- By Powell Slaughter, Contributing Editor
2023 will present additional planning difficulties for furniture retailers due to the pandemic’s lasting effects on the supply chain and production as well as shifting consumer purchasing patterns.
Many retailers will start the new year still shedding higher-than-average inventories. Plus, most retailers’ most expensive inventory is their oldest, and much of that could consist of “the wrong product” left over from the months when retailers would take any delivery they could get their hands on.
It does so at a time when furniture retailers who rely on Asian products for a portion of their product offerings are ordinarily placing orders to cover regional closures for the Lunar New Year.
The cost of doing business for retailers as well as consumer spending are still affected by inflation, despite signs of a decline as of November. However, the high cost of diesel fuel, for instance, is having an impact on the price of ground transportation even though lower demand has reduced ocean freight rates.
- A Long Holiday
Asian Lunar New Year production gaps were one of the few constants in the furniture industry due to inflation, the war in Ukraine, and other macro issues beyond the control of any business. They were a hassle, but you anticipated them. However, LNY 2023 presents unique order-planning difficulties for retailers, particularly in the first half.
Many Asian manufacturers, who were already slowing or pausing production this year due to low order levels and outright cancellations domestically, are now thinking about longer-than-usual LNY production shutdowns for the holiday falling on Jan. 22, 2023. Some plants are even debating whether to continue working in the furniture industry.
Therefore, retailers selling Asian-made goods may have to balance continued inventory investment against uncertain shopper appetites for furniture while overall retail inventories remain high as consumer demand declines from recent highs.
This is good news for domestic and near-shore manufacturers as well as producers in Europe and other regions, but they would struggle to make up for a sustained decline in the flow of Asian goods to retailers worldwide, especially when it comes to case goods.
“In Asia, you have plants that are going to four-, six-, even eight-week” shutdowns, said Gulfstream Shippers Association CEO Freddie Davis, adding that could create an impact on availability out of In Asia, supply chains were constantly under pressure to meet consumer demand, similar to what retailers experienced in 2021. “With this lack of product, we could be experiencing Groundhog Day.”
Another constraining factor was also mentioned by Davis, who noted that even though container rates are declining, steamship lines are responding by implementing yield-management strategies like blank sailings and service modifications to maximize vessel space utilization.
Tim Harris, the owner of Knoxville Wholesale Furniture, claimed that because his business continued to operate throughout the pandemic and never stopped ordering, it was spared from the recent severe inventory bloat that many retailers experienced. He has recently increased his bets, particularly on orders for case goods, because he thinks the LNY shutdown in 2023 will last weeks longer than usual—possibly twice as long as it does now.
Major vendors, according to Harris, are using their purchasing power to control capacity in Asia in response to reduced production, and KWF is preparing to deal with a constrained supply of bedroom, dining room, and home office from the other side of the ocean.
“We have piled in an amazing amount of case goods for our best sellers,” Harris said. “We have double the amount of bedroom than before,” adding he believes some plants won’t be re-opening in light of slow or no orders.
“We may be dealing with a problem that is still developing for the next two years. The strong (vendors) there will eat up the remaining production, so we’ve worked hard to align ourselves with them.”
Another issue that Harris sees is that many Asian factories’ orders have decreased to the point where they are short on cash to fund production, and vendors will have to pay the factories up front so they can purchase the raw materials needed to fulfill orders.
“I’m not worried about upholstery, but case goods are harder to re-start,” Harris said, highlighting the fact that issues persist even if new sourcing options are discovered to replace a shut down or fully utilized plant. “Will the finish be identical if you switch factories?”
The chief executive officer of City Furniture, Andrew Koenig, has heard that its suppliers are taking a variety of steps to ensure the longevity and success of their companies, and he anticipates a significantly improved supply chain environment despite manufacturing issues.
“We expect to see higher in-stock levels, better lead times from our suppliers, better pricing, more favorable payment terms, to ensure that we as retailers are in a good position to satisfy the customers needs,” Koenig said. “The consumer has experienced a great deal of hardship over the last few years, so this is a big deal.
“We are currently discussing our needs for the upcoming year with our City suppliers. We need to be in a position to manage a more financially sound business given our significant potential for growth, and in order to do that, we depend on our partners’ strong supply chain performance.
“The past couple years, costs and lead times just got way too out there and are too costly in the long term,” Koenig continued. “In the upcoming year, we need to return to more normal conditions, and if we can, I believe it will benefit the consumer, the supplier, and the retailer. I’m feeling good though, so let’s hope.”
“We expect to see higher in-stock levels, better lead times from our suppliers, better pricing, more favorable payment terms, to ensure that we as retailers are in a good position to satisfy the customers needs,” Koenig said. “The consumer has gone through a lot these past few years, so this is a big deal.
“As we prepare for the upcoming year, we are in discussions with our city’s suppliers. In order to run a more financially sound business and prepare for our significant future growth, we need our partners to perform well in the supply chain.
“The past couple years, costs and lead times just got way too out there and are too costly in the long term,” Koenig continued. “In the upcoming year, we need to return to more normal conditions, and if we can, I believe it will benefit the consumer, the supplier, and the retailer. I feel good though, so let’s hope.”
“During COVID, the majority of manufacturers in Asia took care of large retailers and were always busy,” noted Senior Vice President of Sales at Magnussen Homes, Christopher De Lisa. “Currently, their inventory is too large.”
De Lisa predicts some Tet shutdowns there could last longer than weeks or even months. For instance, many factories in Vietnam cut back to working only three or four days a week when new orders tanked.
“Since market, it’s been decent business (at retail), but manufacturers in Asia aren’t seeing it because retailers already have so much inventory,” he said. “That implies that they do not place production orders with their own suppliers. Although we will have enough product for the first quarter, there will be a gap in the second quarter due to the lag times.”
De Lisa noted that due to high — for now — inventories in Asia and moderating ocean-freight costs, smaller retailers who don’t typically order in depth and have cash on hand might consider taking advantage of some of the deals available on imports.
“This is grade-A product, too; it’s not like during the pandemic when retailers had to buy anything that was available,” he added, noting that, while retailers try to avoid high inventory, “furniture isn’t a grocery. It won’t spoil, and the product that is on the market right now is excellent. You should be all right if you can locate a place for it.”
A.R.T. is a division of the powerful Asian manufacturer Markor. As well as creating and marketing products, furniture is part of the industry’s production end.
“Part of our job is to understand the future demand forecast on the manufacturing side,” said Doug Rozenboom, president of A.R.T. “We want to prevent a drop in capacity due to the shutdown of a production line or fewer hours worked during the first quarter or a decline in availability due to more time off for Chinese New Year.”
The end of that cycle will require freshness, he continued, so retailers who are focusing on reducing their high inventory levels will need it.
“A lot will depend on what vendors and retailers pay to ship their goods here,” Rozenboom said. “Every day the rate goes down that’s good; it’s getting more affordable.”
That’s good news, he noted, for product sitting in Asian warehouses: “It will be more affordable because I did not yet have to ship it here.”
Through consolidated East Coast warehousing in Greensboro, North Carolina, A.R.T. intends to take advantage of these lower prices and enhance service., along with sister Jeremy Charles and Caracole are split up by Markor.
Rozenboom observes that discussions at the show have generated a lot of actual order writing, particularly among smaller and mid-size retailers with agile buying processes.
“I hope that bodes well,” he said, noting orders for both new and existing product. “It appears retailers are aware of the potential that there could be a gap.”
Although Rozenboom noted that A.R.T.’s partner plants plan to take an average of two extra weeks on top of the normal one to two weeks shutdown.
- Balancing Act
A longer LNY could, however, give retailers who are still weighed down by inventory the opportunity to exhaust their current supplies.
“For those who have high inventory now it’s painful, but they’ll be in better shape,” GSA’s Davis said, regarding renewed product flow constrictions. “Those who now have extra cash in the warehouse will be winners.”
Two trends that John McCloskey, president of Profitability Consulting Group, observes among his retail clients and which will affect planning for 2023 are tied to inventory levels. Mostly independents make up PCG’s clientele.
“First, currently a lot of people have historically high inventories,” he said. “Second, everyone’s starting to see retail fall off. We’re looking at declines of 20% to 30% in business this year after the (pandemic) boom we’ve had. It was like what happens with stores in coastal areas the year after a hurricane.”
Some inventory bloat may be helpful if Asian goods start to become scarce once more and prevent the sale of stale goods at a loss.
“It’s like the stock market: You only lose money if you sell low,” McCloskey said, noting that approach can vary store-to-store. “Say you’re renting expensive temporary warehouse space. If I have $2 million of product that costs 10K to store, that’s one thing. If it’s worth $200,000, that’s different” because of a higher relative carrying cost.
Home Furnishings Association learned this through discussions with retailer members. When it comes to inventory, Executive Director Mark Schumacher thinks the majority are avoiding a fire-sale mentality.
“I don’t know of any retailer that is deeply discounting their entire stock,” he said. “Those who are finding success are targeting certain SKUS they have in abundance, lower them to a promotional price — not a loss leader — and use them to attract attention and shoppers. In certain instances, they are positioning these items between their standard inventory and clearance as a bridge of sorts.”
Many smaller retailers, in particular, don’t give Black Friday much thought, but Schumacher also noted that many of the retailers he spoke to use some of their excess inventory as Black Friday promotional items.
“There is a sense that while many Americans’ are spending less discretionary income right now, the tradition of Black Friday is seen as a way consumers can break out of their funk,” he said in November. “It is as if this will be somewhat of a therapeutic Black Friday.”
Despite the current inventory levels, Koenig claimed City isn’t overly concerned. He is encouraged by the increased freight rates and product flow, even though inventory is having an impact on 2023 financial forecasting.
“We always want to flow goods, and we monitor all our KPIs closely to do just this,” he said, as well as making financial adjustments throughout the entire business to be as streamlined and profitable as possible until the overall consumer and supply market normalizes.
“It’s uncertain times with a still-choppy supply chain environment, so we need to be more financial conservative than usual,” he said. “Again though, we’re feeling confident with freight rates dropping a lot. We think it’s back to being a buyer’s market. We’re seeing product pricing come down, better products, lower shipping costs, which eventually mean healthier margins while still having great pricing for our customers.”
According to Koenig, product margin is only one component of profitability.
“As we navigate through these choppy supply chain times and costly inventory levels, we are asking our entire team in our company to work smarter, not harder,” he said. “That could consist of driving more sales, reducing costs, increasing our productivity, adjusting service levels, putting things on hold, etc.
“We’re hopeful that later next year the product, supply and shipping environments are closer to pre-pandemic times that were a bit easier to manage, forecast and financially plan for.”
News source: furnituretoday.com
