Furniture manufacturing looks set to become an increasingly tough market for timber and wood product suppliers. Sales of furniture are forecast to remain weak over the next couple of years, while the growing importance of non-specialist, high volume retailers, at the expense of specialists, favours low-cost imports.

Oxford Economic Forecasting (OEF) predicts that consumer demand for furniture will rise in value by 1.1% this year and by 0.6% in 2006, down from 10.1% last year. It will then recover to 3.6% and 4.2% in 2007 and 2008. Allowing for inflation, this suggests volume falls of 0.3% and 1.1% this year and next respectively, and gains of just 1.4% and 2.1% in 2007 and 2008.

OEF argues that the downturn in the housing market has weakened retail sales, particularly of household goods which many people buy when they move home. Although a rise in household spending of only 1.8% is expected this year, OEF expects it to increase by 2.6% in 2006. The main risk, it says, is the possibility of tax increases in next year’s Budget.

Meanwhile, revised official estimates indicate that household spending rose by 0.2% in the second quarter, up from 0.1% in the first, but this was the weakest annual increase for a decade.

Household spending

Estimates of the value of household spending on furniture in the first quarter of 2005 show a 3.8% rise on the same time last year, down from an annual increase of 9% in the fourth quarter of 2004. After adjustment for inflation and seasonal variations the latest annual increase falls to 2.2%.

UK furniture manufacturers have enjoyed mixed fortunes in recent months. Output of shop and office furniture fell by 14% in the year to the second quarter, and chair production was down 8%. But production of kitchen furniture and other furniture rose by 10%.

A CBI survey shows that 41% of British furniture makers were more gloomy about the business outlook in the second quarter of this year than in the previous quarter – up from 36% in the first-quarter poll. A balance of 59% of firms says order books are below normal, compared with 67% in the previous poll; and 55% are working below capacity (the same percentage as last time).

Further, 45% expect the volume of new orders to fall over the next three months, and 59% expect output to drop. Some 41% plan to trim their stocks of raw materials and bought-in supplies, and 27% predict unit production costs will rise in the third quarter. But domestic orders are expected to be booked at lower prices by a balance of 14% of furniture manufacturers.

In the high street, consumers are benefiting from lower prices as retailers have brought back their sales and promotions in order to coax customers into their shops. But in the furniture sector prices have been on a switchback, with year-on-year changes ranging from -0.4% in February to +7.9% in July.

Retail volumes

Figures on furniture retailers’ sales volumes, provided by the CBI, reveal that demand in the year to August fell for a balance of 89% – a marginal improvement on the 92% reporting an annual downturn in July.

In contrast, strong first-half sales of kitchen furniture from Howden Joinery boosted turnover at MFI, the UK’s largest furniture store. But the core business was hit by the consumer slowdown and although sales at the firm’s retail stores rose by 3%, orders fell by 2%.

Retail distribution of furniture is undergoing significant change, with non-specialist outlets gaining on the specialists, according to Verdict Research. It says non-specialists’ market share rose by three percentage points to 36.5% over the period 1999 to 2004, and their sales rose by 35.2% to £4.5bn while those of specialists have grown by only 18.5%.

Businesses such as Argos, Next and Homebase have expanded strongly in the furniture arena and new evidence has emerged that they may be joined by the powerful Tesco supermarket group.

The expanding role of the mass marketers into furniture may benefit consumers. But corporate buyers will inevitably increase pressure on manufacturers’ margins and some British companies will be unable to compete with cheaper products from overseas suppliers.