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“Made in America” Furniture Faces Darwinian Cost Pressures

2/23/2024
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With US demand softening and domestic production inflation still a factor, the 2023-2024 bankruptcies and layoffs in the furniture sector are warning flags that geographic exposure to cost is strategically existential. Attention here is once again focusing on production locations, in the face of some harsh numbers.

“Made in America” is great for loyalty, sustainability and supply reliability – but it also looks increasingly like a weighted chain dragging on the sector’s feet

Source: Euromonitor International

Even post-pandemic, inflationary cost spikes are far from over, and cost patterns make imports from Latin America and Asia (beyond China) more attractive by the month. This market shape dictates a further exodus of production from the US via offshoring (as a matter of survival, not choice).

The latest cost spike hurting US production at the start of 2024 is from steel prices

Euromonitor’s Inflation Projection Tool gives a category-level perspective of production inflationary pressure to see what impacts are moving through the supply pipeline towards the market. Manufacturers can see if their cost movements are abnormally high or low, whilst retailers can see pressure heading towards them from supply partners up to six months ahead of shelf price movements.

This helps clients plan ahead, giving a context for negotiations, showing the likelihood of achieving win-win outcomes, and also showing where a market has cost dislocations with issues passing costs forward from factories to consumers (a far more common challenge since the second half of 2021).

The chart below maps production inflationary pressure for furniture, showing consumer price patterns in the US versus cost of goods sold for domestic versus imported production.

Chart showing Production - Cost of Goods Sold (Including Shipping for Imports) for Furniture in the US

Production in both Europe and the US remained badly inflated in 2023, but the latest challenge for domestic US production is the further spike in steel prices affecting product retail pricing in the first part of 2024, taking the pressure levels near to those seen a year ago – and this is a US only pressure.

Whilst production outside the US has a deflationary pattern, giving better pricing options to meet shopper preferences, production in the US still has an inflationary trajectory. This compounds the materials cost gap versus Latin America and Asia that opened up during 2023.

US furniture retailers discount heavily to stimulate demand

When we examine the websites and SKU listings across retailers in Europe and the US, we spot a behavioural gap around the use of discounting and promotions that is consistent across furniture. This gap is especially visible in the types of furniture most affected by the cost-of-living crisis such as big-ticket items linked to renovation projects in the bathroom and kitchen.Chart showing Proportion of Kitchen Cabinets and Bathroom Furniture SKUs Promoted with Discounts

The listed median price of a kitchen cabinet is very similar at the end of 2023, coming in at USD121 in the US versus USD124 in Europe. However, the degree of promotional discounting indicates target price achievement is lower in the US, with all degrees of discounting visibly higher. If we track that against Google search terms as an indicator of what shoppers seek, an interesting pattern emerges.Chart showing search term tracking

The US as a market has been subjected to some of the strongest inflationary pressures in domestic production, but shoppers are increasingly resistant to price rises – and we can see shopping priorities trending more to everyday value rather than seeking discounts.

Passing inflationary cost to shoppers and then attempting demand stimulation is losing potency in this period of discount fatigue

Source: Euromonitor International

The casualties of this dynamic are becoming ever more visible, as recognisable names, including some pillars of the sector that have been around for more than a century, face financing issues beyond their ability to cope.

The reason is twofold – being unable to pass costs forward turns a functioning and viable long-term business model into a liability, and this topic is rapidly coming to a head now because of rising financing costs, with interest rates unlikely to return to their previous ultra-low levels.

Rising costs plus an elastic price and demand cap means something will give

The first half of 2023 saw bankruptcies, liquidations and redundancy programmes linked to financing woes in United Furniture Industries Inc, Serta Simmons Bedding LLC (exited chapter 11 in June 2023 after restructuring), Tuesday Morning, Creative Metal & Wood, and Bed Bath & Beyond.

This accelerated in the second half, with actions harming Klaussner Furniture Industries Inc, Mitchell Gold Co, Noble House Home Furniture LLC, Z Gallerie LLC, and Steinhoff International Holdings NV, which sold Mattress Firm to Tempur Sealy during 2023 and was separately caught attempting to hide financing issues and inflate reported profitability, before being liquidated.

Business as usual is not a viable choice. The two largest furniture export countries to the US (after China, which has become seen as a higher risk in the last years) are both experiencing a rise in factory orders from US companies, whilst the Institute for Supply Management reports a sustained drop in US manufacturing. Mexico, especially, gains investment as a logical low-cost and lower-risk production base with proximity to the US market and not being dependent on shipping lanes.

Pottery Barn, Marge Carson, IKEA and La-Z-Boy are just some of the leading companies which have chosen this route – and looking at how clients have been studying the latest edition of our Inflation Projection Tool, the advantages of sticking with “Made in America” are on a balance scale that is getting worse over time; additional movements to sites in Mexico look inevitable.

Read our article, Global Economic Outlook: Q1 2024, for more analysis on global drivers, including our wider inflation forecasts (beyond home and garden and the scope of our inflation tool). It is also worth checking out our report, New Economic Reality: Navigating High Interest Rates, which touches on why this aspect of value creation strategy has such a degree of immediacy linked to it.

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