Saturday, July 6, 2013

Remnant Economics: Tales from the Carpet Store

One of the joys of moving into a new home is that you get* to do a lot of shopping.  As a result of our recent move, I'm spending a lot of time in furniture stores, car lots, home goods stores, appliance stores, and today, carpet stores.  To me, one of the great things about doing all of this shopping is that it gives me an opportunity to learn about trades/professions I do not know much about.  So, carpet... flooring... In my adult life, I have never shopped at a carpet store.  What's so interesting about the flooring industry?

As some background, our new house has some newly refinished hardwood floors that we'd like to protect.  We want to keep the hardwood because it looks great, but we want to protect the floors while bringing some warmth and texture into the room.  I'm no interior designer, but I'd say that calls for some nice rugs.  My wife Shanna agrees, and that reassures me because she reads a lot about this stuff.

But, this isn't an interior design post about which rugs to buy.  This is a post about some interesting economics in the carpet/rug industry.

When you go shopping for an 8' by 10' rug, you're talking about spending $500 if the sale is good.  Good quality rugs can be expensive.  If you're a savvy shopper, you might consider the alternative of going to a carpet store, buying an 8' by 10' patch of carpet, and having them finish the edges to custom-make yourself a rug.  The carpet stores we tried will do this, but unfortunately, if you pick decent quality carpet, that's going to get expensive too.  When we priced it out, it was slightly more expensive to pick a new decent-looking carpet to finish into a rug.  From a pricing standpoint, this makes sense: Finishing your own rug gives you freedom to pick exactly the fabric you want while picking a rug from the rack or from a catalog will typically restrict your options to what is available.  The carpet factories know this, and they've set their prices accordingly.

Buried in the back of most carpet stores, there's a third option.  Remnants!  Remnants are pre-cut patches of carpet that are not big enough to carpet a room (and thus, would not work for a standard carpeting job), but they are big enough for most standard sized rugs.  It turns out that carpet factories end up with a lot of remnants when they fill orders of odd sizes (e.g., 180 feet of carpet when a roll is 190 feet).  Thus, they end up with scraps, which they roll up, cover in shrink wrap, and throw into the remnant bin.  When the remnant bin gets full, they call up carpet outlet stores and offer them a screamin' deal to take the remnants off of their hands.

Because the remnants are just the right size to make standard rugs, the result of these carpet factory leftovers is the opportunity for some discount rug shopping.  The remnants are often a mixed bag, but there is some high quality carpet available.  It should be no surprise that we took this hidden third option.  In the end, we purchased a remnant that was big enough to make an 8' by 10' rug for our living room as well as a standard-sized runner for the kitchen.  If we shopped in the front of the store, this would have cost us nearly $750, but because we used a remnant, we paid just over half that price.

I'm still digesting this interesting market structure myself, but the existence of high-quality remnants lends itself to an interesting question: Wouldn't it be profitable for the carpet factory to intentionally create a lot of remnants so as to engage in price discrimination?  The sales pitch is that these remnants are low value to the carpet factory once they've been cut, so they're offered as a discount, but an equally-good explanation for the existence of remnants is that the carpet factory intentionally made them instead of making them into rugs so that they could target just the right consumers for discounts.  Either way, we're happy consumers.

*Some people might prefer to use the word "have," but I actually enjoy shopping in unfamiliar stores.

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