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Tough furniture business gets tougher

A changing market and fallout from the housing slump are pushing retailers

Friday, Nov. 3, 2006

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On Rockville Pike in Rockville, Mastercraft Interiors and The Storehouse furniture stores are closing due to bankruptcies. In Virginia, Colony House Furniture of Centerville has closed. Hooker Furniture of Martinsville, Va., recently closed manufacturing plants in Virginia and North Carolina. And Routzahn's furniture store in Frederick is going through its toughest sales period in its 60 years.

National chains, including La-Z-Boy, Ethan Allen, Bassett and Furniture Brands International, reported disappointing third-quarter sales outlooks.

Overall furniture sales for the first nine months of 2006 were actually up 8.6 percent over the same period a year ago, according to a U.S. Commerce Department report, to reach $86.7 billion. Sales in August reached $18.7 billion, up from $17.8 a year ago. However, the September estimated sales for stores selling only furniture is off 0.3 percent compared with September 2005.

So the report, along with comments from industry observers, suggests a factor that has been transforming the nation’s retail landscape as a whole: The mega-discount stores such as Wal-Mart are grabbing a bigger share of America’s furniture shopping dollar, while more specialized retailers — in this case, many traditional furniture stores — are losing sales.

‘‘Yes, furniture may be up by 8 percent, but there is a phenomenon that is affecting traditional furniture stores ... this new channel which is the mass merchants,” said Kevin Castellani, publishing director for the trade publication FurnitureToday.

‘‘You are seeing a whole lot of Wal-Marts, K-Marts and Costcos getting into the furniture category that is truly affecting the traditional furniture stores,” Castellani said.

According to rankings by FurnitureToday, Wal-Mart, with 2,800 stores, passed Rooms to Go stores, based in Seffner, Fla., three years ago to become the nation’s biggest furniture retailer and has maintained that lead.

Staying competitive

But experts also say furniture merchants can’t just blame Wal-Mart.

Another factor is the housing slump, said David Deignan, general manager of Furniture America Inc. of Rockville, one of only a handful of family-owned furniture stores in the region.

‘‘It is not just the slowdown in home sales that might affect moving furniture,” Deignan said. ‘‘It’s that questionable financing has been offered to young couples buying these massive houses. Then they don’t have any money for furniture.”

Lie Zhang, assistant professor of marketing performance at the University of Maryland, College Park, agreed.

‘‘Those high-end furniture stores are more vulnerable to the recent slowdown in the housing market situation. It is really sad, because they are really good stores selling good stuff,” said Zhang, who also pointed to higher borrowing costs dampening big-ticket purchases.

Still, Furniture America is holding its own, Deignan said.

‘‘We sell product,” Deignan said. ‘‘We don’t sell price.” The store sells only handmade, domestic wooden furniture. Sales have ‘‘held stable” this year, he said, but ‘‘educating” customers to buy high-quality pieces that last longer is becoming more difficult.

Another family business, Little’s Furniture in Frederick, is also staying competitive for the same reason, according to partner Shane Little.

The company’s success is ‘‘directly related to not compromising quality,” Little said.

‘‘All the foreign-made furniture is probably another reason these retailers are struggling,” he said. ‘‘It’s because of the imports, and it is something that is all over the place, that we stick to solid wood furniture made here.”

Little said his family’s four stores on Patrick Street, each with a different theme, cater to high-end buyers. ‘‘A lot of times sales are directly related to the stock market,” he said, adding that 40 percent of the business are returning customers.

Furniture America and Little’s may be the exception, however.

Changing habits, concepts

Mastercraft, a high-end furniture dealer in the region for nearly 30 years, declared bankruptcy in May and announced it would shut down all five of its stores. The chain was $25.5 million in debt, and court records said sales of $45.3 million in 2005 were $5.2 million lower than in 2004.

In a statement, Douglas Gomez, founder and president, attributed ‘‘a dramatic drop” in sales to weak consumer confidence and changing buying habits. In addition, he pointed to the shifting dynamics of the furniture retailing business with the expansion of new home furnishing concepts.

Mastercraft’s bankruptcy attorney, Morton A. Faller of Shulman Rogers Gandal Pordy & Ecker in Rockville, said the chain ‘‘did not come up with this problem just this year. They have had lots of marketing issues.” Gomez had tried but failed to find a buyer.

Bankruptcy also is shuttering Storehouse, a more moderately priced dealer headquartered in Atlanta. But its demise was less predictable. Sales grew each year from $106.5 in 2002 to reach $141.8 million last year and the number of stores grew from 60 to 73, including nine in Maryland.

But while sales climbed, profits turned to losses. Storehouse’s parent, The Rowe Cos. of McLean, Va., unsuccessfully tried to find a buyer and Rowe filed for Chapter 11 protection Sept. 18 after reporting an $8.3 million loss in the first half of this 2006, more than triple what the company lost in the first six months of 2005.

The foreign factor?

Experts disagree on the impact of foreign goods on the industry.

Zhang downplayed that factor, saying imported products ‘‘will play much more of a role” in other industries.

‘‘In furniture, production tends to be more regionalized, like in North Carolina,” she said. ‘‘And also the transportation costs are much higher, except at the very high end. For example, if you want to have Malaysian rubberwood furniture, then you have to import it regardless of the price. Then you just mark up.”

But Michael J. Lichtenstein, another Mastercraft bankruptcy attorneys, disagrees.

‘‘All the factors come into play: home sales down, interest rates up and foreign competition,” he said. ‘‘It is difficult to get manufacturing for the same prices, even in North Carolina.”

North Carolina became an epicenter of furniture manufacturing in the 1970s because of low labor and real estate costs and the same factors are at play in Asia today, said Castellani of FurnitureToday.

Furniture imports increased from $8.6 billion in 1997 to $23.6 billion in 2005, according to the Commerce Department. China was, by far, the biggest exporter to the United States, with $10.8 billion in 2005, followed by Canada at $4 billion and Mexico at $2 billion.

The shift to lower-priced imports has prompted the discount giants to enter the market.

Discount retailers ‘‘are selling pretty good furniture at discount prices and it is all coming from offshore,” Castellani said. ‘‘Domestic manufacturing has almost ceased. ... You are also seeing the phenomenon of the younger consumer who has a passion with Crate & Barrel or Pottery Barn or Ikea, who are not shopping the traditional furniture stores.”

Also, manufacturers such La-Z-Boy, Bassett, Ashley and Broyhill sell directly to consumers and are increasingly importing goods from China, the Philippines, Indonesia and Vietnam. Manufacturer L&JG Stickley — the largest of unsecured creditors, at some $1.8 million, in the Mastercraft bankruptcy case — is building a large plant in Hanoi.

At its heart, the retail furniture industry is hyper-sensitive to shifts in foreign competition, interest rates, housing slumps, changing buying habits or a lack of disposable income, Zhang said.

‘‘This whole furniture retail business is so tough because it has very low inventory turnover rate, only 3.3 percent,” she said. The average retailer needs to keep a supply of inventory for about 120 days, much longer than other retail sectors, tying up a lot of cash.

‘‘If they are experiencing a tough period, they are not as able to get rid of their inventory,” Zhang said. ‘‘So they are actually more vulnerable to whatever market volatility because some of them would happen to be so short of cash that they can’t ride out a down or low sales period.”

Routzahn’s furniture, appliance, mattress and appliance store in Frederick has only a slightly higher inventory turnover rate, said Daryl Routzahn, president and CEO of the store that his family has owned and operated for 60 years.

‘‘Yes, it can be a problem, especially for a lot of companies that only have floor samples,” he said. ‘‘We have to buy what customers are going to buy.”

Since March ‘‘our business has been extremely challenging,” Routzahn said. ‘‘We are experiencing double-digit sales decreases.”