W&WP September 2002

State of the Industry:

Architectural Woodwork & Store Fixture Execs See Glass as Half Full

While business has not entirely evaporated for architectural woodworkers and store fixture makers, a soft economy has created incredible competition within each market segment.

By Chad Sypkens and Greg Landgraf

Pricing pressures, foreign competition and slow payments were each among the top concerns cited by participants in Wood & Wood Products' 15th Annual State of the Architectural Woodworking and Store Fixture Industries survey. They reflect a business environment somewhere between the cabinet market, which held up well during the economic downturn, and the furniture market, which disintegrated.

How was business in 2001?  
How was business in the first half of 2002?
Excellent 20.3%   Excellent 13.3%
Very Good 30.5%   Very Good 34.4%
OK 35.1%   OK 43.0%
Poor 13.3%   Poor 7.0%
Terrible 0.8%   Terrible 2.3%
What are your business expectations for the second half of 2002?
What are your business expectations for 2003?
Excellent 9.4%   Excellent 8.7%
Very Good 31.2%   Very Good 44.1%
OK 38.3%   OK 42.6%
Poor 14.8%   Poor 2.3%
Terrible 6.3%   Terrible 2.3%
Based on 128 responses

A majority of respondents, 51%, say that business in 2001 had been "very good" or "excellent." Only 41% could say the same about business in the first half of 2002. And both figures are a drop from last year's survey, when 68% of respondents said 2000 had been "very good" or "excellent."

Klein Merriman, executive director of the National Association of Store Fixture Manufacturers, says, "I think it's been a tough couple of years, but right at the moment, things seem guardedly optimistic" among fixture makers. A major factor for that segment will be the holiday season. "Just one month from now, things could turn dramatically either way," Merriman says.

Buyer's Market?

The economy was rated most frequently by survey respondents as their top concern (See chart). The increase in participants' concern over the economy (last year it was listed as the top concern by 15.6% of respondents; this year, 23.0%), however, is hardly a surprise.

More interestingly, and probably more noteworthy, is the growing concern over factors that rob woodworkers of their ability to secure good prices and good terms. Three such factors were among the top six concerns: low-priced competition, foreign competition and slow payments.

Moreover, all three were listed as a top concern more commonly this year than last year. Slow payments, in particular, were an increasing sore spot. Last year, no survey participant considered it a top concern; this year, more than 6% did.

Combined, these three indicators of a buyer's market were listed as a top concern by 29.1% of respondents. Last year, only 19.5% of respondents considered them top concerns.

Merriman notes that pressure on profit margins is one of the top concerns among NASFM members, although he disagrees with characterizing it as a "buyer's market."

"It's not like a buyer's market in a commodity," he says. "Retailers that buy only on price are regretting it. They can't have stores opening late, and they can't have stores not looking good."

Instead, Merriman says, bankruptcies of major retailers such as K-Mart have done a lot to hurt the industry, and slow payments in some cases may be a symptom of a lack of management expertise. In addition, he says, "Retail customers, for the most part, are much bigger than our members. They've always had significant power."

Hope for Next Year

The good news is, survey participants believe that the first half of 2002 was the bottom of the market - sort of. Nearly 48% believe sales in the second half of the year will be "very good" or "excellent," and 53% feel that way about 2003.

The tepid optimism is a slight improvement over last year's result. Both, however, rate far below any other year since 1995, when we first asked respondents about their predictions for the coming year.

"It sounds like a gloomy picture, but it's not," says Merriman. "It's just a competitive industry." He adds that NASFM members turned out at IWF with an eye toward major purchases, reflecting their confidence in a turnaround.

Price-Cutting Brings Concern

Among the most popular topics of main concerns among architectural woodworkers was aimed at price wars taking place during the bidding phase.

"The competition is brutal," says John Yetter, president of Oakwood Classic & Custom Woodworks in Rochester, NY, who cites profit margins as his main concern. "There are not a lot of jobs to bid on in the first place and the ones that are out there are being bid on by everybody, and there is always some company willing to do a job for less then you. Many companies don't fully understand their costs. The cut-rate pricing has made us market our products better in order to remain competitive."

The Industry's Top Concerns
Concerns Responses %
Economy 26 23.0
Workforce 20 17.7
Low-price competition 17 15.0
Insurance/worker's comp costs 10 8.8
Foreign competition 9 8.0
Slow payments 7 6.1
Another attack/Global unrest 6 5.3
Stock market 5 4.4
Corporate scandals 4 3.6
Taxes 4 3.6
Diversifying markets 3 2.6
Government regulations 2 1.8
Based on 118 responses. Some respondents listed more than one concern; others listed no concerns.

Yetter's company doesn't have to rely solely on getting bids because part of his company sells to the wholesale market.

"We are trying to do more negotiated work and stay out of the bidding war," says Yetter. "We aren't solely reliant on bidding on jobs which helps. We aren't just selling to the local market."

Yetter recently built a new 30,000-square-foot facility, adding new machinery and employees, a move he wishes he would have waited on.

"We are going to have to scale back and layoff some people - for the time being anyway. We have made an effort to try and put it off as long as possible but it is inevitable," says Yetter, who has 39 employees and looks to top $4 million in sales in 2002.

Companies are being forced to find work in places they would not normally have to look to. Yetter has found great success through the Internet.

"It has been a great place for us to generate many of our leads," says Yetter. "We have upgraded our Web site by designing it so people can call on us. When they do, we are able to explain to them in great detail that we have a quality product and competitive pricing. We are also putting our entire catalog on CD and making it available in PDF format on our Web site as well, which is a huge cost saving advantage."

Doug Mock, president of the Architectural Woodwork Institute as well as Mock Woodworking, explained that the economy has had a major effect on business as a whole and price-cutting is just one of the effects.

"All three of our markets are down from the previous year," says Mock, whose company produces 50% architectural woodworking and 50% store fixtures and healthcare furniture. He says his company put plans on hold this year to add an office and manufacturing addition.

"I think right now everyone is seeing a reduction in bid activity. Companies are slow in making their decisions. With margins being challenged and more competition in each area, some people are broadening their geographic and/or product marketing approach. This is happening all across the country," Mock says.

The architectural woodworking industry is low on backlogs with many of the companies facing a lot of uncertainty right now, he adds.

Response to Recession:
No effect: 32
Delayed investments: 28
Cut costs: 18
Layoffs: 11
Made improvements: 3
Diversified business: 2
Increased marketing: 1
Some respondents listed more than one effect of the recession; others did not respond to this question.

"Everyone seems to be waiting to see what will happen," says Mock. "At the recent IWF, AWI signed up 12 new members and also came away with a lot of new prospects as well. That is very comforting. After speaking with the machinery folks during the show, everyone seemed pleased with the results of the show, from both a quality lead and quality sales point of view. Hopefully that will be a sign of good things to come."

Still, Mock says the future is still uncertain. "I wish we knew what was going to happen. You read the news in the morning, and it makes you want to go back to bed. We are just faced right now with a period of uncertainty."

Businesses are looking at being more creative with their market and their customer base, making sure they keep their core employees busy so they can avoid layoffs if at all possible, Mock adds.

"Insurance costs are also becoming more of a major issue," says Mock. "Virtually across the board, whether it be health insurance or property/casualty/liability, insurance rates are going up. Health care is driven by demographics and with the aging population, the increased costs of health care is the result. I know 9/11 had something to do with the rise in costs as well."

The foreign markets are also making matters worse as companies are unable to compete with the low labor costs available in other countries.

"To some degree, we are seeing foreign and off shore competition making it more difficult for our industry," says Mock. "Based on what I have heard, it is hard to imagine the business is ever going to return. They just have a competitive advantage that is going to be hard to deal with for everyone."

About the survey: Wood & Wood Products faxed copies of the 15th Annual State of the Architectural Woodworking and Store Fixture Industry survey to manufacturers believed to have at least 20 employees. One individual in a corporate or operating management position per company was selected randomly from our circulation list to receive this survey. In all, executives from 118 companies responded to the survey. (Not every respondent answered every question.) W&WP gratefully acknowledges the assistance of the participants in this year's survey. Respondents consisted of 27 store fixture manufacturers, 70 Architectural Woodworkers and 21 who manufactured products for both industries.

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