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Darrow: Chinese not a big threat in upholstery

Larry Thomas, Business Editor -- Furniture Today, March 5, 2006

Many industry observers believe Chinese factories will soon dominate the upholstered furniture business much as they have done in case goods, but Kurt Darrow isn't convinced.

Darrow, president and CEO of La-Z-Boy, acknowledges that imports do represent a significant threat to North American upholstery production, but believes it is wrong to draw parallels to wood furniture.

During a recent conference call with securities analysts, he spelled out three major differences between case goods and upholstery that he believes will help keep upholstery primarily a domestic product.

First, there's customization. He says American consumers want a choice of covers, particularly fabric. Chinese factories, he argues, primarily are geared towards mass production and can't handle the special orders that are the heart of many retailers' upholstery businesses.

Second, those consumers who want choice also want it quickly. They won't wait the eight to 12 weeks or more it takes to get a sofa from China. La-Z-Boy, Darrow told analysts, delivers in four weeks.

And thirdly, Darrow believes the pricing of Chinese-made upholstery, once freight costs are considered, doesn't undercut domestic product enough to coerce a manufacturer to deal with the headaches of importing.

"Their pricing is competitive, but not compelling," he told analysts. "It's nothing like the 20% to 30% advantage (Chinese factories) have in case goods."

He believes La-Z-Boy can meet the challenge by increasing its use of cut-and-sew covers, a process in which the leather or fabric is cut and sewn to the company's specifications in China, then shipped to its U.S. factories for final assembly.

Darrow told analysts approximately 19% of the company's covers were done that way in the first half of its fiscal year, and said it should approach 30% in the second half. This strategy should help increase the upholstery segment's operating margin to its historical level of 8% to 10%, he said. The margin stood at 7.2% in the most recent quarter, but was below 4% a year ago.

"We can get cut-and-sew covers delivered for less than we can buy rolled goods (fabric) in the U.S.," he told analysts. The only tradeoff, he said, is that there are some limitations on certain color palettes.

Not everyone agrees with Darrow's views on Chinese-made upholstery, and skeptics are likely to argue that La-Z-Boy is on track to repeat the mistakes it made with its case goods business by stubbornly hanging onto domestic production while margins evaporated and sales plunged.

Darrow, who wasn't CEO when the company made those decisions, insists that's not the case. He said La-Z-Boy is poised to change its upholstery strategy swiftly if conditions warrant.

"We know the marketplace is dynamic and we are not putting our heads in the sand," he told the analysts. "We will not be late in the game with upholstery as we were with case goods."

Darrow knows there's too much at stake for his company to do otherwise.

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Darrow: Chinese not a big threat in upholstery

Mar 7, 2006

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