Carpet Makers Battle Slump

May 27--The housing industry is down. Oil prices are up. Consumers are clamping down on nonessential spending. Those conditions spell headache for the North Georgia-based U.S. carpet and flooring industry, experts said.

Companies are fighting adversity with different methods and varying levels of success as mills race to diversify their products and battle for market share.

Carpet is down overall about 10 percent this year, a slump that inevitably leads to job cuts, said Kemp Harr, publisher of Floor Focus Magazine.

"The mills generally handle that by going from a three-shift situation to a two-shift," Mr. Harr said. "Most of the reduction comes through attrition and shutting down old machines that need to be shut down anyway."

COMMERCIAL OUTPACES RESIDENTIAL

The industry is divided heavily into commercial and residential segments. Residential makes up 75 percent of the business in terms of revenue, and commer- cial tends to be the higher-grade product, Mr. Harr said.

But this year, the smaller segment is the strongest performer.

"Commercial is clearly growing faster than residential," said industry analyst Laura Champine of Morgan Keegan & Co. "You can see that in the numbers housing companies are putting out that show substantial year-over-year decline."

A slumping housing industry has left fewer new homes to fill with carpet, and consumer tastes are trending toward hardwood, ceramic and laminate flooring, mill executives said.

The commercial industry has stayed above water, said Jim Bethel, chief executive officer of J&J Industries, a Dalton, Ga.-based commercial mill that specializes in highend carpet.

"The commercial segment came late into the last recovery," Mr. Bethel said. "It was rough in 2003 and 2004. Since then, we've been going at a reasonably good pace, and economists tell us that will continue. We're not seeing much growth, but there's sustained activity."

That sustained activity has led larger mills to expand commercial production while their primary segment, residential, slumps.

"The key is to find growing categories and maximize our investment in those areas," Mohawk Industries Chief Executive Officer Jeffrey Lorberbaum told investors earlier this month at the company's annual shareholder meeting.

That has placed pressure on some smaller, commercial-only mills.

"Those with the flexibility to move from one market to another will go where the market is strong," Mr. Bethel said. "When you increase supply to a fixed demand level, the price gets squeezed for everyone."

BUYERS' CHOICES SHIFT

If the carpet industry weren't facing enough challenges, fashion is veering away from wallto-wall carpet and to hardwood and other products.

"There's no doubt about it -- we're in the fashion business, and there's some pressure that goes along with that," Mr. Bethel said.

If customers are going to choose alternative floorings, Mr. Bethel said he prefers it be hardwood.

"The nice thing is that most people eventually cover hardwood with a rug," he said. "Hardwood looks good, but it can be cold and noisy. A rug's not wall to wall, but it can be a significant amount."

With demand shifting, companies are adjusting.

Companies such as Tandus, a midsize commercial business, have invested heavily in carpet tile technologies.

Other carpet manufacturers are diversifying into other flooring segments.

Mohawk Industries made a big acquisition in 2005 with Unilin, a Belgium-based laminate flooring maker. That division's success -- flooring sales are strong overseas, the company noted during its firstquarter recap -- has helped offset declines in the residential segment.

"Seventy-eight percent of Unilin business is non-U.S., and the acquisition gets us into that market," Mr. Lorberbaum said at the shareholder meeting. "It enhances our business, especially at a time when U.S. business is down."

ADDING IN-HOUSE OPERATIONS

Companies also have insourced operations to cut costs and pressure supplier pricing. Both Mohawk and Shaw Industries reacquired carpet-backing plants from companies such as Chattanooga-based Propex, causing some of the former suppliers to venture into new industries or segments.

That trend should continue, Ms. Champine said.

"If you can insource components, you can put pressure on your suppliers," she said. "This started when some of the mills began making their own yarn, which put pressure on the fiber suppliers. It makes sense, if you can make your own backing, to take the product in-house and cut out someone else's profit."

Being unique is crucial during tough times, Mr. Lorberbaum said.

ENVIRONMENTAL STEWARDSHIP

Mohawk has invested in higher-end products, diversified lines and increased environmental stewardship, he said. The company has cut its water use by 50 percent since 1995, has started to burn biowaste in its boilers and is working with DuPont to use corn fiber technology, he said.

"If it's important to our customers, it makes business sense," Mr. Lorberbaum said. "But most of all, it's the right thing to do."

At Tandus, environmental sustainability has been big business. After pioneering a carpet recycling process, the company continues to tack onto its environmentally friendly processes list with steps such as putting biodiesel in its boiler tanks and accepting vinyl from other industries and other carpet makers to manufacture carpet tile backing.

"As sustainability becomes more important to buyers and designers, it puts us in a very strong position," said Tandus Chief Executive Officer Glen Hussmann. "Sustainability keeps marching higher on more decision makers' criteria, and we continue to build off our heritage in that field."

Those steps have made the company -- which said it has recycled more than 120 million pounds of carpet -- popular with builders hoping to achieve Leadership in Energy and Environmental Design green-building certifications.

"There has been a dramatic increase in the numbers of companies, architects and facilities managers pursuing LEED certification," Mr. Hussmann said.

E-mail Brooks Rexroat at brexroat@timesfreepress.com

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