19702 Mon, 11/01/2010 - 4:01pm
In literature it’s called a perfect storm. But in the cold, cruel, real world of international business, it’s called a perfectly miserable storm.
The costs of doing business with Asia—specifically in China—have gone up over the past year at rates that practically jump off the spreadsheet. Depending on the specifics and the period of time you are talking about, individual elements of the worldwide economic matrix have increased anywhere from 10 percent to 200 percent. And they are not done rising by most accounts.
What of course makes this particularly relevant—not to mention very painful—for the home furnishings world is that the vast majority of products the industry makes and sells come from Asia.
What’s more when it comes to most of the products, there are no realistic, viable alternatives to Asian sourcing. Bringing in products from other parts of the world or returning to domestic manufacturing just doesn’t work for most home products.
The American home furnishings industry is a captive of Asia and that perfectly miserable storm remains in the long-term forecast.
The dark clouds include:
• Raw materials: Cotton is the worst, but everything from wood to metal to duck down has gone up double digits—often high double digits. Cotton prices have been further impacted by the floods in Pakistan this summer, which has probably wiped out 10 to 20 percent of that country’s crop.
• Labor: Chinese workers are demanding—and getting—higher salaries and a move away from more introductory manufacturing fields like textiles and furniture to more sophisticated industries like tech is causing labor shortages, further driving up costs.
• Shipping: Container prices had dropped to historical lows 18 months ago, but they have swung back to historical highs just as quickly. And they continue to rise.
• Currency: The Chinese yuan has increased in value by at least 10 percent relative to the U.S. dollar over the past two years and international monetary policies suggest it will go up by a like amount over the next year.
• Domestic consumption: As Asian societies mature and local purchases of consumer products go up, less product is available for export, further exacerbating the laws of supply and demand.
So, what’s an industry to do?
• Raise prices: Vendors told HFN they have passed along price increases anywhere from 1 percent to nearly 10 percent over the past year.
• Cost cutting: Those price increases represent perhaps half of vendor’s increased costs, so much of the rest is being absorbed through cost cutting and quiet de-specing of products.
• Find alternatives: Some vendors are moving production further into China, mitigating some but not all of the cost factors, while others are shifting sourcing elsewhere in Asia, to Vietnam, the Philippines and Indonesia mostly.
• Make less money: There’s still profits to be had but something has to give and more than anything else it’s been vendor margins.
In an economy still struggling to regain its footing and with a consumer who has grown accustomed to price cuts, not price increases, the opposing weather fronts can only lead to one thing: Thunder.
“The question of price increases is the most important factor in retailing in 2011,” said Sal Gabbay, head of Gibson, the big tabletop and housewares resource. “This is a global concern.”
“We’re in a box right now, there is no upside,” said Joe Barkley, executive vice president for Kaleen, the floor covering company. “We have absorbed it until this point, but we can’t subsidize ourselves into insolvency. We’re nowhere near that, but we can’t do this any longer.”
“Labor was the tipping point,” said Phil Haney, president of Lexington Brands, the furniture company that has seen shortages in workers drive up costs throughout the industry. “China is increasingly becoming a volatile market.”
Vendors, when they did talk about price increases, said they have generally been in the low single digits, but that another round—in a similar range—is likely, probably right after the first of the year.
“We’re happy to report that retailers seem to understand what is going on and are working with us as best as they can,” said David Zrike, president of the tabletop company that bears his family name. “The difficulty is when prices are put in print and then have to be honored.”
“We expect prices to slowly increase over time,” said Jeff Siegel, president of Lifetime Brands, the big housewares and tabletop supplier, citing materials and labor costs. But, he added, “Chinese production is still the cheapest if the labor factor is high.”
Handling those price increases is a delicate task at best. “Everyone’s holding their cards,” said Barkley of Kaleen, “but no one wants to be the first to” lay down their hand.
“We’ve been able to pass some of this along to retailers, but we also want to still be competitive,” said John Piazza, president of the home textiles resource WestPoint Home. “We need to mitigate how much in increases we ask for. But I don’t think these cost dynamics are going to change going forward.”
“We are doing everything we can to limit the amount of increases,” said Jeffrey Dross, senior product manager for Kichler, a key lighting resource. But he says the alternatives are sketchy at best. “It is unlikely that lighting will move away from China.”
As for the wistful thinking that all of this Asian activity is going to create a return of manufacturing to the U.S.—don’t count on it, said one furniture supplier. “We’ve had a lot of inflation domestically this year, so China still has advantages over the U.S,” said Rob Burch, president of Berkline, which produces both domestically and overseas. “We will continue to blend our manufacturing between the U.S. and China.”
And the storm isn’t going away anytime soon. Said Gibson’s Gabbay, “The reality of this is that this issue has to be dealt with for years to come.”