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Homeward Bound?
July 19,
2012 by in UnCategorized 
By Home Furnishings Business in on July 2012
Domestic manufacturers believe retailers looking to keep inventories under control and rising production costs in Asia have created a window of opportunity for their products, particularly in case goods.
Last year, domestic wood shipments increased 2.5 percent, while imports fell 2.2 percent, according to the U.S. Department of Commerce. While the first quarter of 2012 saw import wood growth of 5.8 percent outstrip domestics 2.3 percent growth, last year marked a change.
And vendors are gearing up to meet anticipated increase in demand for domestic goods. In January, bedroom furniture maker Vaughan-Bassett announced an $8 million investment in its Galax, Va., manufacturing operation aimed at increasing capacity by 50 percent. And at April High Point Market, American Drew introduced three collections under its Heritage Home umbrella, each with bedroom slated for production in the United States.
BEHIND THE NUMBERS
Jerry Epperson, managing director, Mann Armistead & Epperson, Richmond, Va., said the domestic gains were impressive because imports were so strong the year before.
In 2011 we saw domestic gains in wood and upholstery that exceeded import growth, but the year prior import wood was up 14 percent and import upholstery was up 13 percent, he said. If you look at the fourth quarter, (import) upholstery was already bouncing back.
In upholstery, Epperson noted China still dominates leather.
The Chinese own the leather market except for the high-end or custom business, which mostly remains with Italy or the U.S., he said. Theyre making the long production runs with leather. Seventy percent of total Chinese upholstery here is leather.
He thinks U.S.-made wood shipments will continue to grow, but its going to be mainly the re-emergence of existing facilities and filling production there versus opening new factories.
Upholstery isnt as capital intensive as wood, and you can open an upholstery plant pretty quickly, he noted. It doesnt have a lot of the OSHA and EPA rules wood has.
RETAILERS TAKE
With so much wood production going offshore in the past decade, can retailers count on a steady stream of domestic goods? It hasnt been a problem at Acton, Mass.-based Circle Furniture.
Our niche has always focused on domestic goods, said Richard Tubman, CEO. Ekornes would be the big exception.
As a higher-end retailer, he noted that Circles at an advantage when it comes to sourcing domestically.
In the better end, we have a lot of Vermont and New Hampshire manufacturers that are small but have very good product, Tubman said. If we went after lower price points, we would have a harder time filling the floor. To at least some of our customers, and hopefully a lot, made in America is very important.
Imports might dominate middle price points for wood, but cash-strapped retailers at those levels such as Woody Whichard at Midtown Furniture & Mattress Superstore are taking a harder look at domestic goods.
There are two reasons, said Whichard, owner of the Madison, N.C., store, and one has to do with the front end.
The consumer is coming in asking where the products made a lot more than they did six years or so ago, he said. They make a point of asking our salespeopleits a lot more important to them now. A few years ago, everyone was doing well and as long as the price was right we were all happy. Things are tougher now, and there really is a sense that they want to keep things in America.
And domestic is easier on Whichards pocket book and easier to flow.
On the back end, right now I cant afford to buy in containers, Whichard said. Bringing in 10 or 12 of one suite just isnt feasible for a one-store operation.
Also, I havent been able to free up the capital to make that big purchase, and lately the pricing hasnt been much better.
Two years ago, an import suite comparable to a Vaughan-Bassett group wholesaling for $800 had a landed cost of $550 for Whichard. Landed containers of those groups now run him $600 to $650.
Hes seen similar increases for Midtowns imported promotional goods, where the extra cost has a bigger impact on margins than more expensive product.
The domestic producers have maintained their price structure while the imports are increasing, Whichard said. I have lower overhead on storage with domestic goods. Vaughan-Bassett has no minimum order, and our minimum for Harden is $1,200. Right now cans are costing me $12,000 to $15,000. The turnaround on domestic cases is two to three weeks, and import turnaround is 45 to 90 days.
That said, Midtown doesnt carry a whole slew of domestic case goods.
Vaughan-Bassett is the only (domestic case company) Im using at my middle price points, he said. Theyll retail up to $3,699 to $3,899 for suites. I use Harden on my promotional endthose groups retail around $499.
GEARING UP
Lincolnton Furniture, Lincolnton, N.C., has developed a niche in solid wood furniture using traditional joinery produced on state-of-the-art machinery. President and CEO Bruce Cochrane likes the companys prospects. He believes domestic producers have a chance to steal a march as importers adjust to changes in Asian source countries, which he sees as a factor driving his business right now.
China has moved away from offering generous incentives to produce for western markets, he said. Theyre focused on their domestic market.
A burgeoning consumer market in China also will increase competition for capacity elsewhere, he added.
Chinese consumers are going to be buying products from other countries in Asia, he said.
While Cochrane acknowledges a lot of production is moving out of China, theres a learning curve.
If you take all the countries in Asia, they still have maybe one-fifth the capacity of China; and those other countries arent going to have the kinds of incentives you used to see in China, and Chinese workers are the most productive in Asia, he said. Plus, when you have products moving from one country to the other, there an opportunity for miscommunication is high. You have the makings of a product engineering nightmare. Dont get me wrong, so people have figured that out, but a lot of others are having to shift quickly.
Ralph Scozzafava, CEO of Furniture Brands International, St. Louis, doesnt know how much more imported product the market can absorb.
Weve reached a point with case goods where were at a saturation point of products coming in from other countries, he said, though he added that going back to domestic market share levels of a decade ago probably isnt in the cards.
FBIs Drexel Heritage and Hickory Chair divisions, in particular, rely considerably on domestic case goods; and Scozzafava added that wood line has a domestic component, and Broyhill still has some domestic cases.
He noted that big companies such as Ashley and Ethan Allen still makes a lot of case goods here.
Why? The supply chain is the big piece, Scozzafava said. You can manage your production, and you can control your inventory levels much more easily.
He noted advantages in the store, as well.
As a retailer, you dont have to tie up all that money in inventory, and you dont face as many discount issues in getting rid of product that might not have sold, he said. If you can free up your cash and get a better margin, thats good for a business.
BARRIERS TO GROWTH
While theres been an uptick, there are limiting factors on domestic case goods growth.
Were essentially limited to the capacity in the remaining factories, Epperson noted. People like Vaughan-Bassett, Linwood and Lincolnton Furniture will grow into their capacity. You have to remember Vaughan-Bassett didnt close some of their capacitythey mothballed it, ran enough through to keep their permits open.
Once that capacitys used, youll have to see if its economically feasible to build new green-field plants, and I dont see that happening.
Its just not easy to build a new case goods plant. Thats one reason Jack Hawn, president and CEO, Zenith Global Logistics, Conover, N.C., hasnt seen a big increase in the amount of domestic wood his company handles.
I am familiar with a company that was looking at building a new wood factory, but the permits were too complex, he said. We arent seeing any big gains in wood.
Patrick Smith, national sales manager at Watkins Shepard, echoed that take.
Domestic case goods production has seen very little increase and in our opinion that will continue unless some of the strict regulatory issues are relaxed enough to make domestic manufacturers more competitive, he said. On the other hand, Domestic upholstery production has increased due to a number of reasons, i.e. ocean transportation cost increases, time to market and consumer awareness and desire to buy Made in America items when available.
Cochrane at Lincolnton Furniture believes the biggest drag on increased domestic production is that furniture remains a category not many lenders are willing to bet on.
The greatest barrier is access to capital, which is almost impossible considering the oversight of banks these days. They have the money to loan, and thats how they make their money, but its difficult to make a loan for a start-up (furniture manufacturer).
What we need is a cohesive government program to address these issues, be that through grants or loan guarantees. States like North Carolina are more aggressive from a grant opportunity standpoint with things like the Golden Leaf Fund.
Environmental requirements also demand extra training. Integrating water-based finishes into the manufacturing process, for example, demands a lot more from sanding operation for the finish to take.
Theres a learning curve there, and you have to figure it out, Cochrane noted. Finishing companies, for all their technological ability are still figuring that out themselves.
COUNTER PUNCHING
Peter Giorgio Jr., president of Global Logistics Solutions, Madison, Conn., coordinates shipping for several large retailers, and he believes offshore vendors arent taking their increased costs sitting down.
Certainly the recent increases in ocean freight have created an environment where bottom line margin is noticeably affected, he said. This impact most definitely has caused every buyer to at least consider other options. Those options involve looking at production from other overseas origins and domestic warehouses/USA production.
To be honest, I have not seen any reduction in import volume for the accounts I am involved with, Giorgio added. In fact, since last Market I have seen new vendors coming into the mix with my accounts and therefore have to assume the buyers have found aggressive pricing for these imports that offset the rise in transportation/material costs.
Domestic producers that have built a niche, though, have pretty decent prospects at the moment.
Retail isnt that great right now, but we still have a good backlog, Giorgio said. Its a great marketing template ¦ and American workers are the most productive in the world.
You couple that with strong manufacturing processes and state-of-the-art machinery, and thats a game changer. HFB