Occasional prices rising?
Higher costs in China add pressure
Thomas Russell -- Furniture Today, October 8, 2007
AT THE MARKET — Cost pressures in China are squeezing occasional and accent furniture resources, since most believe this isn’t the time to pass on to retailers many, if any, price increases.
Costs are reported to have risen as much as 20% on some items in the past year.
Executives at this week’s market attribute that mainly to three factors: the strengthening value of the Chinese yuan in relation to the U.S. dollar, escalating labor costs in China, and a drop in value-added tax rebates China’s government gives to exporters of finished goods.
Because the occasional and accent category encompasses so many different products, it’s difficult to pinpoint a general percentage cost increase in the category.
But in one example at Klaussner Home Furnishings, a table with a wholesale cost of $79 two years ago could have a $100 price tag today, said Product Manager Chris Rayle.
In light of developments in China, Klaussner, and other importers, likely will shift at least some production to Vietnam or Malaysia. Or it might simply drop an item altogether.
“I’ve been going to China for 10 years and it’s as bad as I’ve seen it,” Rayle said. “Everybody’s scrambling to find out where they can move product to, and how to handle the price increases.”
Jeff Stone, vice president of merchandising at Universal, said wholesale prices in occasional are about 5% higher than a year ago.
Without revealing specifics, he said the company sometimes has to bear those cost increases. In other cases, it might pass them along to retailers. “There’s no question the prices are edging up a bit,” Stone said.
Karen Knoch, merchandise manager for occasional and accent furniture at Magnussen Home, said that on a case-by-case basis, the company has passed along some price increases to retailers in the past six to eight months. But more often than not, it negotiates with its source factories to minimize the effect on both Magnussen and its dealers.
“It’s getting tougher; there’s no doubt about it,” she said, noting that some proposed price hikes have been as high as 20%. “We’ve been trying to absorb the bulk of it,” she added.
Knoch attributed much of the increases to rising rubberwood prices, a raw material it uses in some tables. “We’ve been trying to get creative and use different species,” she said.
Tom Liddell, vice president and national sales manager at Powell, said the major importer had a price increase on certain items in March and expects another price increase about Oct. 15. But that’s only on certain items and not across the board, he said.
Liddell added that Powell minimizes increases by negotiating with factories, and also by getting lower freight rates. “With those two things, there is a negligible price increase to our customer,” he said, without revealing specifics. “We worked hard to make that happen. We’re sensitive to the fact that if it’s going to affect a price point, it will affect volume, so we’re only increasing prices where we have to.”
Accent specialist Bailey Street Holding Co. said it has seen anywhere from a 3% to a 20% increase on certain items since August 2006, largely due to increasing metal and glass costs and the cost of producing certain labor-intensive items.
In some cases, the company absorbed the costs. In others, it changed source factories to get better deals. But it did pass along some increases, particularly to customers who hadn’t seen a price increase from Bailey Street in five years.
Marketing Director Greg Waylock said some retailers are willing to pay extra if the quality and look are there. The items with the highest increases were older items that had not had a price increase in some time, and Bailey Street hasn’t hiked prices at this market, he said.
Hooker Furniture also works with factories to minimize increases. In addition to declining VAT rebates, the minimum wage in China rose 20% last year, and has risen another 20% so far this year, said Mike Spece, executive vice president of merchandising and design.
But Spece said Hooker hasn’t had to deal with many price hikes largely because “we’ve gotten stronger with our key partners. It’s all about leverage… We have new product at more values than ever before at the prices we asked for five years ago.”
Stein World President and CEO Richard Olmeda said that so far this year, his company has only had to raise prices on 5% of its product, or 30 SKUs out of 600 accent pieces. The increase occurred at the July Las Vegas show, and no further increases are planned this market.
“It’s not about enjoying better margins through price increases,” Olmeda said. “It’s about eliminating non-value-added costs. That’s where you increase your margins. We look at every part of our operation to make sure we capture and eliminate every possible cost.”
Stein World uses its leverage in Chinese factories to avoid hefty price hikes, particularly where it accounts for all of the output, and is looking to become the sole customer with other factories as well.
Ray Steele, vice president of sales at Ultimate Accents, said his company took a 5% increase on certain items two weeks ago, and expects another 5% increase early next year. He said the company likely will have to pass along about half the increase to its retailers, but is looking to add more value with fresh looks and new materials.
Also, Steele wants to keep working with these factories in order to maintain quality. “We have beaten those people down,” he said of the Chinese factories. “If the factory doesn’t make money, they go out of business. They are entitled to make a profit.”
The last thing Steele wants is to end a successful relationship with a factory and start over with a new one. “If we lose those factories in China, who’s going to replace them?” he asked.
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