Crafton Industry

In 2009 businesses spent near $17 billion for floorcoverings.

  • The largest floor covering product is carpet and rugs followed by ceramic tile, vinyl, hardwood, stone, laminate and rubber floorings.
  • Residential sales accounted about 11. 33 billion sales (2/ 3 of the sales) in the flooring industry and commercial accounted 5. 67 billion sales.
  • The dollar sales of U. S. floorcoverings went down from $23,227 million in 2007 to $17,122 million in 2009 leaving a difference of $6,105 million.
  • In 2007 the industry sales tumbled 29% at the current prices and 27% after adjusting for inflation.

The U. S. Carpet and Rug Industry.

  • The market share for carpet and rug industry went down from 68. 1% in 1999 to 56. 7% to 54. 5% in two years between 2007 and 2009.
  • The sales were down by $3,383 million.
  • The U. S. carpet and rug manufacturer posted sales of $9. 36 billion at manufactures prices in 2009.
  • The low profit margin due to the cause of mergers, acquisitions and bankruptcies for Carpet and Rug manufacturers reduced down the number of companies from 300 in mid 1980s to 100 companies today.
  • The carpet and rug industry only spent 0. 9% of its sales or $84 million in 2009 on consumer advertising while other manufactures such as household furniture spent 2.7% and household appliances spent 1. 7% of its sales on advertising.
  • In 2009 five companies produced 75% or $6,993 million of the carpet and rug sales in U. S.

The companies were:

  • Shaw Industries $3,025million32. 4%
  • Mohawk Industries$2,479 million26. 6%
  • Beaulieu of America$867 million9. 2%
  • Interface Flooring$423 million4. 5%
  • The Dixie Group$199 million2. 1%
  • Others$2. 352 million25. 2%
  • TOTAL$9,335million100%

The main three companies: Shaw Industries, Mohawk Industries, and Beaulieu of America accounted 85% of the U. S. Residential carpet and rug sales.

  • Shaw industries by itself made $3.0 billion worth of sales in 2009.

Wholesale and Retail Distribution

  • The wholesale and retail distribution for U. S. carpet and rug industry has gone through three major changes since 1980s.
  • In 1980s the largest carpet and rug manufacturers started directly sell to retailers by bypassing the wholesalers.
  • The goal was to increase profit margin by capturing the margin paid to wholesalers.
  • But smaller manufacturers continued to wholesale due to the lack of capital to invest in distribution centers so the majority of carpet and rug manufacturers still used wholesalers.
  • In 1980s small and independent specialty stores made 58% of the residential sales and department stores were accounted 21% and furniture stores for 19%.

Wholesale and Retail Consolidation

  • In 1990s the 2nd significant change in wholesale and retail distribution occurred while department stores, furniture outlets and independent retail stores started being replaced by mass merchandise and discount stores such as Kmart and Walmart and later by home centers such as Home Depot.
  • These stores allowed independent specialty retailers to buy less inventory per order while getting a lower price which reduced the cost and pressure for markdowns caused by over ordering.
  • In 1995, three retail buying groups: CarpetMax, Carpet One and Abbey Carpets registered $3 billion in floorcovering purchases and 10 smaller groups purchased $1 billion.

Integration into Retailing

  • The 3rd significant changed occurred in 1995 when Shaw Industries announced to engage itself directly in the residential and contract segments of the floorcovering industry.
  • Shaw Industry would operate its own retail stores and commercial dealer network.
  • Shortly after making the announcement the company purchased a number of commercial carpet dealers and contractors and carpet land USA.
  • Right after the purchasing took place Home Depot dropped Shaw Industries as a carpet and rug supplier and switched to Mohawk Industries.
  • Carpet One and Abbey Carpets, two main buying groups asked their members not to do business with Shaw.
  • After all these, in 1998 Shaw industries announced it would sell of its retail stores to Maxim Group for $93 million. And later Home Depot started stocking Shaw carpet once again.

Crafton Industries, Inc.

  • Sells premium priced carpeting to rich residential segment of the industry.
  • The company had sales of $75 million in the year of 2010 and 72% of the sales were attributed toward residential market.
  • The company’s net profit before taxes were $3 million while they only accounted 0. 4% of the market.
  • Crafton distributes the product to seven floor covering wholesalers, who supply to 4000 retail accounts.
  • The wholesalers are located all over West, East and Midwest Coasts.
  • Half of the company’s retail accounts provide for about 80% of the overall sales.
  • The company has wholesalers who represented the company for about more than 20 years.
  • The company employees 10 salespeople who mains extensive sales organization.
  • The wholesalers for the company received a 20% margin on sales billed at the price to retailers and wholesalers typically applied a markup on cost of 125% for carpeting sold to retailers.

2. Problem

While the retailers are becoming more conscientious about the price Crafton industries has slowly been growing in sales for carpeting. The wholesalers have a declining profit margin due to the pressure creating from buyer groups which has caused Crafton to have low number of sales since only 6% of its sales are coming from wholesalers and sales representative are only devoted for 40% of each one-hour of their sales call to sell Crafton products, while spending the rest of the time selling noncompeting products. The cost of inventory is rising as well, since the inventory turnovers are 5% per year while the management sufficient to have 4% per year.

3. Alternative/Evaluation

Evaluating the idea of opening Crafton’s own distributing center in year of 2000.

Advantages

  • By cutting the wholesaler Crafton can distribute directly to retailers and possibly increase its market exposure to public.

Disadvantages

  • The company would need to open 7 warehouses in metropolitan areas such as Atlanta, Chicago, Dallas-Fort Worth, Denver, Los Angeles, New York City, and Philadelphia to maintain all 4000 of the accounts it holds.
  • Possible chances of losing the current market share by having the distributer turning to the competitor company. It may also give the company a bad reputation due to the fact of dropping wholesalers that’s been on the business with the company for more than 20 years.
  • The company would need to hire 31 more sales representative and 4 field sales manager in order to start a warehouse and maintain all retail account. This will increase expenses by $2. 5 million
  • With the $700,000 in fixed operation cost for 7 distribution centers and transportation, inventory and accounts receivable costs would almost account for $16. 3 million. Which makes total expenses to $39. 3 million for the year which is almost more than a 50% increase of expenses from the 2000 fiscal year. (2000 fiscal year expenses were $15. 75 million) ·The inventory turnover would decrease from 5 to 4.28
  • The cost of goods would decrease due to the loss of the lost accounts due to the fact of opening up new warehouses. The net profit margin would decrease down to 2%

4. Recommendation

Crafton Industries should not open its own distribution warehouses. Even though the cost of goods sold would decrease for the company and increase its gross profit but at the same time the company would lose more than $1. 5 million from other expenses. Opening up new warehouses would also account for many more expenses depending on the reaction of the retailers.

Retailers would most likely stay with the wholesale companies they are with now due to the discount they get from them. The buying groups may lose power while dealing with Crafton which might lead to having sale losses. The company would end up finding itself in the shoes of Shaw Company when they first decided to open up warehouses and opening their own retail stores and losing potential market. I would make the suggestion to the company to stable their current market and stick to it.

5. Appendices

  • The warehouses need to make at least $7 million wholesale sales per warehouse to operate as a warehouse operation economically.
  • The Annual fixed cost for the company for warehouses is (700,000 * 7 = 4,900,000)
  • Total of 31 sales representatives with annual salaries in total of $2,170,000 ( $70,000 * 31)
  • One field manager with the salary of $80,000 per annual year. So 4 field managers per year would be ($80,000 * 4= $320,000)
  • Sales administration cost would be 40% which would turn out to be $996,000 per year. ($320,000+$2,170,000) * (. 40) = $996, 000 while making total administration cost $8,484,000
  • Transportation and Delivery cost would account for 4% of the sales price.
  • Inventory and accounts receivable costs were 20% together.