September 13, 2011

Mohawk Industries, Inc. 

 

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Industry sales of ceramic floor and wall tiles increased 9.2% in 2010 to $2.0 billion from $1.8 billion in 

2009. Residential remodel and repair accounted for 40% of this category and new residential construction 

accounted for another 16%. This category accounted for 11.2% of total flooring industry square footage sales 

in 2010, down from 12.4% in 2006. This decline has been primarily driven by the fall off in new residential 

construction. Lately, this category has seen an increase in technology and capabilities of digital inkjet software 

and printing technology, allowing for the flawless, completely life-like transfer of images and graphics to each 

and every tile for a highly improved look.  

Laminates sales in 2010 declined 2.2% to $881 million from $901 million in 2009. However, industry 

square footage increased almost 5%. Residential replacement accounts for 80.5% of the laminate market while 

commercial construction accounts for 11.6%. Over the last five years, laminate flooring square footage has 

increased from 4.6% of total industry square footage sales to 5.4%. Laminate flooring is growing in popularity 

with a consumer base looking for value.  

Customer Analysis 

Over half of the industry’s flooring sales are driven by specialty flooring stores, while a little less than 

one-third of the sales are driven by home centers such as Home Depot and Lowe’s.   

Floorcovering Retailers – 2010 U.S. Industry 

Specialty 

Stores

54%

Contractors

13%

Home 

Centers

30%

Other

3%

 

Source: Floor Covering Weekly, and Catalina Research via Company presentation, August 2011 

 

For Mohawk, no single customer accounted for more than 5% of total sales and its top ten customers 

represented for less than 20% of total sales. As a result, a loss of one major customer would not have a big 

impact on the Company’s valuation.    

Mohawk Enjoys Various Competitive Advantages 

Mohawk maintains strong competitive advantages such as the leading distribution network, low-cost 

manufacturing, leading dealer focus, and a broad line of product offerings. Below we provide further detail on 

these competitive advantages: 

Barriers to Entry – Leading Distribution System 

The Company maintains an unrivaled distribution system that is not only difficult for smaller 

competitors to replicate, but also serves as a barrier to entry against new competitors. This leading distribution 

network is a critical factor in maintaining fill-rates, expansive geographic reach, and high customer service 

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Mohawk Industries, Inc. 

 

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levels. The Company operates an efficient hub and spoke operation network of ten regional distribution center 

(300 distribution points), owns a fleet of approximately 700 trucks and approximately 1,500 sales 

representatives. In particular, on the Mohawk side of business, the Company has 40 warehouses across the 

country and it pushes product through its network of trucks and salespeople out to the specialty retailers with 

the consumers coming to the retailers to make their selections and purchases. On the Dal-Tile side, the 

Company has about 250 distribution points across the country. Each one of these has a small showroom and a 

small warehouse. The consumers come into the service center, and make their selections at the showroom. 

These service centers enable MHK to have a decentralized customer service operation that keeps the 

Company close to its customers. The importance of this was reinforced by CEO Jeffrey Lorberbaum on two 

different occasions:  

“… our distribution has provided Mohawk customers with a higher service level than our 

competitors can provide. This has allowed us to continue improving customer loyalty for our 

products. In addition, it has created the foundation for moving from a carpet supplier to a total 

flooring company. As others in our industry retracted to centralized warehousing, we offered 

higher service levels, which reduce our customers’ inventories and improves their sales.”

1

  

“… the distribution system that we have really provided dramatic market advantages and has 

allowed us to have as large a market share as we have…”

2

 

Low Cost Manufacturer 

As a result of its position as the largest flooring company, Mohawk possesses a scale advantage 

relative to its smaller competitors. One of the more obvious scale advantages is its purchasing of raw 

materials. Many of MHK’s raw materials are derived from oil and natural gas such as various fibers, latex, 

dyes, and colors. Given that these raw materials are volatile and gross profit margin are only in the 20% range, 

the Company’s purchasing scale gives the Company leverage against chemical manufacturers to push back on 

higher prices or extract more favorable pricing such as volume discounts, relative to its smaller competitors. 

Also, the Company’s scale enables it to amortize its spending on R&D, marketing and distribution over greater 

units, resulting in lower cost per unit.  

MHK also enjoys scale in its operating activities, especially in research and development spending, 

and marketing. For example, new product development has been a key growth driver for the company, and has 

produced such innovative products as SmartStrand Triexta, Reveal Imaging and Uniclic. As a result of the 

Company’s scale, it is able to monetize these large expenses over larger quantity of units, resulting in lower 

cost per unit.  

In addition, MHK’s manufacturing operations are highly efficient. Mohawk’s carpet and rug operations 

are vertically integrated from the extrusion of resins to the conversion of resins into fiber, and the manufacturer 

and distribution of finished product. Dal-Tile’s operations are vertically integrated from the production of frit (a 

basic glassy substance that has been fused in a special fusing oven to make porcelain) to the manufacture and 

distribution of ceramic tile. Vertical integration not only enables the Company to lower costs, but allows it to 

control quality and service levels. The Company also employs state of the art management information 

systems to provide managers with real time information to control labor, quality and yield from the shop floor to 

the sales floor.  

Finally, the Company’s aforementioned distribution provides it with another cost advantage. Shipping 

heavy flooring inventory across the country can be costly, especially during periods of elevated energy prices 

(gas and diesel) such as those currently being experienced. The Company’s expansive distribution system with 

its own truck fleet enables the Mohawk to realize lower transportation costs (shorter travel distance, no fuel 

surcharges, etc.).  

                                                      

1

 Textile World, April 2003 

2

 4Q 2009 earnings conference call transcript 

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