The Furniture Industry Down Under

Part 1 - Australia’s challenges.

By Tom Dossenbach

Editor’s Note: This is the first of a two-part series on the state of the furniture and woodworking industries in Australia. Tom spent a month “down under” as part of an Australian government-sponsored program on lean manufacturing in the furniture industry. He held workshops in six states and visited 28 companies – conducting lean manufacturing audits.

The United States is not the only developed country feeling the effects of rapid globalization in the furniture and woodworking industries. I thought it would be of interest to share the challenges of the Australian industry — including the issue of globalization — and what companies down under are doing to fight back. While much of this and next month’s topic will center on the furniture industry, other woodworking manufacturers and suppliers have a lot in common and are ultimately affected by the same issues.

Industry Profile

Australia’s land mass is about the size of the 48 contiguous states but with a population of just over 19 million — about the same as Pennsylvania and New Jersey combined. Most manufacturing is located around the major population centers in the coastal areas of Sydney, Melbourne, Brisbane, Adelaide, and Perth (on the west coast).

The industry shipments for wood and upholstered furniture total about US $1.8 billion in Australia as compared to $22 billion for the United States. Even though the industry is small compared to that in this country, the woodworkers in Australia boast that their total employment is greater than that of the automobile industry and in fact represents about 4.5% of all manufacturing industry employment.

     
 
The Lounge Innovation plant in Perth cuts motion furniture frame parts on a router for chair arms.  
     

There are a surprisingly large number of manufacturers of wood and upholstered furniture in this market, about 3,100. This means the average annual volume is just under $600,000 per manufacturer. The average total employment is about nine employees per manufacturer resulting in a low productivity value for the industry of less than $70,000 per employee. As expected, the larger plants have much better productivity. The distribution of plant sizes is shown in the chart above.

According to the Furnishings Industry Association of Australia (FIAA), there were a thousand fewer manufacturers 10 years ago. In the early 1990s a number of larger Australian furniture manufacturers went out of business. This has resulted in the emergence of small entrepreneurs to fill the demand left by these companies.

The reason these larger companies are no longer in business is due to the gradual erosion of margins necessary to maintain a healthy profit. Imports contributed, but it was the insistence by the retail customers for lower prices that was the cause of their demise. Slowly but surely the manufacturers backed themselves in a corner by not raising margins through productivity improvements.

Loss of Brand Identity

Today, retail furniture sales in Australia are dominated by a handful of large retail furniture stores and franchises – much like in the United States. For the past 15 to 20 years, these retailers have specified their own designs unique to their stores. If a manufacturer developed a new product, it would not be able to offer it to more than one retailer. Major modifications would be necessary for any new design in order to provide differentiation between the product sold to Retailer A and that sold to Retailer B.

An alarming marketing scheme has evolved in the distribution channel. Since the retailer is selling products unique to its store, it ‘brands’ the furniture as its own. If a customer shops at Joey Furniture for bedroom furniture, the only brand on the floor is Joey.

I went shopping at one of Australia’s largest furniture stores. There was an obvious absence of any hangtags or point-of-purchase materials promoting the brand of the manufacturer. To the contrary, when I asked to see products from a specific manufacturer – the salesperson could not find them and explained to me that all of the products were equal and made to their specifications.

     
 
CNC routers are used in both large and small factories.  
     

To make matters worse, these large retailers are demanding a 6% to 10% ‘rebate’ from the manufacturer for advertising. This would not be so unusual if the money were used to promote the individual manufacturer’s products and its brand. But this is not the case. The money is used for store newspaper and television advertising that may be focused on promoting products that are not even made in Australia.

Thus, the furniture industry can correctly be described as being made up of many small to medium nameless providers of custom furniture to retailers. It can also be described as an industry that is subsidizing the retail advertising of generic products including imports. Without any brand identity, there is no way for a manufacturer to appeal to the consumer through the media or through referrals. This has greatly increased the exposure of an already vulnerable industry to the threat posed by imports.

Globalization

It should come as no surprise that importing furniture is a major issue in Australia – just as it is here in the United States. The trend toward imports has increased over the past eight years and now accounts for a full 40% of the demand for wood and upholstered furniture.

With few exceptions, most Australian furniture manufacturers have chosen not to import themselves. Thus, many entrepreneurs have formed import companies to sell directly to the retailers. As this trend has grown, more manufacturers are now looking at options to import themselves. These similarities to the United States are striking.

No product categories have proven to be immune to imports. An example is the upholstered goods sector of the furniture industry. In fact, upholstered furniture is the largest import category and registers three times the import value of bedroom furniture. The main suppliers of upholstered goods to Australia are in Malaysia; then Italy; and third China (which is gaining and taking market share from the other two).

The fact that the Australian market is small as compared to the U.S. market has not kept developing countries in Asia from looking at their close neighbor for export opportunities. In fact, the close proximity of Australia to these producers makes the industry more susceptible to imports.

East vs. West

Just as there are shipping challenges from Virginia to California in the U.S. — likewise the challenge exists for Perth manufacturers in the west to reach the Sydney market on the east coast in a timely manner (and vice versa). The transit time is at least three days. Most transportation across the country is done by rail on piggyback trailers.

     
 
This worker is putting sanding sealer on a pine piece. Finishes are generally simpler on Australian made furniture.  
     

Most furniture manufacturing and other woodworking plants are found in eastern and southeastern Australia. However, the outdoor furniture industry is concentrated around southwestern Australia where the eucalyptus marginata or jarrah forests are located. Jarrah has many of the characteristics and appearance of teak — although not quite as durable to outdoor exposure. Therefore, a significant outdoor furniture cluster has emerged around Perth and Fremantle.

Much of this product is exported to the United States and Europe as high-quality outdoor furniture. The Australian government has begun a sustainable forest management policy that has strict logging allotments (or concessions) that is designed to maintain the long-term viability of the southwestern forest where this natural resource is located.

The Challenge

The challenges facing the Australian woodworking industry are many. Among them is the issue of employee recruitment and retention. Young Australians, like those in the United States, are looking more at “high-tech” industries to provide them with a career. The woodworking industry is perceived as a “low-tech” industry that does not offer a good future.

Hundreds of Australian manufacturing companies will go out of business in the next twelve months and, like here in the United States, many jobs will be lost. The overriding issue is: how to survive? What can be done to slow or stop the decline underway in this industry? How can the industry combat imports and the price pressures from retailers?

Some of the answers to these questions will be the focus of the second installment in this two-part series on the furniture industry down under in next month’s article.

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