Optimism prevails: despite tighter profit margins and rising material costs, architectural woodworking firms and store fixture manufacturers are optimistic about fourth quarter 2004 and 2005 business projections in light of rising new orders and shipments.

U.S. store fixture and architectural woodwork manufacturers can look ahead to a brighter future.

According to recent reports by economic analysts, the United States, as well as global economies, are projected to continue their slow, but steady growth pace during the rest of 2004 and into 2005. The Conference Board, which also produces the Consumer Confidence Index, reported last month that "industrial growth has been rising at a 5.6% rate in the United States, and a 5.2% rate globally."

In the United States, total value of construction put in place for the month of July rose slightly to $997 billion, up 0.4% from June and an increase of 9.7% from July 2003. According to U.S. Department of Commerce figures, July residential construction values reached $546 billion, up 0.4% from June and 13.9% from 3uly 2003. Non-residential construction, which includes commercial, offices and recreational facilities, hit $452 billion in July, up 0.5% from June figures and 5.0% compared to July 2003.

Wood & Wood Products recently interviewed executives from the National Association of Store Fixture Manufacturers, the Architectural Woodwork Institute and the Woodwork Institute for their thoughts on the outlooks for the store fixtures and architectural woodwork industries and concerns for the future.

Store Fixture Industry Projects Increased Revenues

The modest climbing of retail sales continues to be good news to the store fixture manufacturers who count on the chains for much of their business.

According to Platt Retail Institute's Monthly Retail Analytics, retail sales, excluding autos, rose a modest 0.2% in July, following slight increases in June mid May. On an annualized rate, sales are up 5.3% for the trailing three months, and 7.8% for the trailing 12 months.

"The economy appears to be stronger, so retailers are renovating and expanding," says Klein Merriman, executive director of the National Association of Store Fixture Manufacturers.

That's good news for the estimated 3,000 companies that manufacture store fixtures in the United States. According to the NASFM, the U.S. store fixture manufacturing industry generated approximately $10.2 million in revenue for 2003.

"We've forecast 2004 to be up approximately 8 percent in revenues. Increased demand and pent-up demand are helping to account for the increase," Merriman says.

"We've also pretty optimistic about the next 18 months," Merriman adds. "2005 is difficult to quantify yet, but the industry appears to be upbeat about revenues. We base this on information members are hearing from their customers."

The upcoming holiday shopping season, he adds, will also play a crucial role in determining the profitability of the store fixture industry'.

Another factor affecting manufacturers' profitability is rising material costs. According to the Institute for Supply Management's August report, hardwood lumber, steel and plastic products are all up in price, some for the 11th straight month. "We surveyed members in June regarding material increases. While some increases are not as dramatic as those of steel prices, we're still seeing increases across the board," Merriman says.

Store fixture manufacturers have added pressure to keep costs down as they bid for jobs in the competitive retail market, he adds.

Facing Foreign Competition

"China is also playing a role with aggressively priced imports," Merriman says. A recent trade mission to China was conducted to help NASFM members better understand the growing fixture manufacturing industry in Asia.

"Lots of our members are outsourcing items from there or investigating it. A handful have also developed more for realized relationships, either through contracting or investing directly, although those that have invested directly are in the minority," Merman says.

Items suitable for importing tend to be high labor or commodity type fixtures, such as wire-wrapped baskets or chrome-plated four-ways and hang racks, "more so than labor-intensive items," Merriman adds. North American manufacturers appear to have an advantage when it comes to shorter lead-time requirements and customization. (See chart below.)

"The retail industry is an ever changing, ongoing process, oftentimes demanding short lead times," he says.

According to NASFM, approximately 85% of fixtures are installed in retail stores, with the remaining 15% manufactured for schools, offices, casinos and other types of non-retail businesses.

Architectural Industry Looks to Finish 2004 Strong

Like the store fixture market, the overall outlook for the architectural woodwork industry/also appears to be positive.

"Some manufacturers are doing very well," says Judy Durham, executive vice president of the Architectural Woodwork Institute.

"Most of the work the companies are getting are the jobs that require quick turnaround," Durham says. "Therefore, the companies that have the skills and abilities to respond quickly are getting a good percentage of the available work. Low interest rates and favorable tax investment laws have allowed many of our members to improve their equipment and cash flow needs."

According to Durham, the AWI's Cost of Doing Business survey also found "that most of our members feel the last half of 2004 will be better than the last half of 2003.

"We are optimistic about the future," she adds. "In fact, we are so optimistic, we lowered our dues for our manufacturing members."

Currently though, architectural woodworkers still must contend with a lower operating profit standard compared to past years. Based on survey responses, Durham says, "The operating profit standard for our industry continues to lessen. Particularly disturbing is that the firms in the top 25 percent profit range has dropped their standard from 9.45 in 2002 to 6.32 in 2004.

"In addition," she continues, "our industry's equity and return on equity is slipping, with the return on equity half of what it was in 2001."

Architectural Concerns

Another concern facing architectural woodworkers is the need for skilled labor. According to Stanley (Rob) Gustafson, CEO/secretary of the Woodwork Institute, qualified help ranks as one of the top three concerns by the group's members. The other two are government regulations and competition.

Durham concurs. "The concerns of the architectural woodwork manufacturing industry faces have not changed a great deal in the past year. We are still struggling with the lack of available smiled employees, low-price bidding and local governmental regulations and requirements.

"However, one item that has seemed to increase in its impact on our members is the LEED specification/requirement now appearing on a more regular basis in federal and local government specifications," Durham says.

Developed by the U.S. Green Building Council, the LEED (Leadership in Energy and Environmental Design) program establishes a measurement for defining the "Green Building" concept. Points are assigned in six criteria: Energy and Atmosphere, indoor Environmental Quality, Sustainable Sites, Materials and Resources, Innovation and Design Process and Water Efficiency. Currently under development is LEED CI, which will specifically ad dress commercial interiors.

Stirring up controversy, however, is the fact that currently LEED only recognizes wood products certified by the Forest Stewardship Council. Furthermore, 50 percent of the building materials must be extracted or manufactured from within 500 miles of the building site.

"The challenge manufacturers face with this specification is finding FSC-certified suppliers and resolving conflicts the specification may have with our industry standards, including the AWI Quality Standards," Durham says.

"It is now becoming widely recognized, including by such respected design professionals as Harry Gordon, FAIA, that the LEED criteria are a 'work in progress.'"

Durham cites an August 2004 AIA Journal of Architecture article in which Gordon, a founding member and past char of the AIA Committee on the Environment, was quoted as saying, "The development of the LEED Green Building Rating System created an objective, if imperfect, method of measuring the environmental responsiveness of buildings."

"This is a huge concern for our association," Durham says. "While we do not currently receive a great deal of calls on this matter, we predict the future will bring more technical challenges regarding this specification.

"AWI is involved with the North American Coalition on Green Buildings, which is comprised of more than 30 associations and industries," she adds. "This coalition was created in 2003 to work with all interested parties to promote green building concepts and standards that reflect the views and concerns of all stakeholders. So far, this coalition has been working to be heard by the U.S. Green Buildings Council's leadership regarding its concerns and has been working to affect changes within the U.S. government legislative entities." (See related One on One article on page 41 of this issue.)

Gustafson agrees. "It's a rapidly growing issue and will have substantial impact in the foreseeable future," he says.

Facing Foreign Competition

Another potential issue facing some architectural woodworkers is foreign competition. Although Gustafson says most of the competition his members see is from Canadian companies, "We have seen a couple of projects furnished with architectural casework manufactured in Vietnam which was in complete compliance with the project specifications and our industry standards.

"Traditionally, the transport time/cost/distance issues of manufacturing overseas were (slanted) in favor of local manufacturers, however it appears with aggressive product engineering (foreign manufacturers) have learned to overcome these issues, at least in certain types of projects," he adds.

In order to remain competitive, the U.S. architectural woodwork industry must head toward "increased product manufacturing specialization and automated equipment utilization," Gustafson says.

CONSIDERATIONS FOR MANUFACTURING FIXTURES IN CHINA

ITEM TO CONSIDER            NOT WELL SUITED

Labor Content               Low labor: Gondola Shelving

Lead Time                   Short (6 to 7 weeks)

Quantity                    Less than a container, short run

Material                    Veneer-clad MDF

Finish                      Clear-coated veneer

Density of Shipment         Low-density assembled fixtures,
                            i.e., assembled bookshelves

Quality & Complexity        Complicated, high-quality
                            fixtures, i.e., back islands

ITEM TO CONSIDER            A GOOD CANDIDATE

Labor Content               High labor: Specialty, individually-
                            wrapped wire baskets

Lead Time                   Long (more than 12 weeks)

Quantity                    At least a full container or
                            multiple containers, long run

Material                    Steel

Finish                      Chrome-plated steel

Density of Shipment         Fixtures that can be densely
                            packaged, i.e., boxed RTA four-ways

Quality & Complexity        Components or simple, average-quality
                            fixtures, i.e., thrift-store fixtures

Source: NASFM

Low-cost labor also factors into play. According to the National
Association of Store Fixture Manufacturers, seven laborers in China
cost less than one-fourth the cost for a single worker's annual salary
in the United States. NASFM estimates the costs at $1,500 for each
Chinese worker, compared to $40,000 for one U.S. employee. According to
the U.S. Department of Labor, the average hourly earning for the month
of August was $15.77, totaling to $32,801.60 per year.

AN HISTORICAL LOOK AT THE ARCHITECTURAL WOODWORK INDUSTRY
(COST VALUES IN $1,000)

                              PRODUCTION WORKERS
Year              Number              Hours          Wages

2002              23,080             45,310         $693,370
2001              18,060             34,864         $477,952
2000              19,086             36,326         $507,982
1999              17,846             34,765         $471,374
1998              17,375             34,567         $447,228
1997              17,351             32,733         $430,466

              Value Added        Total Cost
Year         Manufacturing        Materials

2002          $2,408,486         $1,440,734
2001          $1,623,991         $1,097,989
2000          $1,743,899         $1,009,095
1999          $1,644,513         $  909,861
1998          $1,499,446         $  920,769
1997          $1,352,631         $  848,718

             Total Value       Total Capital
Year          Shipments        Expenditures

2002          $3,846,452         $  113,312
2001          $2,721,166         $   48,906
2000          $2,732,511         $   68,001
1999          $2,544,363         $   61,022
1998          $2,419,287         $   45,169
1997          $2,205,019         $   56,025

Source: U.S. Department of Commerce, U.S. Census Bureau:
Custom Architectural Woodwork and Millwork Manufacturing 2002

The chart is derived from data in the 2002 Economic Census and the 2002
Annual Survey of Manufacturers. Amounts for 2002 are based on 1,543
custom architectural and millwork companies. In 1997, the amount of
companies under the 337212 NAICS code was 1,094 Material costs refer to
payment for items consumed or used in production, ranging from the raw
materials, such as veneer, to fuel and electricity.