. Yet the policing of such programs is extremely difficult and no effective enforcement mechanism has been developed to the satisfaction of all parties. The federal government has established minimum performance standards for carpeting included in mortgages; however, even these are far from being satisfactory. In essence, the consumer has little protection in the marketplace against poorly constructed materials and there are many who will testify that such products are in abundant supply. New efforts to establish standards are now starting to move along two broad fronts. The A.S.T.M. has recently begun to consider standards for floor covering products in general and the carpet and rug industry has set out to establish standards specifically for carpets.13 It seems inevitable that some form of control standards will be put forth in the near future. Enforcement and acceptance of such standards is, however, quite another 12 "Standards In Making," Modern Floor Coverings, Vol. LXXXII (August 1969), p. 14.

56

The Carpet

Industry

matter. In the absence of complete adherence to the regulations by all industry members, increased government intervention is highly probable. The nature of such regulation would perhaps be similar to provisions such as are now found in the Hill-Burton Act (which provides funds for hospital construction) relative to flammability requirements. The impact of product standards will be most severe to the small marginal producers who historically have a reputation for trading of! product quality for profit on a short run basis. These are the so-called "boilerroom" operations whose numbers, according to insiders, are relatively high in the industry. It is quite possible that the increased costs imposed upon the new undercapitalized producers by such a program could drive them out of the industry. Despite the imposition of such a barrier to entry, the potential benefits of controls are too great to be disregarded.

PLANT

DESIGN

AND

LOCATION

CONSIDERATIONS

One writer envisions the textile mill of the future as an integrated production-sales unit which makes maximum utilization of space. He states that "the sprawling one-story textile mill" will no longer exist but will be replaced by tall domed structures connected to raw material pipelines and conduits. Within such a complex, fibers would be produced and the major production flow will be vertically downward. The entire operation will be fully controlled by computers. 14 Another prophet predicts a sizeable decrease in operating personnel in the average tufting plant by the year 2068. Auren Uris predicates his example on a tufting operation involving six broadloom machines of 12 and 15 foot widths producing 50,000 square yards of carpet per 120 hour week. Such an operation today involves approximately 82 people in the production-shipping-warehousing complex. Uris predicts a reduction of personnel to nine within the next hundred years. He further contends that behavioral psychologists will make strong inroads into the textile mill of the future.1"' Although such concepts may seem unrealistic when compared to current operations, there is little doubt that a vital need exists for automation at the plant level today. While such innovations as continuous dyeing trains are a significant improvement, the entire spectrum of materials handling remains, for the most part, unautomated. Plants which were originally 11 "Fantasy or Not, This Could Be The 21st Century Textile Mill," Textile Reporter, Vol. LXXXIII (February 20, 1969), p. 42. 15 Auren Uris, "The Workforce," Textile 148-149.

World,

America's

Vol. CXVIII (April 1968), pp.

Manufacturing—Technology

& Environment in Transition

57

designed for straight-line operations in the 1950's have again become product flow nightmares because of continuing expansion problems. Computerization of materials flow is largely nonexistent. The entire concept of the plant as a continuous production unit has been challenged recently by considerations stemming from the contract market. Since the number of large contract jobs is growing, part of the business has become increasingly custom orientated. The mill cannot inventory standard items to fulfill such contracts and often the time requirements involved force the manufacturer to interrupt normal operations in order to manufacture the special product. Because of these factors, a number of specialized "contract plants" are now evolving which have built-in flexibility to deal with the problem. The topic of plant location referred to in Chapter II in regard to the reasons for southern concentration, could potentially be influenced by two additional factors which are currently coming to the fore. The first of these is availability of labor and relates, at present, mainly to the Dalton, Georgia area where mill location is most intensive. A recent newspaper article describes the Dalton situation as a "cutthroat labor problem" in which employee stealing is rampant and compounded by the continual start-up of new mills despite the manpower shortage. 16 In general, employment in Georgia carpet and rug mills has increased more than 50 percent in the 1963-1968 period. 17 For the most part, southern mills have remained entirely without union organization, partially because of employer incentives such as higher wages, increased fringe benefits, and profit sharing plans which are designed to counteract that possibility. Georgia tufters are, however, becoming increasingly concerned over the Alliance for Labor Action formed by the 103 Teamsters and the United Automobile Workers Alliance which is building an aggressive organization campaign in Chattanooga, Tennessee, and Atlanta. One firm the author interviewed was actively searching for a new plant site outside of the Dalton area due to labor availability problems. They preferred to remain within the state but predicted a movement out of Georgia in the long run. 18 It has been evident, however, that initial new plant locations in the future will be directed into areas where organized labor does not exist. Recent examples have been the growth of tuft-

" "Dalton Labor Shortage Seen Getting Worse," Home Furnishings 1968, p. 1.

Daily, July 17,

17

America's

18

Field notes f r o m interviews conducted by the author in August 1969.

Textile Reporter,

Vol. LXXXIII (May 1, 1969), p. 52.

58

The Carpet

Industry

ing operations in Oklahoma and the migration of Georgia tufters into states geographically adjacent to the Georgia area. The second locational factor, transportation costs, has recently been given new emphasis as a result of integrated synthetic backings which are substantially increasing product shipping weight. The reactions of those interviewed on this topic varied considerably. A few firms admitted that they had no real grasp of their current shipping costs and were involved in efforts to determine these. Others remarked that the added weight factor is more than offset by high profit margins on such products. Some pointed to new warehousing facilities recently completed in the South as a testimony for their feeling that transportation costs were not a factor. There is, however, a growing awareness that increased weight across the broad spectrum of a company's product line could become a problem in the future. 19 Perhaps the need will arise for centrally located "backing mills" which would receive the unbacked product from carpet mills and convert it to finished goods. The lack of available data precludes further analysis at present.

INTEGRATED

INFORMATION REQUIREMENTS

SYSTEMS

The tremendous decline in product life cycle, the increasing need to supply the customer with merchandizing programs which will allow him to attain a zero in-house inventory position, and desire to predict the future product preferences of a style conscious public are major factors which require the institution of electronic data processing based information systems in major carpet companies today. In general, complete systems are already operating in the inventory control area. An example of one on-line system is Lee's telephone service room in their new Valley Forge headquarters. The visual display center lists every manufactured item in the line and further subdivides the information into widths and various modifications. The customer can receive instant information concerning availability of an item and delivery schedules. 20 Daily computer print-outs to sales management are generally involved in such systems. These reports detail line availability, expected carrying times, and replacement needs. Although on-line phone hookups are common only in the largest firms, the adoption of such techniques by other " Field notes from interviews conducted by the author in June and August 1969. 20 "Lees Inventory Board Frees Salesmen," Home Furnishings 1968, p. 42.

Daily, December 26,

Manufacturing—Technology

& Environment

in Transition

59

manufacturers is only a matter of time. The more advanced firms are in the process of building computer based forecasting systems. This development, however, is still far from completion. Organization of the Landrum Computer Center within the BigelowSanford Corporation has been designed to utilize historical sales trend data to forecast demand for various styles, weaves, and colors in the product line in addition to scheduling related raw material acquisitions and machine availability. 21 The ultimate objective of such systems is to build a model which will maximize profits from product lines by coordinating sales, market research, and manufacturing cost data to forecast new product demands as well as timing on scale down and phase out of existing lines. The stimulus for such a project is the desire to maintain flexibility for action in an environment where a completely new product line can be designed and in production in less than six months. Therefore, since the manufacturer has the ability to react quickly, and since the need to do so is becoming increasingly apparent, the utilization of systems analysis and management science tools will increase significantly in the future.

THE PROSPECT

OF EMERGING

BARRIERS

TO

ENTRY

The absence of positive barriers to entry in the tufted carpet industry was referred to in Chapter II. In regard to manufacturing, the dimensions of the topic included comparable cost for tufting and weaving machines and the greater productivity of tufting, and the elimination of costs for spinning facilities to the tufter via the utilization of continuous filament yarns. Brandt noted that approximately $750,000 was required to organize a new business in the 1950's. 22 In 1962, Sequoyah Industries was organized for approximately the same amount of capital. 23 The future widespread use of styling tools such as printing in which equipment costs can be twice that of the entire start-up costs of former businesses, and increasing utilization of automated equipment in general raises very real questions concerning the emergence of scale economies in the tufted industry. If, through the assimilation of such technology, plant size continues to increase and superior efficiencies result, then true large

* Annual Report, 22

1966, Bigelow-Sanford Corporation.

Harry Brandt, Tufted Textiles, Economic Bank of Atlanta, 1955), p. 17. a

Study No. 2 (Atlanta: Federal Reserve

Margaret D. Pacey, "Flying Carpets," Barron's, December 16, 1968, p. 11.

60

The Carpet

Industry

scale plant economies will arise. In addition, the large capital requirements represent an absolute cost barrier.- 4 In the past, the new small scale tufting firms have encountered n o such barriers. They have purchased their tufting machines and ovens on long term payment programs, leased their plant facilities, and contracted out such work as printing and yarn spinning. In addition, they have encountered no barriers in the marketing area, generally selling on price reductions and going through distributors. At present, most industry participants will admit that entry to the industry is not hindered in any way, as is evidenced by the large number of very small firms in the business. The future emergence of barriers to entry depends upon several factors. First, such barriers will not arise simply because expensive equipment is available and is purchased by major manufacturers. The key is ' if superior efficiencies result." These capital assets must be utilized in such a manner and to such a degree that their ownership is absolutely essential to the business and the average per unit cost of product produced is enhanced by such ownership. Printing and continuous dyeing would appear to be only the first of continued efforts to automate at the plant level. As this trend further develops, eventual scale economies seem assured. Second, since such large capital requirements and market share dictate larger overall company operations, continued improvement in such areas as information systems, mentioned previously, is essential. Third, the carpet manufacturer must upgrade his marketing programs in order to make the impact of his superior capabilities more effective. Indeed, if he cannot improve upon his present performance in this area, the existence of superior capability at the plant level is thoroughly obviated as a competitive advantage. There is evidence that carpet manufacturers are finally beginning to realize the urgent need for new marketing concepts. This topic is futher explored in Chapter VII.

a For a detailed discussion of barriers to entry see Joe S. Bain, Barriers to New Competition: Their Character and Consequences in Manufacturing Industries (Cambridge: Harvard University Press, 1956).

CHAPTER VI.

Elements of Demand and Product Market Size From a base of slightly over $2 billion total sales in 1968, the carpet and rug industry's current expectations are for $5 billion annual sales volume by 1975. To reach such a goal will require an average compounded growth rate of 16 percent in yardage and approximately 17.5 percent in dollar volume within the seven year span. The present chapter attempts to determine the sources of such future market growth and the relative importance of various product classes. First, certain general elements of demand are reviewed, including an analysis of the role of product differentiation. Second, specific market forecasts are presented and selected product markets are analyzed with respect to their individual demand determinants. 1 INCOME

AND

PRICE

DETERMINANTS

As is typical of other consumer durables, purchases of carpeting are highly correlative with the level of consumer disposable income. In fact, the demand for carpet is income-elastic in both the short run and long run. In a statistical analysis of income elasticity, Reynolds found that "a 1 percent increase in real family income resulted in a 3.53 percent increase in the unit sales of carpet" over a period from 1949 to 1963.2 Therefore, the growing affluence of United States families is a key factor in the future growth potential of the industry. The National Industrial Conference Board estimates an average annual growth potential of approximately 5 percent in constant dollar family income in the 1965-1975 period. On this basis, the "over $10,000" family income market is expected to rise 9 percent a year and to account for 72 percent of total family income in 1975 versus 40 percent in I960. 3 1

For the data contained in these forecasts, the author is indebted to industry members who so willingly made their market research data available. s William A. Reynolds, Innovation in the United States (Princeton: D. Van Nostrand Company, 1968), p. 53.

Carpet Industry:

1947-1963

5 "Retailing in the 1970's: An Investment View," a research report prepared by Smith, Barney and Company ( N e w York: Smith Barney and Company, March 1969), p. 6.

61

62

The Carpet

Industry

Fundamental to such income statistics is the industry's ability to gain an increasing share of consumer personal income. As published by the Carpet and Rug Institute, dollar shipments as a percent of disposable income have risen from 0.18 percent in 1958 to 0.28 percent in 1968. 4 A major reason for this success has been the industry's ability to offer better value at reduced cost which was noted in Chapter II. As was evidenced in Reynolds' statistical analysis,"' the demand for carpet is price elastic in the long run and price reductions on comparable quality from 1950 to the present have been dramatic. Barring major production breakthroughs, however, it is doubtful that further increases in volume will result primarily from overall price decreases. The more important determinants lie in the consumer's changing attitudes toward carpeting, such as the growing desire to carpet more rooms and a willingness to replace before wearout.

OTHER

MARKET

FORCES

In addition to becoming richer, the United States population will become significantly younger and better educated. By 1975, one out of every three Americans will be in the 20-35 age bracket versus one out of every four today. 6 This group is known to spend significantly more for household goods than the overall average. A better educated consumer will take the "long view" of paying for better value and service and his higher taste level is conducive to increased fashion consciousness. In addition, demand for individually styled goods and the use of credit will be key factors in selling this market. Another factor in the growing market for carpeting is the pent up demand for new residential housing which should materialize in the 1970's. One estimate places increases in gross floor area due to residential construction at 60 percent by 1973 and a 17 percent increase in nonresidential area. This represents a 3.25 billion square foot market by 1973. 7 Such statistics, when combined with the consumers desire to carpet more and more area of his present living space, emphasize the fact that the carpet industry is a long way from encountering a "replacement" market situation. In fact, in one market survey replacement purchases accounted for ' C a r p e t a n d R u g Institute, Inc., Basic Facts About the Carpet 1969 Edition ( N e w Y o r k : T h e Institute, Inc., 1969), p. 12. h

Industry,

Reynolds, op. cit., p. 54.

" M a r g a r e t D . Pacey, "Flying C a r p e t s , " Barron's, 7

and Rug

D e c e m b e r 16. 1968. p. 11.

" H a r d S u r f a c e Industry Is Expecting C o n t i n u e d G a i n s , " Home July 3, 1969, p. 7.

Furnishings

Daily,

Elements of Demand

and Product

Market

Size

63

only 51 percent of carpet and rug sales in 1966, a year in which the move to carpet "other a r e a s " had just begun to get u n d e r w a y . Of these replacement purchases, 53 percent were bought to displace worn out carpets or rugs. These statistics apply strictly to residential customers and are shown in T a b l e 15.®

TABLE 15.

Replacement vs. New Use Purchases of Carpets and Rugs, 1966

Total

(Percent of total purchase) Carpet Rugs

For Replacement

51

50

52

For "New Use"

49

50

48

100

100

100

Source: The American p. 22.

Residential

Carpet

Customer:

1966-1968,

Table 21,

By 1 9 6 7 - 1 9 6 8 , the most frequent reason for purchasing had changed from "replacement for worn out floor coverings" to "change in need or requirement," a response that specifically designated a need to carpet uncarpeted rooms or to purchase a larger floor covering. 9 Data given to the author in field interviews show the private residential replacement yardage at 5 6 percent with very low "wear-out" replacement in 1968. 1 0 Therefore, there are basically two positive factors under consideration here. The first is the customers desire to carpet "other areas" and the second is a change in reasons for replacement from sheer physical necessity to more aesthetic factors such as redecorating.

PRODUCT

DIFFERENTIATION

AND CARPET

BRANDS

The present discussion of product differentiation is presented from the standpoint of the carpet manufacturer. Although product differentiation is only one element in the total demand structure, the current high level of interest in the topic justifies a more extensive treatment.

"The American Residential Carpet Customer, 1966-1968, a research study of the American Carpet Institute (New York: The Institute, 1968), p. 22. "Ibid., p. 43. w

From author's field notes of June 1969.

64

The Carpet

Historical

Industry

Perspective

Objective and consistent efforts to focus consumer preference on a manufacturer's brand name began around the first decade of the twentieth century. At that time, wider utilization of magazine advertising developed and one of the first successful users of the medium was the Hartford Company whose "Saxony" rugs became widely recognized.' 1 In the 1920's, mill advertising became more extensive. Bigelow's advertising expenditure went from $39,000 in 1921 to $157,400 in 1924 and in 1926 it began to advertise nationally. 12 Mohawk Mills was an aggressive advertiser since its founding in 1920. In the 1920's, however, manufacturers generally failed to develop strong brand preferences among consumers. Retailers easily diverted sales from one company's line to another. In the 1930's, faced with depression, a number of companies made substantial changes in marketing methods. Bigelow chose to garner consumer recognition and in 1932 launched the most extensive advertising campaign in the history of the carpet industry. Challenged by a market research survey which showed that only a third of the women interviewed could name any brand of carpeting, it developed the "Bigelow Weavers" label and allocated a phenomenal 4.7 percent of sales revenue to promotional efforts in 1932 alone. 13 In this era, it was determined that consumer acceptance depended upon two variables: style and quality. These variables further encompassed the parameters of color, design, pattern, and wear life. It was felt that the role of advertising was to assure the customer of the qualities involved in branded goods, qualities which he was unable to judge for himself. By 1944, a Bigelow consumer survey showed that 20 percent of the people interviewed knew the Bigelow name as compared to only 7 percent for Alexander Smith. 14 These results were interpreted as substantiating Bigelow's prior efforts at establishing a consumer franchise. Following World War II, the industry turned increasingly toward national advertising. The advertising budget for carpet manufacturers in 1947 was 4.5 times the prewar rate. 15 James Lees and Sons "became the largest and most consistent advertiser of carpets in America." 16 In addition to the pro11 John S. Ewing and Nancy P. Norton, Broadlooms Harvard University Press, 1955), p. 184. 12 Ibid., p. 220. 13

and Businessmen

(Cambridge:

Ibid., pp. 255-256.

u

Ibid., p. 320. Standard and Poor's September 15, 1948. 16

M

Annual

Report,

Industry

Surveys:

" H o m e Furnishings, Basic Analysis,"

I960, Burlington Industries.

Elements

of Demand

and Product

Market

Size

65

grams conducted by separate companies during the 1955-1958 period, member of the American Carpet Institute carried on a separate institutional advertising campaign to raise the demand for all carpet, budgeting millions of dollars in advertising for the project. Although brand names of the members were mentioned in the cooperative advertisements, it is highly probable that many nonmembers such as the innovating tufting firms also benefited from this type of program. From the author's analysis of national advertising expenditure data as compiled by Leading National Advertisers, Inc. for National Advertising Investments, it was apparent that, in the 1950-1968 period, James Lees and Sons was the only industry member which consistently spent large sums on national promotion.17 This company was followed by Bigelow and Mohasco, firms for which the expenditure pattern was more erratic. There was a marked difference between the level of expenditure for these three firms and the remaining firms listed. The data also show a growing reliance by industry members on color television as an advertising medium and the emergence of substantial advertising outlay by several of the innovating southern tufters in the years since 1964. Evidently, national advertising has been restricted, however, to a very small number of these firms. It has been estimated that, as recently as 1967, only ten members of the Tufted Textiles Manufacturers Association (composed primarily of southern tufters) accounted for nearly 75 percent of member advertising expenditure.18 Of course, the other major advertiser since the mid-1960's has been the Ozite Corporation which has expended large outlays on the promotion of indoor-outdoor carpeting and more recently, on carpet tiles. Although data concerning national advertising expenditure in these four media do not encompass the total spectrum of the industry's promotional efforts, it has an important bearing on the level of consumer brand awareness because of its singular direction at the consumer (versus, for example, trade advertising). From this brief analysis, it is concluded that Lees, Bigelow, and Mohasco have traditionally been the largest advertisers and that, "National Advertising investments presents a compilation of the advertising expenditures of national advertisers as reported for magazines, newspaper supplements, network television, and spot television. It is limited to companies investing $20,000 or more in the first six months of the calendar year and $25,000 or more in the twelve month period. For a description of data collection methods in each media, see, for example, National Advertising Investments, Vol. 20 (January-December 1968), p. 2. 18 "TTMA Gets Down to Serious Business with Marketing Program," Textiles Magazine, January 1968, p. 43.

Modern

66

The Carpet

Industry

more recently, Ozite and such southern tufters as Cabin Crafts, Callaway Mills, and Ε. T. Barwick have spent significant sums in these media. As an indication of the recent level of this effort, during the six month period from June 30, 1968 to January 1, 1969, eight major carpet mills, with fiber supplier support, spent $4,204,066 on national advertising for their particular brands. 1 9

Effectiveness

of Product Differentiation

Efforts

Product differentiation seeks to direct consumer demand toward one manufacturer's product or, in other words, the firm attempts to shift its own demand curve to the right.20 Such differentiation may take the form of greater consumer awareness of one manufacturer's brand, even though his product is not unique, or the possession by the manufacturer of a product which is considerably different than others currently on the market. In addition, brands of a product can be differentiated in ways not built into the product itself. Fairly homogenious consumer durables, however, tend to be differentiated via product promotional efforts centered around manufactures' brand names, and for this reason consumer advertising was stressed in the previous section. The current section analyses relevant data concerning the effectiveness of the carpet manufacturers' programs in this area. In his investigation of the degree of production differentiation which existed in the industry between 1947-1963, Reynolds analyzed the data contained in three market research reports sponsored by the American Carpet Institute. 21 Specifically interested in the importance of product differentiation as a barrier to the new tufting firms entering the industry in this period, he concluded that "product differentiation did not create a significant barrier to entry in the industry as consumers showed indifference or a lack of concern over methods of construction, and brand preference was not a major consideration in purchases." 2 2 Differentiation was limited to style, i.e., color,

Nathan S. Lanning, "And N o w , a Word from Our Sponsor," 1969 Carpet Review (Dalton, Georgia: Carpet and Rug Institute, Inc., 1968), p. 163. 20 E. Jerome McCarthy, Basic Marketing: A Managerial Illinois: Richard D. Irwin, Inc., 1968), p. 220.

Approach

Industry

(Homewood,

The reports referred to were: Consumer Attitudes Towards Carpets and Rugs ( N e w York: Carpet Institute, 1948), Motivation Survey of the Consumer Market for Carpets ( N e w York: Carpet Institute, Inc., 1953), and "The American Carpet Customer," A Research Survey conducted by National Family Opinion, Inc. ( N e w York: American Carpet Institute, Inc., 1961). 22

Reynolds, op. cit., p. 98.

Elements

of Demand

and

Product

Market

67

Size

pattern, appearance, and texture, a form of product variation which was available to all producers.- 3 All three reports presented evidence of the consumers' lack of knowledge concerning the product purchased. There were a number of factors involved in the failure by carpet mills to differentiate their products. The existence of a large number of nonbranded lines and private labeled goods, the proliferation of lines offered by an increasing number of manufacturers, the inability to build in significant product differences, the retailer's tendency to push the price drop syndrome in an attempt to overcome carpet's luxury image, and an inability to channel the level of funds required into national brand promotion were primary considerations. In addition, the promotional efforts of the man-made fiber suppliers, referred to in Chapter II, tended to establish strong consumer franchises for fibers at the expense of the mill brands. In this period, both Bigelow and Lees went on record as refusing to utilize popular fiber brands on their products because of their feeling that the label detracted from the mill's brand identity.24 The failure to establish mill brand identification and the effectiveness of fiber brand promotion were further evidenced in a subsequent study undertaken by the American Carpet Institute in 1964. Of 1,680 families who were interviewed with respect to their former carpet purchases, approximately 50 percent did not know what brand of carpet they had purchased. Only one carpet producer had its brand recognized by as high as 10.1 percent of those interviewed and 13.7 percent gave the trade marks of two fiber manufacturers as brands of carpet. 25 Also in 1964, the major reasons for selection of a particular carpet remained heavily style orientated. In fact, in both 1964 and 1966 studies, reasons associated with color, pattern, texture, and appearance received approximately two-thirds of all mentions for selecting the particular product purchased. 26 Since the mid-1960's, however, the Carpet Institute has indicated that it feels consumer preference is shifting in favor of branded products. One basis for this opinion is the independent study conducted by the Kaufman Carpet Company of New York. Using an interview technique with 487 female heads of households in the New York metropolitan area, it attempted to establish 23

Ibid., p. 45.

24

Ed Cohen, "Rug Fiber Label Use Split Widens," Home tember 24, 1963. * The American Carpet Customer, Inc., December 1964), Table 27. m

The American

Residential

Furnishings

Daily,

Sep-

1964 (New York: American Carpet Institute,

Carpet Customer,

1966-1968, note 8, supra, p. 27.

68

The

Carpet

Industry

the factors that influenced consumer store selection. Research results showed that "well known brands" was a highly rated factor and that only 16 percent of those interviewed could not name any carpet brand. Most consumers could name one or more brands of carpet on an unaided basis. 27 Another reason for the Institute's favorable opinion is found in the purchase data which became available in 1967. These data show that purchases of branded goods had increased since 1964.-* Thus, in January 1968, they were led to state their belief that "total consumer preference is veering sharply to branded carpets and rugs. A few years f r o m now the dealer who carries brand franchises with strong consumer acceptance will have a powerful competitive advantage." 2 " Those carpet manufacturers interviewed by the author in the course of this study, however, were extremely negative on the subject of increasing consumer awareness of mill brand names. With very few exceptions, most felt that their company's recent market research data could not discern an increasing consumer preference for branded carpets in relation to previous studies in the mid-1960's. A letter received by the author from one of these manufacturers is most representative of the type of response encountered on this subject. It has increased significance because of the fact that the writer's company has been firmly committed to establishing consumer awareness of its brands for some time now. Excerpts are as follows: A s a result of recent studies, I would say that the consumer has net become more brand orientated since the appraisal in 1966. On an unaided basis there is a limited awareness of brands of carpeting; a liittle more than 35% of all women interviewed were unable to recall a brand of carpeting as were a little more than 50% of all men. Compared to the reputation of the dealer and the kind of fiber, consumers evaluated the importance of the brand of carpeting as relatively unimportant. When asked which of the three was most important, only one in four of the women questioned selected the brand of carpeting while a little more than 35% selected the fiber and a little more than 30% the reputation of the dealer. There continues to be three leading brands that the consumer is able to play back. These are Mohawk, Lees, and Bigelow. Following these three brands there is a large number of individuals brands with no one brand outstanding. 1 would not say that the retailer is showing an increasing preference for branded gocds in his buying pattern. There are many more manufacturers making carpeting available and I think that as a result of this, the retailer is even in a better 27 The American Carpet Institute, "How Retail Research Can Increase Your Advertising Effectiveness" (New York: The Institute, Inc., June 1966), p. 11. M The American Carpet Institute, "How To Choose Carpet Shoppers More Profitably In 1968" (New York: The Institute, Inc., January 1968), p. 12.

N

Ibid„ p. 13.

Elements

of Demand

and

Product

Market

69

Size

position to . . . buy from an increased number of suppliers and tend to select the better items from each.30 Conclusions

and Future

Outlook

In analyzing the effectiveness of product differentiation and brand establishment, the standard of measurement becomes the determining variable. It is obvious that the carpet manufacturer has never established the kind of consumer franchise typical of Monsanto's "Acrilan" brand where strong consumer pull is in evidence. One exception might be Ozite's indoor-outdoor carpeting. In its early production efforts in the mid-1960's, when it was the only producer of the material, the product was clearly physically differentiable and its promotional campaigns extremely effective.31 It is safe to state, however, that those manufacturers who have invested heavily in consumer-orientated promotion, have'been able to establish consumer awareness of their brands. That the positive benefits of this increased awareness can be obviated so easily by the dealer at the point of sale, is one testimonial that the effectiveness of product differentiation as a barrier to entry in the industry is still negligible. The carpet manufacturers, however, fully realize this fact. It is not that they do not believe in the positive benefits of a consumer franchise. Rather, it is their feeling that the funds available to them for such a purpose fall far short of the mark. An individual in one of the leading carpet companies, which has always been an aggressive advertiser, stated that: No one in the industry can afford to support the kind of advertising it would take to establish a demand^for a brand such as "Acrilan." We can only hope that the consumer is aware of our name when she walks in the store. Since the construction and fiber composition is nearly the same for everyone, we must emphasize color and style—and they are not items we have a year to year priority on. A good deal of our effort is going into trade advertising aimed at the dealer because he spends roughly 3 percent of his sales dollar on advertising versus our 1.5 percent. After all, he is the key to sales of any brand. If he doesn't carry it, he can easily convince the customer that she doesn't want it.32 In the future, carpet brand recognition may increase simply because the number of participants in the industry may decrease. Unless physically difm Letter to the author from a representative of a leading carpet manufacturer, August 5, 1969. 31 See, for example, "The Outdoor Carpet Market," Modern September 1966, p. 35. 32

Floor

Field notes f r o m interview conducted by the author in Iune 1969.·

Coverings,

70

The Carpet

Industry

ferentiable products are produced or the expenditure for product promotion is increased significantly, however, the prospects for strong consumer franchises are slight. At present, no one is visibly making the effort. In fact, one leading advertiser, Mohasco Industries, is moving back towards joint efforts with the dealers. In 1968, its "carpet marketing effort was highlighted by a switch in emphasis in advertising from consumer media to point of sales promotional efforts." 33 In addition, the fiber producers are continuing their efforts to maintain strong consumer franchises, thus further detracting from mill efforts. There is a possibility, however, that some of the large firms now entering the industry may set out to establish strong brand names. One potential candidate, of course, is Armstrong Cork which has a reputation for brand establishment and has the funds to do so. In addition, the consumer is already familiar with its brand in other market areas, so it is starting from a higher base. To date, Armstrong has refused to become engaged in fiber producers' labeling programs and this may be one indication of the beginnings of a strong brand promotional effort. This should be one of the more interesting facets of the industry to watch in the next few years.

MARKET

FORECASTS

AND

DETERMINANTS

The following discussion of various carpet markets attempts to present more definitive data concerning specific market segments which have been previously referred to. Most of the statistical data contained in the projections was supplied by the carpet manufacturers and fiber suppliers interviewed by the author. The data selected for presentation in this study were those which displayed the greatest degree of cross-verification among industry members. They are intended, however, only as broad, general estimates of market size and for this reason, statistical analysis of these data have not been employed.

Total Market

Outlook

United States shipments of domestically produced carpets and rugs are expected to reach 963,000,000 square yards by 1973 as shown in Table 16. Various end-use areas for the industry's products are shown in Table 17. The market has been divided into residential and contract segments. Under this definitional arrangement, "contract" encompasses all nonresidential "Annual

Report,

1968, Mohasco Industries, Inc.

Elements

of Demand TABLE

16.

and

Product

Market

Carpets Shipments 1968 and 1973

Type

1968 (Millions of square yards)

71

Size by

Type

1973 (Millions of square yards)

Woven Broadloom · Tufted Broadloom Needlepunch Auto and Aircraft Bath and Scatters Other

40.0 394.5 35.0 41.8 75.0 3.5

35.0 720.0 75.0 54.5 75.0 3.5

Total

589.8

963.0

Source: Data in author's possession. * Includes Axminster, Knitted, Velvet, and Wilton. TABLE 17.

Demand for Carpets in Specific Market 1968

Market

Areas

Demand (Millions of Square Yards)

Private Residential One and two family houses Apartments Mobile homes Other Contract Apartments Tract homes Mobile homes Hotel, motel Stores, restaurants Offices Educational buildings Other

282 18 5 27 25 49 9 13 17 9 5 14

Source: Data in author's possession. sales or carpet purchased by someone other than the end user. Although many different interpretations of "contract" are currently in vogue, this rather simple definition is adequate for the present analysis.

72

The Carpet

Industry

The market breakdown shown places the contract market at approximately 3 0 percent of total demand. When auto, aircraft, hospitals, and other yardage is included, the final figure lies in the 30-33 percent range. At this point in time, however, it is well to recognize that any data relative to contract yardage are somewhat imperfect because of the measurement problems involved. Residential carpet is frequently sold at retail for nonresidential uses while commercial grades are often sold for use in the home. Since these transactions take place at the retail level where records of the end use are highly imperfect, accurate measurements are difficult at best. Actually, the author encountered two different viewpoints on the projected size of the contract market in interviews with industry personnel. The more conservative estimates place contract's market share at 29 percent of total yardage in 1968 with projected growth to 33 percent by 1973.' i4 Other estimates, for which there appears to be wider support, estimate that 33 percent of total volume was contract in 1968 and project future growth to 50 percent by 1973. As is obvious from the rather diverse nature of end use markets shown in Table 17, a number of different market forces constitute the demand pattern in each market area. While it is beyond the scope of this report to detail the complexities of each market, some of the major elements are considered below.

Private Residential

Market

Whereas the contract market is primarily concerned with various aspects of carpet's functionality, residential consumers still place major emphasis on esthetics. The living room continues to be the largest end use area in the home, constituting approximately 34 percent of the yardage in 1968. This figure may shrink to 25 percent by 1978 however, at which time bedrooms and family rooms could approach living rooms in importance/ 1 "' The increasing growth of "add-on areas" such as patios, kitchens, and outside surfaces is placing greater importance on the functionality aspects, especially in the area of indoor-outdoor carpeting. In essence, people are beginning to extend their "inside" living area through the use of carpeting on outside surfaces. Although kitchen carpeting has not gained wide consumer acceptance, it has a number of strong selling points among which are reduced breakage, acoustics, comfort, esthetics, and alleged ease of mainM

This includes woven, tufted, and needlepunch yardage.

M

Data in author's possession.

Elements

of Demand

and Product

Market

Size

73

tenance.™ One estimate points out that only 0.25 percent of the nation's 55 million kitchens were carpeted as of 1968, an approximately 700,000,000 square yard market as yet untapped. 17 It is also possible that the new carpet tiles will break into this market, especially in the apartment field. In addition, the entire concept of printing and embossed designs, referred to previously, is making strong inroads into the add-on markets. It is one more feature of a market which is becoming more fashion conscious.

Contract-Apartments

and Tract

Homes

In 1967, builders covered 25 percent of the new floor area in tract homes. This trend was greatest for those homes in the $20,000-30,000 range. Approximately 80 percent of the builders included the cost of carpeting in the mortgage if carpet was sold with the house. ss Apartment building consituted nearly 45 percent of total residential construction in 1968. 3n Approximately 60 percent of new apartment units are carpeted by the owner-builder. 40 There is a strong trend on the part of apartment realtors to include carpet requirement clauses in leases and many are allowing lessors to select their own grades. Not only does the individual living unit represent a market but corridors, pool areas, and lounges are being carpeted as well. The basic selling points are acoustical advantages, comfort, and esthetics. M Maintenance or labor saving considerations are frequently alluded to in much of the current literature concerned with the functionality of carpeting in new end-use markets. A point of distinction must be made however. It is true that new stainrestistant, longer wearing fibers and synthetic backing materials have improved carpeting's wear life and cleanability in relation to the products which existed previous to their introduction. The supposition that such innovations have imparted qualities to carpeting which allow significant maintenance advantages over other currently existing flooring materials, such as resilient tile, is however, extremely questionable. For an extensive analysis and discussion of this subject, the reader is referred to George M. Parks, The Economics of Carpeting and Resilient Flooring: An Evaluation and Comparison (Philadelphia: Industrial Research Unit, Wharton School of Finance and Commerce, University of Pennsylvania, 1966) and David C. Stewart, Economics of Carpeting and Resilient Flooring: A Survey of Published Material and a Questionnaire Summary, Report No. 14 (Philadelphia: Industrial Research Unit, Wharton School of Finance and Commerce, University of Pennsylvania, 1966). 37

Pacey, op. cit., p. 25.

"" Data in author's possession. 38 "Apartment Building Spurs Challenges," Home Furnishings Daily, July 28, 1969, p. 12.

Data in author's possession.

74

The

Contract-Mobile

Carpet

Industry

Homes

One estimate places the mobile home market at 322,000 new units in 1968 with a projected 400,000 unit market in 1969. There is an average of 50 square yards of carpeting per unit. 41 Within the past ten years, mobile homes have become the major source of low-cost housing in the United States, accounting for three out of every four homes sold for less than $15,000. 4 - Their assembly line processing lends itself to an integrated sales approach and carpeting is becoming a standard part of the package. Contract-Offices Functionality, within the office environment includes the elements of acoustical control, maintenance, and durability. It is a quality market which utilizes the more expensive grades of carpeting in the contract field and the finer gauges. Although most design and styling has been limited to quiet tones, prints are expected to make strong inroads and many residential grades and styles are now moving into this market area. It is also expected to be one of the more important initial markets for wall coverings. At present, it is a considerably larger market than educational buildings, but this disparity may disappear in the future. Contract-Educational

Buildings

This is the largest single area of new contract construction, with public schools representing approximately 70 percent of the market.4'1 In 1966, slightly more than 1/6 of new elementary and secondary schools were carpeted. Well over 1/3 of new elementary and 2 / 5 of new secondary schools will be carpeted by 1968 however.44 Acoustical considerations are a prime ingredient in carpeting's current success in this sector. School libraries are often the first area to be fully carpeted. Growing at the rate of 15 percent per year, educational buildings could become one of the largest contract markets in the future.

" "Dateline D a l t o n , " Home 12

Furnishings

Daily,

"Housing: T h e M o b i l e Millionaire," Time,

March 17, 1969, p. 42.

July 4, 1969, p. 75.

" Sidney Schwartz, How to Sell The Contract Furnishings Hudson, N e w Y o r k : Contract Books, Inc., 1 9 6 8 ) , pp. 4 0 - 4 1 . " Ibid.,

p. 43.

Market

(Croton-on-

Elements

of Demand

and Product

Market

Size

75

Contract-Hotels/Motels This represents an established market for contract carpeting. Recent innovations in carpet printing, finer gauge constructions, and antisoil fibers have made carpeting increasingly attractive in this area. On the average in the 1960's, the motel industry consumed in excess of 5 million yards of floor coverings annually. The hotel market is estimated at 5,500,000 yards of carpet for replacement purposes and 750,000 yards for new construction. 4 "'

Contract-The

Medical

Market

Hospitals are one of the most complicated and toughest markets to break into because of federal and local laws limiting carpet usage. They are beginning, however, to accept soft flooring materials because of such factors as reduced injury rates during falls and increased comfort. One of the primary factors stimulating industry efforts to penetrate this field has been the significant increase in hospital construction in recent years. One trade paper estimates that the "total hospital area in 1968 was 67.5 million square feet, while the total nursing home area in 1968 amounted to 22.5 million square feet. It is estimated that there is one and a half million square yard potential for all carpeting in this market." 4 6

THE MARKET

FOR INDOOR-OUTDOOR AND CARPET TILES

CARPETING

T h e specific product markets of indoor-outdoor carpeting and carpet tiles have been selected because of the very high level of interest concerning their future development. In addition, the success of such products has important implications for the industry's future distribution pattern, as will be noted in the following chapter.

Indoor-Outdoor

Carpeting

Needlepunch fabrics were first introduced by Ozite Corporation in late 1963. Technically, felt-type floor coverings were not new. They had appeared as early as 1933 in such products as "Fiber-Tex" and "Glamorug." Nor was the concept of outdoor carpeting entirely unique, for grass fiber "Ibid.,

pp. 5 and 13.

" "Contract," Home Furnishings

Daily, May 19, 1969, p. 30.

76

The Carpet

Industry

products were advertised in 1900 in House Beautiful,47 T h e blending of the two ideas of felt construction and outdoor use, in combination with polypropylene fiber and the imaginative promotional campaign conducted by Ozite, were prime ingredients in the product's success. The needlepunch fabrics, however, might not have found such ready acceptance had the industry not been in the process of playing down its luxury image in the 1960's. As retailers jumped on the price reduction bandwagon instead of relying on merchandising skills, the consumer lost sight of the unique advantages of higher priced brands and came to regard all carpeting as pretty much the same article. This made it much easier for the needlepunchers to fight their way into the market. By 1966, demand for the product was well established and polypropylene was on allocation. Although competition from such firms as Mohasco and Cabin Crafts began to arise, Ozite still controlled 95 percent of the market of approximately 18,000,000 square yards. 4 8 By early 1968, approximately 34 manufacturers were producing the product in either tufted or needlepunch form and, in a survey conducted by Flooring Magazine in early 1969, there were 56 manufacturers producing 105 open lines. 49 In 1968, approximately 55,000,000 square yards of indoor-outdoor carpet were sold with needlepunch fabrics continuing to dominate the market. Tufted carpeting's portion of the market, however, has grown steadily since its introduction. In the early years of indoor-outdoor's growth, many industry observers predicted a take-over for needlepunch goods. Its significant styling problem has limited its appeal, however, and tufted carpets utilizing solution dyed acrylics are expected to constitute nearly half of the market in the late seventies. 50 Of the 100 grades available in 1968, approximately 70 were tufted, 30 needlepunched.·"' 1 The projected growth for indoor-outdoor carpeting shown in Table 18 is open to interpretation on several counts. First, there is no truly accurate record of indoor-outdoor sales volume and growth predictions can be highly imprecise. Secondly, many observers feel that tufted products, which have been in the market for less than two years, will easily overtake

11

"Olefin," Flooring

18

"Now You Can Have a Wall to Wall Lawn," Business

Magazine,

March 1969, p. 47.

""'Indoor-Outdoor Carpet Report," Flooring

Magazine,

Week, July 16, 1966, p. 89. March 1969, p. 36.

r

" See, for example, "Indoor-Outdoor Carpet Growth Pegged to Modern Styling," Modern Floor Coverings, August 1969, p. 38. ™ Joe B. Garrett, "Indoor-Outdoor: The Industry's Diet Cola," Industry Review (Dalton, Georgia: The Institute, 1 9 6 9 ) , p. 45.

1969

Carpet

Elements

of Demand

and Product

Market

Size

77

the needlepunch product in yardage sales well before the mid-1970's. Most observers agree, however, that the growth of indoor-outdoor carpeting, in general, will be dramatic in the next several years.

TABLE 1 8 .

Projected

Growth

of Indoor-Outdoor

Carpet

Market

1968-1973 Needlepunch Year 1968

35

Tufted (Millions of Square Yards)

Total 55 90

1969

50

20 27

1970

56

34

1971

62

40

102

1972

70

46

116

1973

75

52

127

77

Source: Data in author's possession. There are a number of determining factors behind this dramatic growth. The primary consideration is the movement to carpet "other areas" which require all-weather carpeting, such as kitchens, patios, family rooms, etc. In addition, there are a large number of end-uses in the contract field, as yet untapped, which will require stain resistant products. Approximately half of the current indoor-outdoor grades are contract qualified to some degree. Finally the consumer has come to feel that any carpet acceptable for outdoor use must be the better product for inside the home and has purchased accordingly. It is conceivable that indoor-outdoor carpeting may account for one-third of industry sales in the near future.

Carpet

Tiles

In contrast to the indoor-outdoor product market, very little data are available to date concerning the market performance of carpet tiles. After two years, carpet tiles now account for 30 percent of Ozite's total sales. Barwick has a waffle-backed self-installable product on the market and plans to introduce a tile version in the near future. Both General Felt and Armstrong Cork are coming into the field and J. P. Stevens is introducing a new "peel and stick" version. At the retail level, Sears and Woolworth started to exploit the carpet tile market in 1969 and are giving them wide

78

The Carpet

Industry

exposure on network television. Such activity has prompted some observers to estimate that carpet tiles may represent nearly 25 percent of the wall-to-wall carpet market in the next few years. M In the author's interviews with leading carpet producers, there was no consensus found concerning the future outlook for carpet tiles. Only two manufacturers were completely favorable concerning its chances for success and were planning major expenditures in the area. Three producers were completely negative and had no immediate plans to enter the market. The remaining firms recognized the product as representing a specialty market at best. They felt that, in general, most consumers did not want to install their own carpet and that current styling limitations, especially the problem of seam appearance in low-profile carpeting, were major limiting factors. Also involved is the problem of dimensional stability in high traffic areas. Their comments are especially applicable to the living room market, where consumers have traditionally been reluctant to install their own carpets. Yet, most industry personnel agree that the concept of self-installable carpet has a number of strong advantages. Of primary concern at the moment is the shortage of skilled installation mechanics, especially in the contract area. The dire need for floor covering apprentice schools was pointed out recently at a meeting of the National Association of Floor Covering Installers."'3 Related to this problem is the rising cost of the skilled labor which is available. Installation is now running about $1.75 per square yard and by 1970 it will cost approximately $2.00 per square yard on the average. One retailer in St. Louis is already charging out installation labor at $2.25 per hour and expects a move to $3.00 per hour in the near future/' 4 Barwick Industries "Duraform" backing adds some $.60 per yard to total carpet cost but the consumer can save an estimated $2.50 per yard in installation charges. Therefore, as the percentage of labor costs in the total sale continue to rise, the prospects of self-installation should become more attractive to the consumer. As previously pointed out, this is especially true in "add-on areas" such as kitchens, bathrooms, basements, and outside surfaces. In the contract market, their removable feature lends itself to use in schools, one reason

02

"Carpet Tile Orbiting," Home Furnishings Daily, May 1, 1969, p. 1.

ω

"Mechanic Shortage Impedes Contract Carpet Growth," Modern Floor Coverings, Vol. LXXXII (January 1969), p. 67. M "Do-It-Yourself Future Seen for Carpets," Home Furnishings Daily, March 4, 1969, p. 1.

Elements

of Demand

and Product

Market

Size

79

why this market has been so big for resilient tile. This feature could also apply to offices where constant movement of equipment and furniture is a problem. It is certain that more color and new printed patterns will be forthcoming as well as, perhaps, die cut tiles for special design applications. Also to be considered is the fact that carpet tiles in their present form, are a very recent product innovation and continued improvements could overcome a number of their deficiencies. In essence, the self installable carpet market will continue to grow. The recent activity in this area at the 1969 Summer Markets is a testimonial that a number of carpet producers are becoming convinced of the product's growth potential.

THE FIBERS

MARKET

Although a detailed discussion of the fibers market is beyond the scope of this study, the significant role which they have played in increasing the attractiveness of and the demand for carpeting over the past several years makes necessary at least a brief analysis of the future outlook. The consumption of fibers in broadloom carpets is shown in Table 19 for the 1960-1968 period. One outstanding feature is, of course, the rapidly increasing demand for polyester fiber since 1966. By the end of 1969, this fiber will be entrenched in third place in terms of total fiber usage and will continue to solidify this position in the future, as shown in Table 20. There are a number of reasons for the rapid acceptance of polyester fiber. It was the first major fiber introduction to come onto the market after nylon got into price footballing problems. The fiber suppliers were willing to promote the product heavily and trade names had already been established in the wash and wear apparel field. In addition, shag styling is currently extremely popular in the market and polyesters are ideally suited for this type of product construction. A number of other technical factors have been referred to in Chapter IV.

Prospects for Fiber

Brands

With the advent of new "second-generation" fibers such as du Pont's "Antron," it is obvious that the fiber suppliers are continuing their efforts to build and sustain strong consumer franchises for their products. Many observers have noted, however, that the recent proliferation of fiber brands now coming onto the market could potentially dilute the total effectiveness of the individual effort.

80

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