Furniture market review – Sofa, so good but slump heralds tough times for furniture firms

Don't bank on it
Elvila, 70 percent of whose business targets the retail segment and the other 30 percent corporate sales, is keeping calm in the face of an estimated downturn this year.
While in 2008 the firm managed to make a turnover of EUR 115 million, it now expects a drop of 10 percent. The less than optimistic predictions, attributed in part to the general downturn of all economic sectors, are also due to the tremendous increase in the price of raw materials, estimated by Gabriela Craciun, marketing economist at Elvila, at some 60 percent over the value of 2007, in 2009.
These supplementary costs are mirrored in the product prices, which has hit sales, within an overall downturn on the furniture sector in Romania. Still, Elvila's business development representatives don't rule out a future comeback and chain expansion.
“So far, Elvila has invested EUR 50 million on the furniture market and, in the future, the investments will focus on large sales stores, following the pattern of the Ploiesti-based Elvila store,” Craciun told BR. The company's main strategy is to finance the business from its own funds and avoid bank loans.
Despite the current economic background, the company's representatives would not consider, even in an emergency, seeking bank financing, “no matter what the situation on the market,” Craciun commented. The same approach to loans is shared by Dan Sucu, owner of Mobexpert. The businessman told BR that the company's current main strategy is to take out as few bank loans as possible. It has also decided to cancel financing lines worth over EUR 15 million.
“The cost of bank financing is really unrealistic at this moment and cannot be sustained from the furniture retail operations,” Sucu explained. He also cited as problems the increasing price of the materials used by all furniture producers to develop the final products, along with the supplementary costs of utilities, fuel and employees.
To avoid adding these costs to the sales price, Mobexpert representatives have started to “toughly negotiate” with their suppliers in order to maintain prices in the local currency but the struggle is far from over, Sucu said.
“Every supplier on the market operates using the Euro, and, as a result, everything is related to the Euro. Increases in sales prices were not as visible when the local currency had a good exchange rate with the Euro but the effects were harsh when the depreciation was high,” he added.
According to the businessman, there is a general pessimism on the market which has resulted in a weaker furniture industry.
Sucu expects a recovery sometime in 2011 or 2012, when yearly targets could be set again, instead of the quarterly-type plans at the moment. Many businesses are playing the waiting game, a predictable strategy to adopt in a very unpredictable economic climate.
Mobexpert posted a turnover of EUR 169 million in 2008. Its many divisions include 10 retail companies, eight furniture plants, six import companies and three business units running logistic, IT and development and planning operations for the group. The furniture firm has put EUR 100 million into its development since 1993.
As for sales on the retail/corporate segment, the business ratio is similar to the other companies on this market, 79 percent retail and 21 percent corporate. Sucu estimates a slight decrease on the office segment this year, as a natural result of the fewer acquisitions and developments currently being carried out by companies.
In its turn, BoConcept furniture retailer, owned by BD Furniture company, entered the Romanian market in 2006 when it first opened a store inside the Feeria complex in Bucharest. Last year, the retailer opened a second unit of 550 sqm in Sibiu, within Shopping City Sibiu commercial center. With the two units opened so far, the furniture retailer has spent EUR 900,000, according to Diana Staicu, the official representative of the BoConcept brand on the Romanian market.
Last year, the company announced its plans to reach a network of six units countrywide by the end of 2010. Currently, BoConcept is focusing on logistics and plans to open a storage site which will facilitate deliveries for the retailer's chain. In the last quarter of 2009, a store in Iasi is expected to join the network.
Regarding the firm's business strategy for 2009, Staicu told BR that sales prices have been frozen at a RON/EUR parity of RON 3.9/EUR, in order to keep sales stable. Still a drop of 10 percent is also on the cards for BoConcept in the first quarter of this year.
But Staicu says the future looks brighter, with the last quarter expected to generate more positive results. Starting next year, the online sales platform is expected to be implemented within the entire BoConcept business worldwide structure and, based on the current demand coming from its Romanian clients, the company will wait until 2010 to access these services.
Galermo, another furniture retailer operating on the local market, has developed a business strategy which its representatives deem safer.
“Currently, the demand is low due to the general business downturn registered across all economic segments. To fight this problem, we are mainly addressing the high-income users less affected by the crisis, with more than 75 percent of our product portfolio,” said Zafer Gurbuz, general manager of Galermo. The company reported that producers' prices had more than doubled between 2007 and 2008. Still, once the general slump started to show up in most budgets, the end of last year brought decreasing raw material prices.
“Due to the significant stock levels all producers are dealing with, the decrease hasn't also resulted in lower sales prices to the end-user as yet. We estimate that from the end of 2009, the sales price reduction will start to be more visible,” added Gurbuz.
In the near future, the company will focus on developing its countrywide distribution network, which is expected to bring more positive results than the retail operations.

Expansion in sight
Some companies, such as Quadra Invest, are planning to consolidate their local presence through continuous expansion.
“We have a continued focus on expanding our portfolio for total interior design solutions, with outstanding service and affordable prices. We currently have 1,000 sqm under construction in the historic center of Bucharest, where we plan to open a flagship store for our European Heritage brand, and which will also include Thomas Antiques,” Ralph Polko, executive director of Quadra Invest, told BR.
He added: “There is still a lot of room for expansion, despite the slowdown in the real estate market. We also plan to explore the interior design and consulting business as we have reached a point where we can offer total solutions for interiors that include fabrics, paint and tailor-made upholstery besides the ever increasing range of decorations and furniture.”
So far, the company, based on export-oriented commercial activities, has opened two European Heritage retail stores in Hunedoara Mall and Sibiu, and plans include the launch of a partner shop in Cluj. “Last year also saw an investment of EUR 200,000 in a Factory Outlet Store in Targoviste, where warehousing and sales are combined in a 800-sqm showroom,” Polko said. The company's total investments in Romania exceed EUR 5 million so far.

Furniture companies face restrictive corporate budgets and taxing clients
Cautious and more price-sensitive clients, along with new acquisition expectations, characterize today's consumer, an opinion shared by both Diana Staicu of BoConcept and Mirela Dumitru, general manager of Innoffice.
“Clients are showing more caution over investments in equipment and high-level fixed expenditure, having been negatively impacted by the long periods taken to reach breakeven and due to stagnant activities. As we are operating on a niche market, there is a paradox in the fact that demand is still there, but the expectations of acquisitions brought about by the new economic trend are negatively balancing this demand,” Dumitru told BR.
As InnOffice exclusively targets the office segment, the general downturn in office developments within an overall blocked real estate market has put a hold on the company's mathematics.
“Relocations currently mean smaller spaces and fewer staff, and the new spaces chosen for businesses are rarely A-type class,” Dumitru said. InnOffice, as part of a group of companies, made sales of EUR 1.5 million two years since starting operations on the Romanian market. Most of this sum represents sales from 2008.
For this year, the InnOffice representative foresees a possible sales decrease of 40 percent. Dumitru also cited the increasing price of raw materials, resulting in higher sales prices, but has now detected a certain improvement.
“The prices of raw material had increased two fold since 2007, resulting in several percentage points so far. Now, though, the prices charged by the producer
have obviously improved,” Dumitru said.
As a company focusing on the office corporate segment, retail makes up only five percent of the company's overall business structure, “a share that will remain unchanged in 2009,” Dumitru estimates. Horatiu Didea, commercial director of Corporate Office Solutions in Romania, thinks that the segment on which the firm operates will suffer an overall reduction of 25 percent this year. Still, COS representatives are quite optimistic, following their business strategy of targeting turn-key and ongoing office
projects, and do not think the company's turnover will be affected by the general downturn, maintaining last year's value of EUR 15 million.
In 2008, COS recorded a 13.5 percent increase in its turnover compared with 2007. From this amount, 80 percent came from B2B office solutions sales, according to Didea.
Since its establishment on the Romanian market 10 years ago, COS has invested over EUR 2 million and the next investments will target refurbishing and maintenance work at the firm's showroom in Victoria Business Park and replenishing stocks. On the long term, according to Didea, the company is looking at opening regional subsidiaries in the next two years. As for sales prices, it seems that the office segment is a little bit different from that of home-use furniture producers and importers. COS representatives have acknowledged a slight increase in the price of raw materials but, according to them, it is not enough to push up final sales prices.
COS is another of the companies that are shunning bank loans. Like most other players on the furniture segment, it is securing the financing for development from its own resources.

International retailers hang on
This year, the furniture retailer Staer International plans to halve its imports and increase to 85 percent production at the company's plant in Galati, in line with the strategy adopted for 2009, the company has said.
In 2008, the firm posted a turnover of EUR 26.8 million, a decrease of 12 percent from 2007, when it posted EUR 30.44 million. In February 2009, Staer International opened a 4,000-sqm showroom in Brasov and it also has plans to open four more offices in Braila, Targu-Mures, Bacau and Focsani within local retail parks. The total investment is estimated at EUR 2 million, according to an official statement by the company.

High times for high end
Distinct from the wide range-orientated retailers, Thomasville, which entered the Romanian market last year, claims to have seen no significant effects on the company's sales, due to the high-end nature of its products.
According to a company representative, the luxury furniture segment has not experienced significant differences from last year, since a company targeting the high-end consumer gains its profits from the sales value rather than volume. For this year, Thomasville is looking outside Bucharest for expansion, having already developed a showroom in Iasi.
Local furniture producers, both small and big, have to face up to a wider range of problems – such as decreasing demand and the price of raw materials – than the international furniture retail chains Ikea and Kika, which chose to target a very clear segment of the market.
Kika found a place on the Romanian retail furniture market one year after Ikea came here. The Swedish chain's local franchise, owned by Moaro Trading, has within its administration and management names such as Michael Lloyd and Puiu Popoviciu.
At the end of 2008, Ikea reported a turnover of EUR 104.7 million. Last year, Cornel Oprisan, retail manager of Ikea, stated that the firm's imminent expansion plans would not include a second store in Bucharest, but the possibility was not being ruled out on the long term. “I don't think the next store will be in Bucharest. So far, we haven't bought any piece of land nor signed any contract,” said Oprisan.
As each Ikea unit needs between 12 and 14 months to open, the second store in Romania is likely to open in 2009. The company is currently negotiating for land in Constanta, Galati, Iasi, Cluj-Napoca, Timisoara and Brasov, according to Oprisan.
The Austrian Kika also announced expansion plans when it planted its flag on the Romanian market, with a 27,000-sqm store worth EUR 31 million located within West Park Bucharest.
At that time, the retailer planned five more openings in Romania, for which it said it had already secured locations, following an investment of between EUR 30 million and EUR 40 million.
“I can see three Kika stores in Bucharest, but countrywide, taking into account that Romania is several times bigger than Austria, I am thinking of a very long-term developed business here. We started with this location in West Park Militari and we have already secured locations and financing for five
other outlets in Romania. At least for Constanta, Timisoara and Oradea, we plan to assign a total of up to EUR 40 million by 2011,” Paul Koch, manager director of Kika, told BR at the end of 2008. Currently, the Austrian Werner Grassmann, in charge of Kika Romania's retail operations, is busy trying to adapt the Austrian model to the local market.

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By Magda Purice
magda.purice@business-review.ro