Light at the End of the Tunnel

Date: March 24, 2014

Light at the End of the Tunnel

Current worldwide consumption of office furniture is estimated at around US$50 billion, with per capita consumption at around $30 per year in some European countries, Japan, and the US. It remains a mature segment of the overall furniture market, with aggregate value of world exports estimated at around US$9 billion, according to Global Information, Inc. The largest exporter remains China, followed by Germany, with the US being the main importing country.

Global Industry At a Turning Point

Office furniture sales should pick up
in 2014 and beyond.

The entire sector was hit hard by the world recession, with international office furniture trade dropping almost 30% in 2009. Growth has since returned to the sector, but business activity remains somewhat lackluster. In 2013, industry shipments in North America grew just 0.9% to US$9.35 billion, which was a slight improvement over 2012. The industry ended 2013 with a 1% decline in shipments in the fourth quarter, according to the Business and Institutional Furniture Manufacturers Association (BIFMA).

Asia Still the Fastest Growing Region
For 2014 and beyond, the global market is looking brighter. Revenues in the US are forecast to increase 4.9% to US$12.2 billion and 10.4% in 2015, according to BIFMA. Michael Dunlap business consultancy’s quarterly survey of global office furniture executives confirms this forecast, with expectations of 5% growth this year. The personal outlook from the industry’s CEOs is at the highest level since January 2006. According to Dunlap’s latest survey, the “industry is on solid ground and on a positive track.”

Despite an expected slowdown in overall economic growth in Asia, the region should remain the fastest growing market for office furniture worldwide. The market in the major countries of Asia, excluding China, was estimated to be worth US$7 billion in 2013, according to the Centre for Industrial Studies. Over the past 10 years, the Asia-Pacific region grew on average 4% annually, in terms of both production and consumption. Only around 1% of the Asia market is currently satisfied by imported office furniture. However, the openness of the market is increasing, as evidenced by the fact that imports expanded by over 10% over the past decade. In terms of values, Japan and Australia are the leading importers, at around US$300 million and US$185 million, respectively. China (which provides about 60% of total imports in the region), Taiwan and Malaysia are the biggest office furniture suppliers in Asia. Roughly 10% of products come from Europe.

After China, the main exporting countries are Germany, Canada, the US, Italy and Sweden. About 53% of office furniture exports come from high-income countries, down from 78% in 2003. The share from middle and low-income countries increased from 22% to 47%, a trend that is expected to continue.

Employees, Wood, and Steel: Still the Biggest Costs

Despite some upbeat forecasts on the overall industry’s performance going forward, not everyone is convinced it’s going to be clear sailing. Some analysts are recommending a more cautious approach. For instance, last November, The Motley Fool, the US-based financial newsletter, warned that the office furniture market was likely to remain hostage to slow economic growth in the US and elsewhere. One area to watch is the US unemployment rate which, while down from its highs, remains near three-decade record levels. The result is that economic growth in the US will likely be only modest over the near and medium term.


Rising lumber prices will cut industry

What this means is continued downward pressure on office furniture company earnings and stock valuations worldwide. One such company is Knoll, one of the US’ leading designers and manufacturers of branded office furniture products. Its stock at the end of 2013 was down 25% from its 2007 highs, a time when it was generating some US$1 billion in revenues. Analysts project that sales will remain below that level for 2014, given its significant exposure to the weak European economic recovery and to local governments, many of which are cutting budgets. This weakness in government sales, around 12% of the company’s total revenue, should continue, and other industry leaders, such as Steelcase and Herman Miller, are likely to face similar challenges. The CEO of the world’s second largest office furniture maker, HNI Corporation, warned in late October 2013 that US federal government spending on office furniture was likely to fall 30%. 

If slow sales growth were not enough, the industry will also be facing higher raw material and employee costs in 2014 and beyond, putting added pressure on operating margins. The rising costs of steel, wood, and healthcare have been cited as the biggest threats to the industry. The International Wood Markets Group believes that the price of lumber will set record highs in 2014. 

Industry Leaders Show Confidence

Despite the challenges, many industry leaders still see a “very steady, but improving trend line,” according to the latest Michael Dunlap office furniture industry survey. Completed in January, the overall index score was 54.36, almost unchanged from October 2013. A score of 50 is neutral and 100 is the highest, with anything under 50 being a negative reflection. Michael Dunlap said, “The overall index continues to remain well above 50 and is definitely in line with the average of the 39 surveys done since 2004.” And the personal outlook index, based on views from industry leaders, jumped from 57.38 to 64.62, well above the long-term average of 54.31. The survey was sent to more than 750 individuals involved in office furniture manufacturing and supply in Africa, Asia, Australia, Europe, and North and South America.

“Eight of the 10 index values remain above the 50 level,” said Dunlap. “I maintain the opinion that the industry will continue on its slow growth period in early 2014, then see a modest acceleration during mid- to late 2014.”

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