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Domestic upholstery producers optimistic

Jamie Sorcher -- Furniture Today, April 28, 2011

Mayo Furniture makes its upholstery domestically and is at the High Point Market this week with product including the new Walker sofa in a cranapple cover.HIGH POINT — Domestic upholstery is on track for a promising 2011 as manufacturers and analysts say the industry could benefit from signs of life in the housing market, lower unemployment and a shot in the arm from consumer tax refunds and HDTV sales.

But looming issues for domestic players - including rising import costs from China and the climbing price of textiles worldwide - could spoil the rebound, experts say.

The biggest factor for driving the industry forward is an improving outlook for employment, which should lead to more of the home sales so critical to the upholstery market, sources said.

Single-family home starts, considered a bellwether for the housing market and economy, are projected to improve 21% in 2011 to 575,000 units, according to the National Assn. of Home Builders. The forecast also calls for sales of new and previously built homes to rise 10% this year. Remodelers also are seeing a jump in calls for bids, and the NAHB cited a rebound in consumer confidence that has boosted sales of big-ticket items like cars and furniture

Finally, economists are saying that the recent renewal of the Bush-era tax cuts will free up more discretionary income, as will a one-year 2% reduction in Social Security taxes.

Latest TVs also help

Expected gains in home technology sales may prove to be a key driver for upholstery. According to the Consumer Electronics Assn., more than 65% of U.S. homes have an HDTV, and 23% of households plan to buy one in the next 12 months. As the recovery loosens consumer purse strings, domestic upholstery makers could benefit from pent-up demand for large flat panel TVs and videogame consoles.

"If a consumer buys a big screen TV, they buy a sofa," said Ron Klosterman, CEO of Flexsteel. "Technology is an important part of our lifestyle, and our business is supported by it as well.

"But we're further down the food chain than we were before," he said. "As we look at the next generation of consumers, we're competing for their dollars against electronics like iPads, TVs and smart phones. One of the biggest challenges is that we have less of the consumers' discretionary income than we did 10 years ago."

Nonetheless, according to the December 2010 "Upholstered Furniture: A Mini-Study" report by Mann, Armistead, and Epperson, the recliner/motion category is expected to do particularly well in years to come, partly because producers continue to innovate and improve the products.

In addition, those products are now going into more rooms in the home because of the comfort needs of aging boomers (ages 43-64), but also because of the interests of Gen Yers (ages 11-29) who will be setting up new households with TV and gaming in mind. All this has led to recliners seeing more retail floor space - and more sales.

While all these factors could translate to a strong second half of the year, the upholstery industry won't be without its challenges.

Manufacturers cite the rising cost of raw materials, and higher labor costs and shipping expenses from China. Add to this the challenges of managing production needs and the long lead times associated with overseas manufacturing.

If these issues come to roost in 2011, they might lead to a return to more domestic manufacturing as the advantage of doing business with China and other Asian countries erodes.

Manufacturers are particularly edgy about the volatile state of raw material costs, citing sharply rising prices and an uncertain future. It remains to be seen when cotton prices will stabilize following the spike caused by shortages from increased demand and summer rains in China and Pakistan, the world's No. 1 and No. 4 producers. Prices peaked late last year at a historic high of $1.50 per pound, following a 50% rise since July. Prices are expected to ease in 2011 but will remain unpredictable.

Imports gain ground

Imports have sharply gained market share in U.S. upholstery sales over the past decade, according to the Mann, Armistead & Epperson report. Imports - mainly from China - accounted for about 37% of U.S. upholstery sales last year, up from about 15% in 2001, the firm said.

Irrespective of raw material prices, the cost of overseas production in China has been increasing because of factors including a rapidly expanding Chinese economy and the slow rise of the yuan's exchange rate value, which tends to make Chinese goods more expensive in U.S. dollars.

"We expect higher prices for Chinese products in the next 12 months, and that could mean a return to more domestic manufacturing. If costs eat into the prices that the Chinese offer, it isn't that attractive an option anymore, said Jerry Epperson, managing director of Mann, Armistead & Epperson.

"The biggest issue right now we're facing is the increasing cost of business, and that's whether you're making furniture or widgets," said Bill Martin, director of the Franklin Furniture Institute, a research outfit at Mississippi State University. Mississippi is home to more than 120 upholstery manufacturers. "Because of freight costs, changes in management, increases in wages and the whole value chain," many manufacturers are reevaluating their decision to do business overseas, he said. Industry giants like Ashley Furniture are aware of the changes.

"The industry is facing a number of challenges, including the rising costs of raw material and devaluation of the U.S. dollar," said Todd Wanek, president and CEO. Ashley pursues a blended strategy, manufacturing both here and abroad with its 10 million square feet of factory space, and has more than 400 Ashley Furniture HomeStores retail outlets.

According to Wanek, the company remains upbeat for 2011 thanks to a line that has 40% to 50% new product this year, and the higher quality Ashley achieves by doing its own manufacturing.

Made in USA advantages

Domestic producers cite several advantages to building upholstered furniture here rather than overseas.

"The emphasis in the industry isn't going to change," said Don McCoy, senior vice president of Mayo Mfg., a Texasbased maker of medium to upper-medium priced leather and fabric sofas. "It is pricedriven, and we have to keep low raw material costs with cutand- sew kits out of Asia. But for us, (manufacturing in the U.S.) creates opportunity."

Mayo can turn around a custom order in 10 to 18 days, he said.

"We are never going to be able to compete with the imports (on price), but speed and choice come out of that. Retailers don't have to commit to a container. They don't have to tie up money and worry if product is going to turn or not. Quick ship means less risk."

Domestic production seems to be working for Mayo, which showed at the Las Vegas Market in January and is back at the High Point Market this week with a new showroom after a seven-year absence.

"There are some big advantages to producing here in the U.S.," said Roger Berkley, vice chairman of the National Textile Assn., which represents domestic manufacturers among others. "We specialize in short runs, quick turns and easy access. We dominate in terms of responsiveness and, of course, unassailable quality. We're Americans, and we design for the American market.

"The Chinese have to reinterpret for our market. Not to mention, the U.S. also has strong color matching and can make a commitment for three to five years out with a color - the Chinese do not," said Berkley.

As with Ashley, Flextsteel's Klosterman said that a blended manufacturing strategy has worked well for the company.

"We import from Asia as well as having a long history of making domestically produced American upholstery," he said. "Asia has had a big impact on the business, but selection is limited, retailers have to buy containers, they have the cost of the inventory, and there's long lead times."

Flexsteel can turn around custom orders in four to six weeks, but importing product allows the firm to keep stock that can be delivered to retailers in a week or two.

For his part, Epperson thinks the industry is on the road to a recovery, but may have to wait a while to see significant gains

"For 2011, we should have a decent second half, with housing activity which will give the U.S. economy a bounce," he said. "But 2012 is the year we've all been waiting for."

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