The State of the Furniture Universe

Part 1

Wood Digest talked with Art Raymond about the U.S. furniture industry following his presentation to the Woodworking Industry Conference last April.  His consulting firm, A. G. Raymond & Company, specializes in assisting their clients solve operations problems in areas such as plant layout, production control, materials utilization, and manufacturing strategy.  Clients include furniture producers, cabinet makers, and other secondary wood products manufacturers in the U.S. and in 18 foreign countries.
 

Where does the U.S. fit into the global furniture economy?

Today the U.S. is the largest single market for furniture and related products like kitchen cabinets.  At the retail level, furniture sales in the U.S. are about $58 billion.  The size of our market is the reason every furniture producer in the world wants a piece of our action. 
 

How important are furniture and the furniture industry to our economy?

Our retail economy is about $1.7 trillion.  So at $58 billion you can see that furniture at the consumer level is a very small segment. 

On the manufacturing level, U.S. furniture producers shipped about $23 billion of casegoods and upholstery in 1998.  Compared with other segments of the economy like transportation equipment or electronics, furniture is a very small business.

Putting our industry into perspective, the entire furniture manufacturing business in the U.S. at $23 billion equals the sales of Xerox, the well-known document/information handling company.  And Xerox is the 63rd largest company in the U.S.

If you look at business at retail, the $58 billion compares with AT&T, the 10th largest U.S. company. 

No furniture company - manufacturer or retailer - is in the Fortune 500 list of largest U.S. companies.
 

What is the outlook for furniture sales?

The stars have been perfectly aligned for the furniture business over the past several years.  The primary economic drivers of furniture sales have all been positive.  The result has been an annual growth rate of about 6% since the early 90’s.
 

What are those economic drivers?

Everyone knows the importance of housing sales both new and existing.  A recent survey by the National Home Builders Association revealed that a new home owner spends nearly $2,200 on furniture soon after buying their house.  That’s at least double the amount spent by someone who does not move.

Next in line is overall consumer confidence.  Before buying a big-ticket item like furniture, a consumer must feel confident about his future.  So indicators like the unemployment rate and the stock market are important.  The University of Michigan’s consumer confidence indicator is a good summary of these factors, and it has been at or near an all-time high for the past several months.

Probably the largest driver recently has been population demographics.  The baby boom generation is over twice the size of the group that preceded it.  The leading edge of the baby boom has entered the time of their lives when historically people spend the most on furniture.  So the large size of this population group – about 77 million – and their spending proclivities have resulted in large sales of furniture.

The only real negatives are high consumer debt and a negative savings rate.  More individuals are declaring personal bankruptcy.  And we simply cannot keep spending beyond our incomes.
  
  

The Macroeconomic Scorecard The near-term outlook for the U.S. furniture industry is sound…   Population Demographics  Furniture Expenditures   Consumer Confidence   Housing Starts   New Home Sales   Unemployment Rate   Existing Home Sales   Stock Market   Consumer Credit  Consumer Debt  Source:  BDO Seidman, Conference Board, U.S. Dept. of Labor

Will demographics continue to fuel growth?

For the next 10 to 15 years the answer is yes.  The trailing edge of the baby boom effect will occur between 2015 and 2020.

But the problem demographically speaking is Generation X, those who are between 21 and 34.  That group is only 60% the size of the baby boom.  As a result household formations are forecasted to fall from a 1.3 million annual rate in the late 90’s to below 1 million by 2008. Obviously that fact means fewer potential buyers.  Plus you need to understand the psychology of that generation.  Their motivations are significantly different than those of the boomers.

Not only will there be fewer buyers, but there will also be fewer potential employees.  In the view of many experts we have a demographics problem on the near horizon for both manufacturers who need to staff their plants and retailers who need buyers. 
 
 

Looking at the publicly traded furniture producers for whom numbers are available, gross margins increased about 25% from 1994 to 1997. 

Latest reports indicate that producers’ earnings in the latest 12 months may be up as much as 18%.

But the opposite has happened to retailers.  Their margins have fallen by 6%, and the median return on revenues was negative in 1997. 

So while the economy has generated high furniture sales, the retailers have not capitalized on good times.  In fact, mismanagement led to the bankruptcies of Levitz and Montgomery-Wards, once both major furniture retailers, and the exit of Sears from the furniture business.

You can’t blame the larger producers like Bassett for starting their own retail businesses.  The fate of the producers is in the hands of the retailers, and many retailers have made a mess of their businesses. 
 

Do you expect good times to continue for U.S. producers?

I believe that U.S. furniture producers face the largest challenge in their histories.  Our industry has become global.  As I said earlier, producers all over the world want a piece of our market.  Competition has never been hotter. 

While producers’ profits have recovered nicely in the 90’s, profits are only half the 1983 level.  Clearly, over the last 20 years, times have gotten tougher, and the future is not rosy for those who continue to do business as usual.

A major problem is overcapacity.  Economists will tell you that overcapacity is marked by falling prices.  Strictly speaking, furniture prices have not fallen, but since the early 70’s our prices have not kept up with consumer price inflation. We’re simply giving the consumer more value for her dollar.  That’s why profits have fallen since the early 80’s. 

So while we have closed about $300 million of capacity in the U.S. since 1996 just in lower priced product, the problem is not behind us.  Offshore competitors are adding more capacity.  Last year about 3 million square feet of new capacity was built in China alone.  That’s the equivalent of Stanley – the 15th largest furniture producer in the U.S.  And this new capacity is better equipped than most U.S. plants. 
 

Just how much of our market is taken by imports?

That’s the $64,000 question.  Unfortunately answering that question using available statistics is difficult.  The problem is that an unknown part of our imports are private label goods made for resale by U.S. furniture producers. That part shows up in the producers’ shipments – about $23 billion in 1998.

Look at some of the facts…

• Furniture imports in 1998 were about $8.3 billion, up about 18% from 1997. 

• Wood furniture imports have grown by about 112% in the 6 years since 1992. 

• Imports first exceeded $1 billion in 1982. 

So while we can’t calculate what the market share of non US-produced furniture is, we can unequivocally say that imports are a growing factor. 
 

Who are the leading source countries for furniture shipped to the U.S.?

For many years starting in the mid 70’s Taiwan was the leading source country.  As Taiwan’s labor costs grew, Canada who benefited from proximity and the exchange rate took the No. 1 spot through 1997.  But China is now No. 1, and the Chinese have taken the top spot by growing at a remarkable annual rate -  about 30% - since 1993.  In fact China was not in the top 10 list until the late 80’s. 
  
 

                  Source:  U.S. Department of Commerce

But hasn’t the import wave been restricted to products like chairs and tables that ship efficiently?

The first imports were items that were labor intensive like chairs that could be shipped knocked down.  However look at the recent history of the wood bedroom category.  Since 1990 bedroom imports have grown by about 216% despite their shipping inefficiency.

Most of the top 10 source countries have labor costs below those in the U.S.  Has the cost of labor in the U.S. vs. developing countries become a serious disadvantage?

Let’s look at the labor economics.  Wood furniture manufacturing workers in the U.S. average about $10 per hour in base wage plus between $2.50-3.00 in fringe benefits. 

To get the labor content in a product you also have to consider productivity.  The average U.S. wood furniture worker generated about $93,000 in finished product value in 1997.   That performance puts furniture manufacturing slightly above the average for U.S. industry.

The result for wood furniture producers is a total labor cost of about 27% of selling price. 

Compare that to an offshore producer that achieves a productivity rate of $41,500 per worker and pays an average wage of $1.25 per hour.   Yes, that producer must employ more than twice as many workers and work 6 days a week, but he pays them about 12% of the U.S. worker’s cost.  At the end of the day his labor content is only 7.5%.
 

To achieve equality in labor cost, the U.S. worker must produce $333,000 in finished product value annually.  That performance is found in few if any U.S. furniture plants.  And those that achieve that rate are probably making simple, RTA-type products not traditional residential furniture with lots of detail and style.

So without question, reasonably efficient offshore producers have a significant labor advantage over U.S. producers especially in more ornate, labor intensive styles.
 

Given this economic scenario, what is the most serious threat facing U.S. furniture producers?

It’s only a matter of time before Chinese and other offshore producers develop significant direct relationships with U.S. retailers.

Remember that a high proportion of imports are resold through U.S. furniture producers to their retail channels.  Everyone understands the savings that can normally be captured by ‘eliminating the middle man’.

An offshore producer selling to a U.S. furniture manufacturer typically receives about 25% of the U.S. retail price for his work.  If he can develop sufficient critical mass to sell direct to U.S. retailers, he captures some of the U.S. furniture producer’s margin.  In some cases that offshore producer might receive as much as 50% more for his work.

It doesn’t take a genius to predict the future as offshore producers gain sophistication, size, and relationships with U.S. retailers. 
  

So economic good times in the U.S. may not ultimately benefit U.S. furniture producers?

As I said earlier, our furniture industry faces a huge challenge.  To survive, U.S. manufacturers must identify what they do best and then carve out a part of the furniture value chain where their excellence can be translated into profits.

We have many advantages over offshore competitors – an ample supply of hardwoods that consumers prefer and locations closer to the market.  But unless the world changes drastically I believe that the days of fully integrated U.S. companies producing complete furniture lines are numbered.
 

Part 2 of this report contains the conclusion of this interview in which Art discusses his ideas on survival strategies for U.S. furniture manufacturers. 

More information on organizing for the future can be obtained from A. G. Raymond & Company by phone at 919/831-0070, by e-mail at info@raymondnet.com, or by visiting www.raymondnet.com.

September 1999