Wood makers jockey for growth
Price hikes may occur, but bargains are still available
By Powell Slaughter -- Furniture Today, December 25, 2005
High Point — Case goods' share of furniture spending at retail dropped slightly in 2005 compared to 2004, according to Furniture/Today estimates, from 28.3% to 28.2% of total furniture and bedding sales.
How the category performs in 2006 will be a function of consumer confidence, improved delivery, and ability to address needs in growing categories such as youth bedroom and casual dining, suppliers say.
In dollar amounts, case goods sales were up slightly in 2005 to $21.8 billion from $21.4 billion last year. Youth bedroom was the biggest growth category for case goods this year, rising 6% to $4.6 billion, while master bedroom, with 11% of overall furniture sales at $8.2 billion, remains the category's largest segment, and the industry's third largest overall after mattresses and box springs, and stationary sofas/loveseats.
Master dining room continued to lose market share this year, dropping 3% at retail to $5.7 billion, while kitchen/dinette tables and chairs were up 4% to $3.3 billion.
In 2006, upward pricing pressure from energy costs affecting the manufacturing and transport of goods, rising labor costs in China, duties on wood bedroom furniture from China and currency fluctuations — particularly in the fast-growing source country of Brazil, and to a lesser extent from a moderating attitude of the Chinese government toward the yuan — should remain under some control. That's due to the huge production capacity existing in Asia, where manufacturers are fast exploring markets besides the United States in order to increase their plant utilization.
Ashley Chairman Ron Wanek thinks retailers are in for even better bargains on case goods this year.
"Pricing will get lower," he said. "There is overcapacity at both retail and manufacturing. ... The high-priced bedrooms that used to be around $4,000 (retail), you can get now for $2,000."
Phil Haney, executive vice president of marketing and sales for Stanley Collections, believes case goods pricing will remain very competitive.
"We had a price increase last August, and while it may not go down, it's our hope to maintain current pricing," Haney said, noting that energy prices appear to be stabilizing.
End of deflation?
The deflationary era for case goods is over, said George Revington, CEO of SLF, but he expects pricing to remain steady.
"For at least five years, we were in a deflationary environment, but with energy prices, tariffs and currency situations, that's leveling out," he said. "I think pricing will hold firm, but I don't think it will go up."
On the other hand, Lexington CEO Bob Stec doesn't think furniture manufacturers can afford to keep absorbing increased costs and that excess capacity is the only thing holding the lid on major price hikes.
"I see some price inflation overall next year," he said. "I'd like to see 5%, but it's probably going to be around 2% to 3%. Transportation is a bigger percentage of cost than ever before. As an industry, we're going to go broke absorbing increases like you saw in fuel this year."
Stec thinks it will take only one major case goods supplier to announce big increases for "most of the rest (to) follow like lemmings."
Looking at categories, master dining room continues to lose ground to casual dining, but some products in the middle-upper to high end continue to do good business.
Stanley, for instance, continues to do good business in master dining room even though casual dining and dinettes keep eating away at more formal settings overall.
"We kind of buck the industry trends in that regard — our master dining is actually up this year," Haney said. "I think that trend (toward more casual dining) is true overall, and we're planning a major casual dining introduction in April, but I think it's a matter of having the right style and price point. We're in a nice niche, upper-middle, for the dining category."
Wanek of Ashley doesn't see any end this year to master dining's slide.
"How often do people use their formal dining areas these days?," he said. "Kitchens have become bigger rooms, and there's also the great room layout. A lot of homes don't even have a formal dining room now."
Looking to next year, Wanek believes retailers have to offer products at a wider variety of price points, especially those who to date have focused on the middle market.
"I don't think the low-medium and promotional end has been exploited by retailers the way it could be — they start at too high a price point," he said. "They spend a lot of money advertising, and then they don't have something everyone can buy."
Wanek pointed to Nebraska Furniture Mart in Omaha as a good example of a retailer offering accessible prices.
"They have 70% of the Omaha market, and 50% within 150 miles because when people come there they know there's something to buy," he said. "Not every store can have that much space, but they're a great example of a retailer that's not leaving anything (off the table) in terms of what people can buy."
Stanley's Haney sees increased attention to home design and décor among consumers, and retailers need to play off that in 2006.
"Consumers are ready to upgrade," he said. "If consumer confidence holds up, we think we'll have a good year."
A focus on speeding goods to market, expansion into youth furniture and promotional dining, and stronger, more flexible service has SLF's Revington looking forward to 2006.
"Our October introductions will be shipping as early as December and January," he said. "We're focusing on reducing order-to-ship time to three weeks for mixed containers, which will bring container pricing to loads that are more like what you'd order out of a warehouse."
While case goods have experienced mid-single digit increases of late, Revington noted that there are suppliers who are doing extremely well at the expense of some longtime players.
New business models
"The real story is the shift in market share to companies that have adjusted to new business models," he said.
Another trend to watch this year is the growth in channels of distribution other than traditional furniture retailers, Stec said.
"I think we're going to see the same thing in 2006 that we have the last two years — consumers are going to buy more case goods," he said. "The question is who they'll buy it from in terms of channel, and how much they're willing to pay for it."
Stec noted that his latest information, through October, showed case goods sales up 5% to 6%.
"I know we aren't getting that," he said. "It's going to Pottery Barn, Crate & Barrel, Restoration Hardware, Costco, Wal-Mart, Kmart, Target — all those people we don't want to talk about. You can't look at housing starts and say there's no demand for furniture, but the traditional players and channels are going to have a mighty struggle."
A look at Furniture/Today's Top 25 Furniture Retailers bears out Stec's opinion. Wal-Mart sits atop the list, and Sam's Club, Office Depot, Staples and Costco all occupy the Top 10, as they did the prior year.
An "X-factor" for case goods in 2006 is the first round of administrative reviews of Chinese furniture manufacturers of wood bedroom furniture by the U.S. Department of Commerce.
Those reviews will come from two directions: first, from Chinese companies seeking to lower or eliminate antidumping duties imposed last year; and second, from domestic manufacturers who originally petitioned for the DOC investigation requesting deeper examination of Chinese manufacturers they believe rate a higher duty.
As in the original investigation, DOC probably will fully investigate less than 10 manufacturers. That situation creates a double-edged sword for Chinese factories that submit their operations for full review but don't get a full investigation. They will be subject to a new rate —à la the Section A companies from the original investigation — based on a weighted average of manufacturers actually investigated in 2006.
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Wood segment confronts challenges
Jan 7, 2007 -
Formal dining category very much alive
Aug 25, 2002
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