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NZ carpet maker Cavalier on growth path after emerging from ‘tough’ restructuring

Thursday 5th April 2018

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New Zealand carpet maker Cavalier Corp is emerging from a “tough” period after an influx of cheaper synthetics forced it to restructure its business to compete. It has now streamlined its operations and with most of the pain now behind it, is stepping up investment in innovation and marketing as it eyes rising consumer demand for natural woollen products.

The carpet market has undergone rapid change over the past 20 years, with woollen carpets in New Zealand shrinking to about 15 percent of sales from 80 percent as cheaper synthetics made inroads. In response, Cavalier sold uncompetitive assets like its carpet tile business in Australia, began manufacturing its own synthetic range, and consolidated its woollen felting and yarn spinning operations.

In its latest financials, Cavalier lifted first-half profit in the six months to the end of December 2017 as costs fell and margins improved, allowing it to reduce debt, and chief executive Paul Alston is expecting the trend to continue.

“Out to the remainder of the year, we are confident that we are going to improve again and going into the next financial year we are pretty confident we are going to grow further,” he told BusinessDesk in an interview at the company’s tufting factory in Papatoetoe, Auckland, where its head office is based.

“Last financial year for Cavalier was tough,” Alston conceded. The company underwent “massive” change, consolidating its Wanganui woollen yarn spinning plant over to its Napier operations, and relocating its Christchurch woollen felting plant to the larger site in Wanganui.

While the physical move went according to plan, the company underestimated the disruption to the business from having to find and train new staff in Napier and Wanganui as 60 jobs were lost and only a handful of staff chose to relocate.

“It cost us a lot more in terms of down time. We struggled to produce the yarn. We suffered as a result of not getting enough supply to make the carpet in time,” Alston said. While that hurt last year’s results, the supply chain disruption is now behind it, he said.

As well as more streamlined manufacturing operations, profitability is also being helped this year by the flow-on effect of a low wool price which makes woollen carpets cheaper to manufacture. The benefits can take up to 18 months to flow through to carpet sales, so Cavalier began to feel the impact only from the start of the 2018 calendar year.

“The market is coming back in our favour,” he said. “I’m feeling a lot more confident about the future.”

Cavalier is upbeat about the prospects for its woollen carpets in the future, noting the success of other New Zealand wool brands like footwear company Allbirds and outdoor clothing company Icebreaker.

“We are seeing a bit of a swing back to wool, which is something we specialise in,” said Alston. “I think the pendulum had swung quite a bit towards the synthetics and it’s coming back a little bit.

“We are well placed to catch that wave should it eventuate.”

Some 45 percent of Cavalier’s production is now synthetics, lower than many of its global peers who are closer to 80 percent.

While Alston doesn’t think the woollen carpet market will revert back to where it was, the company is seeing growth in demand for more luxurious chunkier, textured loop type carpets which are hard for synthetic carpet makers to replicate.

“There is a place for wool and we think it is going to be a bigger part of us,” Alston said. “The market has moved too far. I think there’s going to be a bit of a shift back.”

It sees opportunities for its top-of-the-range woollen carpets outside of its core New Zealand and Australian markets, with woollen carpets making up only about 2 percent of the carpet markets in the US, Europe and Asia.

“We are never going to compete with the big volume players in synthetics, we just don’t have the capacity,” Alston said. However, while the bigger players focus on the high-volume synthetic market, it’s attractive for Cavalier to target the smaller global market for woollen carpets.

“I have to get a real little bit just to make a massive difference to us,” Alston said. The company is in the process of revamping its export operations with the aim of growing its international business.

“There was no point trying to really put the accelerator down in the rest of the world markets when we were struggling to supply our traditional markets because we were going through the consolidation, and so now the change has happened, we can look to focus on the areas we want to grow,” he said.

Unlike other carpet makers, Cavalier has an end-to-end carpet manufacturing business which spans wool buying, scouring, felting, yarn spinning and tufting. That means its research and development can reach deep back into the business.

“After the consolidation of the factories which took a lot out of us in terms of cost and time, now that’s behind us it is now time to start putting some money into what Cavalier has always been really good at and successful at, is research and development and innovation, particularly around wool and woollen carpets – we were the market leader, we still think we are, and will be,” Alston said.

Cavalier acquired the world leading Radford Felted Yarn business in 2012 and one of the reasons for moving the operation to Wanganui was because it was at capacity and needed room to expand to meet rising demand for the unique chunky felted loop carpets which attract a higher margin and currently account for less than 10 percent of production.

“We would prefer to fill our factory up with higher margin product,” Alston noted.

Cavalier launched a new carpet called Samurai a few months ago, which has the look of the more expensive felted product at a cheaper price, and is now one of its biggest woollen sellers. It has another dozen new products poised for release across its wool and synthetic ranges, with launch dates out for the remainder of the 2018 calendar year.

While house sizes have been getting bigger, a trend to hard flooring means many households will now only carpet the bedrooms and media rooms, which means overall carpet use per household has declined. To address this, Cavalier is today starting to sell customised rugs from its carpet range which can be bought direct from its website or through retailers, enabling it to “keep a foot in the lounge”.

The company is also becoming more focussed in its marketing, targeting retailers with incentives for selling its products, and enabling consumers to order samples direct from its website.

It’s tapping the resources of AgResearch and conducting wider market research to help formulate its plan for the future, and expects to be able to provide a better steer on its strategy at the end of this financial year.

Still, the end-of-year results are unlikely to include a dividend, which was last paid to shareholders for the first half of the 2014 financial year, given the company has signalled it needs to see consistency in earnings before resuming the payments.

Cavalier shares recently traded at 60 cents. The shares dropped as low as 27 cents in the third quarter of last year, but have recovered since.


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