Industry will look entirely different in five years
By Michael J. Knell -- Furniture Today, June 27, 2005
Ottawa — The Canadian furniture industry is facing its second major structural change in the past 20 years.
The first round of change was caused by free trade. In the early years of the 1989 free trade agreement with the United States and Mexico, the Canadian furniture industry was decimated as antiquated factories and old-fashioned attitudes towards product and market development forced the unready and the unwilling out of business.
Those that remained retooled for the new reality without a tariff wall. They worked hard to create products and programs aimed at serving the needs of retailers on both sides of the border. The success of this strategy was amplified by a strong U.S. dollar, which gave Canadian manufacturers a competitive boost in their efforts to develop business in the world's largest economy.
Even when Asia-made product began entering the U.S. market in a significant way five years ago, Canadian manufacturers were holding their own.
But over the past 18 months so, everything has been turned upside down. The value of the U.S. dollar has plummeted, pricing Canadian goods out of the market, particularly when shopped against Asia-made products.
While opinions about the outlook for the future vary among industry leaders, they all agree the industry will survive — and that in five years it will look totally different than it does today.
"We've been in hiding behind this weak dollar," said Gerry Cockerill, president of Traditional Sales, a management consultant that matches Canadian and American producers with manufacturing partners in China. "If you look at what's been happening down south over the past few years, you can see the writing on the wall for us, if we're not careful."
He sees two emerging trends. The first one is happening now: Major retailers are going direct to China to buy product, bypassing North American sources with whom they've had long and fruitful relationships.
"It won't be long before China factories are going to stop working with established North American manufacturers and start selling direct," he said. "After that, the next big step for them is to begin to buy established retailers."
That possibility suggests that those manufacturers who decided to shed their brick-and-mortar facilities to become marketing and distribution firms may have given away too much.
"There is no easy answer for any of this," Cockerill said. "What we are going to have at the end of the day is a bunch of small manufacturers who have developed niches that can't be touched in China. In China, they don't and can't do 27 flavors of finishes for one item."
Art DeFehr, president and CEO of Palliser, doesn't believe Canadian furniture makers will share the fate suffered by their American counterparts.
"There are significant differences between the two countries," he said, the most important being Canadian manufacturers have been reluctant to shift their production offshore.
Palliser has embarked on what DeFehr describes as a North American strategy, which calls for the company's leather furniture for the U.S. market to be made in Mexico. In Canada, production is focused on goods for the Canadian market and added-value products for the U.S. that tend not be adversely affected by currency. Supporting all of this is a range of product imported from Indonesia.
Producing leather upholstery in Mexico means Palliser can embrace all of the advantages of quick delivery and customization while enjoying many of the cost efficiencies associated with China.
What makes Palliser unique is that it owns all of its factories, regardless of location. This gives Canada's largest producer of assembled household furniture control over all critical manufacturing and product development decisions.
"I feel that there are going to be strong North American strategies available to a lot of companies," said DeFehr.
He also points out that there is considerable pressure on the Chinese government to allow its currency to float on the world market. If that happens, Asia-made product will become more expensive, making Canadian product much more competitive. "If the Chinese yuan goes up by 30%, then our strategy will look really good," DeFehr said.
Since U.S. manufacturers will not be able to reopen the factories they have closed quickly enough to meet this shift in demand, this will put Canadian factories in a good position to do more business in both markets.
"There is a market position for Canadian manufacturers in the U.S. because they've lost so much of their capacity," he pointed out.
Bob Tweedy, CEO of Sklar-Peppler, also believes in the merits of a blended strategy where Canadian producers take the best from the global market — be it components such as cut-and-sew leather or finished goods — to complement their own products.
He also notes that China's big push in upholstery has been in leather — a market that may soon become saturated even as deflationary forces send prices even lower. Consumers also will begin demanding more variety and service.
"That's our advantage," Tweedy said. "As consumers become better educated, they will become more discerning."
Jean Deveault, executive vice president of casual dining powerhouse Canadel, is also confident that Canadian producers will thrive in the years to come — if they have a plan, a quality product and a story to tell.
"I suspect that this 'China syndrome' will collapse," he said. "Deliveries from China are very bad."
Retailers don't want to wait 13 weeks or more for product, he added. And their bankers aren't going to allow them to tie up their money for that long.
He also points out that when China product was first seen on retailer floors, it was a novelty. Now, every retailer sells it, usually for the same price. This means "a sameness" is spreading over retail floors at the same time that consumers are growing hungrier for unique and interesting products.
