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The Furniture/Home Furnishings Industry consists of businesses that manufacture and sell furniture, textiles and related goods to residences, offices, hotels and others in the commercial space. Offerings include upholstery, case goods, bedding, seating, hearth products, and fabrics. Though mature, this industry will present investors with investment opportunities during certain periods within the economic cycle.

Competition

Traditionally, domestic companies in this fragmented, labor-intensive industry have concentrated on wholesale manufacturing. But, recently, the rising cost of production, along with intense overseas competition, has forced a consolidation and shift to the retail side. Duty-free imports have left the U.S. market wide open to foreign producers, which have increased their market share. Overseas companies, especially those in China, have an advantage, given their low-cost facilities and workforces, efficient distribution, and good-quality products. They are a challenge to American manufacturers, particularly in the residential furniture segment.

Faced with tough international competition, domestic companies have attempted to produce more with less plant and staff, improve materials supply, and enhance distribution. Even with these efforts, it can still be hard to earn a decent profit. Too, difficult economic times, most notably in the housing sector, can exacerbate the pressure on margins. Many companies have chosen to source economical finished goods from overseas and customize them for customers. Greater attention to design and finish can be a key differentiator.

Regulation

International trade, safety, and environmental regulations have an impact, sometimes beneficial, sometimes detrimental, on the industry.

For a number of years, a big concern of domestic manufacturers has been the importation of low-priced products, most importantly from Asia. In international trade, when manufacturers from a developing nation export products, at a substantial markdown, to a developed country, where production and labor costs are high, claims of dumping may arise.

U.S. law provides for anti-dumping duties to be imposed on imports, if the Department of Commerce and International Trade Commission determine that a domestic industry will be materially injured. In 2005, the Department of Commerce imposed a duty on Chinese wooden furniture. In 2007, a similar duty was imposed on innersprings from China, Vietnam, and South Africa. The tightening or relaxation of trade barriers, depending on the political climate, affects the competitive standing and profitability of domestic furniture producers in the home market; U.S. exports are essentially nonexistent.

In the United States, the Consumer Products Safety Commission (CPSC) holds sway over the furniture sector. For decades, the commission has worked to improve the flammability standards regarding various materials, and the bedding segment has been affected. Since 2005, the CPSC has ramped up its efforts to address safety issues concerning mattresses and mattress foundation sets. Increasingly stringent standards on mattress/fabric safety have led to higher costs for manufacturers.

On the environmental side, the Lacey Act has come into play. This Act has traditionally prohibited trade in fish, wildlife, and plants that are procured in violation of state or federal law. Recently, the U.S. government has expanded the law's reach to prevent the sale of timber obtained through illegal logging. All timber and wood products, including furniture, have to be reported and declared for fees and taxes to the government by importers and suppliers, with the country or area of origin recorded. The Act surely will entail more costly record keeping and, possibly, supply disruptions for furniture companies.

Investment Merit

U.S. furniture manufacturers have had to deal with competition from low-cost, foreign producers, limiting sales growth, and increases in the cost of goods sold and selling, general and administrative expense, causing margin declines. Managements have cut production, turning to outsourcing to save money. Such efforts, along with the addition of value-enhanced features, have made domestic companies more competitive and given them a greater chance to stay profitable.

Nonetheless, barring higher trade barriers, imports will likely continue to rise, posing a major long-term challenge for the industry. Economical furniture makers in Russia, India and Eastern Europe have joined their China peers in the market. American companies, serving the largest market in the world, can push back by buying in quantity and negotiating for better prices and quality. Bargaining power is limited because the industry, having a lot of small operators, is fragmented. Mergers and acquisitions would be a plus. There's not much of a threat from overseas manufacturers selling direct to retailers, since most of those customers do not have the ability to efficiently source and distribute products around the country.

Investors should consider companies here that are adapting well to the changing, increasingly volatile market landscape. The largest players are generally more stable, with comparatively predictable operating results and share-price performance. Smaller companies suffer greater swings in share net and stock values; risk-tolerant traders, though, may find them attractive. All in all, careful monitoring of this industry is recommended before making any commitments.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.