Monthly Issue
From Home Furnishing Business
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.
October 23,
2018 by HFBusiness Staff in Business Strategy, Industry
While this is good data to have and quite often provides insight about overall trends and future forecasts, I sometimes wonder how pertinent or actionable it really is for most of us that are down in the trenches fighting for every customer opportunity and the resulting sales.
I do think it is great to know how the American consumer is feeling about their life situation, which is influenced by employment levels, income growth, home sales and other economic indicators. We use the Consumer Confidence reports to give us a feeling for how all of these factors impact people’s willingness to invest in big-ticket items like cars and home furnishings.
It is also good to know what retail channels consumers are choosing to buy from. This can tell us the relative level of service, price points and type of shopping experience they may be seeking.
Historically I have also found that national information about what products and suppliers are doing well can be very useful. I call it “Who’s Hot and Who’s Not”. With a few exceptions, an item or line that is selling well nationally is a good bet for just about any market in the country. Fabrics and finishes might vary by region, but a good frame or style will usually carry its weight on any floor.
In addition, most highly effective marketing ideas, business systems and processes that are doing a good job in one region, will also help businesses in all the other regions, as will the majority of successful training programs, Web Site improvements and other business enhancements. These things are pretty universal in their application and ROI.
Therefore, much of what we see in the big picture does indeed trickle down to the local level and knowing about it can give us a nice heads-up about what we can be doing in our marketing, merchandising, sales and service efforts to give our potential customers what they want. However, while it is very helpful stuff to know, it is not the be-all, end-all. This type of information should influence what you do, but in order to properly plan your strategy to maximize your results, you must dig much deeper to gain a thorough understanding of what is happening much closer to home, in your backyard – your local market. That is what I call “The State of YOUR Industry”!
So while “The State of Our Industry” is nice to know, the national sales numbers and performance trends do not necessarily provide solid guidance or direction about how or what you should be doing. Certainly, benchmarking and comparing your results with the overall industry or retailers in totally different markets can be a good place to start and could provide points of interest to investigate further as you study your business. But any final decisions made about actions to take should come from solid, location specific information. It must be focused on what is happening with the consumers in your marketplace, the ones you want to target to create customers. Discovering the important data for your market, studying the consumers who live there and measuring your performance within it, are key starting points for any business planning effort. You must know where you are before you can determine where you can go. Total industry numbers will not give you that, only ground level, local data will.
This is because every market is different. So many things create our consumers situations and the vast majority of them are local, not national. They may be influenced by what is happening nationally or regionally, but that is not always the main driver. As an example, Ford may be doing great in the US, but if they move production and the associated jobs from a plant in your city to Mexico or Canada, the national trend is meaningless to those left unemployed in your market. Another wild card is the weather. As I am writing this article, the Carolinas are being devastated by Hurricane Florence. When we look back next year, I am sure the statistics will show that those states had a terrible month and they will most certainly have under performed the industry. However, in September 2019, as people rebuild and redevelop the area, they will most probably outperform the industry. Such has been the case with much of Texas after Harvey.
Therefore, business opportunities and results vary across the country for many reasons. But it really boils down to knowing exactly how you are performing within your market, studying the local target consumers to determine your potential and then determining how well you are doing with them, so you can find ways to improve and attract more.
As I have said in previous columns, a professional business advisor would approach this process much like a doctor approaches a patient with medical issues. First, the physician would ask a lot of questions to gain a clear understanding of the situation and get ideas about any underlying issues. Obviously, if the patient is at risk, the doctor could decide to recommend surgery immediately or take some other drastic action, but in most cases, the doctor would perform a physical and then order tests to see what could be causing the symptoms. After getting the test results, the doctor determines how at risk the patient is, and designs a treatment course that will help him/her regain their health and perhaps improve it far beyond where they were before the ailment. Trust me, I have had a few serious health issues in the last two years, so I know this process well!
I also understand the business analysis process pretty well too, having observed or participated in many successful projects over my career. It is very similar to the doctor analogy above in that the steps are pretty much the same. It is the tests and treatments that are different. Here is how we would recommend a retail store owner—who is interested in improving the health of their business—should proceed.
Steps to Take
- Get a Business Physical – Find a service that will give you reliable, accurate and consistent market share data covering your company’s performance over the past eight quarters. This will allow you to see where you have been and how you are trending. Looking at the movement of your share will tell you if you are healthy, a little sick or deathly ill. If you have been consistently growing your piece of the pie over the past eight quarters, then you are healthy and should keep doing what you are doing. Should you see a small but constant shrinkage, then you have a bug and need to get some treatment to make sure it does not get any worse, because someone is taking business from you. Most scary is when you see a dramatic reduction in your share because it could indicate that you are potentially looking at some rather dire consequences if you don’t reverse the leakage of business. It is best to drill down into your share by major category to see where your main issues might be coming from within your lineup. We have often seen losses in mattresses and/or case goods strongly influence a store’s overall results, while upholstery and motion might be doing fine. You also need to study your sale metrics to see if it is driven by a loss of traffic, lower closing rates or declining average sale. Each cause will require a different treatment.
- Study the consumers available in your market and compare them to your actual customers to find opportunities for improvement. This is one of the most useful treatments for any retailer trying to reverse shrinking market share or just drive growth in their business. You must first know who your target customer is and then you need solid data on how many households fit that profile in your market. The next logical step is to define the customers you have sold over the last two years in the same manner and compare the two groups. This will tell you how well you are doing at attracting and selling those you have targeted within your market. Properly done, this treatment will also indicate which ones you are underperforming with, so you can focus on determining how to capture them in the future. The main criteria here is the age for the head of household and the total household income. While there are over a dozen demographics actively tracked by government agencies, these are the two that have the most influence on when people buy furniture and how much they are willing to spend. Knowing this information will help you accurately define your target consumers so that you can find out where they live in your community and focus your marketing efforts on getting more of them them into your store.
- Find out where those that chose to buy locally are shopping and buying. This is the most critical information to have before creating any turnaround plan if you are losing chunks of market share. Remember, declining share means that someone is taking business from you. You need to determine who it is and why they are winning the battle for your potential customers in the market. Only then can you work to find out why it is happening and make changes in your marketing, merchandising, selling and/or service efforts to reverse the hemorrhaging. Most end up doing this by gut feel, but the best way is to conduct a professional survey of consumers that recently purchased furniture locally to find out who they considered, who they shopped and from whom they bought. This is the best way to get a complete picture of what is happening competitively in your market and it will give you the most insight into what you must do to take back market share.
There are more steps you can take and as stated, most depend on how sick your business is and what resources you want to invest in the process. Unfortunately, there is no Medicare or Health insurance you can use to help offset the cost of treating a business that is ill. But that does not change the fact that you must actively seek to determine “The State of YOUR Industry” before you create any plan to make it better!
October 23,
2018 by HFBusiness Staff in Business Strategy, Industry
Stationary upholstery still represents over half of all upholstery sales and has enjoyed renewed growth in 2017 and continues in the first half of this year.
What is driving this growth? No linger is the sofa or sofa grouping – sofa/love or sofa/chair, the point around which the room evolves. The sofa, with its many configurations; sectionals, chaise, and the many other choices, have become a functional part of a more casual lifestyle.
“We have seen great success with our frames that offer deep, plush seating as well as fashion. This frame specifically can fit in a variety of spaces and is great for day to day family living. Everyone seems to love the ‘curl up’ furniture!”
- Celeste Brayton, Product Development Manager, Emerald Home Furnishings
The demand of the consumer is more. More selection, that is. According to FurnitureCore research, a better selection was the most challenging issue as presented below.
Style is changing to meet the need of the new industry customer. While the Baby Boomers fade into the sunset, Generation X and the older Millennials are searching for a new look.
In a recent study of urban markets where style direction starts, FurnitureCore found that consumers under 35 favor Mid-Century design twice as much as those over 35.
As can be seen from the table, other styles are gaining favor with the emerging consumer target.
If we move beyond the very subjective definition of style, we find that consumers are moving away from the “plum overstuff” in favor of “sleek tight body cover.”
“As a category, swivel chairs are in high demand due to their functionality that allows individuals to swivel to a conversation, a breath-taking view, or a big-screen moment.”
-Del Starnes, President/COO, Taylor King
A contributing factor is the continuing reduction of size of living space. Again, from FurnitureCore research on urban living, the “dream” style of consumers living in smaller spaces favor style other than traditional.
Stationary upholstery will always be the base of decorating one’s living space. Manufacturers today must recognize the taste of the new target consumer and the restriction of their environment.
October 23,
2018 by HFBusiness Staff in Business Strategy, Industry
Home Furnishings Business: How would you describe current business conditions in furniture for Lectra and what are the biggest challenges?
We see a robust market for technology in the furniture sector. It’s one of our key markets for Lectra North America. Companies with old technology are looking to upgrade to the latest and greatest, and to do more with technology. That’s where we have been hitting the market the last few months. We have a very high-tech piece of equipment and getting people to adopt that technology is our biggest challenge. The products that we are supplying can increase throughput, save material and labor. There is a long sales cycle on it because it’s new and almost futuristic, and it’s difficult for some to get their arms around it right now. Cutting machines used to be seen as doing just one thing, but now they are a real driver of profitability. If run correctly, they can improve the profitability of the entire company. North Carolina is the largest market, but there are clusters of manufacturing around the U.S. and Canada. A couple of areas of Indiana have quite a few manufacturers that supply local markets and there are other areas in the Midwest. Los Angeles has a robust local market.
HFB: A major driving force for Lectra’s product is the perceived need for customization to satisfy the needs and wants of millennials? How does this tie with their tendency for lack of commitment?
Our Made To Order solution is geared toward millennials. They might want a fabric, but six inches longer and two inches deeper. We have the system that can do that on the fly. We have geared our Made To Order to specially handle that kind of business. Millennials want a piece of furniture in their own style and they don’t want to wait eight weeks for it. So the manufacturing has to be done in the U.S. to maintain that kind of delivery schedule.
HFB: Will the potential tariffs on “cut and sew” from offshore drive the production back to the U.S.? Will this impact your adoption rate and what effect will the labor shortage in manufacturing have?
We have heard that a couple of large manufacturers are considering bringing production back. Things are on the path for speedier delivery. Tariffs have accelerated their plans. Back in the day, if you picked something from the La-Z-Boy gallery you could wait 12 weeks. No one is accepting that now. That is supporting our business. Obviously, there is a scarcity of labor in the U.S. Our solutions help speed up the process and reduction of labor allows them to move production to the U.S. Labor costs in China are increasing as well. Also, China is looking for American goods. Labor is a big problem across all manufacturing. The furniture industry needs degreed engineering people now with the complexity of pieces and the complexity of manufacturing, they really need top-notch people and companies are starting to recruit a higher level of engineers. A lot of that is coming over from the automotive seating business, which has had lean manufacturing in place for a long time. They are big in to Six Sigma and that has moved into furniture over the past five years.
HFB: A major tangible justification for capital investment is material savings. Ekornes stated that five to six percent is typical? What is the starting investment for cutting?
Material savings is one of the key drivers for ROI for any technology. Our customers have been using CAD and cutting for 30 to 35 years. They have experienced the major savings from moving to automation years ago. For the last couple of years, we have been driving new ways of accomplishing fabric savings. We’ve tested algorithms, developed better matching and our machines cut tighter. Twenty years ago we would have talked about fabric savings in the 20 percent range. Now, it’s in the three to five percent range and that is considered huge. Manufacturers have moved to way more expensive materials. We have seen our latest machine, Virga, in its first couple of tests in North Carolina, achieve three to nine percent in material savings. The way the machine looks at fabric, we are able to capture some of those savings. It’s the same for leather, too. We talk about major savings going from one cutting technology to another as being in the one to two percent range. That could be $1 million. In the past, the cutting area of manufacturing has been a big black box with companies doing whatever they can do to get parts cut. In the 1990s, when the market was rolling, they were like, ‘give me another machine, give me another one.’ When the Great Recession hit, they may have had 15 machines when they really only needed three. That brought the whole concept of lean manufacturing into these companies that didn’t have it before. The thinking was, ‘I’ve got 10 machines, but they are only running at 35 percent. If I had four running at 80 percent, I can save five percent on material. It has been driving a transformation. Cutting has always been like a panic mode business. Our system is one of the only ones out there that gives the cutting room more visibility. The same transformation is going on on the wood side as well.
HFB: What’s next in Lectra’s R&D pipeline?
“We just launched our Made To Order platform and we plan to expand it throughout our product line. The Virga [Lectra’s new single-ply cutting system] is one of our new machines and we plan to make this platform the normal way people do business. We are going to offer it on some of our older machines, going back to 2007. The cutting business isn’t really about cutting. It’s about the management of the entire process and it’s about driving savings. We do demos and events for people and very little of it is about cutting. It’s all about management and data flow. It’s become more important than just cutting. R&D is a long process. We have more than 250 employees in France working on R&D. We will pick specific customers, interview them, find out their needs and find out where they are growing and build with them. We will roll out new machinery even to a pilot situation on the factory floor. When we are convinced it is ready to go, we will then kick it out.