ICFA board roundtable
Cinde Ingram -- Casual Living, September 1, 2008
How is the casual furniture industry faring in a difficult economic climate marked by a credit crunch, high numbers of foreclosures and unemployment along with dramatic cost increases for materials, fuel, energy, transportation and food?
Members of the International Casual Furnishings Association board of directors recently shared their perspectives about those economic impacts and other factors affecting the industry they are working to unify. The low and mid parts of the business are hardest hit, they said. Location also matters.
“Just like the rest of the furniture business specifically and retail in general, it’s tough. People are afraid to spend money,” said Dudley Flanders, chairman of the ICFA executive board and president of Lloyd/Flanders. “We have found it does vary through parts of the country. The areas that are hit with the real estate problem seem to be having the hardest time at retail. Those in the middle of the country, where real estate doesn’t zoom up and down, seem to be doing better.”
The economy is affecting all aspects of the casual furniture business, but hurting those in lower to mid-range price points most, said Woodard President Dean Engalage, another ICFA executive board member. “In addition to the obvious inflationary impact, the psychological impact is affecting how dealers and mass consumers approach the season,” Engelage said.
“It’s a big-time negative impact on the business or lack of business,” Terra Furniture President Ken Burrows said.
“The upper end has seen some impact but nothing like the other market segments,” said Rory Rehmert, vice president of sales and marketing, Pride Family Brands. “The better consumer is still buying, but they may not be buying as much. They may buy the dining and seating set, but cut back and only buy four chaises instead of six.”
“We are losing ground with the middle and upper-middle income shoppers, which directly affects the traffic flow in our stores,” said Carl Vice of Casual Living & Patio Center. “It appears many of these consumers will opt for lower quality, less style, fewer pieces, less service and shorter lifespan, all for a cheap price. Specialty retailers must continue to present the upscale appearance as a means of pulling the shoppers out of the lumberyards and grocery stores, and bring them back into our fold.”
Retailer Butch Wallace of Yard Art & Fireplace agreed the economy is hurting moderate and low-end consumers most. “Our high-end customers seem to be furnishing their home as always,” he said.
Like Wallace, retailer Karen Galindo of the Greenhouse Mall was optimistic about the current economic climate as her market is moving toward the high end. “People are nesting more, buying at the high end,” she said. “They are thinking more about the quality level they are buying.”
John Mulholland, Rock Wood Casual, described the impact of today’s economy as unavoidable. “The issues daily in the media are major issues -- oil prices, the sub-prime lending crisis and the housing industry,” he said. “On the upside, the U.S. economy is still very strong, with the largest (20%) of worldwide wealth held by 5% of the world’s population. The slowdown in airline, automobile and related industries caused by high oil will ease as oil prices ease.
“The important things to focus on are the basics,” Mulholland said. “The economy will get stronger. As the economy improves, the basics driving the casual industry – the huge growth in time share and resort properties, and people’s desire to recreate their vacation experiences in their home environment – will drive this industry forward.”
Q: How will across-the-board price increases change the casual industry?
Engelage said, “It will test the demand of the consumer. Will they absorb the increases? It will also change the value of the equations, as a $499 set at a mass retailer will be different next year than this year.”
Burrows said the price increases for outdoor furnishings will not result in fundamental changes to the industry, but will be viewed as relative to other price increases.
“With the price increases, it’s going to be a greater responsibility of management to spread the value story,” Flanders said. “That message has got to get all the way down to the end consumer.”
“While dollar volumes may actually grow, unit sales will decrease,” Rehmert said. “It will affect some manufacturers and segments more than others. There will be a dramatic shifting of price points on the retail floors depending on if the products are domestically produced or are produced in Asia. Retailers will have to take a hard look at their assortments and make changes accordingly. It is very hard to get sales personnel to understand that something they retailed for $1,499 last year now has to be $1,999. Sales personnel are more receptive to a new product and price than a dramatic shift on a current collection. Some materials (categories) can carry a higher price due to perceived value while some materials (categories) cannot.”
“With the exception of some companies importing direct from China, most manufacturers are trying to do a piece-by-piece review to cushion the blow,” Mulholland said. “I know that is what we are doing. Every increase in price at this time is a challenge to the retailer and could result in a reduction in sales, at least in the short term. Perhaps we should look back and remember the lack of prices increases, and even price reductions, so now we are going the other direction.”
Vice said he knows price increases are inevitable, and sees them as a byproduct of a healthy industry. “However, a blanket increase on products should be avoided if possible. As retailers we can’t purchase every item in a manufacturer’s catalog. It only stands to reason that we don’t want to pay higher prices on the products we sell as a way to support manufacturer’s outdated, slow sellers or in some cases non-cataloged collections designed for buying clubs or a non-traditional channel. Let those collections command the higher price increase. If it’s an exclusive design, I’m sure the consumer will be willing to pay a little more for the design.”
“Any time prices go up, you take a certain part of the buying public out of the mix,” Wallace said. “We need to offset this with great marketing to encourage spending on our furniture.”
“It makes us buy smarter,” Galindo said. “I will have to make my margins, not give stuff away. It makes me upgrade my displays and advertising to support the product.”
High gas prices
Q: Do the record high gasoline prices help or hurt the casual industry?
Most agreed it is hurting the industry.
Vice said high fuel prices are affecting every segment of every industry and that includes the affluent consumer. “Eighty bucks in the gas tank is 80 bucks less spent on casual furnishings,” Vice said.
Wallace said the high price of gas can’t help the casual furnishings industry, but “if we gear our marketing to encourage customers to spend on their home rather than taking trips, I think we can offset the negatives.”
Galindo took a surprising minority view by saying it helps because homeowners are fixing up their homes. “There is more value in it,” she said.
“In a backhanded manner, I think it is helping because people are driving less and staying home more,” Flanders said. “The lower end of the business is suffering greater from gas prices than the upper end. Those customers aren’t making daily sacrifices in order to fill their gas tanks.”
While the record high price of gas could be viewed as a positive if it forces consumers to stay home to take a vacation in their own backyards, Rehmert said, “The reality is that it affects discretionary income and, more importantly, enhances the level of negativity that is already running rampant.”
Mulholland attributed much of the huge oil price increase to speculation, which has blown the rise in oil prices out of proportion. “Today we could be seeing the pendulum (oil speculation versus currency speculation) swinging the other way,” he added.
“It sure doesn’t help,” Engelage said. “Not only is it impacting demand, it is impacting the cost/price of the finished product.”
Burrows said the high cost of gasoline has resulted in some manufacturer sales reps changing their driving habits and calling on customers less frequently.
“It’s just like many of the other costs of doing business that are increasing,” Flanders said. “Fuel’s been going up for several years so I think it’s made people more aware of the cost of ordering small quantities. By the same token, we have gone out and made partnerships with trucking companies in order to gain discounts for ourselves and our dealers. So we’re doing business differently.”
Q: What are leading casual furniture companies doing to offset rising costs?
“Controlling what we can control,” Rehmert said. “Internally we work hard on efficiencies and we work to make sure our people are well trained and productive. We have to control our inventories and work in process no different than a good retailer controls their inventory. There is some margin erosion as we attempt to hold price points.”
Mulholland noted cost savings are an ongoing process for any successful company. “What many companies are doing now will be dependent on their situation,” he said. “Cost differentials led companies to production in Southeast Asia. The change in costs in Asia has created the possibility of domestic manufacture of household hard goods more possible, with differences in wages and the offset of differences in shipping costs becoming much closer. The difficult part is the management today of potentially large price increases, with no immediate mitigating factors to those increases.”
“From a manufacturer’s standpoint, we’re being vigilant in taking cost out of the process through lean manufacturing and accurate/intelligent forecasting,” Engelage said.
“I think we’re all looking at ways to save energy,” Flanders said. “Those things drive the costs of heating and running ovens and water. I think that’s making green more attractive and affordable. It’s now making financial sense to closely monitor your use of resources.”
Wallace said his store is watching its expenses closely. “We are paying more attention to routing our deliveries, focusing on one-time deliveries and scheduling properly, to name a few things.”
Vice said it appears easy for vendors to say, “fuel costs more so let’s raise our prices. It shows a sign of cohesiveness when a manufacturer will instead help offset the rising prices by offering some of the following:
Elimination of premium finishes pricing.
Lower certain grades of fabric.
Drop slow or non-selling products to streamline SKUs.
Year-end bonus plans for increased purchases.
Complementary pieces to be used in the form of advertising specials.
Prepaid freight programs when shipping early buys at factory convenience.
Better reports as to Top 10 selling items, finishes, fabrics, SKUs, etc.
“Retailers will support the efforts of the manufacturer especially in inflationary times,” Vice said.
The China factor
Q: China has continued to grow as the dominant source country for casual furniture, but what will result from the combined overseas freight increases and recent changes inside China, such as its minimum wage increase?
Engelage said the changes brought direct results. “The reality is China has become more expensive on several fronts,” he said. “Some product that was previously produced in China may be less expensive from a total cost standpoint to produce in the Americas.”
“The industry will see higher starting price points and some dramatic price point shifts on well-established brands,” Rehmert said.
“We have already experienced higher prices from China but I think the cost of raw materials has a greater impact than labor costs,” Wallace said. “In this case, it is affecting all prices.”
Vice said he has been “quoted increases of 6% to 21% for a plethora of imported products. Increases range from unique materials to the weight of and quality of those materials, simple designs to unique designs. In addition to the cost of goods are the increased cost of container freight and the size of the container. Just a few years ago, we could only pack a 40’ container and the cost was averaged $12,000. Today we receive high cubes, extended lengths, large-scale furniture and higher priced products so containers have now crossed $40,000 in value.
“In this economy, one must look at the landed cost to place a chair on the consumer’s patio as opposed to gross margins,” Vice said. “Before I commit to a container, I want to resource those products from a domestic supplier and compare all options: freight, assembly, warranty, ship dates, custom orders and, of course, the landed cost.”
Mulholland described the changes in China as a natural cycle. “When you take a third world country and give them enough business to create a middle class, there will be price increases. If anything, the market will look for lower prices in other countries, reducing its dependence on China. Additionally, some manufacturing will return to North America -- creating additional opportunities for workers here.”
“The price increases seem to be happening faster in China than in some other parts of the world so I think it’s going to cause everybody to look at alternative sources,” Flanders said. “And the cost of energy may cause us to look closer to home for those resources. Nobody benefits from the percentage of a product’s price that is freight. It’s not value or quality. It’s not something you can see. Even so, particularly on imported product, it can be a substantial part of the cost. So anything we can do to eliminate or lessen any cost that doesn’t add value, we need to try to do.”
Q: Will Chinese price increases make any difference in sourcing? Will it level the playing field for domestic vendors?
Manufacturers who import and also make furniture domestically are paying close attention to China’s changing costs.
“Absolutely, it changes the calculus,” Engelage said. “Product that was previously finished in China may make more sense to bring in unfinished. Product previously brought in finished may make more sense to produce domestically. Couple the FOB increases with freight increases and the game has changed.”
Mulholland said sourcing changes have already started. “Even the most successful factories in China are looking at or moving to opportunities in Vietnam, Laos and Cambodia -- other Asian locations that may not have some of the factors driving pricing in China,” he said. “Companies sourcing products for the U.S. market must look to the alternatives, or limit their future abilities to handle their source costs.”
“The price increases may create opportunities for domestic suppliers as well as alternative foreign suppliers,” Rehmert said. “Certainly the dramatic price increase out of Asia will help level the playing field. There will still be a gap, but the gap will be reduced to the lowest level in many years. With the differential in price being smaller, the domestic resource can add value and this, in effect, can close the remaining gap.”
“Specialty stores are looking for ways to separate themselves from the discounters. Discounters have been moving up and up into our price points,” Flanders said. “I think this jump in cost is going to cause them to question whether their clientele is willing to pay that kind of money for their casual furniture.”
Retailers also are paying attention.
“Import products have made huge strides by increasing their quality and designs, with that comes the increased cost of their goods,” Vice said. “Imports will continue to have an advantage with lower prices; however, smart retailers will weigh all of the options of domestic vs. imports when committing to large scale purchases. I think domestic manufacturers will always have the advantage.”
Galindo agreed the price increases on products made in China are making a difference in sourcing practices and making the playing field more level. “Absolutely, it already has,” she said.
“When prices for any one area go up disproportionately to another, it must affect sourcing,” Wallace said.
As to whether the playing field is more level, Wallace said, “I think only time will tell. Just as much as price is quality, the proper combination must be there.”
When asked what they see ahead in five to 10 years, overall optimism ran through ICFA board members’ answers. They were more upbeat as their focus narrowed on the casual furnishings category rather than the overall economy. Some predicted a quicker economic turn-around than others.
Rehmert said he expects more of the same until 2010. “All indicators are that it can take another 18 months to clear the recession,” he said. “The lower end of the market will continue to struggle and attempt to determine who their true consumer is. The upper end will continue to grow.”
“The demographics are there for the casual industry when you look at the baby boomers being at their peak earning years and then reaching their retirement years,” Flanders said. “I would think that would bode well for fixing up their home or looking toward a second home. It ties in with the Outdoor Room concept and the whole idea that people are taking more pride in their homes.”
Engelage agreed with that thinking. “The underlying trend of outdoor living is still solid. This will carry the industry through and act somewhat as a buffer.”
“People are in a hold pattern,” Burrows said. “Except for the necessities of life, generally speaking, they are not buying things they don’t have to, but that will change long-term. In the long-term, people will be buying and building houses and cars. This is no different than any of the other recessions we’ve had. It’s just longer and deeper. I happen to live in the state with more foreclosures than any other state.”
Vice said the industry is poised for better times ahead. “We have already seen the lowest prices, lowest quality, lousy designs and ugly fabrics,” he said. “The presentation of deluxe new casual furnishings will soar to new highs as consumers crave better products to use in their homes. Unlike other industries, casual furniture still has a tremendous base of domestic manufacturers. Specialty retailers will depend upon these manufacturers for new spectacular designs and quality products in the future.”
Galindo said her market is moving toward the high-end, which bodes well for U.S. suppliers. “The middle class is going away,” she said. “Retail will be a form of entertainment.”
“Call me a fuzzy headed optimist, but I see a great next couple of years ahead,” Mulholland said. “I do believe that the election in the fall is going to signal enormous change -- and also give people hope for the future.”
“We are blessed with an industrious and prosperous society,” Wallace said. “We have had bumps in the road before and come back strong.”
Most said they have not seen strong consumer demand for eco-friendly products. Wallace said he doesn’t expect it to have a big impact on the industry in 2009.
Burrows said he started seeing the green trend grow last year in the hospitality and design niche. “Ultimately there will be more people asking for recycled merchandise, and will specify that in their purchases,” Burrows said. “It will come from the designer or retailers.”
Engelage agreed that the green trend is starting to have an impact, but mainly in the hospitality channel. “Some customers are specifying 'green’ manufacturers,” he said.
Vice finds it distasteful that a green movement is needed to force people to protect the environment. He described it as a cash cow for the public relations industry.
Rehmert said the movement is a good thing, but too many people just give it lip service. “Most manufacturers understand the importance of being green and many are attempting to become even more environmentally friendly,” he said. “Certain categories, by the nature of the materials used, are more 'green’ than others.”
Galindo said the green trend is great for those who embrace the concept, and the high-end part of the industry should promote it. Efforts should be made to teach consumers to be responsible and not buy disposable furniture/cushions. “Think about it. Our high quality furniture does not end up in a landfill,” she said.
Flanders expects the eco-friendly movement will bring about industry awareness. “We do need to be good stewards of the resources we use and look for ways to make things that are recyclable or renewable or using products that won’t last forever in a landfill. It remains to be seen whether the day-to-day consumer is willing to pay a premium for a green product. Frankly, I think that’s not likely. They never seemed to be prone to spend more money for a product that was made in the USA.”
Mulholland said eco-friendly product was the only factor, it would be a good cause to move slowly toward. “As 'green’ is also coupled with the new emphasis on saving the planet and reducing our reliance on oil, green is the cause du jour,” he said. “It will settle out over the next two years to become a way of business.”
Rehmert viewed the 2008 Presidential election as “just one more issue for the consumer to focus on that diverts attention away from buying furniture. Between the economy, fuel prices and the election, there is just too much uncertainty. Consumers are taking a wait-and-see attitude.”
“It’s all part where we’re at now, part of the wait-and-see,” Burrows said. “Not that things are going to turn around in November, but it will be one hurdle we won’t have to worry about any longer.”
“I think it can create a wait-and-see attitude,” Flanders said. “But I don’t think anybody expects anything to change overnight regardless of who wins.” If the nation’s newly elected political leaders get further into a taxation mode, it could hurt the industry, he added.
Consumers are quite concerned about this election, Vice said. “I hear it everyday: 'Is this the best that America has to offer as leadership?’ Consumers are worried about their family’s future, health care, home values, jobs, education for their children, how much it costs to fill up their tank and a lengthy list of other items. Unfortunately, the two candidates are only talking about inflating our tires and rock star appearances. The public is looking for strong leadership for the highest office in the land, not sound bites. When our leaders focus on the values that have made this country great and strive to improve those values then we will see improvements in the America economy.”
Wallace said the election is creating a climate of uncertainty, which is not unusual for a presidential election. He agreed if the new leadership brings raised taxes, it would have an adverse economic effect.
Galindo was looking toward having the election finalized. “A fresh start will give people new perspective and hope,” she said. “The corruption of the past will hopefully be gone.”
“Going forward I believe the U.S. election and a new president will invigorate the United States like never before,” Mulholland said. “My own personal opinion is that the possibility of the election of a person who is part of a recognizable minority means that person must be an individual of extraordinary abilities to be so recognized. I have believed for a number of years that the country needs just that — someone the country can be inspired by — to want to reach for something better. The impact of such a person on the economy could be huge.”
Here are some of the thoughts ICFA board members have about future opportunities for the casual industry.
Rehmert: For manufacturers, improve manufacturing processes to help control costs and to improve output.
For retailers, clean up tired and slow inventory. This doesn’t mean dump all inventory. The inventory that has done well is actually more valuable as we head into ’09.
Galindo: We need to promote the staycation and show how the best resort of all is the home resort. Clean up your inventory and buy smart for next season. Our industry has great growth ops for those who aggressively pursue consumers who are still buying. The retailers who hold back on marketing and advertising will allow stronger, more aggressive retailers to steal market share.
Engelage: If we were able to raise awareness in the core segment (baby boomers, etc.), demand would increase considerably. There remains a large segment of the population that doesn’t have a clue about the breadth and quality of furniture available today.
I see continued growth in the hospitality channel, such as non-smoking laws driving demand for patio dining, as well as increases in demand for customized/special-order collections.
Wallace: We have to continue to sell the concept of outdoor rooms and enjoying our patios and outdoor living areas. The consumer is there and we must convince them our furniture is the best use of their disposable income.
I think our opportunity lies in focusing our marketing to encourage customers to spend their disposable income on their home. Give them positives about our vision of living.
Mulholland: With higher gas prices, people are staying closer to home, hence staycation. This should mean more business for those products for the home. However, the rise in gas prices is also taking money out of the consumer’s pocket. One thing for sure, the super cheap priced product at an OK quality level is gone. To keep their margins, mass retailers must pass along the higher prices or reduce quality. Either case means a real opportunity for the specialty retailer. Again, the main focus for the specialty retailer should be providing their clients with the experience they are looking for -- be it the feeling from the Hyatt in Hawaii or the increased family occasions arising from the popularity of the outdoor room.
We all must focus on continuing to band together in the ICFA organization so that we can offer consumers a united approach.
Vice: International Casual Furnishings Association. This is our industry and every member needs to do their share by speaking up and supporting it. Let’s make a better industry for future generations to follow.