China Consumer

Soft furnishing

Furniture industry is suffering badly

Soft furnishing

The good news: China’s property market is showing signs of life. Residential and commercial property sales totaled Rmb4.6 trillion ($742.2 billion) in the first 10 months of this year, up 5.6% on-year.

But the news looks like taking time to work through to new construction. While property prices seem more resilient, in terms of floor area, construction starts in the January to October period fell 8.5% to 1.5 billion square metres.

Even if demand looks like it may be slowly recovering, the news is still bad for China’s furniture industry. It relies more on the sale of newly constructed flats, rather than on people moving homes – since consumers are more likely to buy new furniture when they buy a new home (whereas if they simply sell one home and buy another, they’ll already have the bulk of their furniture). So the data measuring construction starts is the key number industry executives monitor.

“If they don’t buy homes, we don’t sell sofas,” one salesman told NetEase, a news portal.

The industry has been reporting signs of stress for a while. According to data compiled by NetEase, total revenues from the country’s 10 largest furniture manufacturers dropped 34.8% in the last quarter compared with the previous year.

To get more of a sense of the current challenge look no further than Royal Furniture, one of the largest furniture makers in China. Listed in Hong Kong, it shocked investors by announcing that sales fell 30% in the first half of the year compared with a year ago. Profits dropped 90%.

To cope with falling demand, Royal Furniture has already laid off a fifth of its workforce and shut down 80 underperforming outlets (out of a total of 1,930 stores).

But it is still having to sell surplus inventory with steep price discounts, with Hong Kong’s Apple Daily reporting that goods are being sold at 50% off at the company’s flagship store in Guangzhou’s Tianhe District.

Despite such a generous offer, the reporter claimed that there were no shoppers at the store, even during peak business periods. NetEase noticed a similar situation, with quiet showrooms and sales assistants lounging on display sofas.

“It’s not only Royal that’s suffering. The entire industry is in winter,” complained the company’s general manager Tan Jun. Several large producers have shut down in recent months and others have been closing factories. Experts say that the industry is operating at 40% of capacity to cope with the reduced demand.

In Shunde in Guangdong, where many furniture manufacturers have their headquarters, it’s a similar story. “The output in the peak season this year would be similar to what was common in off-peak seasons over the last few years. We are working hard to maintain normal operations,” one factory owner told First Financial Daily.

Others say the problem with China’s furniture industry goes beyond conditions in the wider economy.

For a start, manufacturers have often tended to copy designs from one another, doing little to upgrade their products. Customers complain that much of the merchandise on offer is almost identical. This sales strategy might have worked in the past, but with little product differentiation furniture makers end up competing purely on price, a particular problem when demand starts falling.

Perhaps the Chinese should take a cue from Swedish giant IKEA. It has announced that sales in China rose 21% to Rmb6 billion in the year ended August 31, compared to 2011. And analysts say IKEA has protected itself from some of the unpredictability in the real estate market by marketing itself as the place to go for “changes in living situations” such as births, visits from friends and even changes in the seasons. By doing so it reduces its reliance on on sales to purchasers of new homes, says IKEA spokeswoman Yvonne Yin.

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