Materials costs spike

Could raise prices as much as 15%

By Ray Allegrezza -- Furniture Today, April 12, 2010

HIGH POINT —

Will rising raw material costs result in higher prices for finished goods?

Many importers and manufacturers contacted by Furniture/Today think so. Although it's too early to track, suppliers believe that depending on the product and materials used, prices on finished goods could rise anywhere from the low single digits to as much as 15% over the next year.

While acknowledging increases in the cost of leather, wood, foam, glass, cardboard and even finishing sprays and coatings, sources said that the most recent spike — an impending 30% hike in the cost of steel — just may have pushed this issue to the tipping point.

“In terms of raw material costs, the industry is seeing across-the-board inflation and in some categories, at a double-digit level,” said Todd Wanek, president of full-line furniture source Ashley.

He said the demand for finished steel and the rising prices for iron ore have resulted in the price hikes for steel materials in the United States and China. He also said that prices are higher for foam, polyester staple fiber, leather, medium-density fiberboard and cardboard.

“Many of these items, including leather and polyester staple fiber, are up more than 30%,” said Wanek. “These increases will impact the prices of finished goods and retailers should expect to see price increases over the next year.”

Mark Quinn, group executive vice president of marketing for components supplier Leggett & Platt, concurs. “We've observed price hikes on most everything from steel to nonwoven fabrics and foam, generally in the area of 6% to 10%,” he said.

“The skyrocketing costs of raw materials has all of us living in very interesting times,” added Jim Ziozis, president of importers Powell and Linon. He said he was surprised by the magnitude of the recent price hike of steel.

“A few weeks ago the world saw the price of steel go through the roof. This was monumental and something not seen in 40 years,” he said.

Prices more volatile

Last month, steelmakers began passing on cost increases after Vale SA, said to be the world's largest iron ore producer, killed a 40-year system of negotiating prices on an annual basis in favor of a quarterly time frame, a move that already has dramatically jacked up iron ore prices for steelmakers globally.

“Steel is now much more volatile in price, and will fluctuate just like we've seen with oil, gold, platinum and even wheat,” Ziozis said.

He said the spike in steel has the potential to affect not only home furnishings, but the country as a whole. “When the price of medium-density fiberboard goes up it doesn't necessarily impact the whole economy. But when steel goes up, it impacts everything from the price of automobiles and white goods to the cost of constructing buildings and even performing road repair,” he said.

Matthew Briggs, president of importer Four Hands, is keeping a close eye on the raw material costs. “We've all tried to become more efficient and we've all watched the race to find the next supplier who can make that chair for three dollars less,” he said.

But more efficient or not, importers have to deal with escalating prices for raw materials. “In the past 12 months, mango wood, as just one example, has gone up by 25%,” Briggs said. He added that in order to give retailers the best prices, importers often have to invest more time and resources searching for the best deals. And once they find them, importers have to buy in bigger quantities as a means of keeping costs down.

“However, even with the importer absorbing much of the higher prices, at some point, industry prices to retailers will have to go up,” he said.

When asked by how much, Briggs said, “If you had to pick a magic number, I would guess that prices could rise by about 15% over the next 12 months.”

Sources said that until now, few suppliers have passed along raw materials price increases to their retail customers. However, with costs continuing to escalate, they believe that furniture producers and importers are reaching a tipping point.

“We've watched the price of raw materials steadily increase during the past couple of years,” said Michael Amini, CEO of case goods and upholstery importer AICO. “In the first year, most of the factories absorbed the costs as a way to maintain their growth and to prevent customers from leaving them.

“In the second year of increases, the factories began asking for price increases and this time it was the importers' turn to absorb all the price increases. But now, the spoon has hit the bottom of the pan and if importers don't start to raise their prices they may not be able to sustain themselves,” Amini said.

He said that on average, material prices have increased by 15% to 20%, with the cost for some items spiking by as much as 40%. “Therefore, I feel that furniture prices are steadily going to go up and more is yet to come,” he said.

What's more, sources said there is likely to be more upward pressure on prices as the economy picks up.

“With improvement in the economies across the globe, we believe there is a very good possibility of sustained inflation, possibly even hyperinflation,” warned Quinn of Leggett & Platt.

The stage for that drama has been set, in part, by manufacturers who significantly cut back on inventory in the face of a sluggish economy and weak demand. As a result, “any significant uptick in demand could result in more dollars chasing fewer available goods,” Quinn said.

Until now, a soft economy has kept many wholesalers and manufacturers from passing higher costs on to retailers.

“We are all dealing with raw material interruptions, price hikes and shortages,” said Ziozis. “However, despite all of this, very little of this has translated to retail. In fact, for lots of retailers, a price change means they expect to hear that a supplier is taking prices down because the market has been less than robust.”

Dangerous decision

Raising prices can be a dangerous decision because some changes can dramatically affect retail sales, suppliers said.

“If you raise your price on an item from $89 to $99 it may change your retail sales by 5% to 10%. But spike the price from $99 to $109 and your retail sales can really take a hit,” Ziozis said.

Almog Lieber, vice president of juvenile furniture maker Berg Furniture, said he was rudely awakened to the price situation from a supplier.

“I was shocked when I recently tried to reorder some plywood. Luckily, we don't use a lot of this material, because I was told that the price had gone up by 50% since my last order,” he said.

Despite that increase, along with higher costs for cardboard, plastic and glass, Berg hasn't raised prices since March 2008, Lieber said. “We've cut costs and added new techniques and equipment to be more efficient and don't think this is the time to raise prices.”

But even so, he said a time will come at Berg when raw materials costs will force the company to rethink its pricing strategy. “For example, if prices of laminate board went up two to three (percentage) points, I can deal with that. But if it spiked an additional 5%, then I would be forced to respond,” he said.

La-Z-Boy President and CEO Kurt Darrow also is evaluating the situation. “None of us has very much control over raw materials. You still need wood, leather and metal to build furniture,” he said.

Further complicating the situation is the fact that there's no way to predict how long the prices for raw materials will remain high. “As a result, it has also made it more difficult to negotiate long-term prices on these items,” Darrow said.

He said the issue of raw material costs is a double-edged sword.

“It is a story of supply and demand. As the economy improves, and more houses are built and more cars are made, the prices for lumber and steel go up,” he said. “Even so, for the long-term, I would rather see the price of raw materials go up if they are tied to an improving economy.”

Darrow added that La-Z-Boy hasn't yet decided whether to raise prices. “All of us have tried to take costs out of our business, but at some point, you have to pass some of the increases along,” he said.

Jena Hall, vice president of merchandising and design at importer Aspenhome, said her company too is evaluating the situation. ”

“We are very sensitive that demand is still somewhat soft,” she said. “While we see business improving, it is still a 'soft up,' so we will continue to watch, listen and see how things shake out at the High Point Market.”

Retailers, including Fred Berk, president and CEO of Fort Myers, Fla.-based Robb & Stucky, agree that the timing of any price moves is critically important.

“The entire industry — retailers and suppliers alike — have all sucked up a lot of these added costs and lived on slimmer margins,” Berk said. “Retailers are just starting to see some forward movement in the economy and even if the price increases in finished goods are justified, this is not the time to do it. The consumer is still very price-sensitive and we should not be doing anything at this time that could be detrimental to the economic recovery.”