Ethan Allen goes global: one of the best-known names in the furniture industry is reshaping itself not only to be more competitive domestically but to vie for world markets.

After nearly 20 years as an American furniture icon, Ethan Allen Interiors Inc. is on the verge of a profound transformation.

Long a company that has taken pride in its U.S.-based vertical integration -- the company owns 18 factories and three sawmills that supply its 312-and-counting retail stores -- Ethan Allen intends to serve its stores with an increasing percentage of products procured from third-party overseas factories.

Beyond looking abroad for new supply sources, the company is also looking overseas for new retail customers as well. Last year Chairman and CEO M. Farooq Kathwari formally laid the groundwork for a global expansion intended to build Ethan Allen as an international brand.

Driving Ethan Allen's shift in global sourcing is the growth of emerging foreign manufacturers of low-cost products. For the last several years, most American furniture manufacturers have felt increased pressure to cut costs by using overseas suppliers for their products.

Imports now represent 34 percent of all furniture sold in the United States, according to the AKTRIN Furniture Group of High Point, NC, up from 23 percent in 1995. Given the growth of the furniture market during those boom years, from $23 billion in 1995 to $35.8 billion in 2000, the increase in imports is even larger than it appears -- 126 percent above its 1995 levels.

"I can very well imagine that within the next five or six years, furniture imports will be in excess of 50 percent," says AKTRIN's president, Dr. Stefan Wile.

The reason is simple, Wille says--low wages. According to AKTRIN data, Chinese wages are 15 to 20 percent of what they run in the United States. Even after allowing for the extra costs importers incur, such as shipping and quality control, a sizable cost difference remains. Wille says that just as furniture companies within the United States once moved their production from New England and the Midwest to the South to profit from cheaper wages, they are now relocating their sources of production again, only this time outside the country.

"But so be it," Wille says. Producing good furniture at a good value is the industry's primary responsibility, he adds, not preserving stateside jobs.

Global Outsourcing 

Yet, even as other major United States furniture companies had already begun buying more of their products from overseas factories, as recently as 2000 Ethan Allen still manufactured 83 percent of all its goods. Recently, however, the company has adapted to the reality that nearly all of its competitors are taking advantage of lower-cost products sourced from foreign manufacturers.

In 2001, the $1.3 billion Danbury, CT, company made deals with Markor Furniture International Ltd. of Urumqi, China, a major importer of case goods, and "several leading manufacturers in Southeast Asia," according to Ethan Allen Interiors' 2001 annual report.

In addition, Ethan Allen announced Nov. 20 that it would begin sourcing "selected furniture product" from the Philippines. The initial production is slated to arrive in Ethan Allen stores this spring.

The new source will primarily manufacture case goods, according to Kathwari. "We have always had some accents supplied from overseas markets and now we are adding a select group of wood furniture pieces," he explains in an e-mail interview.

Case goods represent the majority of sales at Ethan Allen. Thirteen of its 18 furniture manufacturing plants were involved in case goods production, according to the 2001 annual report.

However, on June 6, 2001, just a week after releasing news about its strategic partnership with Markor, Ethan Allen announced plans to close three of its case goods plants, a 78,000-square-foot operation in Island Pond, VT, a 93,000-square-foot factory in Frewsburg, NY, and a 238,000-square-foot factory in Asheville, NC. The company said it needed to consolidate manufacturing operations in order to remain competitive.

Despite the new import arrangements and the plant closings, Kathwari said that the 7,800-employee company still sees manufacturing as a core competency.

"Manufacturing has always been a core part of our business. The level of our manufacturing may change, but for the foreseeable future, manufacturing will be a major part of the Ethan Allen vertically integrated business," he says.

While the company continues to invest in plant improvements, including a Dublin, VA, case goods factory that opened this past fiscal year, one indication of how the company is rethinking its mission can be seen in its financial reporting. In the FY 2001 annual report, the company announced that instead of reporting on five business segments (case goods, upholstery, home accessories, retail and other), it would report on just two: wholesale and retail. Company executives wrote that the change was made to accurately reflect how the company was now managing its business, and stemmed in part from growth of its retail side, which reached 43 percent of sales in FY 2001.

Striking Strategic Retail Partnerships

Ethan Allen's sourcing evolution may now be following a predictable pattern already set by many American companies and industries over the past 50 years, but its retail aspirations seem somewhat grander. While the company ended 2001 with 28 stores abroad in addition to its 284 stores in North America, Kathwari now appears to be pursuing a more aggressive international expansion.

Two recent retail deals may indicate where Ethan Allen is heading. The deals give the company access to two very different markets: the United Kingdom and China.

The British deal is a 4-million-pound joint venture with UK furniture retailer MFI Furniture Group PLC, the largest furniture manufacturer in the United Kingdom. In October, the two companies announced that they intend to build five 10,000-square-foot Ethan Allen stores in the United Kingdom as a pilot project. While the UK is a large market in its own right, what may make this effort even more significant than it appears is that MFI Furniture is an experienced global retailer, with MFI-branded stores in the Middle East, Africa, India and Taiwan.

Ethan Allen's China deal is with Markor Furniture, the same company that will be supplying case goods to Ethan Allen's U.S. stores. In May, the company announced a joint venture with Markor to develop a chain of retail stores that will promote both an Ethan Allen and a Markor retail theme. The first store is set to open in the summer of 2002, with additional stores to follow.

Wille reserves praise for Ethan Allen's agreement with Markor. "It's a very, very courageous move, but I think it's the right move," he says. While it may take years for the company to make money in China, Wille says, the growing middle-class market in China and throughout Asia offers huge long-term potential.

Ethan Allen's international expansion will not follow a cookie-cutter pattern, according to Kathwari. "Our overseas retail expansion will continue in many formats," he said. "In some cases it makes sense to have licensees and, in other cases, joint ventures make sense."

Supplying those stores will be similarly eclectic. "Our objective will be to continue to provide overseas stores with products made in our factories in the U.S. and also by licensing products made in plants overseas," Kathwari says.

Planning for Steady Growth

Although he has mapped out an ambitious path for his company to enter world markets, Kathwari says he is not looking to rush growth. Indeed, slow but steady reinvention seems to be a key element of the Kathwari style.

"Our focus has been running one business right, rather than just being big," Kathwari said in a recent interview with the Wall Street Transcript.

Reflecting on the dot-com crash at a Chief Executive magazine roundtable two years ago, Kathwari said, "Mountain climbers know if you go too fast, you just don't reach the top, you get water in your lungs at 13,000 or 14,000 feet. There are two options: come down or you die. Most folks don't like to come down. All this death in the tech sector today is because they tried to climb too fast."