for Furniture Industry
There are currently several notable factors and trends that are affecting the industry; 1) mergers and acquisitions (M&A), 2) style and competitive response, and 3) competitive strategies. With the economic meltdown, the strongest companies are in a great position to buy up competition at discounted prices. This is not only increasing those company’s productive capacities, but it is also reducing competition; which is important from a corporate perspective, especially given the fragmented nature of the industry.
In addition to M & A’s, according to Schuler and Buehlmann, the ability of competitor’s to imitate “hot” styles and trend’s adversely affects those companies that originally introduce the product (2). From the consumers perspective this is great as the competition insures prices are driven down. However, from the manufacturer’s perspective it is extremely difficult to rely on any significant revenue being generated from a particular style or trend. Additionally, this tactic further complicates forecasting efforts.
In addition to these trends, the industry has established the practice of competing on price rather than other attributes of the product. This strategy essentially relegates the product to be considered a commodity, or functional product, rather than an innovative product (3). In an article by Schuler and Buehlmann (2), the authors make a strong point by recognizing this pricing strategy and propose this is the wrong approach. The author’s state furniture should be competitively positioned based on other factors; such as quality or utility. As a subset of quality, the author suggests the furniture industry compete based on style- antique, contemporary, etc. This proposed idea is reinforced by an article authored by Dr. Fisher. In his article, Dr. Fisher explicitly discusses the difference between functional and innovative products, and the consequences of marketing products within each of these categories under the wrong classification.
What further complicates this analysis is that furniture can be presented as functional or innovative, which seems to be a decision that is at the discretion of the retailer; in how he wants to present the merchandise- creating an atmosphere that instills a certain expectation from the customer’s point of view. What is meant by this is from an aggregate perspective all furniture pieces could be considered the same (i.e. all sofas). However, from an individual perspective, looking at a sofa, it can be simple without frills, bearing fabrics that have been used for the past 30 years in a design that has been around for the past 30 years; this would be considered the functional furniture piece, reinforced by the way it is arranged on the showroom floor. On the contrary, a sectional sofa with chenille fabric and an ottoman with a built-in massager, is an example of an innovative furniture piece, which requires a very different showroom presentation if it is to be sold accordingly.
Not only is price a significant factor of these two classifications, with functional items competing on price, with lower profit margins, and innovative competing on features with higher profit margins, both possess very different demand forecasting as well. This difference in demand variability requires different production and supply chain approaches. Because demand for the “trusty” sofa model can be fairly accurately projected from an aggregate perspective, the product competes on price and therefore requires the manufacturer to focus on manufacturing and supply chain efficiencies, while the innovative couch can be sold at a higher price, therefore requiring the manufacturer to focus on speed of response time to demand.
This observation leads to another issue. Furniture is being treated, or sold, as a commodity, but this is contrary to consumer purchasing habits. In looking at the frequency of furniture purchases, it is a big purchase- both in cost and physically- requiring more thought on behalf of the consumer prior to the purchase. However, the industry is letting the consumer and additional external forces dictate price, leading to what could be considered excessive price reductions and therefore reinforcing the commodity mentality. It seems the industry needs to grab hold of its self and retrain consumers to acknowledge the fact that the purchase isn’t a disposable commodity, but rather an item that will last many years and price it accordingly. In short, at some point in time the industry allowed its products to become devalued and perceived as equivalent to a can of soup, while it is truly equivalent to a car in regards to the decision process.
In looking at how the Internet has affected this industry, a positive aspect is that brick-and-mortar facilities are not going anywhere; it appears the Internet is incapable of competing on an individual consumer basis. This is for many reasons. The primary reason is there are no captured benefits as a result of economies of scale, by selling individual pieces through the Internet. The shipping cost of selling from a manufacturing location overseas nears or exceeds the item cost in many cases. The consumer is not willing to bear the burden because it seems unreasonable and in some cases more expensive, and the on-line retailer can’t absorb the cost; particularly because the on-line retailer is competing with brick-and-mortar establishments that have captured economies of scale, offering lower prices. In addition to this, furniture is a “touchy-feely” purchase; the consumer wants to see it and feel it before they buy it. Online interactions do not fulfill this need.
Furniture retailing is as fragmented and competitive as the furniture manufacturing segment. Targeting the fickle consumer that demands high quality and low-cost, while competing with neighboring stores that have access to the same manufacturer’s and distributors, has proved to be a difficult task. This makes cost and revenue structures as important as the effort that goes into differentiating services.
In looking at cost structure, retail organizations are bound by large variable costs with little room for error in purchasing decisions. If too many units of a particular product are ordered, the units will stagnantly sit on the floor taking up space as unproductive inventory. Alternatively, buying just one unit of a product that the consumer doesn’t like will have the same result. In either case, inventory is costly and can have detrimental effects on organizational profitability. Below are a few major components to consider when looking at fixed and variable costs:
- Taxes (on property), Lease space, utilities, insurance, advertising, wages (non-sales)
- Taxes (on product), insurance, obsolescence, inventory, commissions (sales employees)
In looking at the elements of the above, it should be noted that the most significant fixed costs are leasing and insurance, while inventory is the most significant variable cost. According to Furniture World Magazine (6), variable costs account for approximately 15%, with fixed costs accounting for 26% of expenses. However, when the cost of goods is included, variable costs account for almost 70% of expenses. Furniture retailing is relatively low in labor intensity; employees are paid a commission based on each unit they sell. In observing price as it relates to cost, as a whole the industry seems to enjoy 30-50% gross profit margins. On the surface, this is fantastic. However, as costs are considered, the profit quickly begins to diminish, with the cost of inventory bearing the most weight. According to one article, net profits actually range between 0- 5% once all costs are considered (5).
Illinois Wholesale Furniture
This section seeks to analyze several key areas that affect Illinois Wholesale Furniture (IWF) operations. The section begins by addressing IWF’s competitive strategy and advantages. It then moves to briefly review financial data and measurements. Next, key aspects of IWF’s service operations are discussed and the section closes with recommendations.