Carpet Cleaning: A $3.5 Billion Industry

An article reprinted from September, 1998 issue of Services magazine

A new study profiles the carpet cleaning industry.

In recent years, the commercial customer has been the fastest growing segment for the carpet and upholstery cleaning industry. More schools, stores, restaurants, and offices are switching from hard to soft floor coverings, and concern with "sick building syndrome" in particular has fueled increased business on the commercial side.

According to the Institute of Inspection, Cleaning, and Restoration Certification (IICRC), about 30,000 companies providing carpet and upholstery cleaning services are registered with the IICRC.

As many as 100,000 other establishments currently operating in the United States could bring the total number of companies to as many as 40,000 or more. A lot of growth took place the past five years. It's very difficult to obtain an exact number of companies, since the lines are fuzzy between mainly commercial janitorial service companies that also perform carpet cleaning, and pure residential carpet cleaning firms.

Carpet cleaning companies usually target one side of the business or the other-residential or commercial accounts, but not both. More services target the residential accounts. Industry insiders also report that a lot of the business is on a cash basis, and goes unreported. Cleaners find it very easy to take cash for a job and not report it to Uncle Sam or to their franchise system (where they'd have to pay royalties on the revenues).

Residential cleaning accounts for the majority of revenue in this industry. According to the Cleaning Management Institute, most businesses operate in metropolitan areas, employ an average of five people, and offer carpet cleaning services exclusively . Only about a dozen or so of the larger companies offer carpet and upholstery cleaning as part of a range of unrelated services.

Marketdata analysts spoke with the leading consultants, trade journal editors, and management at the top seven franchise organizations. The consensus opinion is that business is split about 80 percent residential and 20 percent commercial accounts. Based on Marketdata's estimates of industry revenues for 1997 ($3.5 billion), we estimate that the residential side of the business is worth about $2.8 billion, and the commercial side is worth about $700 million.

Some companies are branching out to include more specialty services. Besides carpet, upholstery, and drapery cleaning, niche markets have developed for ceiling and wall cleaning, water/fire/smoke damage restoration, janitorial cleaning services, hard surface floor cleaning, duct cleaning, and high pressure washing. Area rugs are a profitable service generating more profit

than cleaning wall-to-wall carpeting ($1.00-$3.00/sq. ft. for area rugs) .

Industry managers interviewed by Marketdata say that the price obtained for residential cleaning jobs is higher than for commercial business. Residential accounts usually generate 18-20 cents per sq. ft., while commercial accounts generate 8-10 cents. Consequently, profit margins are also better. There is a split in the industry between the "low ball" price cleaners that try to sell more services once they get in a home, and the highly professional cleaners who don't play those games.

Major Trends and Issues

Based on Marketdata's interviews with leading consultants, suppliers, and carpet cleaning contractors, it's apparent that there are several main variables driving this business:

1. Consumers in general are more concerned today about their health and indoor air quality, and a dust-free work and home environment. This concern is fueled in part by the media and any publicity it may generate for these concerns. Consequently, one would expect people to increase the frequency of carpet cleaning, boosting demand for carpet cleaning services.

2. Since this industry's fortunes are largely tied to the residential market, strong housing starts /construction should boost sales of carpeting and, ultimately, demand for carpet cleaning services. However, there is another trend offsetting this expected higher demand, the fact that less carpeting than in years past is being installed in today's residential housing (and commercial buildings). Consumers are choosing alternate floor covering materials (wood laminates such as Pergo, ceramic tile, and vinyl). We even see more area rugs today, rather than wall-to-wall carpeting. This trend may be a short-term one, however. Many consumers find wood and tile floors too cold and wind up buying area rugs to cover them later on.

3. Sales of carpeting are leveling off, not only in the United States but also internationally, although the large carpet manufacturers (and the trade association representing them) will all deny it. In some European nations, carpet sales are down as much as 50 percent. Consumers complain that today's carpeting just doesn't wear as well as carpet installed 10-20 years ago. Style and color changes also contribute to a shorter life cycle.

4. Like the commercial cleaning business, the industry's biggest immediate problem is finding labor. Carpet cleaning is not exactly a career track. Laborers are usually paid by the hour, ranging from $7$12, and many are treated as "subcontractors."

New Technology Impacts

According to the trade publication Floor Focus, during the last

decade, young adults and baby boomers have rejected the notion that practically every room needs carpeting. Carpet's share of overall spending on floor covering in the United States has dropped to 58 percent from 80 percent in the mid-1980s. According to the Wall Street Journal, carpet sales are growing just two percent annually. Many homeowners are even ripping out the living room carpeting and installing wood flooring.

According to Floor Focus magazine, the laminate market in 1997 was estimated to be worth $160 million, and is projected to double and possibly even triple by 2000. Low or no-maintenance flooring seems to be the wave of the future.

Of the total U.S. production of all floors, the Carpet & Rug Institute estimates that carpet's share is 70 percent. Of the total broadloom residential market (74.9 percent) about 56 percent goes to residential customers and 19 percent goes to the contract residential market (tract homes, apartments, mobile homes) . The overall replacement market for existing carpet in homes, offices, schools, and other institutions is over 67 percent annually.

Industry consultants particularly disagree with this last statistic. They dispute the 70 percent share and believe it to be much lower. They claim that the Institute's figures are probably skewed, since they represent the interests of the large carpet mills.

As further confirmation of this, an article in the March 31, 1998, issue of the Wall Street Journal discussed the changing preferences of consumers and the move to more wood floors. It cited data providing the following breakdown of floor coverings by type:

• Carpet 58.2%
  
• Rugs 13.6
  
• Vinyl 13.0
  
• Hardwood 7.1
  
• Ceramic 6.1
  
• Laminates 2.0

About a year ago, vertical integration by the large carpet mills was the major topic. Shaw Industries (the producer of over 40 percent of all carpet in the country) entered the retail business in a big way. It was opening its own stores and buying up independents at a rapid pace. Shaw and other producers announced that they would vertically integrate the total carpet experience-meaning that first it will make the fiber, then the carpet, then they'll sell it to the end-user. They will also install and clean it. Last of all, they will take the carpet back and recycle it when it's replaced. Some expected the next logical move to be leasing carpet rather than selling it.

The manufacturers claimed the reason they are moving into this market is because companies that are currently performing the work aren't doing a good job-including carpet cleaners. (More likely, the reason is that they need to make up for lower carpet sales with other revenue sources.) Needless to say, these actions, if carried out, could represent real trouble and competition for the local "'mom and pop" carpet cleaning business.

Shaw Industries was expected to have 100 truck mounts on the street by year-end 1997. Some insiders put that number at 500 machines by the year 2000. Estimates are for 100 machines each by 1997 for Interface and DuPont as well. And what about the 100 other mills and fiber producers? Are they entering the carpet cleaning business as well? CarpetMax, with $1.3 billion in sales, announced last year that it will follow and offer cleaning services through its 600 members to any floor covering retailer. And Home Depot is on the verge of getting into carpet cleaning.

All the talk may have been hype and premature, however. The large manufacturers are finding that cleaning carpets is not as easy as they envisioned. They are encountering some of the same problems that small cleaning firms have to deal with-namely, finding and hiring workers. They also have a little way to go on "the learning curve" of providing good residential customer service. So, this could be more of a long-term, gradual threat for mom and pop cleaners.

Size and Growth of the Industry

Marketdata estimates that the U. S. carpet cleaning industry in 1996 was worth approximately $3.2 billion. We expect that last year the industry's receipts grew stronger than in 1996, or 7.5 percent to $3.5 billion. For the current year, Marketdata projects strong growth still, fueled by very strong housing starts. We expect the industry to grow 8.4 percent to $3.8 billion.

Another way to estimate the industry's size is simply to take the known number of carpet cleaning firms operating and multiply that by the typical/average annual gross sales. Most industry insiders say there are 25,000 to 30,000 firms operating. American Business Lists, a leading compiler of national business Yellow Pages listings, currently has 30,282 carpet and rug cleaning companies in its database.

Of these 30,000, 5,000 are related to franchises such as Stanley Steemer, ChemDry, ServiceMaster, and others.

From Cleaning Management's annual Contract Cleaner Survey, taking an average of sales reported for 1993-1996, gross sales are about $244,000 per company. This seems like a reasonable figure, since the 1992 Census Survey reported revenues of about $193,000 per establishment (five years ago). Obviously, receipts have grown in five years, if nothing else, at least at the inflation rate of 2-3 percent per year.

Doing the multiplication, this comes out to $6.7 billion. This figure seems a little too high, so either one of two things is possible: (1) there are less than 27,500 cleaning firms, or (2) their average sales are lower than $244,000 per year. Probably the latter is true.

Long Term Outlook

Industry consultants believe that over the next five years we'll see a leveling off of this industry's growth rate, probably a lower rate, due to technology changes, shifting consumer floor covering preferences, and competition.

Others, however, think that the growth rate will stay the same as the past five years, or go higher, for several reasons. Proponents of higher growth say that the entry of the large carpet mills and retailers into the business (i.e., Shaw Industries, DuPont, Carpet One, CarpetMax, etc.) will be good for the industry. Their large and currently very active advertising campaigns will increase public awareness about the benefits of more frequent carpet cleaning and expand the total pie of business for everyone, rather than simply taking market share away from the small players.

The effect of recessions or economic downturns is downplayed by most. Carpet cleaners say that when new money gets tight, consumers clean their existing carpet, rather than go out and buy new carpeting. However, this industry seems to be recession-resistant, but not recess ion-proof . This was evidenced in the years 1987 and 1991, when industry receipts fell by 8.5 percent and slowed to 4.3 percent growth, respectively.

We think it highly likely that we will see a slowdown in the economy sometime during the next five years, perhaps when strong stock market gains end. When that happens, carpet cleaning can easily be postponed by consumers who are tightening their spending. In such a, year, growth could slow to one or two percent, or even decline. This will drag down the five-year growth rate to 2003.

Contract Cleaning

The share of man-hours allocated to carpet cleaning other than vacuuming, for cleaning companies that provide all types of services, including carpet cleaning, is about 8.3 percent on average. For comparison, the percent of man-hours allocated to vacuuming and floor care is about 22 percent for each.

Nearly every cleaning contractor-almost 93 percent in 1997-is involved in cleaning carpets. Other frequent services performed by contractors include uncarpeted floor cleaning (89 percent), windows (78 percent), and walls/partitions/cubicles (67 percent).

On the subject of the source of customer complaints, there's good news for carpet cleaners. Customer complaints related to carpets not being cleaned adequately have been on a downtrend since 1993-falling from 16 percent to 9.5 percent in 1997. By far, the number one complaint is the cleanliness of restrooms-46.2 percent of all complaints received in 1997.

Excerpted from The U.S. Carpet Cleaning Industry, published by Marketdata Enterprises, Inc.