CWB July 2003

Residential Furniture Industry Aims for Stability

As a theorized recovery still struggles to take hold, manufacturers cut costs with imports and plant closures.

By Greg Landgraf

Much like the economy and the nation as a whole, the residential furniture industry has had a series of turmoil-filled years. Terror attacks, war, foreign competition and consumers whose minds and wallets seem focused on the building they live in rather than the furniture they live with have combined to put the wood residential furniture industry in a kind of doldrum.

It is not exactly a recession - overall industry sales are essentially flat, and there are nearly as many positive specific stories as there are negatives. But equally, the return to boom times has not come nearly as quickly as many projected in the early days of the recession two years ago.

Mixed Results in a Challenging Environment

After the Sept. 11 terrorist attacks, some pundits predicted a big jump in home furniture spending as people cancelled extravagant travel plans and invested in their homes instead.

In five months, the U.S. dollar has dropped 12.7% in value compared to the Canadian dollar, and 10.5% in value compared to the Euro. That should raise prices in the United States for goods from those countries, and lower prices of American goods there. The Chinese government, however, ties the value of the yuan to the value of the dollar. Change in the value of the yuan is therefore miniscule, even as China's economy has boomed in recent years. As a result, many economists consider the yuan one of the world's most undervalued currencies.

Dollar Dropping
Date Canadian Dollar Euro Chinese Yuan
1/1/03 1.58 0.95 8.28
2/1/03 1.52 0.93 8.28
3/1/03 1.49 0.93 8.28
4/1/03 1.47 0.92 8.24
5/1/03 1.42 0.90 8.28
5/29/03 1.38 0.85 8.28
Note: numbers indicate the value of 1 U.S. dollar in the given currency on the date listed. For example, U.S. $1 was worth CDN $1.58 on Jan. 1, 2003.

Whatever bounce there was, it did not last long. While upholstered furniture shipments increased by 10.9% over 2001 to $10.928 billion last year, wood furniture shipments actually decreased by 1.8% to $10.863 billion.

"It's tough times out there," says Andy Counts, executive vice president of the AFMA. "Even though the broader economic indicators are trending upward, it's not translating into increased shipments yet."

A cursory review of financial results reported by leading furniture companies in late 2002 and early 2003 indicate few big changes either positive or negative. Hooker Furniture fared the best; it had its best quarter ever as sales grew more than 20%. While much of that was due to its acquisition of leather upholstery operation Bradington-Young, Hooker's casegoods business grew by 7.9%. Stanley, Dorel and Bush each racked up modest sales gains in their home furniture businesses as well.

But the furniture giants also had losers in the first quarter of 2003, including Furniture Brands, Ethan Allen, La-Z-Boy, Bassett and especially Bush, which saw quarterly sales drop 15.1%.

The AFMA sees only slightly positive results through 2003. It projects U.S. furniture shipments of $24.411 billion, up 2.4% from 2002. AFMA expects wood furniture to fare almost equally, with a 2.2% increase in shipments to $11.110 billion.

"We're hoping that with President Bush's tax plan and the weaker dollar that manufacturers will be a bit more competitive in the second half," Counts says.

Plants Still Closing

In North Carolina, at least 41 residential furniture plants have closed and 30 more have undergone mass layoffs since 1999, according to data collected by the Employment Security Commission of North Carolina. These cuts affected more than 3,750 jobs in that state alone. Not yet included in the data is the June 3 announcement by La-Z-Boy that it would be closing one of its North Carolina plants as part of a larger reorganization. (See Trends & News, page 18 for more details.)

The actual number of plant closures and furniture jobs lost are undoubtedly higher, considering that the ESC is only required to track closures of companies with at least 100 employees. In addition, the number of employees affected by plant closures and layoffs was not reported for every incident.

The closure data paints a picture of an industry that has made it through its worst times, but has not yet made great steps toward better ones. Layoffs and closures peaked in 2001 with 36 events (19 closures, 17 layoffs) after only 13 in the two years prior. Last year there were 16 closures and layoffs, and this year is on pace for only a slight decline, with six announced through the first three months. (Historically, about half of each year's reported mass layoffs and closures tracked have been announced by April 1.)

Import Challenges Yet to Serve as Deterrent

In both of the last two years, a significant challenge to importing, particularly importing from China, has broken just in time for the International Home Furnishings Market in High Point. Last fall, the West Coast port lockout kept some new introductions from making it on shore in time for the event. This spring, the threat of SARS has thrown a wrinkle into importers' plans.

If the lockout had any effect on anybody's opinion of importing from Asia, the numbers do not show it. The value of furniture imports from China last year grew by 51 percent to $4.2 billion, with $1.2 billion of that coming in the fourth quarter.

Time will tell if SARS will reduce the demand for Chinese furniture either. It has, however, created headaches for some importers. The potentially deadly SARS virus hit worst in China's Guangdong province, the center of China's furniture industry. It has caused many importers to cancel travel to China for designers and quality control, relying instead on staff already based there.

U.S. Furniture Imports

(in billions)
Country 2001 2002 % change
China $2,817 $4,268 +51.5
Canada 2,487 2,476 -0.4
Italy 1,148 1,197 +4.3
Mexico 613 646 +5.4
Indonesia 566 604 +6.7
Malaysia 466 532 +14.2
Thailand 296 386 +30.4
Taiwan 369 337 -8.7
Brazil 167 253 +51.5
Philippines 226 212 -6.2
World Total 10,311 12,190 +18.2
Source: International Trade Commission

Nevertheless, importing continues to gain acceptance and is even claimed as a source of pride. Furniture Brands International chairman Mickey Holliman boasted, "We remain an industry leader in offshore sourcing," in his company's recent quarterly report.

In an April 18 Wall Street Journal article, Pulaski Furniture President and Chief Executive John Wampler said, "It's just not economically viable to move [the new Antiques Roadshow furniture production] back here." Wampler said if SARS does interfere with production, Pulaski would move production to other Asian countries.

On the other hand, there are also companies who have chosen to fight the tide of imports by becoming more efficient in their operations and focusing on shortening lead times. Most notable and vocal among them has been Vaughan-Bassett. At a panel discussion at the International Home Furnishings Market in High Point, NC, in April, President and CEO John Bassett III said, "We have increased production by 25 percent without adding one extra person. Is it easy? No. I can tell you this is the most difficult thing I have ever done, but it is rewarding to know that we are helping this country."

Counts of the AFMA says that imports will not continue rising forever, although he is not sure when an equilibrium will be reached. "I definitely think you'll see a plateau, if you haven't already," he says.

Counts adds that the impact of imports on the number of plant closings can be overstated. "Even though you continue to see layoffs and plant closings, a lot of that is people learning they need to be more efficient," he says. "I think people will continue keeping a close eye on their supply chain."

The Currency Conundrum

The strong dollar, an economic factor that has encouraged importing, has reversed itself recently, dropping more than 10% in value versus both the Euro and the Canadian dollar since the beginning of the year. In theory a weaker dollar will reduce the amount of imports and stimulate exports, by effectively reducing prices of American goods in other countries and raising the prices of foreign goods here.

"It's definitely having an impact on our exports, as well as on imports from some countries," Counts says. He notes that it is too early to know the full impact.

Quarterly Sales Among Major Furniture Companies
Company Sales in millions Change Quarter ended Notes
Winners
Hooker Furniture $74.5 +22.2% Feb. 28 Much of increase due to acquisition, but sales grew 7.9% without
Dorel Industries $111  +3.9% Mar. 31 Retail climate still difficult
Stanley Furniture $61.3  +2.9% Mar. 29 Fourth straight quarter of growth
Losers
Bush Industries $74.9 -15.1% Mar. 29 Second quarter likely down also
Bassett Furniture $73.3 -13.6% Mar. 1 Hurt by JC Penney sales decrease
La-Z-Boy $550  -9.4% Apr. 26 Casegoods particularly soft
Furniture Brands $614  -3.2% Mar. 31 High-end furniture continues to underperform
Source: Company quarterly reports

Imports from China, the largest foreign supplier of furniture to the United States, are unlikely to be affected any time soon, however. The reason? China ties the value of its currency to that of the U.S. dollar. So, while the Euro has gained 10.5% in value compared to the dollar since the beginning of the year, the Chinese yuan has stayed essentially constant at 8.28 yuan to the dollar in that time - and for the past several years, despite China's booming economy. As a result, many economists consider the yuan among the world's most undervalued currencies.

"China continues to manipulate its currency, despite agreements it made when it joined the World Trade Organization," Counts says.

He adds that monitoring China's involvement in the WTO is one of the AFMA's top priorities.


AFMA To Focus on Domestic Manufacturing

At a May board meeting, AFMA members decided to retain its focus on serving domestic furniture manufacturers.

"We decided that now more than ever it's important to focus on domestic manufacturers," says Andy Counts, AFMA executive vice president. "We're going to continue to explore what companies outside our traditional membership can do, but will focus on domestic manufacturing."

In addition to monitoring China's involvement in the World Trade Organization, Counts says the association's priorities include tort reform, liability laws and enforcement of trade laws. The association is also involved in the newly formed Home Furnishings Caucus, a bipartisan group of U.S. Representatives focusing on furniture industry issues.


Furniture Working Group Created on Capitol Hill

The American Furniture Manufacturers Assn. and 17 members of Congress have established the Congressional Furnishings Caucus to develop policies to benefit the domestic home furnishings industry.

The caucus held its first meeting June 3. The meeting featured a presentation by the AFMA on the state of the industry and the association's legislative and regulatory priorities.

The caucus' stated goal is to serve as a sounding board and clearinghouse for proposals to improve manufacturers' competitiveness. It will also provide a venue for representatives to learn about industry initiatives.

Membership in the caucus is bipartisan and made up of representatives from furniture-producing regions. The following representatives have joined so far: Howard Coble (R-NC); Cass Ballenger (R-NC); Melvin Watt (D-NC); Rick Boucher (D-VA); Virgil Goode, Jr. (R-VA); Mark Souder (R-IN); Sue Myrick (R-NC); Roger Wicker (R-MS); Mike McIntyre (D-NC); Gresham Barrett (R-SC); Charles Taylor (R-NC); Julia Carson (D-IN); Fred Upton (R-MI); Phil English (R-PA); Marsha Blackburn (R-TN); Paul Gillmor (R-OH); and Don Sherwood (R-PA).

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