Importing Change

October 31, 2007  by in UnCategorized   

By Home Furnishings Business in Case Goods on November 2007 For nearly a decade, the dependable answer for most questions that furniture retailers have faced has been China.

Where do I find the best case goods values? China. How can I offer $299 sofas? China. Who has the best deal on mattresses? China.

Suddenly, with China facing higher labor costs and rising prices for raw materials, many retailers now say that the world’s largest furniture producer is still the most obvious answer for many furniture products, but it’s no longer the sole answer. Retailers who operate dozens of stores—as well as those who just have one—say answers are increasingly coming from countries like Vietnam, and, at the same time, upholstery and case goods from U.S. factories are also answering more of their needs.

“There’s no doubt that domestic product becomes more attractive as import product costs rise, and domestic upholstery is a good example,” said Keith Koenig, president of City Furniture, Tamarac, Fla., which operates its own Kevin Charles Fine Upholstery factory in Mississippi. “We want to buy in the U.S. what makes sense to make here cost-effectively, and, believe it or not, those are the more generic, broad-appeal styles,” he said. “What China can do (more effectively) is higher-end, traditional frames with wood-carving details.”

A ‘Better Breeze’ Helping Domestic Factories

Koenig, who operates 15 City Furniture stores and seven Ashley HomeStores, said he’s added more case goods from American factories, but said most shoppers seem to continue to prefer the styles and values in imported products. “There’s no doubt that there will be a better breeze at the back of the domestic producers as costs rise globally and as the U.S. economy and production costs stay competitive,” he said. “I’ve always said almost all retailers would prefer to buy from U.S. suppliers just because they can get it quicker.”

That “better breeze” for domestic factories takes on the form of a decline of the U.S. dollar (which has less purchasing power in Asia) and what manufacturers in China see as a shift in policies that are increasing production costs at the same time gasoline and raw materials costs are rising worldwide.

According to the International Trade Administration, imports of wood furniture—from all countries—declined 7.2 percent in the second quarter and upholstery imports declined 1.4 percent. China saw its wood imports into the U.S. decrease 11.6 percent in the second quarter, and upholstery imports from China rose 4.6 percent.

The decline for China’s wood output came during a time when most retailers were trimming orders due to the housing slump. On an annual basis, wood imports from China increased 8.3 percent in 2006 and upholstery imports increased 29 percent, according to ITA figures reported by Mann, Armistead & Epperson, Richmond, Va., in October.

In the second quarter, the 11.6 percent decline in wood imports from China came as Vietnam saw imports to the U.S. increase 26.9 percent and Indonesia posted a 7.8 percent as all other countries declined.

One example of the shift in China’s policies is that rebates of the country’s value-added tax (VAT) have been reduced substantially and some U.S.-based importers fear it could be phased out altogether, adding 12 percent to a producer’s costs. A recent report in Forbes magazine said the reduced VAT rebates caused profits to decrease at Samson Holding. The company launched an unsuccessful bid for to acquire Furniture Brands International in July. In October, it was disclosed Samson paid $73 million for a 14.9 percent stake in St. Louis-based FBI.

Faster Fashion

Rooms To Go CEO Jeff Seaman believes furniture retailers are becoming more focused on domestic upholstery, in particular. Price, he said, is not as big a factor as speedy delivery and style. “In upholstery, you get it so much faster domestically than from China. There (are) still going to be a lot of upholstery imports, but there’s still room for growth domestically because upholstery is much more fashion driven, and you have to get in and out of it quicker ... and make changes faster.”

Still, no one is predicting that China will relinquish its dominant role as the top source for furniture. Instead, retailers say that rising costs in the country may lead to growth from other sources in Asia and, perhaps, in the United States. “China is still an extraordinary value in the global home furnishings market,” Koenig said. “We’ve been careful to align ourselves with the very best factories in China, and that’s been to our advantage. However, Vietnam is growing in importance and has the advantage of no import duties on bedroom (furniture).”

David Beckmann, president of Emerald Home Furnishings, an importer based in Tacoma, Wash., said China is still king, but added, “You’re seeing government policies moving away from low-cost manufacturing jobs. You have a tight labor market. Oil prices affect raw materials and fabrics.”

Emerald also has production in Vietnam and Malaysia, and Beckmann is planning a trip to India in the year ahead to scout opportunities there.

With that backdrop, Lee Goodman, president and chief executive officer of Jerome’s in San Diego, said, “Our philosophy is to try to stay as agile as possible because we feel there’s a lot of exposure with imports due to everything from the dollar to geopolitical issues to (the risk) of having all of your eggs in one basket.”

He said Jerome’s, like many large retailers, has shifted sources of some case goods products from China to Vietnam. “We’re constantly trying out to find out where the next factory is so we can move and reduce our exposure in the imports. There are so many different things that can happen out there. We’re constantly talking about watching out for what’s ahead.”

Smaller Retailers See More Flexibility among Importers

At the single-store Follett’s Furniture in Lewiston, Idaho, General Manager Greg Follett is finding that importers are giving more opportunities to smaller retailers these days. In many cases, Follett said there are less savings in buying a container of goods shipped directly from Asia versus buying from an importer’s U.S. warehouse. “Warehouse prices that used to be quite a bit higher are coming down a little bit. I think that might be a function of why they have a little bit more flexibility right now.”

Still, container buys still can produce savings of 20 percent—sometimes more, said Follett, who is also president of the Pacific Furniture Dealers, a buying group of more than 60 retailers. “If anything, as a group, we’re buying more (container goods) and we’re looking for any good buys that come about,” Follett said. “We’re fortunate to have different (PFD) programs that allow us to have multiple dealers buy on one container. Otherwise, a lot of us wouldn’t be able to buy that way.”

He said the PFD program has a billing program for container sharing, as well as a shipping agent who breaks out orders that are trucked directly to each retailer.

Woody Whichard, the owner of Midtown Furniture Superstore in Madison, N.C., said he’s seeing similar deals in which a retailer can buy as little as a quarter-container of goods and still save 10 percent or more off wholesale prices from a U.S. warehouse. “It seems like they’re trying to help the smaller retailer compete with the big boxes a little bit more, which is encouraging,” he said.

Whichard said he’s sold imported case goods exclusively for the past year, but began seeking out domestic suppliers again at the October High Point Market. “We bought a couple of suits from Vaughan Furniture,” he said. “We like to buy domestic when it’s feasible, but the prices haven’t been there for us. Since some of the imports from China have increased (in price), I think we’ve seen the quality go down on some of those who didn’t raise prices. For us, the decision (to buy from a U.S. factory) was a little bit of price and a little bit the speed of delivery. We don’t have to have as much tied up in inventory, so it makes us more liquid.”

Potential for ‘Catastrophic Mistakes’

Slug Hefner, who operates two Hefners Furniture stores in Missouri, said he’s also seeing importers offering more flexibility when it comes to allowing a retailer to mix different types of furniture in a single container. “The smaller (importers) seem to be offering more flexibility. If they allow you to mix containers, it’s a lot easier for us. Not matter how smart you are, if there are 18 of the same bedrooms in a container, you’re going to be missing a bed here or a nightstand there when you get to the end of it. If you can mix three different ones, you can sell through them much more quickly and there’s less risk.”

Like other retailers, Hefner said he buys from domestic sources when that’s possible, adding that mistakes can become “catastrophic” when it involves a shipment of 20 bedrooms. “We’ve had some mistakes, and you just have to bite the bullet and do what you need to do to get rid of it.”

He said the situation in China is already having an impact on Hefner’s approach to buying. “I think you have to look at every transaction now on its own individual basis and merit because there are so many factors that go into it.”

Pushback on Pricing

In San Diego, Goodman said rising costs in China are unlikely to be absorbed by U.S. retailers because a long bout of deflation has brought the prices of many furniture products to historic lows. “There have been a couple of (recent) cases where we passed (increases) on to the customer, and there wasn’t even a blink. We’re going to look at everything that if a product still retails (at a higher price), then that’s a product that makes sense. If additional costs make the product slow down, then we know it’s a cost we can’t pass on, and we’ll pull it. In most cases, we haven’t seen a decrease in the sales rate ... but we won’t be absorbing more price increases.”