Market Forces Inside and Outside the Industry
Structural forces shaping production and market-oriented considerations are discussed in separate sections of this chapter. Several were mentioned previously, but their importance and consequences are highlighted in greater detail below. Additionally, contemporary concerns are reflected in two other sections on the increasing interest in “green” manufacturing and market-related shifts due to lifestyle, demographic, and housing conditions.
Supply Factors
Rapid construction in developing countries throughout Asia, driven in large part by China and Chinese-led projects abroad, fuels demand for inputs such as steel and other materials used in furniture production. Offshore manufacturing requires good infrastructure facilities to handle the importing of production parts not obtainable domestically, their conveyance via road or rail to the factory, and the means to export the full or partially finished product. Lumber for wooden furniture is globally sourced at the quality and quantity desired by the market for the finished product. The United States, for example, supplies large quantities of lumber for case goods made in China. Other types of wood are imported to that country from neighboring Russia and Myanmar since China has much more abundant labor than lumber. As furniture manufacturing declined in the United States, suppliers also went out of business, further raising the cost of U.S.-made products as parts had to be sourced elsewhere.1
The steady, if uneven, and relentless rise in fuel-driven shipping costs since the mid-1970s ensures that this will remain an integral part of the friction of distance and calculations as to the relative affordability of outsourced products. The backhaul rate for sending relatively empty containers on the return trip to Asia also accentuates the affordability problem, as shipping contractors must cover the round-trip cost with far fewer goods on the way back to spread the cost of transport. This rate virtually tripled from 2000 to 2008. The confluence of higher shipping costs, rising wage rates (along with associated labor amelioration costs), and government-imposed costs, such as taxes, combined as major considerations stemming the rush to offshore manufacturing. Containerization revolutionized the ability of distant manufacturers to ship large-volume products, such as furniture, over long distances. This was particularly practical when it was possible to send single containers to large-volume purchasers/retailers. Smaller-volume destinations became proportionally problematic and involved third-party logistics (3PL) managers to a much greater extent and expense.2
Intellectual Property Issues
Legal structures to protect intellectual property (IP), particularly in design features that created a market for fashionable items, are notably lacking in many developing countries where furniture manufacturing moved primarily in order to cut production costs. IP issues take several forms including:
- •laws to prohibit IP infringements that reward intellectual product piracy may or may not be in place;
- •enforcement of these laws in a fair application that does not distinguish between perpetrators who are natives or foreigners;
- •transparency of the regulations so they and their enforcement are known clearly rather than handled through less visible channels or subject to conditions that do not involve being clearly written and disseminated;
- •punishment that fits the crime enough to deter further commission, rather than a trifling amount that is easily met or avoided.
The competitive cost of loss of IP protection can be considerable and is heightened when various foreign as well as domestic brands are produced in nearby facilities. Suspect visitors may be dissuaded from entering or prohibited from sketching or taking photographs. More difficulties involve former employees who change jobs for higher pay and bring replicable knowledge with them or are in a position to divert proprietary product from its intended recipient.
Quality Control Considerations
Numerous issues involving dangerous quality gaps in products produced in offshore locations have led to lawsuits and market loss. Problems can be attributed to the difficulties and cost of supervising the manufacturing plant at great distances. Some issues arose when foreign supervisors were shown products and factories that were not the ones that were, in fact, used to produce the items agreed to contractually. Inferior or contaminated materials, lack of coordination among suppliers, substitution of parts, and hidden insufficiencies of material, machinery, or manpower skill are all part of the problem when supervision is not in-house, onsite, and frequent.
Warehouse Time and Storage Cost
Global 3PL providers are major players in managing warehouse and storage costs incurred when distance leads to delay. These companies handle orders placed for production in one country and delivery to customers in another country. “Inventory is the enemy” in that warehousing rather than rapid delivery delays customer satisfaction and profit realization. Consolidating shipments within a container and using a port with computerized tracking capacity helps to reduce time overall, but distance still comes at a cost to both manufacturer and consumer (see discussion on Meridien). Some have suggested that hemispherization, the shifting of manufacturing to the southern American tier, would assist this problem, but infrastructure issues remain.
Concern with the competitive dampening factor of lengthy warehouse processing time reflects the complicated coordination of logistics relating to managing different product inventory. This includes picking up furniture in various locations around a single or multiple countries or picking up mixed amounts of furniture, shoes, and toys going to different locations. These may be shipped in mixed or separate containers, followed upon docking in the destination country by re-routing along various domestic networks depending on the destinations of different types of products. This procedure varies by companies according to their customer location concentrations and established national nodes.3
The Need for Speed
Speed can become a critical issue in both furniture manufacturing and purchasing. It has been calculated that for an average container size of 130 seats (1 per chair, 2 for a loveseat, 3 per average sofa), shipping and handling transit represents approximately one quarter of the final price of the furniture piece. The average overseas production requires a 60-day lead time, 5 weeks on the water, and an additional 3 to 4 months to stock it in the store. The time spent in storage varies with the turnover speed of sales of that item, along with other considerations, such as the number of items consolidated in any one warehouse location. Just-in-time delivery of supplies at the time when they are needed in the production process—stuffing for pillows, mattresses for bedding, and so forth—is an important part of the lean manufacturing system that reduces space needed to store parts and the cost of delay prior to sale. Distance, lack of coordination and communication, inadequate infrastructure or supply systems can all cause problems in a sophisticated but dependent manufacturing process such as used for furniture. The longer the supply chain and slower the speed of delivery usually comes at a cost to consumer and producer. Although this is not a direct correspondence, a greater differential in other costs (e.g., wages, quality) is needed to compensate for the price of distance delays.
Décor purchases involving furniture tend to be tied to particular occasions, for example, holidays, weddings, house purchases, or moving events. Customers like to see and sample in a showroom what are usually large dollar purchases. They want to actualize this purchase in as short a time as possible and may defer it or switch suppliers if the time gap is too great. Buying a domestic product is part of the trade-off in price when speed is a major consideration, and one that companies such as Ashley and Klaussner seek to combine with affordability and swiftness. Bringing down the time involved in all parts of the process, from ordering to manufacture, distribution and delivery, remains a major marketing consideration.
Changes in the Economy
A series of shifts since 2010 indicated that recovery from the global recession was underway. Twenty years earlier marked the beginning of a stampede out of U.S.-based furniture manufacturing and investment to largely Chinese or other Asian offshore facilities. In the interim U.S. buying power dipped as a Chinese middle class rose on (albeit low) factory pay and the Chinese yuan strengthened. Inexpensive foreign-made furniture seemed to be the future for U.S. consumers, but other costs intervened. These were, principally, a sharp rise in the cost of fuel and a decreasing wage differential between Chinese laborers in factories concentrated near its east coast ports, while the American wage rate dipped in a population impacted by immigration and unemployment. Wealthier customers less impacted by the recession continued to pay for the customized, high-skill small batch work done in streamlined, reorganized U.S. factories.
New overseas locations, from Saudi Arabia to Russia, India, and China, grew a market flush with new wealth and a corresponding demand for fashionable, quality foreign goods. Concerns (not unfounded) with the safety of locally produced medicine, contaminated food (for humans and their pets), children’s toys, and other consumer products led to interest in acquiring nondomestic-made products among the more well-heeled and middle-class aspirants. Large furniture showrooms, built in newly available warehouse space vacated by factories moved out of inner-city areas, are now close to newly built apartments. These feature a dizzying array of side-by-side choices: simple European furniture such as IKEA or florid Italianate and Philippine styles, “American” Ethan Allen, or classic “English” furniture (from firms owned by Chinese parent companies), all compete for brand recognition and identifiable qualities that foreign consumers might seek to identify with, in addition to traditional offerings such as prestigious rosewood and (Myanmar) mahogany or mid-level (Taiwan) teak. While incomes and commodity purchases in the large middle-class segments of the developed world froze or declined, developing world citizens in cities such as China’s went shopping to fill new spacious apartments in tall towers and walled communities with names like “Orange County” and “Silicon Valley.” From Baker shoes to Johnson and Johnson pharmaceuticals and Bassett furniture, a new constituency sought prestige in purchases with recognizable quality names.
For foreign direct investment companies operating abroad, while the costs of acquiring branded IP and time loss mounted, the U.S. housing market returned to life. Mergers led to global consolidation of furniture companies and a new spatial differentiation of where the best places were for what type and stage of manufacturing. Furniture work both expanded offshore and, in a new turn, re-shored as well in areas such as upholstery, which had maintained skilled customization and speed advantages. Furniture specialties such as institutional (government, hospitals, hospitality) markets that weathered the recession were predicted to take a hit during upcoming cost-cutting uncertainties but by 2018–2019 were major market segments. As in the past, the furniture industry promised to fluctuate along with the economic future. The robustly growing economy in the 5 years leading up to 2020 seemed to lift furniture prospects, but emerging new trends were also reshaping the market.
Greening Manufacturing
Growing concern with environmental degradation and climate change pushed production process changes and advertising positioning, especially for products aimed at a younger market. A public policy poll focused on furniture purchases reported in early 2017 that shoppers were willing to pay more for environmentally sensitive “greener” furniture designed and produced for an environmentally conscious market concerned with sustainability.4 Aspects of interest included reforestation efforts and use of recycled wood or non-wood parts. The Philippines’ Department of Environment and Natural Resources is encouraging the growth of bamboo plantations and setting up new processing plants to accelerate the wood supply in that country. IKEA, on the one hand, is seen as a disposable, inexpensive product (thus problematic for sustainability) but, on the other hand, uses relatively little wood in their shavings-to-pressed-plywood construction material.
One response advanced by the American Home Furnishing Association (AHFA) to this market concern was the Eco3Home sustainability program and creation of a corresponding label of participation catering to an environmentally concerned market. Key features of AHFA’s “Enhancing Furniture’s Environmental Culture” program include improving resource management and recycling along with reducing energy and water use while more carefully managing waste processes. The “Sustainable by Design” phase encourages participating companies to set and achieve goals to improve supply chain management and allied social responsibility targets.5
Lifestyle, Demographic, and Housing Shifts
Consumer surveys showed interesting divisions by segmenting purchasers by age coordinates into Baby Boomers (post–World War II, born 1946–1964), Generation X (born 1965–1979), Millennials (born 1980–1996), and Gen Z (born 1997 and after). One online furniture marketing service exhorts industry practitioners to “identify customer needs… based on region, demographic, and personal preference to enhance and improve your brand’s distribution, delivery, and logistics strategy.”6 Shopping at physical “bricks” rather than via “clicks” is expected to increase 43 percent for Gen Z and Millennials compared to 13 percent among Baby Boomers and Gen X. This in part reflects a larger numeric base for the latter two groups, but also a surprising reliance on in-person selection for large ticket items such as furniture, combining the technology of online research with the physical experience of manually inspecting pre-purchase items. Nevertheless, online purchases fueled the rise of an e-commerce company like Wayfair, supported by statistics such as the 20 percent of Millennials purportedly purchasing furniture and home items with their cellphone. The prevalence of technology penetrates the furniture supply chain, from robotization to transparency, increasing the immediacy of supply chain communication, service delivery time, and optimization from individual features to delivery means and location.
At 30 percent of the furniture market, Gen X forms a fairly affluent segment at peak earning age. Millennials constitute 37 percent of the furniture market, with boomers and older seniors at 33 percent. Items catering to the luxury product market and competitive lowest price market generate the most sales. The latter reflects an increase in the rental home market, given the increased expense of home purchase prices and the rise in single person households. More space-efficient and flexible-use furniture cater to the rental and small home market. Millennials are the powerhouse for furniture purchases, looking for “identity” items with a unique message. The high end of the bifurcated “wealth gap” market continues to support customized and unique furniture options such as solid wood and custom upholstered furniture.
According to a survey by the major accountancy firm Deloitte,7 Millennials poised to plunge into their initial real estate ownership venture triggered a mini-housing boom accompanied by an increased need for furnishings. The current very low unemployment rate is generating funds, fueled by credit card purchases, to address this need though in a tight and relatively high-cost housing market. Increased purchasing power in the wallets of well-employed females is also good for furniture since women make over 90 percent of household-related purchases. The prevalence of technology penetrates and increases the productivity of manufacturing, including the furniture industry, from robotization to enhanced transparency, immediacy of supply chain communication, service delivery time, and optimization of means and location.