Monthly Issue
From Home Furnishing Business
December 11,
2018 by HFBusiness Staff in Business Strategy, Industry 
The big question I often get is: why do some organizations tend to always be at or near the pinnacle of their area of endeavor and others always lag behind? Well, to use a dreaded sports analogy, there are several teams that readily come to mind as consistently being on top of their game year after year. Everyone in each league plays by the same rules, their fields and equipment are pretty much the same, they have the same list of plays or strategies to draw upon and they all want to win their games. In our business, we all work under pretty much the same rules, have the same advertising opportunities available, carry relatively similar merchandise (at least to our customers) and want to sell as much as we can. So why do some continue to prosper while others don’t? Obviously, the best ones manage their business or team better, but how?
The answer boils down to the fact that they are great at studying how they did and figuring out ways to do it better in every aspect of their game or business. The best teams analyze each area of their game, grade every player’s performance and set targets for improvement in the next game and at the end of the year, for the next season. What training needs to take place, which players or coaches need to be replaced and how they can improve their preparation for each game, are all examined. As a result, they create plans for performance improvement. The best companies do the same thing.
Here are some thoughts that may help you move the needle next year by starting off with a solid plan for what you want to accomplish.
Proper Planning Positively Propels People’s Productivity
One of the biggest mistakes I see many organizations make when they begin the planning process is not establishing goals or performance targets for every department within their organization. Basically, a plan is a map for your business and the two things you must know in order to use a map are—where you are and where you want to go. It is the same with a plan, with the goal being where you want to go or your destination. Once you know that, you can decide what steps you need to take to get you to it, how to take them and when. That completes your plan.
As stated, this month is a great time to create your plan for next year. So here are some ideas about the areas in your business for which you might want to create a Performance Improvement Plan and a few metrics you could target in each:
Sales – This is the first one that comes to mind for all retailers because it drives the business and without it nothing happens. It is also the one we most often see goals developed for by our clients. However, quite often they only deal with total sales volume, which is the product of a lot of things happening together. Increasing/maximizing sales is obviously the main result you are interested in driving, but we find that targeting the things that go into the sale like Closing Rate, Average Sale and Revenue Per Up are better to focus on, because improving them will deliver the result you want. We also have seen goals for Items per Sale, In-Home sales % and Sketch % help get the right things happening on the sales floor. We recommend you look at where you are in all your sales metrics and determine two or three that you think can be improved. Target them on a quarterly basis, changing to new ones as you improve the originals. Just don’t give them too many goals or it will weaken their motivational power. Be sure to reward and celebrate success!
Office – Does your office run so smoothly that you never have issues with orders, paperwork or other processes? If that is the case you are in the minority, yet this is an area where we seldom see goals utilized as a planning or motivational tool. We suggest you find those parts of the office process that seem to constantly be causing issues within your organization and develop solutions for the problems, then set goals for improved performance. Each operation varies as to what parts of the sales support, order fulfilment and customer service processes are handled, so it is tough to come up with any universal recommendations. However, your management team should be able to develop good ideas in this area.
Warehouse, Delivery and Repair – There are many performance metrics that can be goaled in the back end of your business. In fact, next to sales, this is the most common area we see clients setting goals, paying bonuses and driving improvement. Perfect Deliveries %, Items Repaired, Open Repair Orders, Deliveries Made, are some of the targeted numbers we have seen. Depending on what systems you are using, you can find several great ways to focus this business area on improved performance and customer service.
Advertising – Most retailers do a good job planning their advertising expenditures as part of their budgeting process. The best ones do great work in planning their creative to consistently deliver the message they want to targeted customers in their market. What we don’t see as often is a goal setting process that reflects the actual performance of the advertising other than just raw gross sales. While those are of course the major result, it is also good to track and set goals for each promotion that focus on traffic level, revenue per Up generated, average sale, cost per customer, advertising to sales % and other meaningful numbers. This is especially true if you have an outside agency managing this process for you. What better way to hold them accountable for spending your money productively?
Merchandising – Merchandising, along with advertising and sales, are the three areas of your business that most drive sales. Yet, we seldom see meaningful goals set for it in most small to medium sized retailers. There are many very critical numbers you can track with your business system that can be goaled to help you plan for improvement here too. Obviously Gross Margin, GMROI and Turn are very important to our business, so they are good places to start. There are other areas a buying effort should manage such as freight costs, open to buy and vendor selection that can also be targeted.
Yourself! – So, you thought we might forget about you? Remember that unless you develop and strive to make growth goals yourself, it will be tough for you to lead a goal oriented, growth focused team – walk the walk and talk the talk!
Once you have your plan in place, it is critical that you follow it and make sure you are hitting the goals you set each month. There is no doubt that executing a plan is much harder than creating one, so this is where the rubber meets the road. The biggest thing to avoid is giving in, throwing out your plan and going back to just doing what you think is right at the time. It takes discipline and courage to make the hard decisions and stick to your guns. Of course, if you determine that your plan is too optimistic, you may want to adjust, but don’t just discard it.
In retail, the most important areas to plan for and keep an eye on—because they directly impact your sales results—are what I call the Final Four: Product, Promotion, Presentation and People. These are the ones your management team needs to focus on every day, to make sure your plan succeeds. Are we assorting the right products, displaying them the best we can, advertising to bring in the targeted customer and lastly, are our people providing the best customer experience possible? As a coach though, I must say that it always seems to be the last one that gives us the biggest problem. Products, advertising and display are easy to manage compared to people. But, even if we do a stellar job of managing all of the other areas, if our people fail to deliver, then our business/team fails.
As is often the case, I am not telling you anything you didn’t already know or at least suspect. The most successful businesses and teams excel at creating a plan and executing it. Having a solid plan, getting everyone onboard with it and consistently executing it is the key difference I see between highly successful organizations and the “also-rans”. So, get busy this month and work on planning for your growth and success in 2019. If you don’t plan for it, it won’t happen. Next month I will provide you with a list of some things you may want to include in your plan to help drive performance improvement in your company!
December 11,
2018 by HFBusiness Staff in Business Strategy, Industry
On trend open floor plans for homes means that home offices are no longer restricted to a single, dedicated area of the home. Instead, manufacturers are facilitating the trend to allow for more flexibility in their product offerings and where these products will be placed in the home. According to Lisa Cody, Vice President of Marketing at Twin Star Home, “consumers want more flexible spaces in their homes that can serve multiple activities” with products that “can work well in a home office, casual living room, mudroom or kitchen. On top of flexibility, we are in a time where consumers are influenced by technology in everything they do.”
And she’s right. Consumer research by FurnitureCore (the research arm of Home Furnishings Business) shows that among recent purchasers of home office furniture, 47.06% report using a laptop for their work, guaranteeing the fluidity of moving from space to space. The same report found that less is more in these home offices with 94.12% of consumers reporting that both a personal computer and printer are the main items in their work spaces. With the flexibility of smart phones, many other needs have fallen to the wayside (think fax machines and land lines).
Consumers still need an area to set up these items, no matter how technology shapes work life. 47.06% of consumers report that the primary use for their home office is an area to work when they are not in their regular office. Another 29.41% use the area to perform home and family business, while 23.53% report using the space for home-based business , up 11.93% points over 2017.
The furnishing selection is vital to the work that will be accomplished by the consumer in the environment of their choosing. 29.41% of consumers report that the home office is in a shared room and 70.59% of consumers report that their office furniture is not a part of a coordinated set. This trend has triggered a move away from office furniture collections and into a more eclectic look that can easily blend in with shared spaces. If these consumers rely on flexibility to create their work environment, manufacturers must meet that need by creating beautiful pieces that can be integrated into any room. According to BDI’s Matthew Weatherly, associate design director and designer, "the beauty of [BDI’s Office Collections] is the number of components offered, which means consumers can create the ideal set up that works for their space and their office needs. From a smaller, modular set up, to a full executive office suite, BDI brings sophisticated styling and generous features that make any workspace functional and beautiful.”
Desks have long been the heart of the home office. When asked, most consumers reported that their preferred style of desk is an executive desk at 35.29%, quickly followed by a writing desk at 29.41%, and L-shaped desks in third with 23.53%. Trailing behind were corner desks and desks with a hutch, both at 5.88%. Desks with an adjustable height were not included in the survey choices but are up in popularity as they allow the user to stand while working and are marketed as a healthy alternative to hours in a seated position. Though these desks provide differences in functionality, it is clear that the contemporary style is favored by nearly 50% of those polled, followed by traditional style at 29.41%.
Other office furniture staples follow with desk chairs and file cabinets both reported in consumers’ home offices at 58.82% and some 41.18% report that book cases are in their home office space. Work tables have surged in popularity as 29.41% of respondents reported that they are present in their current office set up (up from 10.1% reported in 2017.)
No matter the setup of the home office, more and more people are working from home with their entertainment sources just steps away, if not already in the same room.
Just as open floor plans are trending for the home, entertainment centers have opened up to reflect the technology advancements in the form of a wireless experience. Gone are the days of unsightly cable bunches needed to power home entertainment systems as we welcome Bluetooth and smart devices that consolidate function, like smart televisions with built in DVD players and Wi-Fi connectivity.
Televisions are crucial in the home entertainment case goods category and require consideration for cord management and screen size when it comes to selecting storage devices. Without fail, ‘the bigger the better’ mindset has persisted when it comes to screen size and picture quality, 50% of those polled reported that their primary TV screen in their home is 55” or larger.
While technology advancements move at a pace that will make your head spin, one thing is clear: consumers no longer need to hide their televisions and instead, proudly mount them on the wall as 31.25% of those polled have reported. Consumers’ favored method to display flat screen televisions is to place it on a media console as 43.78% have reported and only 18.75% of consumers prefer to hide their televisions. These televisions are central to the home as 50% of consumers state that the television is placed in the living room and 37.50% report that it is placed in the family room.
With the larger screen sizes and other advancements in technology, manufacturers have to find a balance by updating their product offerings to accommodate for the fast paced electronics industry. Luckily for retailers, they have done just that by offering wall mountable consoles, products with door features that allow remote access yet hide multiple media devices, or produce consoles that double as statement pieces for the room suited to large screens.
October 23,
2018 by HFBusiness Staff in Business Strategy, Industry
The U.S. economy is expected to have grown at its best pace in four years in the second quarter, and a part of the boost may have been from inventory building and exports ahead of the implementation of tariffs. Economists say it’s difficult to determine how much tariff-related activity added to the expected 4.1 percent growth. Some economists say it could be just a few tenths of a point, but NatWest Markets economists say it could total a full point.
However, the news is filled with the closing of stores that have been in business 75 years plus. In 2007 at the furniture industry peak, the U.S. had 27,630 furniture stores (store fronts). By the end of last year, that number had fallen 21 percent to 21,765 stores. Over 50 percent of the 5,865 stores that closed between 2007 and 2017 did so in 2008 and 2009, unable to survive the recession. Preliminary data from first quarter of this year shows the first possible increase since 2007 with the addition of 287 stores compared to the fourth quarter of 2017. The graphic below presents the facts.
The political environment which is driving much of these external factors shows no signs of abatement. Even with a change in the midyear elections, the resulting turmoil for the next two years would intensify this change.
All of this disruption has added to the concern of the impact of ecommerce on the traditional brick and mortar stores. While we believe the increase in growth to the ecommerce channel has peaked, we see Amazon’s latest move to create a better online experience in furniture shopping, along with Wayfair’s expansion into the higher end segment with its private label products, promising showroom /gallery quality furniture at a price the consumer can “comfortably” afford, offering an “unparalleled” way to shop online for their homes.
What is the solution? There is no magic answer. However, a trusted map to guide your decisions—or should I say a reliable GPS—that is updated consistently for changing industry conditions, is helpful.
Today, the industry needs more than a sextant or compass to avoid the shoals.
Stay tuned to the next issues.
October 23,
2018 by HFBusiness Staff in Business Strategy, Industry
The overall U.S. economy is experiencing the second largest period of economic growth since World War II. And if the growth continues through 2019, it will be bigger than the dot.com boom. Economic growth in the U.S. is expected to remain above average through the end of 2019 but could fall back from growth levels seen in 2018. Most economists believe a recession is out to at least the end of 2020, perhaps 2021 or even 2022.
The Furniture Industry
Forecast. New data from a comprehensive revision of Personal Consumption Expenditures by the Department of Commerce, U.S. Bureau of Economic Analysis (BEA), confirms what industry experts have suspected for years. The furniture industry grew more slowly immediate post recession years than the prior PCE numbers indicated, cumulatively almost 10 percent less. This data detailing personal consumption of furniture is tied to the U.S. National Accounts including GDP.
The newly revised PCE numbers also readjusted furniture industry growth upward to a 4.9 percent increase 2016 to 2017. And through August of this year, PCE furniture consumption increased 7.4 percent compared to the same 8 months last year.
Industry sales, all channels, are forecast to slow slightly the remainder of the year, but should finish at least in the 6 percent increase range by year end. Growth should moderate in 2019 to between 4.8 percent and 5 percent continuing to 4.7 percent in 2020. (Table A)
The Bedding industry has been the fastest growing segment of the industry since the recession until last year when the industry was disrupted by consolidation as well as increased internet presence from online companies marketing primarily bed-in-a-box product. Growth in 2017 was 1.5 percent compared to 5.3 percent for all other furniture products. This year the Bedding industry has begun to recover and should expect growth of 4.4 percent while all other furniture is on track to increase 6.3 percent. Both furniture and bedding sales should approach 5 percent growth in 2019 and slightly lower in 2020. (Table B)
Distribution Channels. For Furniture Stores, one would have to go back to 2004 to see a higher growth year. Furniture Store estimates through August show a 7.8 percent increase in sales compared to the same period last year. This increase exceeds the performance of all other home furnishings channels, except electronic shopping (internet)/mail order retailers that grew 9.7 percent August year-to-date. These two channels, along with General Merchandise Stores, are the only furniture and home furnishings channels that are outperforming the 5.4 percent growth among U.S. retail sales for all products. Electronics and Appliances stores continue to decline in number. Home Furnishings stores sales have slowed. (Tables C and D)
Prime Furniture Buying Population. The good news is that Millennials are finally working their way through their prime furniture purchasing years. The age group 35 to 44 is now the fastest growing category under 65 and is expected to increase 1.3 percent 2018 and 2019. As the largest generation since the Baby Boomers, they have delayed marriage and household formations. Jobs coming out of the last recession were hard to find, didn’t meet their salary expectations, or were not the jobs they wanted. Whether this generation will place the same importance on their homes and home furnishings as their Boomer parents is not entirely clear at this time. Nevertheless, they are the prime consumer force in the United States. Unfortunately, GenXers in their mid 40s and 50s with their high salaries and big homes are still impacting the industry but are the fastest declining age group of prime purchasers falling 3.1 percent this year in numbers and another 3.6 percent next year. Baby Boomers are still impacting the industry as the older age groups continue to grow. (Table E)
The U.S. Economy
Despite a politically charged climate with concerns over international trade alliances and tariffs, upcoming mid-term elections, and polarized political parties, the U.S. economy continues to barrel forward at a record pace. The Home Furnishings Business (HFB) forecasts that follow are a result of a compilation of predictions by leading U.S. economists. Figure 1 provides the complete sources.
Real Gross Domestic Product. GDP of 4.2 percent in the second quarter, up from 2.2 percent in Q1, reflects the economy’s robust growth. Most economists agree the second half of the year won’t be able to keep up that pace and the year will finish around 3 percent growth. GDP is expected to slow in 2019 to 2.7 percent and further to 2.0 percent in 2020. A large number of experts feel this historical expansion will continue to cool with a recession looming toward the end of 2020 or 2021. (Table F)
Payroll Employment and Unemployment Rate. The U.S. worker shortage still looms large, especially in retail stores, as businesses struggle to find the right workers to match the job. (See the May, 2018 issue of HFB Magazine, “Statistically Speaking: Companies Look to Technology to Help Solve Nationwide Worker Shortage.”) Furniture store executives, in particular, have expressed frustration at turnover rates while trying to implement new strategies to attract and maintain quality employees. Non farm workers are forecast to grow 1.7 percent in 2018, slightly higher than the 1.6 percent growth in 2017. And although growth will slow over the next two years, companies will still add employees at a forecasted rate of 1.5 percent in 2019 and 1.3 percent in 2020. (Table G)
As the economy adds jobs, unemployment is forecast to continue to be low at 3.8 percent this year and into 2019 with only a slight uptick in 2020. (Table H)
Stock Market. The Dow Jones continues to express little interest in the political climate, instead focusing on increase business performance. The Dow Jones is forecast to end this year at 28,000 plus and grow above 30,000 in 2019. The market is expected to remain strong for most of 2020, but performance will depend on when an often predicted recession might arrive at the end of 2020 or wait until 2021 or even2022. (Table I)
Consumer Prices. The furniture industry continues to struggle to get prices up. This year growth in prices is expected to be negative again, down 0.5 percent from 2017, primarily in bedding. Hopefully, furniture and bedding prices will go positive in 2019 and continue to grow slowly into 2020. Meanwhile all consumer goods prices are forecasted to grow 2.6 percent this year and 2.3 percent in 2019. (Table J)
Gasoline Prices. The International Energy Administration predicts that the United States will become the world's largest oil producer by 2023 growing enough to meet domestic demand. While OPEC walks the tight rope between increasing and lowering production to insure profits and continued exploration, in a free U.S. economy that may prove to be more difficult. Oil companies must find the right balance between increasing supply slowly enough to keep prices high enough to pay for increasing exploration. Perceived shortages caused by hurricanes, the threat of war in oil-exporting areas, or refinery shutdowns can cause panic and prices to spike. Gasoline prices are expected to remain below $2.50 for a gallon of regular gasoline 2019 and 2020, with this year forecasted to average $2.70. (Table K)
Consumer Confidence. The current high level of confidence at press time reflects a sturdy economic expansion in the U.S. that’s about to turn nine years old with no end in sight, according to Market Watch/Barclays. Job openings are at a record high and unemployment is at a 17-year low. Confidence grows despite trade rhetoric, stock market volatility, and political unrest.
Lynn Franco, Director of Economic Indicators at The Conference Board says that, “Overall, these historically high confidence levels should continue to support healthy consumer spending in the near-term.” (Table L)
Prime Interest Rate. This short-term interest rate is the most commonly used in the banking system. The average rate for the year should be at 4.9 percent, according to leading economists. The 5 percent rate at press time, however, is forecasted to be raised to 5.25 percent by the Federal Open Market Committee (FOMC) before year end and continue through 2019. Another increase to 5.5 percent is forecast for 2020. The Prime Rate is generally increased if the FOMC determines that the pace of inflation within the U.S. economy is too high so as to bring inflation under control. (Table M)
The Housing Market
30-Year Mortgage Interest Rate. As the Prime Rate has edged up, so has 30-Year Mortgage Interest Rate to a forecasted average of 4.6 percent this year. While still low, rates should edge up again in 2019 to 5.1 percent and 2020 to 6 percent. (Table N)
New and Existing Home Sales.
With low inventories and slow residential construction, existing home sales are forecast to decline this year 1 percent and pick up slightly in 2019 at 2.1 percent growth, according to the National Association of Realtors (NAR). These low inventories are contributing to higher home prices. With existing home low inventories, new single-family homes are being cobbled up, many pre-construction. Sales of new homes are forecast to grow 8.6 this year following a 9.3 percent increase in 2017. As new residential construction ramps, up 2019 single-family sales should hit double digits. (Table O)
Housing Starts. Despite a recent slowdown, residential construction shows a positive trend. According to Kiplinger, “Increases in the cost of building materials and shortages of land and labor have left builders unable to ramp up construction faster, despite optimism in the industry about the direction of the market. Prices for building materials, however, have recently begun to ease somewhat.” (See HFB Magazine, July 2018, “Statistically Speaking: Housing Industry Struggles to Keep up with Consumer Work/Lifestyle Demands.”) The National Association of Realtors (NAR) forecasts Housing Starts for single-family units to grow 7.7 percent this year and is optimistic about double digit growth in 2019. No economists on HFB’s list ventured a forecast past 2019 but the trend should be positive. Likewise, after a negative growth year in 2017, multi-family units have rebounded and should increase 7.6 percent this year. The NAR predicts Housing Starts growth should then be flat in 2019. (Table P)
Home Prices. In July this year, the Census Bureau reported the median price of a new home sold in the U.S. was $328,700. Existing homes sold, tracked by the National Association of Realtors (NAR), reflect a July median price of $269,500. Low inventories of existing homes should help increase the price by 5 percent this year, with prices continuing to increase in 2019 at 3.6 percent. New home prices should be down slightly this year less than 1 percent, but grow 2.6 percent in 2019. (Table Q)
Conclusion. The U.S. economy appears very healthy. This growth should continue throughout next year, but at a slightly slower pace. In 2020 the economy should moderate further with increased anxiety among businesses as to how long the expansion can last.
October 23,
2018 by HFBusiness Staff in Business Strategy, Industry
Directly impacting the furniture industry is a Canadian imposed 10 percent tariff on U.S. upholstery and mattresses coming into its country. The Trump Administration insists that imposing tariffs on steel and aluminum, not just to Canada, but Mexico and Euro-Asia as well, is designed to level the playing field and return manufacturing and jobs to America. At press time, the U.S. and Mexico had come to a preliminary agreement to rewrite the old NAFTA pact and Canada was still at the table. (See box insert below).
The Canadian retail indoor furniture industry is about 10 percent the size of the U.S., $9.8 billion CAD compared to $99.8 billion USD(Table A). In addition, the Canadian industry grew more slowly as it recovered from the last recession, 2.9 percent annual growth (CAGR) versus U.S. 4.7 percent for the U.S (Table B).
Given the vast difference in the populations of the two countries it should be noted that Canada relies much more on the furniture industry of the U.S. than vice versa. In 2017 the U.S. exported only slightly more indoor furniture and bedding products to Canada than it imported, finishing the year with $1.77 billion in exports to Canada compared to $1.71 billion in imports from our sister country. However, imports from the U.S. into Canada represent about 23 percent (plus or minus) of the total Canadian indoor furniture industry compared to Canadian imports into the U.S. at about 1.7 percent (Table C).
The furniture and bedding trade gap between the two countries has been narrowing, especially since the recovery began from the last recession. Although U.S. imports of indoor furniture and bedding from Canada have increased by 40 percent in the past seven years, exports are still 4 percent higher and have grown 13 percent from 2010 to 2017 (Table D).
Without a totally renegotiated new deal, about 30 percent of the $1.77 billion USD in indoor furniture and bedding exported by the U.S. to Canada last year would now be subjected to a 10 percent tariff. The two furniture areas targeted by the Canadians are upholstery and mattresses, as shown in Table E. Upholstery accounts for 22.3 percent of U.S. furniture exports, while mattresses account for 6.6 percent.
Last year, Canadian furniture retailers imported $396.3 USD million worth of upholstery from the U.S., which was up from $378.7 million in 2016. Since 2010 U.S. upholstery coming to Canada grew only 4.6 percent. The U.S. is the second largest importer of upholstery into Canada behind China, whose imports were valued at $692.0 million in 2017. Despite the smaller size of mattress exports to Canada, the amount has jumped 84 percent over seven years, increasing from $64.3 million in 2010 to $118.2 million in 2017 (Table F).
Many observers believe the big ticket categories chosen by Canada – upholstery, mattresses, refrigerators, dishwashers and washing machines – were strategically picked to pressure leading members of the U.S. Congress to negotiate what Canada thinks would fairly benefit both countries.
According to an article by Michael J. Knell, Home Goods Online, a Canadian market intelligence firm, “Upholstery is probably on the list because Ashley Furniture Industries is in Wisconsin, the state represented by Paul Ryan, the outgoing Speaker of the House of Representatives. While there is no specific data available, Ashley is believed to be one of the largest single exporters of upholstery in Canada, followed by La-Z-Boy, the publicly-held furniture maker with factories in five states including Missouri, Mississippi and N.C. It closed its only Canadian factory in 2005.”
Knell further indicates that “Mattresses are probably on the list because every TempurPedic mattress sold in North America is manufactured by Tempur Sealy International at their factory in Kentucky, the home state of Mitch McConnell, the majority leader of the U.S. Senate.”
As shown in Figure 1, of all upholstery and mattresses imported into Canada from all countries, the U.S. controls about 31.7 percent of upholstery imports and 51.5 percent of mattresses in Canadian dollars (2017). This data is from the Retail Council of Canada’s International Merchandise Trade Database.
Besides upholstery and mattresses, other home furnishings products are also facing 10 percent tariffs imposed by Canada, most notably major appliances. The U.S. controls about 41 percent of total household appliances imported into Canada, roughly $490.8 million Canadian dollars (Figure 2).
The Canadian tariffs on U.S. products are designed to counter the Trump Administration’s 25 percent steel and aluminum tariffs. While the 10 percent tariff response may seem positive for Canadian manufacturers, according to a report by the Retail Council of Canada (RCC), Canadian consumers are facing two negative impact areas – one direct and the other indirect. The RCC’s report states that “the most immediate direct effect of a tariff is an increase in price to the consumer. But the indirect cost of a tariff increase is often reduced consumer spending.”
The report further states that Canadian consumers will face a crisis of “substitutability” of some consumer goods. With upholstery and mattresses, the problem is that both China and Vietnam face a MFN (Most Favored Nation) tariff of 9.5 percent on furniture, so there is no relief found in shifting product orders away from a 10 percent tariff on U.S. imports to the 9.5 percent on Chinese or Vietnamese imports. The RCC said that while the Canadian furniture industry might be able to meet some of the need, increased demand and the lack of competing tariff-free alternatives is apt to lead to price increases from Canadian sources.
For big ticket items frequently purchased together, like major appliances, the 10 percent tariff could potentially deter purchases altogether. Also, there are no domestic sources of supply for appliances, so unlike most of the other goods, retailers would be wholly dependent on sources in Mexico and Asia. The RCC report goes on to point out that “with Mexico being the only plausible source of a tariff-free supply of major appliances, prices from that source will most likely increase”.
The Trump Administration is determined to “level the playing field” for U.S. manufacturer’s claiming the NAFTA agreement has been a bad deal for the U.S. But history has shown that trade wars tend to hurt consumers on both sides of the border. As the final renegotiation of the NAFTA agreement makes its way through Congress, trade between Canada and the U.S. will either be healthier for the two countries or will further sour relations.