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Canada stores doing fine, factories struggle

Currency values, furniture price deflation cut two ways

By Michael J. Knell -- Furniture Today, December 24, 2006

Currency crunch
Sales should stay strong

Ottawa — Canadian furniture and mattress stores enjoyed solid sales growth in 2006, and most key economic indicators should remain favorable into next year.

In sharp contrast, Canadian furniture makers have seen domestic and export shipments fall since early 2005.

Data from Statistics Canada indicates furniture store sales totaled nearly C$7 billion in the first nine months of 2006, an 8% advance from C$6.5 billion in the comparable 2005 period. The gain also is greater than the 5% increase recorded for 2005 over 2004.

It should be noted that furniture stores are defined as stores where furniture accounts for 50% or more of total revenue, and the sales figures include all categories. Most Canadian furniture stores also sell appliances and consumer electronics, with those categories accounting for about 30% of revenue on average.

Of course, furniture stores aren't the only channel where consumers buy furniture. After taking out sales taxes, which average 14% across the country, total Canadian consumer spending on furniture is expected to reach C$8.7 billion in 2006, about 7% more than last year's C$8.1 billion.

Other important channels include department stores, mass merchandisers and the so-called big boxes, as well as non-traditional channels such as grocery stores and flea markets. Sears Canada, Hudson's Bay Co. and Wal-Mart are some of the key furniture merchants in these channels.

Meanwhile, shipments by Canadian furniture and bedding manufacturers in 2006's first nine months dropped 7.2% to C$3.4 billion from C$3.7 billion in 2005's nine months. Mattress producers, however, are doing much better than their furniture colleagues, with bedding shipments up 4% in this year's first three quarters to C$659.3 million.

Taking the biggest hit were upholstery producers, whose shipment fell 15.6% to C$620 million in the nine months. Case goods makers saw a 9.8% sag in shipments to C$1.8 billion.

Industry leaders agree the key factor plaguing Canadian furniture manufacturers in the past four years has been the strengthening value of the Canadian dollar versus the U.S. greenback. In early 2003, the average exchange rate gave the Canadian dollar a value of 63 cents US. For the past nine months, it has hovered around the 90-cent US mark, and most forecasters, including The Conference Board of Canada, believe it will stay at that level for most of 2007.

While this is bad news for manufacturers, it's good news for retailers and consumers.

"The purchasing power of Canadians seeking foreign goods is at peak levels, bolstering imports," The Conference Board said in its latest Canadian Outlook. "At the same time, the strength of the Canadian dollar will erode our competitiveness abroad, exacerbating the difficulties already faced by exporters."

Canadian furniture manufacturers have taken a huge hit in export sales this year. For the first nine months, total exports fell 11.8% to C$1.1 billion, led by an 18.1% drop in upholstery exports, which fell to C$217.5 million. Case goods exports were down 10.6% to C$778.7 million.

Currency crunch

The swing in the currency values, of course, hits Canadian manufacturers in two ways, making imports from U.S. factories more competitive here while boosting the relative cost of Canadian-made product abroad.

Canadian consumers also have benefited from price deflation in most furniture categories, thanks to continued growth in imports, most notably from Asia.

In 2006's first nine months, total furniture imports advanced 16.3% to C$1.6 billion. Upholstery imports jumped 33.9% to C$594.3 million, while case goods imports grew 10.1% to C$653.3 million.

In what surely will be seen as a sign of things to come, mattress imports, overwhelmingly from China, were C$63.5 million, a 50.5% gain.

Stefan Wille, president of Aktrin Furniture Information Center, reported recently that average prices of household furniture rose by 34% between 1986 and 2005, with most of that gain occurring prior to 1992. "Prices fell by a small margin in 1992 and, with the exception of 1999, they have barely increased since that year," he said.

Meanwhile, furniture retailers are expected to benefit as Canadian consumers realize real gains in household income and savings, thanks to personal income tax cuts, the reduction in the Goods & Services Tax and other tax credits, all combined with what The Conference Board sees as strong gains in employment and wages.

"Real personal disposable income is expected to post near-record 2006 growth of 4.8%, allowing real consumer spending to advance by 3.8%, nearly matching last year's blistering pace and with enough left over for a sizable pickup in the savings rate," the board said.

Housing starts, which remain a key leading indicator for Canadian furniture retailers, are expected to moderate over the next 18 months. According to the Canada Mortgage & Housing Corp., the federal agency that monitors housing activity across the country, starts will reach 227,900 units in 2006, dropping to 209,100 units next year.

"Housing starts this year will be stronger than previously forecast, mainly due to persistent strong demand in Alberta, where starts will increase by 20% in 2006," said Bob Dugan, chief economist at CMHC. "Higher mortgage carrying costs, due to modest increases in mortgage rates and rising house prices, will temper housing demand in Canada in the latter part of this year and next."

Existing home sales are expected to register their second-best year on record, with 481,700 units changing hands in 2006, a slight decrease from 2005, according to the Multiple Listing Service. The level of MLS sales is expected to remain high in 2007 at 462,200 units. Marginally higher mortgage costs will ease demand for existing homes.

Sales should stay strong

Taking everything into account, retail furniture sales are expected to remain strong for the next several years.

"Since 1997, gains in real household furniture spending have been strong, ranging from 5.4% to 8.4% per year," according to Aktrin's Wille. "Furniture sales in constant 1997 dollars in 2005 were 49% higher than they had been in 1989, the previous peak year for household furniture sales in Canada."

Retail furniture sales also will benefit as Canada's total population grows by 6.9% between 2005 and 2015, while the number of households increases 12.3% over the same period, reflecting the aging of the population. "Thus, even if the amount spent on furniture per household was to hold steady in real terms at the C$825 level of 2005, the furniture market would grow by 12.3%," Wille said.

He believes that growing after-tax incomes, decreasing tax burdens and a greater number of households should translate into an increase of 28% in real terms in total Canadian spending on household furniture in the decade ending in 2015.

"In other words, we expect furniture sales, in constant 2005 dollars, to reach C$13 billion in 2015, compared to C$10.1 billion in 2005 (including sales taxes)," Wille said.

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