Office Furniture Market Overview

The office furniture industry is bracing for a period of significant change beyond the myriad new products the companies unveiled last month at the NeoCon expo in Chicago.

Crain's Detroit Business reports that as the new product cadence accelerates to accommodate all the new innovations the industry has developed, companies are scrambling to retool their factories. Luckily, their operational performance has mostly improved with the overall economy, and they are able to find the financing they need for equipment or additional facilities. Given their better positions, more companies also have started hunting for strategic acquisitions.

Although the projections are for slow sales growth over the next couple of years, all indications point to the industry ratcheting up its activity. "The office furniture industry is very, very active and aggressive right now in recapitalizing their factories and challenging themselves technically and innovatively," said Steve Waltman, vice president of marketing and communications at Stiles Machinery Inc. in Grand Rapids. The company supplies equipment to office furniture makers and other industries.

"They seem to have really taken the bit in their teeth," Waltman said. "They really are embracing the fact that there is no more normal (and) we had better get with the program. It's impressive."

Responses to the Michael A. Dunlap & Associates LLC quarterly survey of office furniture industry trends tell a similar story. The index for capital expenditures in the first quarter of 2013 was 54.72. While any reading over 50 shows expansion, the index for capital investment actually fell from the previous quarter and is below its historical average, Dunlap reported. Meanwhile, the index for tooling expenditures, 57.36, rose from the previous quarter and was above the survey's 36-quarter average.

At the same time, office furniture industry executives aren't necessarily as optimistic as they were in late 2012. The gauge for their outlook dropped from 59.20 to 54.73, which was also below average.

As the dust settles from this year's NeoCon expo in Chicago, the office furniture industry can look forward to a period of "reasonable growth," as Herman Miller Inc. President and CEO Brian Walker called it.

"It's not like it's a rocket ship or hockey-stick growth," he said. "It's certainly way better than a few years ago when we were all feeling the down side.

"Will we see a big uptick in 2014? I don't know. I think the economic underpinnings of the country look pretty good when we're out another year, so hopefully that continues."

The latest forecast from the Business and Institutional Furniture Manufacturers Association, issued in late May, projects that North American shipments will grow 2.1 percent this year to $9.5 billion, followed by shipment growth of 7.2 percent in 2014 to $10.1 billion.

Customers have turned to the manufacturers for new solutions as worker habits have changed, given the technological advancements and the rapid adoption of smartphones and other mobile devices. That has meant office furniture makers have had to rethink their product portfolios and provide more flexible options than the cubicle walls they've sold for the past four decades.

Dunlap's index suggests the heightened pace of new product development is set to continue. The index for new product development rose for the first quarter — which is "typical" — to 65.74, above the average of 63.41, Dunlap reported.

"Every time we do innovation, that requires investment," said Jim Keane, president and COO of Steelcase Inc. "We have to be able to operate — a company the size of Steelcase — with the agility of a small company."

But a company like Steelcase can leverage its global sales to fund the investment needed to ramp up for new products. Coincidentally, much like the automotive industry, Steelcase is producing global products rather than region-specific models. That increased product scale makes it easier for the company to justify spending more to develop products, Keane said.

"We can make larger investments in each product and yet, at the end of the day, it saves us money," he said.

As office furniture makers and their supply chains have recovered from the recession, corporate valuations have also seen improvement, industry advisers said.

That reversal of fortunes has mergers and acquisitions activity heating up — which led The Charter Group, a Grand Rapids-based M&A advisory firm, to launch a dedicated furniture industry practice, said Managing Partner John Kerschen.

The availability of cheap debt and the willingness of banks to work with acquirers and sellers on the transactions are also having a positive impact on merger activity, Kerschen said. The restoration of top-line growth and improved operating margins are pushing valuations on office furniture companies upward, Kerschen said.

"They're not through the roof by any means, but they are nicely improving," he said. "And debt is much more available today."

While deals are available, Kerschen said, the market still does not have enough supply to meet the demands of buyers.

Light Corp. President Brad Davis, whose Grand Haven-based company made three acquisitions in the 2000s, is "always looking to acquire," given the right opportunity. But the issue in Light's case is that most of the remaining competitors in the lighting niche are all based in Asia, Davis said.

"We're ahead of last year, and we've picked up some market share," Davis told MiBiz at NeoCon. "As we domestically grow our market share, most of our competition is not from the U.S. But products are coming back to the States."

The Asian suppliers simply "can't do special orders" as efficiently as the domestic companies, he said.

Meanwhile, original-equipment makers in the office furniture industry — such as Herman Miller, which in April announced the acquisition of the family-owned Maharam Fabric Corp. in New York City for $156 million — are constantly looking to bring on new expertise and capabilities through strategic acquisitions, Walker said.

"We're always looking for things that we feel take us forward," he said.

Neither Walker nor Steelcase's Keane expect to see a massive new wave of consolidation in the supply chain on the horizon, but they're also looking to align with healthy companies.

After a recent Steelcase supplier conference, Keane said he's "very pleased with the health of our supply network." That's important, he said, because healthy companies are also able to focus on coming up with new ideas that could help OEMs be more efficient or find new markets.

"We want them to be financially healthy, of course, but we also want them to be innovative and to bring us their best ideas," Keane said. "That makes us stronger when you have a supply chain and those companies are strong on their own.

"It's one of the benefits of having a supply base in West Michigan. They're strong and fit and they're innovative."