This is pulled from a report from Stifel, the introduction to a detailed report in September of 2018 about the vinyl flooring industry and its huge affect on the North American flooring industry. Tis report was written for American market, but it equally applies to Canada. The BC flooring buyer can learn lots about the various types of vinyl flooring. This is writtent from non-flooring experts, these people are invesment bankers. But, they have done a nice job breaking this down, and I feel it is valuable to share with the public and British Columbia flooring buyer.
Start of the report:
We have made a considered effort to learn more about the Luxury Vinyl Tile (LVT) market and assess its current and potential impact on the flooring market from both a manufacturer and retail perspective. We have reached out to Chinese producers, private company manufacturers in the U.S., trade press, consultants as well as the companies we cover to pull together as much information as we can about this rapidly growing and rapidly changing product category.
We summarize our key points as follows:
1) LVT is a roughly $2.5 billion industry in the U.S, growing 25-30%, and accounts for approximately 10% of the U.S. wholesale shipment value. We believe that LVT can double its penetration in the next three to four years. Overseas markets are seeing growth in LVT but not the 30% pace.
2) LVT is currently accounting for an estimated 75-100% of the domestic flooring industry growth. We have never seen a category of flooring grow this fast and the implications are profound. Demand is so strong and product innovation so impressive that we have not seen an over-capacity/commoditization of the category as we feared a couple of years ago. In fact, LVT is quite hard to make and the numerous capacity expansion announcements by U.S. players two years ago have struggled to come up to capacity.
3) While carpet has been in secular decline for years, the impact on other flooring categories is clearly evident. In order of impact from greatest to least currently, we would assess the impact as follows: Sheet vinyl and vinyl tile, wood, laminate, carpet and ceramic tile.
4) LVT currently wholesales and retails at a premium to the average ASP of all flooring. This is good. The average ASP of LVT at retail has actually risen slightly in the U.S. as product innovation and advancements have outpaced commoditization at the low end. Margins are attractive for manufacturers and retailers currently.
5) A slight majority of all LVT consumed in the U.S. is supplied currently by China. We estimate only 25% of all LVT is made currently in the U.S. and it is all flexible LVT, not the faster growing Multi Layered Flooring products that include WPS and SPC. The tariff issue, depending on the outcome, could benefit the six minor producers in the U.S. including Armstrong Flooring and Mohawk.
6) The shift to LVT is so fast that is proving somewhat disruptive to manufacturers and retailers. Retailers of flooring, not to mention consumers, are only just learning about this product and its attributes as the definition of what comprises LVT is changing as the product evolves.
7) We only have one Buy rated stock in our flooring universe which is MHK. The disruption to the flooring market from LVT has been a major contributing factor to MHK’s shares falling 30% from its peak in February (vs. a 5% gain in the S&P 500). While we expect the headwinds from LVT disruption will continue near term, and other margin pressures will persist near term, we see many of the headwinds dissipating compared with 2018 which given the drastic change in valuation lower, provides material up-side for the equity.
History of LVT
While LVT as a product type has been in existence since the 1950’s, for all intents and purposes it began making a material impact to the flooring market in 2012 when USFloors (now a division of Shaw Industries) introduced a wood plastic composite product called COREtec and dramatically expanded the U.S. market for LVT. The product had a core that included wood dust that while sustainable, made the product vulnerable to denting with a weak static load performance measure. Nonetheless, the product captured the interest of flooring retailers and consumers and no longer has the wood dust core.
Over a relatively short period of time, this category of vinyl flooring has exploded in growth and now accounts for an estimated $2.5 billion in sales or roughly 10% of U.S. wholesale flooring shipments.
U.S. LVT Product Evolution
1950s: Earliest vinyl flooring products are produced in China as well as in the U.S. with a product by Kentile
Late 1980s: LVT peel and stick tile exported to the U.S.
2000: Congoleum introduces DuraCeramic, designed to take on ceramic tile
2000s: Glue down LVT for residential and commercial applications
2010: Click installation (loose lay or floating floors) with better looks and easier installation help open up higher end residential applications.
2012: USFloors introduces COREtec (a rigid WPC product) and market acceptance explodes.
2016: SPC, or a more dense rigid core with better performance characteristics and looks help drive pricing upwards.
Defining the Products
The speed of change in this sub-segment of vinyl flooring matches the categories unprecedented growth. Along with this rapid change have come new product innovations that are complicating the definitions of various types of LVT and blurring the separation of categories with certain physical attributes that for example include wood and vinyl compositions in the same product. We should note that the changes are so rapid and confusing, that most professionals in the trade struggle to understand definitions and in some cases the acronyms are not fully relevant anymore. If professionals in the trade are confused, one can obviously understand the average consumer’s confusion when it comes to this flooring option. This will in our opinion create some interesting marketing challenges/opportunities in the future.
A product that uses primarily plasticizers or polyvinyl chloride (PVC) as a base material that makes a somewhat flexible product that can be easily laid down on a floor and printed. Products include sheet vinyl, vinyl tile and vinyl composition tile (VCT). Traditional vinyl products are amongst the least expensive flooring options in the marketplace.
LVT: Luxury Vinyl Tile
Often we see reference to “traditional” LVT which is the early generation of LVT that is flexible (one layer or fewer layers than MLF and a fairly thin profile). “Flexible” LVT was really the first mover in the LVT category but the product was prone to telegraphing (imperfections below the surface telegraphing through) and “movement” when subject to heat/cold. LVT now includes “rigid core” products as well which fall into two buckets, SPC and WPC which we define below.
MLF: Multi Layered Flooring
This is the latest attempt to differentiate LVT between flexible and the new generations of rigid core products of WPC and SPC. The layers in a MLF product are slightly different from the flexible products and are typically thicker. These MLFs are also deemed “rigid core” LVT as the core (which can be a WPC core or an SPC core) makes the product rigid. A MLF trade group has been recently formed that may help define the product in the future and create certain standards.
WPC: Wood Plastic Composite
USFloors (now owned by Shaw Industries, a Berkshire company) is given credit for originating this segment of MLF with its product named COREtec which originally had a wood dust fiber core (somewhat similar to laminate flooring). Confusingly, WPC now does not necessarily mean it has wood fiber in it anymore, but rather that it is a lighter weight polymer core (think air bubbles within the core) that also provides somewhat greater comfort given its lower density. In fact, relatively few WPC products use wood fiber today and the WPC name lives on in name only with the “W” now standing for waterproof.
SPC: Solid Polymer Core
This is similar to WPC however the core layers do not contain any foam or air bubbles, making the product more rigid and denser. Typically the product has a greater mineral content in its core which adds to the rigidity, weight and thickness of the product. Compared to WPC, SPC resists crushing (for example WPC products would have static load ratings for 250 pounds/square inch while SPC would be rated for 5,000 PSI), is more dimensionally stable, and somewhat more usable with less than perfect subfloors. The product tends to be used more in residential applications to avoid telegraphing. SPC products are sometimes criticized as being loud or hard, but other sub-layers are often designed to help provide a softer feel underfoot or dampen foot noise.
Raw Material Inputs
There are different raw materials in the different layers that make up an LVT floor. On the very top surface, there is usually a wear layer that may have a finish applied on top of it. The wear layer is clear and made with vinyl. Beneath it is the design layer which is a printed pattern or design on a piece of paper. Below this is a core. The key to an LVT core is that it does not have wood fiber like the typical core of a laminate board but has a 100% waterproof core that includes resins, plasticizers, and limestone. Additionally, LVT cores do not require formaldehyde, the ingredient that caused Lumber Liquidators so much trouble with the sale of its Chinese made laminate floors. In the case of a flexible LVT product, the vinyl core is softer or flexible and uses more plasticizers than rigid products. In the case of a WPC board, the core has limestone but only 25% PVC and the core is injected with a foaming agent that expands the core and gives it a less dense and thus softer core. In the case of the SPC cores, a 50% mix of PVC content and more limestone combined with no foaming agent leaves a denser, heavier and harder core.
Why Is LVT Growing So Fast?
There are numerous reasons that we will list in order of what we view as the most important to the least important.
The new innovations have yielded great visuals that are very authentic looking and have texture with in-registered embossed printing, beveled/colored edges, extremely good wear layers and many other improvements. Replicating the look and feel of stone, ceramic or wood are now achievable in strikingly authentic products.
Most LVT products are waterproof
One of the hottest trends in flooring is pet proof/waterproof products. LVT can be placed over moisture laden cement slabs and used in rooms where moisture can be an issue like bathrooms and kitchens. Laminate floors, which have a wood fibrous core, are not truly waterproof. Wood floors and carpet are obvious challenges with moisture. The flooring market is pushing the water-resistant waterproof story and consumers are buying it.
Installation is relatively easy which means fewer contractor call-backs and a happier consumer. Installation labor is extremely tight and a significant driver of LVT winning share. We may have this issue ranked too low as we hear that finding installation labor is increasingly challenging and the time required to install ceramic and wood is significantly greater. Dealers and contractors who can influence the purchase decision give LVT an edge because the product is much easier and faster to install. It is less invasive to the home owner in a repair/remodel. Ceramic tile is usually at
least two-three days of cycle time, even for a small job. The substantially improved installation options with loose-lay floors has also made this an attractive DIY product, in our view.
The price of LVT is generally below wood and slightly more expensive than ceramic, but the cost of LVT ownership is materially lower than those categories when incorporating the overall cost including installation and lack of future maintenance. Currently 80% plus of LVT products are wood visuals. The installation cost of an LVT floor might range from $1-2 per square foot whereas ceramic floor installations in certain parts of the country are in excess of $10 per square foot.
The latest generations of LVT products solve most all of the challenges presented with hard surface flooring. Not only is the product waterproof but LVT now offers superior dimensional stability, exceptional scratch resistance and multiple installation options.
What Flooring Categories Are Losing Share to LVT?
The Exhibit below breaks down the 2017 wholesales manufacturing shipments by product type below and compare this data with 2012 and 2016. The comparative to 2012 is chosen because we deem this to be the year when LVT really began its growth journey. The comparison of 2017 to 2016 shows how rapid the ascent of LVT has been in terms of its impact on other flooring categories.
Carpet has been in steady decline since around the turn of the century as it has ceded market share to hard surface flooring throughout this period and continues to do so through 2017.
In the past five year period, the biggest loser statistically has been the resilient flooring category excluding LVT or the “traditional” vinyl products. Residential sheet vinyl and vinyl tile have shrunk, as has VCT. Laminate flooring has also struggled to grow recently although its share loss is well below that of the traditional vinyl products as water-resistant laminate floors have gained some traction in the marketplace. Ceramic and wood were growing through most of this five year period, but 2017 reveals some headwinds, particularly to hardwood. Since roughly 80% of the visuals in LVT are wood looks, the impact is understandable. Ceramic and porcelain data may be benefitting somewhat from increased usage on walls, countertops and even exterior panels that are mitigating the pressure on ceramic flooring. We believe that ceramic flooring grew slightly last year, the only category to grow outside of LVT.
How Big Will LVT Become?
Current estimates put LVT at around $2.5 billion or roughly 10% of the total U.S. flooring market. Since the vast majority of the product is imported, the data is a bit fuzzy. The growth rate of LVT last year was pegged at around 25-30%. We believe the market is on pace to grow at that rate or even higher in 2018. If we assume that LVT grows $750 million in 2018, that would represent approximately 3% of industry growth on the approximate $25 billion wholesale flooring market in the U.S. Our assumption is that U.S. flooring sales may grow in the 4% range this year so this would once again mean that LVT will account for 75% of all industry growth.
In trying to address how big LVT can be we need to think about where LVT can take share within the flooring trade and why.
We begin with carpet which has been steadily losing share to hard surface flooring in general for the past two decades. The current flooring share of carpet and rugs is pegged around 47% of all U.S. flooring. Carpet was approximately 65% of all flooring in 2000. In our view, carpet will continue to cede share as it is viewed negatively by so many younger consumers. Carpet is not waterproof and it traps allergens. Consumers have increasingly relegated carpet to the bedrooms or upstairs, limiting its square footage usage and also limiting its visual importance as consumers focus on the downstairs areas where more time is spent and visitors congregate. We see carpet losing a share point per year for the next five years. This means the entire hard surface category would have a full five points of share gain over the next five years, therefore if LVT simply kept its share of the hard surface market which is 10%, it could grow to 11% from this factor alone. However, carpet is losing share specifically to LVT. Applications like apartment replacement are increasingly shifting to LVT from carpet. We see commercial settings increasing the percentage of LVT flooring and carpet losing floorspace. The increasing preference for waterproof flooring clearly is a headwind for carpet and a plus for LVT. Younger consumers also seem more concerned about allergens and dirt and stylistically prefere hard surface. We see LVT taking at least 2-3% points of share from carpet over the next five years.
But LVT is clearly taking share of hard surfaces, not just carpet. Traditional vinyl products may account for 7% of the market today. Sheet vinyl is the least expensive flooring option and will retain some position as a result but the upper price points of sheet goods have been/are vulnerable. We think erosion from 7% to 5% of the market in the next five years is likely with virtually all of that share accruing to LVT.
Laminate flooring has stagnated around $1 billion or 4-5% of the market for the last several years. Given the challenges with the Lumber Liquidators stumble and the somewhat challenged waterproof story, the substitution risk with LVT is high. In laminates favor is a materially lower cost relative to LVT and marketing efforts combined with some product composition changes to improve water resistance. Laminate floors are in many ways very similar to LVT with the primary difference being the core. In other words, the advancements in printing technologies and wear layers translate fairly equally. The key will be the marketing effectiveness around a water-resistant core versus the waterproof core of LVT. We see laminate losing a 1.5 point share over the next five years with virtually all of the gain moving to LVT.
Hardwood flooring is approximately 14% of flooring sales. There will always be a real wood buyer. That having been said, today’s visuals of LVT (80% of LVT are wood simulated looks) combined with the texture enabled by in-registered embossing, the ability to make beveled edges (even with color), the lower price point, all combined with the waterproof benefits, and the ease of installation, and the dimensional stability of LVT implies material share gains against wood. We think wood could lose 3-4 share points in the next five years and LVT will capture much of this although laminate may also take some share from lower priced woods.
Ceramic is the next battlefront with LVT. At 14% share, the market is large. Ceramic can be in many cases less expensive than LVT, but the installation costs are significantly higher, although they vary significantly by geography in the U.S.. To date, the LVT visuals that we have seen to mimic ceramic/stone have not been impressive. But we sense that will change. There is the ability to grout certain LVT products to mimic the look and texture of a ceramic installation. LVT can even be laid on top of an existing floor like an existing ceramic surface with no cost in tearing out the existing floor. With installation labor tight, there is a compelling draw for contractors to move to LVT and away from ceramic. We see floor tile losing as much as two points of share, but decorative wall tile and possible countertop applications may soften the loss of total ceramic share loss.
When adding all of these share losses, it results in a 10.8% share gain for LVT or an approximate double in share. This analysis is done in shares but the overall market should grow, implying more than a doubling of sales for LVT in the next five years. This would equate to a 15% plus CAGR growth rate in LVT over the next five years.
Why Is MLF Easier/Faster To Install?
Most of the products can be put down with adhesives or a traditional “glue-down” method. But recent innovations which include a thicker and sturdier product make a “floating” or click/lock installation method an option. Perhaps even more significant is the forgiveness of subfloor imperfections that LVT allows given the rigid core products that hide unevenness or imperfections in the subfloor. In addition, the rigid LVT products don’t need “acclimation”. Some flooring substrates like wood often need to be brought to the jobsite as much as two days in advance to adjust to temperature and moisture levels or the risk or movement post installation increases. Simply put, MLF flooring requires less installation knowledge/expertise, can be done start-finish significantly faster than ceramic or wood, and is subject to fewer call-backs over time.
Has/Will The Growth Of LVT Change Industry ASPs?
While this question on the surface seems quite simple, the answer may be much more nuanced. Carpet remains the single largest category of flooring, accounting for approximately 50% of flooring units sold but now well under 50% in dollars (around 45%). Carpet, along with traditional vinyl and laminates tend to sell below industry average price points while stone and hardwoods tend to sell at meaningful premiums. We believe soft surface flooring (broadloom and area rugs) sell at roughly 75% of the average of hard surface flooring. So the move towards hard surface flooring over the past 20+ years has actually increased trade sales opportunity. Interestingly, ceramic price points are very close to industry averages. The nuances though involve the shifting shares within hard surfaces. Statistically, wood flooring performed the worst last year and this segment being a premium to the average hard surface and trade had a deflating impact on ASP’s for the flooring trade. There is also a notable slowing in stone flooring which sells at a premium of 3-4X the average flooring ASP, but represents a very small unit share of the industry (<2% of volume).
We see LVT ultimately reaching approximately a 20% market share through cannibalization from other categories.
First, we will attempt to give a possible price range for the offerings of LVT and then hone in on an average. In this part of price analysis, we are trying to assess mill wholesale values and not total installation costs to the consumer. Our analysis of the marketplace, and supported by data we have seen from Market Insights, suggests that the average LVT price at retail or mill value is approximately 10% higher than the rest of the flooring industry. However, if the primary share gains for LVT are happening at the stone or hardwood levels, the growth of LVT should be somewhat dilutive to the average price per unit trends depending on the amount of loss that stone and wood incur. We inject here the data that is coming out of Floor & Décor for insights to the product share shift that is occurring. The loss of share of ceramic to LVT would actually be an increase in ASP’s for flooring but the decline in wood and natural stone would be an offset and the decline in the sales mix for Floor & Décor in stone and wood combined was slightly more than the decline in ceramic. The other comment here would be that ceramic and stone in particular require many more accessory sales although this would not be reflected in flooring ASP’s.