By Barbara Thau
NEW YORK-- Take $100 barrels of oil, Chinese currency politics and a weak dollar. Put them all together and they mean only one thing: price increases for home furnishings products sold in the United States. And it's only going to get worse.
Retailers are bracing themselves for steeper increases from their vendor partners, scrambling to devise creative merchandising solutions to justify passing on inevitable price increases to consumers.
Suppliers, grappling with escalating manufacturing costs, are jockeying to strike a balance between cutting production corners without compromising product quality.
Rising raw material, fuel and labor costs and the rebate reduction/elimination of the value-added tax on Chinese home imports are driving price increases throughout the supply chain. The devaluation of the dollar abroad is compounding matters.
"We're trying to decide the best way to minimize cost increases," Michael Rotar, divisional merchandise manager of home for Mervyns, told HFN. "Anytime during a challenging economic cycle you have to take costs up or retail [prices] up, it becomes a big issue, [especially] when the home furnishings industry is not exactly lighting the world on fire, it's probably the last thing you want to happen."
Several manufacturers have factored price increases to their retail partners into their 2008 plans.
"We're in the process of putting together a price list for 2008, which will include across-the-board increases," Jim McCusker, president of De'Longhi USA, told HFN.
In January, Viking Range Corp. plans to raise prices another 4 percent in efforts to maintain profitability, said Sue Bailey, manager of product development for the premium white goods maker.
Mervyns enjoyed tax rebates from the Chinese government as high as 14 percent on some home products, Rotar said. That's been shaved to as low as 3 percent on certain home goods at the midmarket chain and "there's the potential that all rebates might go away next year," he said. "Some of the cost increases are getting eaten on the bottom line, some will be passed on to the consumer."
Creative Merchandising
The Bon-Ton Stores, hit by high fuel surcharges to ship goods, high raw material costs and most dramatically, the devaluation of the dollar, is "remerchandising and re-promoting" home goods such as twin and full sheet sets and bath towels, working higher price points into the mix, Mike Nemoir, executive vice president of home for the department store, told HFN.
Some retailers are remerchandising their product lines to justify price increases.
"We're looking to reconfigure some of our set configurations," Tom Hayes, senior vice president and general merchandise manager of home for Boscov's, told HFN.
For one, Boscov's will turn its 52-piece flatware set into a 60-piece set. "We'll raise the retail, but [offer] more value in the 60-piece set."
But on single items from resources such as Lenox and Noritake, for example, prices will just have to go up, he added.
Suppliers and retailers are also disguising price increases at the point of sale.
"Maybe we configure a new set to create a new price point, such as a set now includes a 6-quart piece instead of an 8-quart piece," said one housewares vendor. "The consumers are getting less product than they have been getting, and they may not know it."
Hard Home Harder Hit
Rising costs have hit some home categories, such as housewares and appliances, harder than others, with soaring metal prices adding an extra price pressure to the equation.
"We're seeing it more in hard goods rather than textiles," Hayes said.
The housewares vendor said "the four main cookware ingredients" have shot up in the past two years. "Aluminum has increased over 30 percent, copper has soared 90 percent and nickel has climbed 60 percent. Stainless steel has gone up three times over the last three years."
It's forcing suppliers to come up with myriad solutions to both cut costs and cushion the price-increase blow to retailers.
"The majority of our products come from China, and there have been three factors that have pushed up our costs," said Tom Benson, chief financial officer of personal care vendor Helen of Troy.
"First is that labor costs in China have gone up as manufacturers in the cities have been trying to attract workers by offering higher wages. Second, raw materials are more expensive. Third, the exchange rate with the yuan [is] now higher versus the dollar," Benson said.
Regarding the response by retail customers, "nobody is ever happy about price increases," he added. "We've been increasing our prices since the beginning of the year. We've also come up with new product features to justify the increases."
Vendors are also dropping some bells and whistles.
"The issue is looking at your new or current products and getting a whole lot smarter in design, anticipating the reduction of material components or substituting materials to maintain our cost structures," said another personal care vendor.
Vendors are downgrading products in some instances, moving from 18/10 to 18/8 stainless-steel cookware, which uses less metal, for example.
To ease the pain of steel costs, Viking Range is offering a color alternative to its traditional stainless-steel appliances. The painted appliances come in 24 colors and use less expensive stainless steel.
But cost-cutting measures have raised a new concern over the product quality of cheaper-made home goods.
"The Chinese manufacturers are going through the same cost increases, and some of them are going back to practices they did 15 to 20 years ago," said the personal care vendor. "Some retailers here have stopped importing certain electrics after analyzing the quality of the goods, and they're doing the right thing."
Although the high cost of metal used to make everything from forks and toasters is tarnishing those vendors' margins, home textiles suppliers are not immune to price increases.
'We've been eating [price increases] for the past five years," said Lorraine Maberry, senior vice president of Trendex Home Designs. "In the last six to eight months, it has just gotten to the point where we can't absorb it anymore," she said. "If there's a way we can construct a product differently that doesn't compromise our quality, we literally look at where we can save 2 cents or 3 cents," she said.
Resisting Design Shortcuts, Price Hikes
Some industry executives are loath to pass along price increases or skimp on the product design and manufacturing process.
Product categories such as mass lighting are so price sensitive that a $5 increase at retail would be felt by consumers and may mean the difference between purchasing a lamp or not.
Mass retailers are extremely reluctant to tinker with "trigger price points," like $19.99 and $29.99, because of the volume generated and because they have conditioned consumers to pay no more than that price for certain items, lighting vendors said.
Gadgets are not only price sensitive-but design sensitive.
'For gadgets, there's a [$10] sweet spot for price," said one gadget supplier. "After you've designed a product, invested thousands of dollars in developing it and get into a certain price point-when costs rise, it's hard," he said. "Substitute materials aren't always an option. You've invested so much into getting the product right. Changes in tooling or material is not always the way to go." -- Christine Bockelman, David Gill, Andrea Lillo, Nancy Meyer and Michael Rudnick contributed to this report.