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Does U.S. Furniture Have a Leg to Stand On?
Following a tumultuous decade of fierce foreign competition that accelerated the pace of declining sales and profits, the effects of which were exacerbated by the collapse of the U.S. housing market and the ensuing global recession, the long-term outlook for U.S. furniture companies is difficult to forecast. The entire industry has undergone an extensive transformation and continues remains in flux, as companies struggle to realign operations in an attempt to enhance efficiency and alleviate margin pressure from volatile macroeconomic conditions, fitful demand tendencies, and rising costs. The one certainty is that the landscape has changed completely, and, in terms of business models, the industry will likely re-emerge an entirely different animal.
The deluge of Asian furniture imports over the past 10 years all but decimated the U.S. wood furniture market, as the high cost of conventional wood manufacturing in the United States made it practically impossible to compete with the volume of low-cost Asian furniture that began flooding the market. The pressure from these imports also hampered the upholstery business. Furthermore, once the recession set in, unfavorable comparisons soon became sizable losses and stock prices nosedived, forcing many outfits to reevaluate their business strategies and substantially reduce capacity. This meant rampant restructuring and accepting the reality that attempting to go head to head with Asian wood furniture manufacturers in the open market was a losing battle.
Thus, most companies, including well-recognized names like Ethan Allen (ETH) and La-Z-Boy (LZB) began widespread plant closures, divestitures of underperforming assets, and retail location closures, among a slew of other cost-cutting measures. In fact, other less well-known brands, like Bassett Furniture (BSET), which was reduced to two manufacturing facilities, have been hit harder than their larger brethren. Moreover, in addition to the aforementioned obstacles, the aging Baby Boomer generation, coupled with the shift in consumer profiles and sentiment, has compelled these outfits to adjust selling strategies as well, placing more emphasis on technology, logistics, identifying new retail channels, and global sourcing. The same is true of commercial outfits like Herman Miller (MLHR) and Steelcase (SCS), which, though largely unaffected by Asian imports, definitely felt the sting of the slump in commercial real estate during the recession and have continued to face headwinds during the gradual recovery process.
Still, one factor that has remained consistent is the need to differentiate product offerings by quality. Indeed, premium brands are expected to deliver superior quality and customization, which ought to provide an edge over foreign competition. As a result, many companies have diversified product categories and related pricing tiers in order to set apart premium lines and establish a sense of prestige that may appeal to the less thrifty consumer.
On the upside, while current economic conditions remain somewhat unstable, the majority of companies across the industry have done well to adapt to the changing environment. Heavy plant consolidation and capacity reduction have streamlined operations and made furniture manufacturers more agile. On the residential end, many have opted to outsource the lion’s share of wood furniture production and adopt a more quality-driven, retail-oriented approach that emphasizes better service, more efficient distribution, technological advances, and more effective marketing initiatives. This has been demonstrated by greater liquidity and widening margins, despite commodity inflation that has increased raw-materials costs. Too, the improved economic climate has unlocked some pent-up demand, which has lifted volumes and enhanced pricing power, as widespread discounting has begun to subside.
Additionally, during the credit crunch, liquidity concerns prompted several companies to hoard cash. Since then, businesses have been using higher free cash flow levels to acquire franchises in order to implement a more uniform, single-brand, company-owned operational strategy, which has seemingly paid off, as company-owned retail locations have been contributing handsomely to net profits for most businesses.
Meanwhile, some political maneuvering has also translated into income for many residential furniture companies. Since 2006, U.S. manufacturers began filing “anti-dumping” complaints with the government, claiming that Chinese competitors were “dumping” their products in the U.S. market and selling them at unreasonably low prices. A group of U.S. companies asked the Commerce Department to review the duties these Chinese companies were paying. For fear of a spike in U.S. import duties, many Chinese companies have opted to pay cash to U.S. competitors in order to be kept off of the review list. Although somewhat inherently dubious in practice, these payments, dubbed glorified shakedowns by the mass media, have, thus far, not been considered illegal. Thus, in addition to the “anti-dumping” duties that are already being imposed on most Chinese imports by the Commerce Department, these private settlements have continued, as many of the Asian companies fear further scrutiny. However, higher duties and private settlements have done little to stem import activity. In fact, many manufacturers have simply moved into other countries where the duties do not apply, such as Vietnam.
On the commercial end, diversification has been a key strategy. As commercial construction stalled during the recession and has yet to rebound, many commercial furniture companies have broadened their respective revenue bases. Expanded marketing efforts have generated more customers from the healthcare, government and education sectors. Moreover, aforementioned cash preservation measures have left many corporations flush, which has translated into higher spending on refurbishing existing office space with new furnishings, as opposed to expanding and opening up new locations. That said, higher capacity following the fallout from the recession has kept rental rates relatively low, which has made changing office locations an attractive option as well.
On another note, the international arena has begun to provide a wealth of opportunity for many domestic manufacturer/retailers. As globalization opened up U.S. markets to Asian competition, the increasing wealth of developing nations has begun to generate strong sales growth for U.S. companies. In fact, for most companies, sales abroad are growing much faster than U.S. sales and have prompted corporations like Herman Miller to purchase foreign-based companies (Hong Kong-based POSH, Ltd.) in order to tap deeper into favorable demand trends in certain regions.
All things being equal, while challenging macroeconomic factors, including the ongoing housing debacle in the United States, global commodity inflation, and deteriorating economic conditions in several European nations remain a legitimate cause for concern, once the broader global economic climate stabilizes, demand will likely bounce back rapidly. Moreover, most companies in the furniture sector have repositioned themselves to sustain positive sales and earnings momentum once volatility subsides. That is not to say that it will be smooth sailing, but this sector, in its greatly transformed state, has likely seen the worst of its woes.
At the time this article was written the author did not own stock in any of the companies mentioned in the article.