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Furniture makers still paying for supply chain crisis

In 2021, I bought on Amazon a zesty asymmetrical mirror from a brand called “BIKARSOUL.” I paid $141.53 on Feb. 27 of that year. As I gleefully bought mirrors, nightstands and more for my new apartment in the months to follow, I was helping to contribute to a supply chain issue that’s still hanging over the heads of furniture makers. 

Moving a container from East Asia to the U.S. on the spot market typically costs around $1,000 to $2,000. That’s economical for the furniture industry, which, over the past few decades, has become increasingly reliant on factories in Asia to make everything from mattresses to dining tables. 

Something strange emerged toward the end of 2020, as FreightWaves readers know well. The cost of a container shot up like a meme stock, with spot rates eventually hitting tenfold their usual cost. According to the Freightos Baltic Daily Index, at its peak in early September 2021, moving a container on the spot market from East Asia to the west coast of North America cost just over $20,000. Two years prior, pre-coronavirus, that same move was priced at under $1,600.

Compared to 2021, furniture manufacturers are enjoying much, much lower transportation costs. But, furniture insiders told FreightWaves the cost of materials has remained high. Labor has become more expensive as well.

Furniture brands have also had to slash sticker prices as demand slumps. Other industries, ranging from food to airlines, enjoyed elevated profits in 2022. Their prices were elevated from years past, but their costs had started to sink. 

Not so for the furniture industry. (By the way, none of the bulleted companies responded to a FreightWaves request for comment.):

  • Home retail behemoth Williams-Sonoma, which owns brands like Pottery Barn and West Elm, reported lower margins in 2022 compared to the year before. Its revenue increased 5.2% in 2022, but costs of goods sold jumped by 8.3%.
  • RH, previously Restoration Hardware, saw gross profit decrease by 2.3% and revenue by 4.5% in 2022.
  • Wayfair’s revenue sank by 10.9% in 2022. It reported a negative income of $1.3 billion that year. 

The annual report of Purple, a mattress company, stated something that echoed across the home furnishings space: “In 2022, our gross profit and results of operations were adversely affected by elevated levels of materials, labor and freight costs and lower demand levels.”

Here’s what happened, in case you just want the high-level view:

  • Retailers canceled furniture orders in March 2020, expecting the world to shut down.  
  • When the American consumer responded instead by ordering a ton of furniture, brands had to respond by revving up manufacturing plants quickly. 
  • Unfortunately, every other industry did the same thing at the same time, and freight rates (and material and labor costs) began to soar. 
  • Demand sank in 2022, but there were still incoming orders — moving into the U.S. with super-high costs.
  • Furniture brands have been forced to pay to store that inventory. 
  • Unlike other industries, they’ve also been forced to lower consumer prices — so they’re getting squeezed on both sides.  

A chaotic 2020 … and 2021

You, me and the guy who lives under the biggest rock in the entire world know this story, but again I will tell it. 

In March 2020, when the world was shutting down in what was then called the novel coronavirus, furniture manufacturers assumed they would be out of commission for a while. Instead, just a few months later, bored consumers started buying a lot of stuff, especially furniture. It was very chaotic, as longtime furniture analyst Jerry Epperson told FreightWaves.

“Many of our stores had canceled orders,” said Epperson, who is managing director of investment bank Mann, Armistead & Epperson. “They didn’t know what was gonna happen. Factories were closed and we had to get everybody cranked back up again. The demand so greatly exceeded our ability to meet it.”

In some cases, Epperson said, factories in Asia had reopened, but those countries’ ports hadn’t opened.

Reasonably, furniture brands started ordering tons to ensure they had decent inventory for what seemed like a bottomless hunger for more furniture.

Within months, though, the cost of importing that furniture became untenable. The sudden uptick in costs, including freight and materials, caught brands by surprise. Ken Smith, a longtime accountant in the furniture industry, said some producers tried to ask their buyers for a price increase — and many refused.  

“A lot of people lost a lot of profitability by staying with their original pricing,” said Smith, partner at accounting firm Smith Leonard. “That’s one of the things that hurt so many companies, especially those that were importers. You were taking orders right and left, and freight rates were going up like crazy. You weren’t pricing those goods expecting freight rates to do what they did.”

Just about everything we buy that’s manufactured overseas comes to the U.S. in a 40-foot ocean container. It’s trickier packing one of these containers with sofas than, say, socks. Sofas are a lot heavier and bigger. They don’t compress like socks do. You’ll likely run out of space or weight pretty quickly in one of these containers.

And with low-cost wares, like my asymmetrical mirror, that means some furniture companies were paying more to ship their containers than what the actual stuff in the containers was worth. 

Price increases came soon after. After that, it was a highly profitable time for the furniture industry, which tends to not be so lucrative. 

2022 brought a nasty hangover for furniture brands

One key reason for the uptick in furniture sales was the fact that people were buying new homes and even building homes. Such sales sharply curtailed in early 2022 as the Federal Reserve began raising interest rates to combat inflation.

That plummeting demand ended the party for the furniture industry — and with a massive hangover in the form of an inventory glut. Americans seemed to order more and more stuff, and manufacturers and retailers provided. In early 2022, they stopped pretty much all of the sudden. 

Furniture and home furnishing sales dipped by 8.0% in the first quarter of 2022, while retail trade more broadly decreased by 0.6%, adjusted for inflation, according to the U.S. Bureau of Economic Analysis. In total, furniture sales declined by 7.4% in 2022, compared to 0.9% for all retail sales. 

“Everybody knew it wasn’t gonna last, but 2022 fell off somewhat unexpectedly — maybe a little more than what we thought,” Smith said. 

That left furniture brands with an absurd amount of inventory. That inventory could have been stocked in warehouses or left in containers in a Chicago railyard or Los Angeles terminal. Inventory levels popped by 40%-50% year over year in certain months of 2022, Smith said. 

It costs money to keep all that inventory stored, which dragged down the industry’s margins in 2022. In an October report, Morgan Stanley highlighted home goods companies like Williams-Sonoma as ones that were particularly at risk for elevated inventory and depleted sales.

“It’s sleeping money sitting in the warehouse,” Mike Padjen, vice president at American Home Furnishings Alliance, a trade group, told FreightWaves. 

The hangover refuses to go away in 2023 

In January 2023, Smith’s survey found that inventory levels were 20% higher than at the same time last year but down from the previous month. Consumers are still buying perishable goods at a regular clip, but they’ve largely turned away from durable goods, like furniture, in the past year.

“I thought we’d be pretty well through [the inventory] by the end of 2022,” Epperson said. “But we are not. It’s still a significant problem.”

Tragically, a lot of that furniture can’t even be sold, Padjen said. It’s passe!

“People are looking for new items,” he said. “The demand that’s out there isn’t for stuff that is 2 and 3 years old. It’s for new products, especially on the retail floors.”

Some of the inventory is also just … kinda wonky. Think chairs without their matching ottomans, or vice versa. 

“We were so desperate for product,” Epperson said, referring to upholstery in particular. “Our retailers would buy anything they could get just to not have an empty wagon.”

Some portion of that inventory was moved during the height of the supply chain crisis, when freight was exceedingly high. Unusually high sticker prices for consumers were supposed to combat that. But now, even if that un-trendy furniture sells, it will likely be for far lower prices than intended. 

There are other quirks. Furniture makers have been on edge waiting for a federal rule around no-tip furniture, which could revamp how they test their wares. The strong dollar hasn’t been favorable to U.S.-based companies that manufacture overseas.

“Since April, we’ve seen the dollar weaken, and that’s raised prices again,” Epperson said. “Some people who just lowered prices recently have begun to raise prices. You can’t make this up.”

As a result, Padjen said the profitability of the early 2020s has been all but washed away.

“The furniture industry probably enjoyed higher profitability [until early 2022],” he said. “But all this other stuff has pretty much taken all that.”

Some say they’ve been able to lower prices without a massive hit to their margin, in part thanks to lower freight costs. Two high-end, business-to-business furniture vendors told Business of Home in February that declining freight rates have allowed them to slash prices, too.

And, to return to my dumb Amazon mirror, I was stunned to learn that the piece is now about half the price I bought it for more than two years ago — even though the price of glass has skyrocketed since then. Dagnabit! 

Do you have a story to share about the furniture industry? Email [email protected]. And don’t forget to subscribe to MODES for more supply chain gossip.