Vendors manage source country strengths against potential savings

LAS VEGAS — For furniture importers, the past year or more has been an exercise in managing extreme disruption.

For some, this shift began well before China tariffs became an issue, as rising labor costs and tight environmental regulations took effect, forcing companies to reconsider their sourcing structure.

But outside of wood bedroom and dining — much of which has already been resourced in the past decade or more — some key categories still had to be transitioned outside of China. This ranges from motion and stationary upholstery to occasional and accent furniture.

Other products, including some higher priced upholstery as well as metal and glass dining and occasional, have stayed put as countries such as Vietnam and Malaysia have more limited capabilities for those items.

“There are things in materials and craftsmanship — including glass, metal, stone, upholstery and leather — they can’t get caught up on,” said Crystal Nguyen, vice president of merchandising for Coaster Company of America, noting in particular that Vietnam can make more promotional upholstery but not necessarily higher end goods. A major reason is that is much harder to control standards on color dyes the further outside China one goes.

She and other sources also note that Vietnam’s capabilities with metal and glass used in dining and occasional are nowhere near China’s. Thus, to move the product could end up negating any tariff cost savings, particularly if it doesn’t meet quality standards retailers expect.

“When you leave China, you have more hoops to jump through,” she said. The balancing act thus becomes, “Do you want to take an increase, or risk delays and quality issues? You just can’t jump ship; you have to do it gradually. At this point everyone is running away.”

Now a year or more into the process, suppliers and retailers alike have a much clearer idea of what products to expect from where moving forward, particularly as tariffs have risen from 10% last September to 25% in mid-June.

Derrick Ng, president of Lifestyle Enterprise, said that the company has long been sourcing its wood product in Vietnam and Malaysia. But after looking at other alternative source countries, the company found that China was still the best country for adjustable bed bases and other products using metal, such as outdoor furniture.

“Lifestyle has a different strategy to deal with different categories. In metal, I compared Vietnam to China, and China is still a better value,” he said of the capabilities, capacity and materials available in each country.

He also has considered moving some production in outdoor furniture to Vietnam and some other metal furniture to Malaysia. However, he noted, those changes are still in their very early stages. “No one can change everything overnight.”

That said, the company has come up with tariff-related pricing, which represents a shared cost between not just between factories and importers, but also retailers, who likely will pass some of those increases on to consumers.

“We are trying to absorb (price increases) and also are working with our customers and our factories,” Ng said. “We are working together to face the problem.”

Nguyen, of Coaster, said that Vietnam in particular is strong in the wood category, including wood product with antique and rustic finishes. Thus, the company has been shifting more of its dining to Vietnam in recent months.

Still, there will be new dining room pieces from China at this week’s Las Vegas Market. The company also continues to source occasional from China, although it has been moving more to other countries. The same is true with its motion and stationary upholstery in fabric, leather and PU, the majority of which has stayed in China, while more promotional product is moving to places like Vietnam.

To manage the now 25% tariff, the company has worked with suppliers and customers alike on pricing, while also absorbing much of the cost itself.

“You take some of the increase and pass along some of the increase,” Nguyen said, noting that there has been nowhere near a 25% increase passed along any product. “You might as well drop the product,” she said.

“Between us, the factory and the retailer, you have to split it three ways. It is not across the board. We were able to negotiate and work with our factories in China,” she added. “Everybody has to share the burden so it is not all given to retailers.”

Elements International moved some of its upholstered beds, including the Erica bed from China to Vietnam and Malaysia to avoid China tariffs.

Elements International also decided to keep some of its stationary and motion upholstery in China, while moving some to Vietnam and Malaysia, said Mike Wurster, president.

“We have been working on this over the past 18 months and have been working on it more earnestly more recently,” Wurster said. “We are still looking. There is a pretty big appetite for those products, and we want to resource them where it hits a decent price point.”

He added that while the company has some great partners in Vietnam and Malaysia, finding enough factories with enough capacity has been difficult.

“In upholstery, what we are doing is item by item,” he noted of what to move out of China. “Does it make sense, and what would the price point be? We are trying not to abandon our factory partners in China because we have good relationships, and we don’t know what is going to happen. ”

Most of the company’s dining, he said, has moved out of China, including a marble top dining program that the company is having success with in Vietnam.

“Truthfully, we have gone back to the factories where we could, first, and asked where they can help,” he said. “In some cases they have been helpful; in other cases they can’t. With factories that are willing to give up a huge chunk of their margin overnight, it is a question of whether you got the best price to begin with.”

Based on these negotiations, he said, Elements is analyzing products on a case by case basis and trying to pass along as little as possible to the retailer.

“In every case we have tried to make it simple, with a focus on: Do we continue to do this, instead of moving (the product), and how do we minimize this for the customer and still make it work,” he said. “The 10% everyone could manage, but the 25% is more challenging.”

Tim Ussery, president of Standard Furniture, said that biggest shift in product outside China has been its motion upholstery category. But since the line had already been dual sourced between China and Vietnam, he noted, the transition has been seamless.

One of the biggest challenges, he added, has been resourcing product with mixed media, including “metal, wood and glass combinations that China has done really well. There are regions in China where the material is all local, and the fabrics have been around for quite some time. There is definitely a level of expertise there where it will take other countries some time to catch up on.”

That said, mixed media only represents a small percentage of overall product, representing only 5% of the dining category and around 11% of occasional.

He said that the company has shifted most categories from China in the past nine months. This only resulted in it passing along less than a 2% increase in the initial 10%. By the time the 25% took effect, Ussery said, “we were fully resourced, and our pricing was set based on that.”

“Vietnam not only has grown, but it is doing better in multiple categories, and we are positioned well to use our current supply chain,” he noted, adding that Standard also sources product in India, Malaysia and Mexico, along with a small amount in China. “We definitely felt that we were in a very good position from the start.”

Tony Cantrell, chief operating officer of United/Lane Furniture Inds., said that, in response to the rhetoric regarding China, the company already started to move as much product out of China in early 2018.

On the wood side of the business, this primarily affected the occasional category, with much of the product moving to Vietnam. Bedroom and dining was already being sourced primarily in Vietnam and Malaysia.

Today, he said the company is down to the mid-single digits over its overall occasional assortment still in China, with most of that being metal and mixed media-driven.

“It is still mixed media types of designs that are still there,” he said. “That is not the strength of other countries, including Vietnam. For any occasional that has mixed media components, China is still the low-cost producer.”

While the company continues to explore other opportunities for these products, he said there have been some price increases on a limited number of SKUs that remain in China.

He noted that the company had a low single-digit increase at the beginning of this year on the initial 10% tariff. It is now looking at some price increases on the limited number of SKUs still in China.

“We are trying to minimize the impact of the tariff, but it is a real cost,” he added. “It is a hard cost to all importers, no matter who is the importer of record.”

He said there has not been a significant impact on sales in the category, with sales in the mixed media category being “extremely strong,” but said the company is concerned going forward.

Bernards Tuscan occasional group is one of the sets that have remained in China despite the tariffs. Moving such product would likely negate any cost savings achieved from the China tariffs.

Based on the 25% tariff, Bernards Furniture Group is passing along an average 10% hike on select inline goods. This primarily affects some casual dining and occasional tables. The company’s bedroom line already was being sourced in Vietnam and Malaysia.

Factoring in a 10% hike, a table-and-four-chair dining set would now land at $150, for a roughly $299 retail. This represents a $15 increase wholesale or a $30 increase at retail.

Company President Greg Noe said that most of the product that remains in China has some metal and/or glass materials and construction, including dining and occasional.

He added that hand painted goods and metal beds are other categories that have been difficult to move out of China, at least at the same quality levels.

“We evaluated the product line, and we purged it and got rid of all the product that wasn’t worth moving forward with,” he said, adding that for the rest that remained in China, the company renegotiated pricing for those items.

Noe added that the tariff related increase was also kept to a minimum as Bernards established a different margin on those products to maintain the business.

“Even if you have a reduced margin structure on it, you are still generating sales, revenues and profits,” he said, noting that the company also is not putting any new product in China at this stage.

David Beckmann, CEO of Emerald Home Furnishings, said that the tariffs caused the company to shift its casual dining from China to Vietnam.

“It pushed us into a roller coaster ride, but we have resolved it,” he said of the initial 10% tariff, noting that some 80% of the company’s casual dining business previously was in China. “It has taken six months to get done.”

He noted that the company has found a way to keep its occasional lineup in China, noting “there are not a lot of great suppliers in Vietnam doing occasional.”

To minimize any price increases, he said, the company has shifted some of its sourcing further inland in China where it has found some smaller factories to produce the line.

“In some cases we are taking inline product and moving it to hold the pricing, so there is no price increase,” he said. “And we are doing new product in that factory. By getting outside the comfort zone and looking further away for opportunities, we will bring on some pretty good factories.”

He noted that the company has had to take some small price increases, particularly related to the 25% tariff.

“We are getting lower pricing from the factory, but we are not getting low enough prices to avoid the 25%,” Beckmann said. “We are taking a price increase on some items and are having no price increases on others.”

The hardest category to manage, he said is upholstery, around half of which remains in China. In light of the 25% tariff, he said a small percentage of these goods face a price increase.

“There is limited capacity in Vietnam in upholstery,” he noted. “Their ability to develop sophisticated product is not there. They are capable of doing commodity product.”

“We have taken the price-sensitive product and moved that inland, or to another country, he said, noting that the company’s sweet spot for a sofa is around $699.

Like others, Sunpan Modern Home also has been very selective about what stays in China and what moves out of China.

“We continue to diversify our assortment outside of China across all categories,” said Carl Lovett, national sales manager.

He noted that alternative source countries such as India, Vietnam and Indonesia offer more tailored and flexible design options through various mixed materials and hand craftsmanship.

“These looks are highly relevant and appealing to buyers seeking unique finds,” he said. “Infrastructure and capacity also continue to improve in these countries.”

Despite the tariffs, he said, “China remains competitive in large upholstery, metal finishing and certain volume-driven categories, given its ability to produce and deliver product quickly and efficiently.”

Lovett said that effective June 1, Sunpan made modest modifications to its pricing to “capture rising costs related to tariffs, materials and labor realized from our sources.”

I’m Tom Russell and have worked at Furniture/Today since August 2003. Since then, I have covered the international side of the business from a logistics and sourcing standpoint. Since then, I also have visited several furniture trade shows and manufacturing plants in Asia, which has helped me gain perspective about the industry in that part of the world. As I continue covering the import side of the business, I look forward to building on that knowledge base through conversations with industry officials and future overseas plant tours. From time to time, I will file news and other industry perspectives online and, as always, welcome your response to these Web postings.

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Post time: Aug-24-2019