By Wade Vonasek and Brad Walseth

A significant decrease in sales has many companies in the cabinet industry searching for new opportunities while preparing themselves for an eventual upturn in the economy.

It’s not fun and games for the cabinet industry. According to the KCMA Trend of Business Survey, cabinet sales in 2008 were down 19.3 percent from 2007 sales. Photo courtesy of Kitchen Kompact Inc.

As with a host of other industries, the U.S. cabinet industry has been significantly challenged by the current economic environment. According to the Kitchen Cabinet Manufacturers Assn.’s (KCMA) Trend of Business Survey, cabinet sales in 2008 were down 19.3 percent, compared to a decrease of 7.4 percent for 2007. (For month-to-month percentages, see the chart on page 30.) And 2009 already has seen a Merillat plant closing in March that cost 157 jobs, as well as Omega Cabinetry laying off 100 employees in February.

“Cabinet manufacturers have been affected negatively by the current economy,” says Dick Titus, executive vice president of the KCMA, which represents the majority of large cabinet companies. “After 126 consecutive months of growth through November 2006, there has been nothing but negative growth since then. The lowered opportunities have led to layoffs, plant closings, reduced shifts and similar management actions in response to lowered demand for industry products.”

“We have experienced a significant reduction in sales that continues to decrease, especially with our builder accounts,” says Bill Weaver, president and CEO of Canyon Creek Cabinet Co. “We are also seeing a significant number of both dealers and builders going out of business. With this comes an increase in bad debt.”

“We have experienced the slowdown also and have had to cut our labor costs slightly,” adds Mike Junk, president of Crestwood Inc.

A Glass Half-Full Mentality
Most companies are at least feeling some repercussions from the economic downturn, but many also are finding ways to compensate for the drop in business by keeping an eye toward the future, as well as diversifying product offerings.

“We are feeling some of the repercussions, just as everyone in the industry is,” says John Gahm, plant manager for Kitchen Kompact Inc. “To compensate for the downturn, we have introduced some new products to the marketplace and reacquainted ourselves to potential customers throughout the country.”

“We have also made some painful cuts to lower our overhead during this down cycle,” says Jim Ewing, sales manager at McConnell Cabinets Inc. “We are looking at new markets, both geographically and with new product offerings.”

“To compensate for [decreased sales], we are increasing our efforts to get new business from new customers and develop additional products to sell to our existing customers,” says Weaver. “As some of our competitors go out of business this creates new opportunities for us to increase market share. We have also introduced new products for new distribution channels.”

“Some members are using any downtime to increase their advertising and marketing efforts,” adds Jim McDermott, executive director of the Cabinet Makers Assn. (CMA), speaking on behalf of the smaller cabinet shops. “This is also a good time to get better organized in the shop and office, and to take time to look at automating their process from information flow to the shop to newer machinery. Some shops are looking very hard at overhead expenses and cutting where they can. Overall, some shops will adjust better than others. Those in a strong market will fare better than those where the housing market is weakest.”

Though all segments of the industry have been negatively impacted by the economy, some sectors, such as remodeling, are currently showing slight promise.

“The most impressive segment appears to be the remodel sector of the economy, which represents about 60 percent of our mix,” says Junk.

“We have a retail showroom that deals primarily with homeowners and small remodelers,” says Ewing. “This market has remained strong for us.”

“We think the multi-family and remodeling sectors remains promising, and we feel that when residential building gains momentum, that our new products will give us a better footing in that sector,” adds Gahm.

Green Times
Considerable attention has been given to green manufacturing this last year, as governmental regulations and increased public awareness have combined to bring the green movement to the forefront, at least in some areas of the country. Have the green initiatives led to more requests from customers for products containing green materials? The signals are mixed, with some woodworkers reporting an increase, while others report no growth in green business at all.

“Green is definitely a growing point of interest for our customers,” says Gahm. “With the creation of the KCMA’s Environmental Stewardship Program (ESP), our certification has given us some opportunities in areas that would not have been possible without ESP certification. In the past 12 months, customer requests for green materials have more than doubled, and we anticipate it will more than double in 2009.”

Junk agrees, “We have had considerably more requests for green materials and FSC (Forest Stewardship Council) products in the past 12 months, over the previous 12 months, especially in the big commercial projects.”

However, both Weaver and McConnell say their companies’ green requests have stayed about the same, and others have mixed views on the subject.
”Interest in green products continues to grow, although the market is soft,” says Titus. “Green is a consideration for many consumers, but still not a sales driver.”

McDermott’s members have also seen increased interest in green. “There is some increased interest from customers in the green concept lately,” he says. “What we have found is that there is conflicting information about just what exactly green means to us and to the consumer. The only common denominator is that a green product will cost more. Consumers will make that choice as their budgets allow. It will be a few years before a consensus is reached about green products.”

Debating Regulations
The debate reigns over whether compliance with environmental regulations, such as those implemented by the California Air Resources Board (CARB), gives a marketing advantage or disadvantage to cabinetmakers that comply at a cost, especially when non-compliant products are still prevalent in the marketplace.

Weaver says that since the rest of the country has not yet followed California’s lead, Canyon Creek has faced an interesting dilemma in trying to work with different standards. “We do some business in California,” he says, “and we changed our materials to comply with CARB. This has increased the cost of materials. We are still trying to decide if we will carry CARB compliant and non-CARB compliant materials. We originally were only going to have CARB compliant materials, but we are reassessing this as we do not want to increase our cost for materials for areas that do not require CARB compliance. I don’t think the regulations are positive for the future,” he adds. “They will accomplish very little and cost the consumer more.”

McDermott agrees, and says the new regulations work against the best interests of small business. “In Southern California, the attitude from the government towards small business in general, and small manufacturing specifically, is not a good one,” he says. “The more regulations you impose, the harder it is for a business to comply, thus inhibiting profitability. If the government wants to impose restrictions, it should make and enforce the laws equally for all involved. What is happening is that small manufacturing is leaving the area, thereby further eroding the tax base. This hurts everyone.

“What is the answer you might ask? Let’s look at areas where they embrace small manufacturing and small business and learn from what they are doing differently. Small business is the backbone of America and our government should do all it can to encourage a fair and even playing field,” McDermott adds.

However, this attitude is not shared by everyone. Some, like Gahm see the regulations as a positive trend. “We do feel CARB is, and will be in the future, good for the industry,” he says. “It is a little hectic getting everything in line to meet the requirements, but in the end, CARB is definitely good for our industry and good for the environment.”

Titus agrees. “KCMA members have been affected by the CARB regulation,” he says. “The KCMA Environmental Stewardship Program now references CARB compliant materials. Some key provisions of the CARB rule regarding enforcement and finished product compliance issues still need to be resolved. But the CARB regulation already is having a significant effect on the industry, which ultimately, should be positive.”

“Crestwood has long been CARB compliant with our product offerings,” Junk adds. “The only effect has been one of administration in spelling out our compliance.” He points out that, “The regulations will be positive in the fact they will make imports abide by the same standards, thus leveling the playing field.”

Challenges Ahead, Opportunities Too
Junk says sales for 2009 are expected to be off by 15 to 20 percent from 2008 sales at his company, while Weaver is estimating a 20 to 30 percent drop. Ewing, however, says he hopes for an increase in the last two quarters, an outlook shared by some industry watchers. Gahm says he is hedging his bet, anticipating anywhere from a 5 percent increase to a 5 percent decrease. “In today’s economic climate, if we are anywhere in that range or better, then we would be more than satisfied,” he says.

Some CMA members expect a decrease of 5 to 25 percent, but McDermott adds that, “A few members are on track to increase sales this year.”
Thus, with the sales outlook less than rosy, cabinetmakers face an abundance of challenges. “The biggest challenge [for many of the large cabinetmakers] for 2009 will be to preserve market share and survive the worst economy since World War II,” Titus states.

In times like these especially, the bottom line is the bottom line. Weaver says the biggest challenge facing Canyon Creek is “to be profitable,” a sentiment with which Ewing agrees.

“As home prices drop, builders are forced to lower their costs in order to keep building,” Ewing says. “That means they hammer their subs and suppliers for price concessions. Unfortunately, as some of our competitors get desperate to keep the lights on, they start giving their profits away, which in turn, hurts the market for all of us.”

Yet in the midst of the challenges, Junk sees opportunities. “Our biggest opportunity is at the same time our biggest challenge — growing our dealer base in a down market,” he says. “Establishing new partnerships left void by companies that are not doing well in the downturn [is another opportunity].”

“The greatest opportunity for Kitchen Kompact in 2009 will be the shift of the consumer mindset to ‘value’ products,” Gahm says. “We think that value will be at the forefront of any upturn in the kitchen cabinet industry and we feel that with our new products and our price points, we will be one of the first in line to benefit from any uptick in cabinet sales.”

McDermott sums it up with a call for renewed optimism. “The biggest challenge facing our members is remaining optimistic during this difficult time,” he says. “The downturn will not last forever. This will pass, and our members will be better poised to take advantage of increased opportunities in the near future.”