“Zero point” Ukrainian Furniture Business 2020.
«Zero point»Ukrainian Furniture Business 2020.
Good afternoon Dear colleagues Furniture makers and Designers!
We continue our series of articles dedicated to Ukrainian Furniture Business and Product Design.
The first part of this cycle “Furniture Industry of Ukraine and the World Economic Crisis 2020” can be found on the website in the blog section.
Ecosystem of consumption and production.
The global economic crisis and the COVID-19 epidemic that began in the winter of 2020 in the world and in Ukraine have severed all ties and interactions in the ecosystems of global consumer, corporate and commodity markets.
A clear interdependence of the chain has come to the surface: raw materials / logistics / production / sales / consumption.
“Small ecosystems” depend on “global ecosystems” and vice versa, “global ecosystems” are interdependent on “small ecosystems”.
Multiple breakdowns of communication chains in “ecosystems” of various sizes caused by quarantine restrictions have stopped not just individual companies or sectors of the economy in individual countries.
Such global ruptures in the “economic ecosystems” have led to the halt of the largest World Industries and a series of bankruptcies or suspension of the activities of the world’s largest companies.
Against the background of large-scale Global and Local shocks, the Ukrainian Furniture Business has come to the point of “zeroing”.
This essentially means a complete restart of the Furniture industry and the creation of new values and rules of the game in the domestic and foreign markets.
Ukrainian furniture companies lost more than 80% of their paying client base due to the quarantine “lockdown” which lasted three months.
The demand for furniture in most distribution channels is zero or close to such figures.
The costs of maintaining an efficient production are not covered by the volume and margin of the remaining orders.
The practical shutdown of the HORECA sector, the RETAL sector and the OFFICE sector significantly affected the majority of Ukrainian systemic furniture companies, manufacturers of serial or contract furniture.
Orders in the B2G sector dropped significantly, where the state of Ukraine made purchases from furniture companies for kindergartens, schools and educational institutions.
The export of furniture to foreign markets has also been suspended, many foreign retail chains and shops are closed, and it is also difficult to carry out contactless delivery of a sofa or kitchen to the end consumer in the EU market.
Temporary transport restrictions, mass layoffs, wage cuts and the closure of other businesses from various segments have reduced the already small base of private consumers of furniture for the Home Furniture segment in B2C and E-commerce channels.
A slight surge in active purchases of furniture was observed only in the segment “Furniture for Home Office” and Sofas. But this did not last long, up to 3 weeks.
We see a lack of demand for furniture products due to the “collapse of the market” in an amount equal to or close to zero.
This is how the title of the article “Zero Point” appeared.
We will briefly go through the points to understand what is the current situation in the Ukrainian Furniture Business.
External factors World Market.
Rich countries are beginning to rebuild their economies, using the method of direct and indirect financial assistance to businesses and the population.
USA, EC countries, England, Australia, Israel are actively looking for import substitution opportunities for products from China.
There are several paths these countries will take:
Restoring own production
Purchase from the nearest neighboring countries
Search for new supplier countries
Internal factors Ukrainian Market.
Temporary reduction in furniture consumers even after the easing of quarantine restrictions.
Long-term recovery of economic sectors that are growth drivers for the furniture business in Ukraine.
The deterioration of the legal framework, the economic climate and a protracted political crisis that significantly affect the recovery of the consumer market and the economy of Ukraine in general and the Furniture Business in particular.
How the crisis affected the furniture companies.
Microbusiness 1-5 people such companies are about 5000-7000.
The most stable format in the face of global uncertainty and any crisis.
A lot of small work that medium and large firms will not be able to do.
There is no big load of rentals and loans. Everything fits into 2-3 shipping containers and a backpack.
High competition and dumping.
Lack of “financial cushion”.
Everybody just “feeds the wolf’s legs” there is work, but they don’t pay very much for it.
Small business 5-50 people such companies are about 2500-3000.
This is a risky format, since not all companies own production facilities.
The high dependence on the receipt of orders and the relatively weak “commercial communication” and the system everything under the client’s order makes such a business model very risky in the face of a shortage of paying customers.
High dependence on the “quality of personnel” which is very strong in the crisis.
There are no modern effective “digital channels” of sales and “box versions of products”.
A very small number of enterprises have a “financial cushion” and it will last for a maximum of 1-2 months.
The situation is very different for everyone, someone does not work completely, someone works 2-3 days a week.
Average business 50-350 people in Ukraine, about 300-500.
The format is the most risky; it already has capitalization, but there is also a credit load. There are also rental payments for shopping locations.
Relatively large staff that is difficult to maintain with a rapid decline in orders.
High dependence on the efficiency of the sales department and personal managers. Dependence on the efficiency and “quality” of retail locations and showrooms.
There are many non-production and production losses due to “archaic management management” and not “high production culture”.
Lack of understanding of Marketing 4.0 in digital sales channels and truly “working” digital sales channels are not built.
Most owners have a personal financial cushion, but this does not significantly affect the scale of the enterprise.
In this format it is also difficult and everything is similar to the previous one.
Large business 350-5000 people of such companies in Ukraine about 20-30.
The format is the least risky, since the main capitalization and fixed assets have been owned for a long time.
There is a credit load, but it is controlled and the bank will restructure it for a valuable client with a long history.
The scale of the business and multichannel work where the loss of even 60% of all working employees will not lead to a stop in production and sales.
In such companies, there are a lot of personnel, even with a small safety margin for turnover, but their salaries are not very high.
A product portfolio was formed and sales channels were structured, including digital sales channels 2.0-3.0 built with their own online stores operating normally.
High risks of stoppage of the enterprise due to insufficient volume of orders to maintain the planned level of cost recovery and profitability.
Risks in the supply chains of raw materials, materials and components, as the main supplier is China or the countries of Southeast Asia.
The owners have formed a personal “financial cushion” and have a small reserve fund, just in case, which is usually enough for 2-3 months.
Some companies have temporarily suspended operations during the quarantine period.
Long annual contracts for the supply of DIY retail chains are very helpful.
Represented by large players, medium and small.
Almost all shopping and entertainment centers throughout Ukraine were quarantined, where there were small and medium-sized stores of furniture companies.
Only Epicenter worked in quarantine, this led to a kind of “accidental monopoly” and, on the one hand, continued sales and movement of money for furniture products, which for a number of companies was a “breath of air”.
On the other hand, the majority of market players and furniture retail were in “unequal market conditions”.
Furniture retail, in general, regardless of the “peculiarities of an individual operator”, as well as all participants in the market of non-food products, suffered significantly during the period of quarantine restrictions.
In future periods, the issue of resuming consumer traffic to shopping centers in the next 6-18 months will be an acute issue.
There will be an acute issue of the number of customers who have the ability and desire to buy furniture in a physical store or DIY supermarket.
In our opinion, a quantitative reduction in furniture retail is inevitable; the areas of existing furniture stores and sections in DIY supermarkets will also be revised to some extent.
We understand that with a decrease in the number of retail outlets, theoretically, the quality of retail space and exposition in furniture retail should increase “but this is not certain.”
Unambiguously, we will observe in the near future the change of outdated model lines of the majority of both trading companies and branded retail trade of furniture manufacturers.
And in this matter, one cannot do without interaction with Ukrainian Subject Designers.
There are quite a lot of operators of various sizes and specializations in this segment. From national marketplaces to specialized niche online stores.
The main struggle for the consumer and his money was carried out on the Internet and it can be understood that the main winner is the market leader ROZETKA.
Although furniture does not rank among the top sellers, some categories have indeed produced significant short-term gains in this, Computer Desks and Chairs for Home Office and Sofas, Bed Group.
The explanations are simple enough; consumers urgently organized workplaces at home and moved their families to summer cottages and country houses.
When the first wave of excitement subsided, the sales curve began to sink and decrease.
A demanding client with a high income did not bypass domestic producers in the upper price segment.
Realizing that Italian upholstered furniture and kitchens will not be available in the next 3 months, and the apartment needs to be moved in urgently, we placed orders for a complete set of objects from Ukrainian furniture companies.
In general, we can say that the real struggle for the consumer on the Internet is just beginning and this channel will face large and dynamic transformations in a very short time.
The furniture industry in Ukraine has production capacities that are not overloaded with consumer orders, which can be significantly loaded by export products.
There is a sick undiscovered potential of Ukrainian Subject Designers who have been successfully creating a “commercial product” for foreign manufacturers for a long time and by their “personal product line” enter international sales markets.
Geographical location of Ukraine, developed transport network and proximity to the large European Market, which we do not use 100%.
The human potential of workers and engineering specialists in Ukraine is high enough to fight for getting into the TOP-5 world furniture manufacturers.
There is an opportunity for potential growth of the Furniture Industrial Cluster of Ukraine as one of the drivers of the Ukrainian economy on a national scale. Availability of natural resources, free territories, developed urban infrastructure, energy capacities.
Opportunities to enter foreign markets and take your place in the World Market and the World Ranking of Furniture Manufacturers. “European design and quality at an affordable price”.
Promotion of the national umbrella brand “Made in Ukraine” as an element with great confidence in reliability and quality in addition to the personal “Brand” of the manufacturer’s factory.
The emergence of the pronounced “Design of Ukrainian Furniture” as a competitive advantage and distinctive feature in the International furniture market.
Creation of a new competitive product on the world market, taking into account the needs of society and consumers, see our article on this topic:
“10 global trends in the world furniture industry”.
The level of “business culture and modern management systems” does not allow reaching new horizons of thinking and building modern business models that are relevant for the hyper-competitive World Market and INDUSTRY 4.0.
The managerial human resource at the level of C-level and M-level according to the principle “simpler and cheaper” does not allow companies to reach a qualitatively new level of managerial decisions and business transformation.
There is no available financial and credit resources for the furniture sector for a long period.
A worn-out and obsolete equipment park of most furniture factories, which is at the stage of INDUSTRY 2.5, as a result of which it lags behind the main competitors in the World market with the implemented INDUSTRY 4.0 production facilities.
Restriction on raw materials and material components in the cheap and middle price segment in Ukraine there is no developed industrial cluster of furniture fittings and components.
The Ukrainian production capacity in board materials from wood fibers and shavings, as well as plywood is also limited.
Old and New Threats.
“Uncertainty of Transformation” of World Consumer and Commodity Markets.
Political and, as a consequence, externally political crisis in Ukraine.
Economic policy of the government in the next 4 years.
Decline in domestic consumer demand and very slow growth.
Closure of foreign markets by protectionist and restrictive laws.
Increase in the cost of delivery of goods due to risks.
Based on the above, the following conclusions can be drawn about the current state of the Furniture Business in Ukraine.
1. Significant reduction of consumers in B2B | B2G | B2C channels has put the majority of Ukrainian furniture companies on the brink of survival and, in essence, “zeroed the market”.
2. The Ukrainian consumer market will take a long time to recover, even to the level of the end of 2019, it may take from 9 to 24 months.
3. External factors occurring in the World market and the Economy will significantly affect Ukraine and the speed of its recovery.
4. There are hidden reserves even now, but many companies are “frozen” and have buried their heads in the sand.
5. About the active position of the company and its leader significantly affects the survival “in the era of total changes” this is the time of new leaders, strategic alliances and collaboration.
6. Digital communication channels and Marketing 4.0 are our everything, but we must also remember that the consumer now wants a “New Socially Oriented Product” that takes into account the reality of life and work in a dynamically changing environment. Develop and test your product now.
7. “Human resources decide everything” you must understand that AI will not make a “new product” for you tomorrow and will not carry out “Analysis and Research” of the opened product niche and foreign sales market.
Define the core of specialists who make up “the very essence of your company and business.” They need to be supported by an adequate salary fund, and the rest can and should be forgiven.
8. Solve a business problem in several scenarios at once, this will allow you to quickly adapt to changes by applying and modifying ready-made developments.
9. Already now it is necessary to prepare for export to the markets of the USA and the EU, “tomorrow, the day after tomorrow” it will be too late to go there.
The place of Ukrainian furniture companies can be taken by our competitors: Poland, Vetnam, Malaysia, Mexico, Brazil.
Tomorrow it is necessary to sell “a new product to new markets” and there will simply not be time to “cut a new product in a year”.
To be continued.
We, as a judge of subject design SV & Partners, together with our partner https://uidfcluster.com/ we are preparing a systematic program for entering the US furniture market in 2020-2021 for Product Designers and Furniture Business in Ukraine.
Anyone interested in the program of exporting furniture and interior items to the USA, please contact Lyubov Suknenko, the official representative of HPM, and Valery Sukhitsky, a partner of the EF cluster.
CDO of full-cycle product design studio “SV & Partners”.
The author of the text is Valery Sukhitsky.
May the creative force be with you!