State of the Industry Archives.

October 2005

So Far So Good Despite the Black Cloud

Store fixture manufacturers assess the potential impact of Katrina, China and rising energy costs.

By Rich Christianson & Andy Jenkins
The Carlson Co. Inc. created store fixtures for this Levenger boutique, located within a Marshall Field's department store in Chicago. Chris Carlson says the industry may have a hard time keeping up with mergers and changes in the retail market, like the impending brand change from Marshall Field's to Macy's.

Nearly two-thirds of the way through 2005, U.S. store fixture manufacturers had great reason to believe their business would continue to steadily improve, much as it had over the last two years.

Unemployment levels were relatively low and consumers remained in a buying mood. The U.S. Department of Commerce reported retail sales of $280.9 billion for August, up 10.7 percent from August 2004.

Then Hurricane Katrina struck its wicked blow to the Gulf Coast on Aug. 29, leaving an estimated 1 million people without homes and catapulting gas prices to historic highs. Three weeks later, Hurricane Rita wreaked additional havoc on the Gulf, though fortunately, inflicting far less damage to life and property than originally feared.

Ever since, store fixture manufacturers and retailers alike have crossed their fingers as they wait to see how the aftershocks of Katrina, Rita and rising energy prices, on top of the continuing war in Iraq, might dampen consumer confidence heading into the crucial holiday season. How loud and long cash registers ring in the final quarter of the year will have a great impact on store fixture shipments in 2006.

"It seems that our industry is always operating with something of a black cloud on the horizon, be it rising oil prices, increased cost of raw materials or what a hurricane might do to consumer confidence," says Klein Merriman, executive director of the 50-year-old National Association of Store Fixture Manufacturers. "The holiday shopping season is always huge for the fixture industry. If that goes badly, all bets are off. Because the majority of our members do business with just two or three customers, all it takes is one customer to have a bad holiday season to hurt a fixture maker's year."

Business on the Upswing

After struggling through a lackluster three-year period between the third quarter of 2000 and the third quarter of 2003, Merriman says U.S. store fixture manufacturers have enjoyed a solid business revival.

According to NASFM estimates, the U.S. store fixture manufacturing industry generated approximately $10.1 billion in revenue in 2003, with wood accounting for 41.6 percent and laminate accounting for 13.9 percent of the total.

In spite of nagging concerns over the potential drag of recent events on the economy, Merriman says, "Business for our members is good." He points to the results of the association's recently completed biannual Industry Performance Report indicating that members project 2005 store fixture revenues to finish about 10 percent ahead of last year and to grow by an additional 10 percent in 2006.

Alan Harvill says EMI Industries mainly focuses on fixtures for the grocery store, convenience store and restaurant markets, like this job for a Publix grocery store. Harvill says he could see EMI moving into the retail market as well, to help diversify business across different segments and even out the seasonality and cyclicality he finds in the store fixture industry.

Retail Forward, a global management consulting and market research firm based in Columbus, OH, also remains optimistic, though noting in a Sept. 27 news release that "persisting high fuel prices remain the biggest threat to the outlook." According to the release, "Despite the economic side effects wrought by Hurricanes Katrina and Rita, Retail Forward expects the 2005 holiday season to be a healthy one for the key retail sectors, though growth is expected to be off last year's solid performance. Retail Forward's forecast is for 5.0 percent to 5.5 percent year-over-year growth in the fourth quarter for key measures of holiday sales."

Jack Hale, CEO of T.J. Hale Co. of Menomonee Falls, WI, and vice president of NASFM, says, "We have seen a few signs of activity that rival the boom times of the late GÇÿ90s. Improved consumer confidence levels and lower unemployment have led to better business across the board for retailers and store fixture manufacturers. We're optimistic that's going to continue, barring an event that we don't even want to think of."

Hale observes that NASFM's most recent annual report on profit margins indicates that margins have improved since the start of 2004 "and we anticipate significant improvement in the 2005 report."

James Schubert, president of Showbest Fixture Corp. of Richmond, VA, and president of NASFM, says, "2005 has been a good year for the industry, one of the best in five years." Because of what he refers to as the "evil sisters," Hurricanes Katrina and Rita, Schubert says he recently downgraded his outlook for 2006 from "pure optimism" to "cautiously optimistic."

"My concerns are short term," Schubert says. "I do see inflation and continual pressure on margins. The issue on the cost side is still troublesome. But the volume and activity of the fixture industry is still good. I generally get good vibes from the members I talk to. They're busy. Energy prices could dampen the holiday season, but people still seem to be buying. If there is a reasonable Christmas season, the industry should have a good 2006."

Alan Harvill, president of EMI Industries of Tampa, FL, says his company saw business pick up in the second half of 2005 following a previously "slow" 18-month period. "We see 2006 as a good growth year for us. Our retail store customers have told us that their capital expenditure budgets are up and, therefore, they expect retail spending at the store fixture level to be up as well."

Leggett & Platt to Close Up to 30 Facilities

Leggett & Platt, which became the North American store fixture industry's biggest player through a slew of acquisitions in the second half of the 1990s, is finding that being bigger is not necessarily better.

The diversified company posted third quarter sales in the range of $1.30 billion to 1.35 billion, representing a shortfall of approximately $40 million compared to its previously announced earnings guidance.

Commenting on the company's performance, Felix Wright, chairman and CEO, says, "We are very disappointed with the reduction of our anticipated results for this quarter and the full year."

As a result, Wright says L&P will look to improve its bottom line by passing along raw material and energy costs to customers and to close or divest between 20 to 30 production or warehouse facilities.

"We were previously of the opinion that recent cost increases would likely be temporary, but we are no longer comfortable with that assumption," Wright says.

"Accordingly, we plan to adjust our product prices immediately in some lines of business and closely monitor raw material costs in other product categories."

In addition, Wright says, "Over the last few years, we have purposely chosen to maintain spare capacity, expecting demand in the markets we serve to return to the levels seen in the late 1990s. That incremental demand has not materialized and our patience has finally run out. We will wait no longer. We have decided to eliminate spare capacity to match the demand levels experienced over the last few years. We will also take this opportunity to close or divest a few operations, which though operating near capacity, are chronically unprofitable or marginally profitable. Most of the changes will occur within the Residential Furnishings and Commercial Fixturing and Components segments, with modest adjustments in the other three (L&P) segments."

"The retail market has been great over the last year," says Chris Carlson, owner of Madison, WI-based Carlson Co. Inc., which specializes in fixtures for the cosmetic industry and has seen sales increase at a 20 percent clip this year over last. "I don't know where all the mergers are going, with Marshall Field's turned into Macy's and other things like that. My personal take is that we've been over-retailed for 15 years, but I'm not going to bite the hand that feeds me."

"This has been a banner year for us," adds Marc Sagrillo, vice president of High Country Millwork LLC of Longmont, CO. "We're looking for a 17 percent increase from last year."

Assessing Rising Energy Costs

With oil trading prices rising from $48 a barrel in mid-May to up to $71 in recent weeks, Merriman issued a call to members in the September NASFM News bulletin to report rising costs related to petroleum. "This includes fuel both to deliver fixtures to customers and the surcharges our members are receiving for materials shipped to them. It also is impacting other petroleum-related items such as natural gas, some plastics, polymers, etc."

"It is a continuing concern," Merriman says. "It's almost similar to a year ago when we saw steel prices go up so fast. Our members are already reporting increases with anything petroleum related, even shrink-wrapping, for example. If you are in a low-margin business like fixtures, there is not a lot of excess that can be cut."

Schubert says his company and other fixture manufacturers have traditionally been reluctant to pass along sudden increases in raw materials, supplies and energy costs. "I think the recent events give the industry a little bit of pricing flexibility because everyone is aware of the situation. If there's ever been a time for our company to raise prices, the time is now."

Harvill says energy costs have risen faster than his company could pass them along as price increases. "Margin compression is still a battle within our industry. I think we're seeing an overall trend of growth in revenue and an upward trend in spending with retailers, but we're not seeing that big of an improved margin within the industry, because it's being offset by rising energy and material costs."

Carlson says the only cost that his customers have complained about is rising freight surcharges. "We're asking our clients to roll with the changes," Carlson says. "I know it can be unsettling for them, but there really aren't any other options."

Hale notes that T.J. Hale learned an expensive lesson in 2004. "Last year, we took a significant hit from the rising cost of materials, particularly steel and board. We did not pass along the increases and did not know the cumulative cost until late in the year. When we did, we said, GÇÿHoly Toledo!' Since then, we're doing a better job of forecasting material price increases."

In view of the sharp spike of energy prices, Hale says, "We need a clear focus on how we will conserve energy." For example, with winter just around the corner, Hale says he hopes to find a way to prevent excessive heat loss at the company's truck docks.

Sagrillo says the rising cost of gas to heat High Country Millwork's 85,000-square-foot facility this winter has been on his mind of late. "If we have the opportunity to pass along the costs we will. But, where we really have to make up for these costs is with our efficiency. If we have a 20 percent increase in energy costs, we have to find these savings somewhere else - maybe through better engineering or cheaper material costs."

The China Connection

As with nearly every manufacturing sector under the New World sun, store fixture manufacturers have not been immune to competition from China and many source products from there. According to Merriman, the majority of fixture products and components imported from China are metal.

"Global sourcing to China is a major trend in the industry that our members have had to respond to," Merriman says.

"I think 10 years ago, our customers looked at outsourcing as a negative, like our business couldn't keep up," Carlson says. "Now I think they look at sourcing as a positive and a reality of doing business."

NASFM organized trade missions to China in the spring of 2004 and again in 2005. About 35 members participated in each of the "sold-out" tours, Merriman says.

Marc Sagrillo, vice president of High Country Millwork LLC, thinks consumers are looking for the fine shopping experience, like at this St. John Knits shop in Beverly Hills, CA, an HCM customer. "The one sector of retail that has consistently good growth is the luxury market," Sagrillo says. "Whatever state the economy is in, the rich people still spend money."

"We are definitely not in the business of encouraging our members to outsource from China," Merriman says. "The main purpose is to familiarize our members with what is going on in China, predominantly through plant tours. I think everyone comes back thinking that China is a fast-changing economy and a formidable competitor."

NASFM does not have to encourage its members to recognize the value of outsourcing, particularly from China, Schubert says, adding, "If you are not sourcing from China today, you are making a serious mistake." He says his company, which specializes in supplying products to university bookstores, purchases metal shelving, metal gondolas and other metal components from China to complement wood, laminate and other products manufactured at Showbest's factory.

"Within the last year, some of my retail clients have begun asking for two bids, one for all domestic-made products and one that includes imported products," Schubert says. In the end, the client has to weigh the importance of timely delivery versus lower price, he adds.

Sagrillo agrees that sourcing metal products from China is a fact of today's fixture business. "It's easier to get a metal fixture from China than it is to get a wood fixture. The trend is going more toward metal fixtures, but there are still a lot of opportunities out there in the industry for wood fixtures" especially for high-end casework, Sagrillo adds.

Hale says he attended last year's China tour. "I think it's valuable to get an overview of the Chinese market. Several of our people have already been over there for sourcing. We're not doing much in the wood realm but we are buying some metal products because of price."

While the outsourcing trend has not had an industry-wide destabilizing impact like it has had with the U.S. residential furniture market, NASFM members are wary that some U.S. retailers might order fixtures direct from China or other low-wage nations. What makes this scenario less likely is the fact that most retailers not only require adherence to short lead times, but quick response to changes in design, quantities and delivery dates, Merriman says.

Hale says it is just a matter of time before some retailers work directly with Chinese fixture makers. "I think it's going to happen by a gradual step-by-step process. We won't see a dramatic sudden impact," he says.

To be more competitive, Hale says his company will continue to pursue a blending strategy through which it will augment logistically sensitive products with imported components and systems. "We will also strive to improve all aspects of our business through lean manufacturing, including our rapid response to customers. You have to be acutely aware to customer needs and make sure they are met to be successful."

Harvill says the store fixture industry will continue to embrace outsourcing as a way of reducing costs and that companies will look at sources beyond China. "Outsourcing could mean Mexico or Brazil," he says.

Sagrillo says the custom-nature of his company's work buffers it from Chinese competition. "Our customers can't go to China and get a one-time Tiffany & Co. store outfitted. It's just not possible. If they want to build 200 Tiffany stores, that's a different story, but that's not going to happen anytime soon."

Because it takes so long for products to cross the ocean, Carlson says he worries more about competition from Canada than China. "I seem to be the lone one in the industry with this view, perhaps because we serve the cosmetic market, but the biggest relief I have seen is that the Canadian dollar is getting stronger. Our Canadian competitors - who I wish I could say do lousy work, but I can't, because they do very nice work - made it almost impossible to compete when the Canadian dollar was weak."

Other Trends

"An onging trend is the evolution of traditional retailers," Merriman said. "Department stores are continuing to lose market share and we're seeing fewer and fewer regional malls being built. The traditional shopping mall is having to reinvent itself."

Merriman says he also sees additional consolidation of retailers such as the Kmart/Sears and Federated/May mergers. As there become bigger but fewer retailers, Merriman says there likely will be a new round of consolidation in the fixture industry.

Carlson says the industry is backing away from online reverse auctioning. "Retailers have gotten stung by going with the lowest bidder," Carlson says. "The lowest bidders haven't always been qualified and the job ends up costing the retailer more than it would have in the beginning. It has largely gone off the radar screen."

Sagrillo says e-commerce has not had the impact on retail sales, and thus the fixture industry, that some people feared. "The Internet was going to be the death of the brick-and-mortar store. People were going to go online, place an order and wait for delivery - the stores were all going to shut down." Sagrillo adds that retailers met the challenge of attracting customers into stores by "getting better looking and that has trickled down to us in store fixtures."

                                                                                                                                                                                           

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