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Amid Bottlenecks, Furniture Manufacturers Look Closer to Home

Over the past two years, the furnishings industry has experienced a perfect storm of pandemic closures, supply chain disruptions, logistics bottlenecks and unprecedented demand for product from consumers.

With so many companies sourcing product or materials from Asia, extended pandemic-induced closures in China, Malaysia and Vietnam have meant repeated disruptions to an already overwhelmed system. At the same time, delays at American ports—with containers sitting on the water for weeks at a time—coupled with exorbitant increases in freight charges have made sourcing from Asia not only difficult, but untenable for many companies.

And while furniture sales have settled slightly, they’re still growing at a healthy pace. According to the National Retail Federation’s November retail sales numbers, furniture and home goods sales increased 18.6 percent year-over-year.

On top of that, according to a recent survey by Statista, furniture store sales in the United States were estimated to reach $65.8 billion in 2020, up from $63.6 billion registered a year earlier. By 2021, this value was forecast to reach $68 billion, with combined sales for furniture and bedding projected to reach $119.8 billion. In a separate survey, Statista found that furniture and homeware e-commerce in the U.S. accounted for almost 12 percent of total online sales, and furniture and appliances ranks as the e-commerce retail category with the highest compound annual growth rate, outpacing categories such as electronics and apparel.

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This overwhelming consumer demand coupled with sourcing and logistical issues has left many furniture companies with the unenviable task of explaining to consumers why they can’t get the home goods they ordered in a reasonable amount of time. Some companies have reported lead times stretching months to even a year out.

Furniture manufacturers have scrambled to find workarounds to expedite production and delivery of their products. And one of the most viable of these alternatives is Mexico.

“Most companies are assessing the concentrations they have in their sourcing,” said Timothy  Stump, partner, Stump & Co., a mergers and acquisition specialist for the furnishings industry. “But if you go to Ethan Allen’s recent disclosures, they’re really happy with 75 percent of their product coming from their factories in North America.”

Ethan Allen operates two upholstery plants in Mexico, in addition to a case goods facility in Honduras and six other plants in the U.S. The company also sources from Asia and Europe. During Ethan Allen’s most recent earnings call in October, the company’s leadership attributed some of the business’ quarterly growth to being able to meet demand.

“Mexico has not been immune to supply chain issues, but our presence there certainly has helped mitigate other risks.”
— Tim Newlin, Flexsteel

“We have taken steps to strengthen the business, including additional work shifts within our North American workshops and continuing our investments in plants in Honduras, Mexico, and also in our various logistics centers,” said Ethan Allen CEO Farooq Kathwari during the call. “And also growing our manufacturing headcount by double digits over the last several months.”

Ethan Allen isn’t the only company turning to South of the Border. La-Z-Boy opened an upholstery assembly plant during the third quarter of fiscal year 2021 in San Luis Rio Colorado, its second upholstery operation in Mexico. The company also added additional manufacturing cells at its Mexico cut-and-sew center, and additional investment is expected next year.

Marge Carson ended production in Asia earlier this year, opting to center its operation in Mexico and California, and other furniture brands such as Rooms To Go, Joybird and Standard Furniture are all now sourcing at least some of their product from Mexico.

Flexsteel opened its third upholstery plant in Mexico in July, with another slated to open in Mexicali in 2022.

Mexico has not been immune to supply chain issues, but our presence there certainly has helped mitigate other risks,” said Tim Newlin, vice president of product management, Flexsteel. “We have had less shutdowns and disruptions in production in Mexico, and our team members have been able to travel to our facilities. We have also been able to better control our distribution costs and our logistics flow over this time period.”

International Direct Furniture recently announced plans to add 50,000 square feet to its Guadalajara plant to accommodate its expanding upholstery business.

“We see there’s an opportunity in upholstery, and we are aware the lead times are longer,” said Diana Zaldivar, vice president of sales and merchandising, International Furniture Direct. “And we know this is probably temporary, but we have the resources to expand and we like challenges.”

Scaling opportunity

While many furniture companies are looking to Mexico in an attempt to sidestep supply chain and logistical challenges with Asia, the biggest unknown is whether or not the country is ready to handle a major influx of manufacturing business.

“(Mexico) absolutely is a viable alternative—the question becomes scale and how much can be moved and how quickly,” Stump said. “The China and Vietnam factories are huge with thousands and thousands of workers. And for the most part, the Mexico facilities are smaller with 200 to 500 employees. And that’s great, but if you’re looking to move $100 million in production, will they be able to scale to that?”

Stump, who works with companies interested in setting up shop in Mexico, recently traveled to the country to assess the feasibility of adding production there. As he toured Tijuana and other areas, Stump said he noticed general improvements in infrastructure and resources, including better roads, which points to better capacity to handle an increase of business.

“In the factories, we saw a lot more CNC equipment than I had before,” he said. “They’re spending money on labor, but also machinery, and that’s a big plus.”

The investment in labor comes at a time when not only Asian countries are having issues because of COVID lockdowns, but facilities in the U.S. have struggled to hire and retain workers.

“Mexico has a capable workforce and well-established supply chains,” Zaldivar said. “It has been easy for us to know where to find the workforce, and we’ve been pretty much able to control the supply chain, as well.”

The key, according to Stump, is deciding whether the low-cost maquiladora-style factory on the border makes more sense or if it’s better to invest more capital in building a loyal workforce elsewhere in the country.

“Historically, the labor in the maquiladoras tends to be more transitive,” Stump said. “They’re on the border, so it’s looking at how do you hire and retain people and reduce turnover versus heading into the interior in places like Monterey where you can have a real factory community.”

Material exchange

Opportunities for partnership with Mexico not only lie in American companies sourcing product, but in Mexican factories importing raw materials from the U.S.

At the most recent High Point Market in October, representatives from the North Carolina Furniture Export Office organized an event designed to connect decision-makers from furniture manufacturing facilities in Mexico with hardwood lumber producers based in North Carolina.

During the event, visitors from Mexican factories toured sawmills and lumberyards in the High Point area, as well as in Western North Carolina. The tours were designed to give those manufacturing representatives an idea of what’s available for import.

“Some of the companies that attended had never been to a sawmill or lumber yard, and they were super excited to see what that is and how the process works on our side,” said Liz Isley, director, North Carolina Furniture Export Office. “It was a great opportunity for our North Carolina companies to get in front of them and have a conversation and explain they’re interested in working in Mexico and supporting their efforts.”

North Carolina produces around 2.3 billion board feet of lumber each year, which outpaces in-state lumber consumption by about 700 million board feet, according to a recent report on the industry by North Carolina State University.

“We’re identifying potential partners that are currently being served by Asia that are a little closer to home,” Isley said. “We are in a really great position to supply Mexico with lumber and try to capitalize on the delays from Asia.”

The one drawback Isley sees of this potential partnership is scale.

“The orders are going to be such that the Mexican companies are going to need to get inventory of wood, and they need to be in a position to accept the lumber that is delivered,” she said. “A lot of times they do smaller loads, and it’s tough to justify that sale for our producers.”

Next steps

If the pandemic has taught furniture manufacturers anything, it’s that the old adage of not keeping all your eggs in one basket certainly applies to sourcing. And as companies look at alternatives to Asia, many are looking to diversify their sourcing partners going forward rather than simply moving from one market to another.

“The smart companies are stepping back and taking a holistic approach,” Stump said. “Concentrations can be good, but they can also interject risk. It has just gotten harder to run a business, and I think we’re getting back to some basic business fundamentals and risk management.”

Stump added that while Mexico certainly offers a great deal of opportunity for furniture manufacturing, it doesn’t have the capacity at this point to totally replace Asia.

“We see the huge factories in China and Vietnam, but there are starting to be some really big factories in Mexico, and that’s great,” Stump said. “But it’s still cumbersome to create the maquiladora with the licenses and accounting procedures to set it up, and I don’t see that getting any easier. Mexico is very rigid in their regulatory world.”

But for companies already operating in Mexico, like International Direct, the benefits far outweigh the drawbacks.

“There are a lot of natural resources, and there’s a stable and reliable supply chain,” Zaldivar said. “And the workforce is reliable, and obviously it has lower production costs than here in the U.S.”

And Zaldivar said that especially now, with supply chain disruptions affecting so many, being able to deliver product faster has been a huge advantage.

“We’ve been able to shorten lead times,” she said. “Our warehouses are now shipping six weeks out, and that also helps our dealers a lot when bringing merchandise for stock or special orders.”

While Mexico won’t completely replace Asia for furniture industry any time soon, the inroads it has already made leave the country poised to become a significant player going forward.

“There’s a lot of interest in Mexico, and Mexico is in a unique spot and has the opportunity to really assist us in manufacturing,” Isley said. “They’ve got such a vast workforce, and they also have capacity potentially to assist our furniture manufacturers that maybe are currently manufacturing in Asia but are looking to nearshore opportunities or add opportunities closer to home. Mexico has the ability to do that if they can meet our standards.”