US shows signs of a market slow-down



Industry experts are warning that the  recent double-digit growth rate in the US office furniture sector is likely to soon "run out of steam".
They fear that the recent trend-bucking figures reported by many suppliers could begin to lose momentum with the end of the "deferred demand" from the US recession earlier in the decade.
Jerry Epperson, managing director with Mann, Armistead and Epperson, a Virginia-based investment banking firm which specialises in the office furniture sector, warned that industry executives must prepare for a general slowdown.
But he highlighted three areas of potential continued growth as he told OPI of his believes for the future.
In an exclusive interview, the leading industry expert said: "Between 2001 and late 2004, we witnessed a decline in sales of 39.3 percent. Ever since then, the deferred demand has kicked in and we have seen double-digit gains.
"It’s been absolutely wonderful while it’s been around, but now we are trying to get across the message that these growth rates just aren’t sustainable. It would be better to assume this steep growth rate will level out slightly and gains of between 5.5 and 7 percent should be expected. This is still good and is double the GDP rate of the country."
Epperson said that after suffering during the market downturn between 2001 and 2003, strong global demand boosted sector profits. In 2005, industry revenue in the United States bounced back more than 12 percent to almost $12 billion.
But he warned that several economic indicators are all now pointing towards an imminent slowdown.
"This is a cyclical pattern and there are three reasons why the industry will be affected by a slight slow-down," he added. "The first is a general slow-down in the economy, this is clear from the consumer debt figures which cannot possibly continue.
"Secondly, the office furniture industry has been affected by uncontrollable expenses such as inflation in metal-based prices as well as the rise in petroleum-associated costs.
"Thirdly, the yield curve is currently at a point where historically we would expect a slow-down in 18 to 24 months’ time; this is a very solid indicator and one which we always pay a lot of attention to."
The analyst said that the cash-drenched sector fuelled by the dot com boom ten years ago was unlikely ever to return.
He explained: "I don’t think we will ever again witness the size of growth we saw in the late 1990s. Then there was so much demand for office furniture by companies that had more money than sense.
"But those times have gone and we’ve been in and out of a recession since.
"There are some good indicators out there now. For example, the office vacancy rate is well over 15 percent which is good for the industry. This means there are some good deals out there like paid-for rentals and extra space offers.
"Investment that was earmarked for rental can now be freed up for office furniture and the like.
"There is a lot of speculative office space on the market which means more room to expand into. This obviously increases the need to furnish and equip.
"From the property market it would be sensible to predict another mini-boom in 2008, but my message would be not to expect the same rate of growth we have seen over the past two years.
"Business has been good, better than good, in many areas with double-digit growth figures. But a lot of that can be put down to deferred demand from the two or three years of recession."
Epperson told OPI he believed that he had identified three markets areas of potential interest.
"Healthcare is the real area of opportunity as providers increase their offerings with the likes of cardiac care units, women’s health clinics and blood donation/transfusion centres," he points out.
"There is so much investment pouring into this area that it will clearly have a knock-on effect on the office furniture industry.
"Often, healthcare centres require bespoke items of furniture and where the market is right now, that’s a very big hot spot and I believe it’s probably the sub-sector with the promise of the greatest growth.
"The financial services industry is another opportunity of increaseing sales, as is the hospitality sector, with the recovery in the travel and tourism sector triggering an increase in refurbishments.
"These are probably three of the areas of appeal right now. The growth spurt the industry has seen in recent years, the past two in particular, is slowing down.
"The industry should start thinking about this in its strategic planning."
Epperson said that recent rocketing raw material costs had levelled out and that much of the additional expenditure had been easily absorbed by manufacturers.
He added: "Uncontrollable expenses such as fabric and steel that are used in the manufacturing processes are calming down and last year’s increases appear to have  been absorbed into the industry’s growth. It isn’t as bad as it may seem, growth rates of between 5.5 and 7 percent are still twice as fast as the nation’s economy as a whole."
Epperson’s views were mirrored at last month’s NeoCon 2006, the US interior design and facilities management conference held in Chicago.
"This is our second full year of recovery, so we think we’re right in the middle part of the cycle and we could easily see another two or three good years of top-line growth," Knoll CEO Andrew Cogan said during the event.
He added: "Will the industry grow at the 11 to 12 percent base growth of the last couple of years? No. I think it will slow down in 2007…maybe to 7 percent."
And Jim Hackett, CEO of Steelcase, added: "I don’t think there’s anything to interrupt the year in terms of being a good one. I see more years of good growth."