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BIFMA's Reardon Discusses Economy's Impact On Office Furniture Sales

The office furniture industry has taken a hard hit from the softened economy. Several of the leading manufacturing companies have laid off workers in the wake of declining demand for their products. Grand Rapids, MI-based Steelcase, Inc., the world's largest office furniture manufacturer announced in Mid-April that it was considering laying off up to 1,000 additional hourly workers if business does not perk up.

In light of these developments, Wood & Wood Products spoke with Tom Reardon, executive director of the Business and Institutional Furniture Manufacturers Assn. Reardon noted the slowdown but also discussed the potential for improvement created by the Federal Reserve Board's most recent round of interest rate cuts. He also addressed the prospects for continued growth of the small office/home office (SOHO) segment that many BIFMA members are pursuing.

Orders Down, Yet Shipments Up
Reardon said that January and February orders of office furniture were down 4 percent as compared to the first two months of 2000, but shipments were up 3 percent. "That's a little misleading because manufacturers are working off the backlog of orders from late last year," Reardon said. "We are pretty much through the backlog, and from here the monthly numbers should reflect the incoming orders."

Reardon said that the overall impression he garnered from anecdotal conversation with BIFMA members is "that things are still soft." He attributed this sense of softness to a variety of factors. "When you talk about the general economy, we are seeing a slowdown in most manufacturing businesses and not just manufacturing of office furniture, but anybody who manufactures some kind of capital goods. They have seen a reduction in their order rates that, coupled with higher energy prices, has put the squeeze on profits. Our industry is sensitive to corporate profitability. When businesses have excess profits and capital they tend to reinvest it in their business. Whether that's hiring more people or upgrading their offices, our members benefit. If a business, whatever it is, is not experiencing strong profits, it will put any expansion and renovation plans on hold. Also, if you are not hiring more people, then office furniture is certainly a discretionary expense," Reardon said.

Signs of Improvement
Optimistic signs exist for improvement, Reardon said, due to the recent lowering of interest rates by the Federal Reserve. The latest half-point interest rate drop occurred on April 18, surprising many in the industry since the Federal Reserve was not set to meet until May. The drop in interest rates was the fourth of the year. The Fed had cut rates twice in January and again on March 20.

"From an economic policy standpoint we are headed in the right direction," said Reardon. "It's just a matter of time before we see the interest rate reductions take effect. The Fed has been very aggressive in the first three months of the year in cutting interest rates. Conventional wisdom says it usually takes about six months for the affect of any Fed action cuts. We are confident that we will see stronger corporate profitability in the second half of the year and that will translate into improved business conditions for office furniture manufacturers."

Asked about the impact of the energy crisis to the industry, Reardon said the biggest impact is that everyone is paying more for energy, whether it is fuel increases in transportation costs or energy to run facilities. He noted that it affects everyone's profitability, including furniture manufacturers and their customers.

Reardon said there has been an erosion of confidence, both among consumers and businesses. "CEO confidence stems from what we see and feel as a result of the stock market. The stock market responds to corporate profitability. When projections for corporate profitability are strong, that reflects positively on rising stock prices and a rising stock market. When corporate profitability is a little more dismal it has a negative impact on stock prices. We saw that late last year and also in the first quarter of 2001. I think the Fed's action will send us in a positive direction. We saw a little response to the most recent surprise interest rate cut by the market's rallying. I think we are poised for things to improve."

The Battle for SOHO Market Share
Reardon said the home office market is viewed as a growth market by many traditional office furniture makers.

"The small office, home office is a lot of different things. We have seen traditional commercial office manufacturers adjust their marketing strategies to get into that market either through the acquisition of companies doing that kind of product and already in that distribution channel or the internal development of products to meet that market niche.

"Likewise, we see residential furniture manufacturers adapt their product lines to develop more office type of products as opposed to the more traditional offerings of bedroom, dining room and living room furniture. It remains to be seen who is better poised to serve the small office/ home office market. The residential furniture manufacturer may have a slight advantage just because they are in the distribution channel."

Reardon added, however, that commercial furniture manufacturers are better poised distribution-wise for serving the small office market. "I believe it is a small segment for our industry in that you are talking about selling one or two items as opposed to landing a 50- to 100- workstation job. But when you look at the growth rate of the market, it is impressive."