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The trade war is coming to a design center near you

Though news of tariffs and trade summits can often fade into the background din of political noise, now’s a good time to start paying attention—things are coming to a boil. In the same week that a long-delayed 25 percent tax will finally be added to a broad range of Chinese imports, the Trump administration announced that it will pursue escalating tariffs on Mexican goods in an effort to pressure our southern neighbors to curb border crossings. A new round of tariffs is also being levied on India.

We took a look at how the Trump administration’s trade policies are impacting the design industry.

TARIFFS 101Tariffs are an import tax on foreign goods, charged to the buyer. Say an American company wants to purchase a sofa made in China that would normally cost $500. If the sofa has a 10 percent tariff, the American buyer would have to pay $50 to the U.S. government for the privilege of buying it.

Tariffs ostensibly de-incentivize imports and act as a kind of punishment against the foreign nation: The idea is to encourage American companies to shop local instead of paying the international import tax. In practice, often companies continue to buy abroad, and are simply forced to raise their prices, which is why the tariff bill is ultimately often footed by consumers.

THE BACKSTORYThe U.S. and China have been engaged in a game of chicken for the past year, each slapping (relatively) small tariffs on each other’s exports. Currently, the U.S. has a 10 percent tariff on a broad range of Chinese goods. At that markup, most wholesale buyers and sellers have agreed to swallow the cost, and consumer prices haven’t changed much. However, a scheduled hike to 25 percent tariffs on $200 billion of products, already delayed several times, is scheduled to go into widespread effect this month. At that markup, the first domino will topple in the supply chain, triggering a slow-motion wave of change.

“Most vendors who import in China have sent us notices saying the 10 percent tariffs would be absorbed by them or their manufacturing partners,” says Mac Hoak, CEO of specialty retailer Mecox Gardens. “At 25 percent, vendors who import in China and their manufacturing partners would both have to increase prices and look for alternatives for production in other countries—which, of course, takes time.”

Tariffs will begin to affect even made-in-America goods soon.

BROWNLEE CURREY, PRESIDENT OF CURREY & COMPANY

Another reason why prices haven’t changed yet: hoarding. Because trade tensions have been percolating for well over a year, many companies have had time to build up a cushion of inventory—like stockpiling supplies for a long winter. Furnishings manufacturer Currey & Company is a case in point: Though the company relies on China for roughly a quarter of its manufacturing, it hasn’t yet had to raise prices. “Our very strong inventory position will ensure that there are no pricing impacts to our customers in the immediate future,” says Bob Ulrich, Currey’s SVP of sales and marketing. “We have been very intentional in the growth of our inventory.”

However, if the tariffs continue, even the most well-stocked larders will run dry, and companies will be forced to either import from China at a markup or manufacture elsewhere.

BEHIND THE SCENES With a 25 percent markup and no clear end in sight, many manufacturers are scrambling to get out of China, or at least develop a backup plan. In recent years, Southeast Asia (Vietnam especially) has grown exponentially as a manufacturing base, and many companies large and small are looking to go there.

“The tariff situation with China has been a major strategic focus in our planning for 2019 and beyond,” says Austin Painter, CEO of designer Amanda Lindroth’s product business. Painter and Lindroth manufactured much of their early pieces in China, and are currently assessing their manufacturing options as their company grows. “Every penny of our margin matters, and a 25 percent hike in landed cost is felt across all lines of the business. … We need to continue to source product elsewhere. While our current materials and construction techniques are replicable throughout Southeast Asia, future product development efforts will be hedged by flexibility in production locations.”

For most designers, the biggest effect of the trade conflict may not be a delayed custom sofa, but the hesitation of a client whose stock portfolio is hurting.

Ironically, some companies, predicting a trade conflict in China, had begun to move production to Mexico (in February, Ethan Allen CEO Farooq Kathwari told Forbes that part of the appeal of the company’s 600,000-foot facility in Mexico was the shelter from tariffs). And many manufacturers south of the border had begun working on compliance with the updated NAFTA treaty—an agreement jeopardized by the threatened tariffs.

Others are attempting to bring elements of their production into the U.S. Though this is precisely what the Trump administration had hoped for, it’s not without complication. “I think it is worth understanding that the tariff piece will begin to affect made-in-America goods soon, because most parts, at least for lighting, are all affected,” says Brownlee Currey, president of Currey & Company. “So even if a company is doing U.S. metalwork, the price of the steel has gone up and the price for many other materials, such as glass, wires, and hardware will all increase.”

And though U.S. manufacturers are no doubt grateful for the new business, some have been overwhelmed by demand. “We know one of the largest high-end retailers began moving some upholstery manufacturing from China—they have already contracted out orders to one of the [U.S.-based] upholstery makers we use,” says Hoak. “This resulted in major new orders for them, but delays and quality-control issues for us, as this new volume has overwhelmed their capacity.”

Put simply: It’s a bit of a mess.

WHAT KINDS OF PRODUCTS ARE MOST AFFECTED?Because tariffs on steel and certain electronic components have already been in place, products that rely on those materials—lighting, for example—are more vulnerable. However, in a highly integrated global economy, a 25 percent increase on materials will have far-ranging consequences.

The situation with China is more mercurial—the uncertainty itself has become its own problem.

“Mainstream furniture will be the most impacted by the situation in China. Even as quickly as U.S. companies are relocating production out of China and into countries like Vietnam, the country remains the single largest source for furniture,” says Warren Shoulberg, a longtime industry watcher and retail expert. “The Mexico situation will impact the glassware and decorative accessories segments more than any others.”

WHAT HAPPENS NEXT?The inner workings of 1600 Pennsylvania Avenue lie well beyond the purview of Business of Home. Many analysts predict that diplomacy will prevail and the tariffs on Mexico will not go into effect on their scheduled start date of June 10. The situation with China is more mercurial—the uncertainty itself has become its own problem.

If the conflict with Mexico dies down, and the trade war with China fizzles out, then the overall impact will be minimized. Andy Counts, CEO of the trade group American Home Furnishings Alliance, strikes an optimistic note: “The imposition of a new 25 percent tariff on products from China has created uncertainty in the U.S. furniture industry, but no consistent impacts to date,” he says. “While consumers are likely to eventually see some modest price increases, … they also are likely to see a greater selection of U.S.-made goods.”

In a more dramatic scenario, the 25 percent tariff on Chinese goods will continue unabated, and the tariffs on Mexico will increase to 25 percent by October. Such a development would have ramifications throughout the economy in ways that are difficult to predict.

WHAT DESIGNERS NEED TO KNOWNo matter what happens on the political front, the tariffs have already had an impact. Prices for a range of goods have risen, and will likely continue to go up throughout 2019. For interior designers who primarily earn from markup on product, higher prices might not seem like the end of the world. However, it’s likely that disruptions to the global supply chain will lead to delays and backlogs—even for goods not manufactured in China.

More broadly, trade conflicts lead to economic uncertainty, and that’s bad for business. For most designers, the biggest effect of the trade conflict may not be pricey chandeliers or a delayed custom sofa, but the hesitation of a client whose stock portfolio is hurting.

“The overall impact of these tariffs creates a level of uncertainty that makes everyone uncomfortable,” says Ulrich. “This uncertainty can impact business and our perception about the health of our economy in a negative way.”

WHAT TO DO ABOUT ITThere’s not much that designers can do about large-scale economic uncertainty or geopolitical tension. The best plan is simply to follow the news and be prepared. Two things to keep in mind:

Across the board, prices are likely to go up at least a little in the second half of 2019. In general, clients are likely to get more for their money today than they will in five months.

Now would also be a good time to double-check the availability of product—especially items that are integral to long-term projects. Confirm lead times, and try to lock in prices now. Don’t assume that because something is available for a certain price today, it will be in stock at the same price in three months.

Homepage photo: Shutterstock.com

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THE SHOWROOM IS DEAD. LONG LIVE THE EXPERIENCE CENTER

APR 4, 2019
FRED NICOLAUS

Pity the executives of luxury appliance brands: In 2019, it’s not enough to have a great product anymore. Beautiful ads, hooky marketing? Everyone has that. And it’s certainly not enough to open a regular showroom—you need an experience center.

Fisher & Paykel

Fisher & PaykelCourtesy of Fisher & Paykel

The term “experience center” comes from the world of consumer retail strategy, and like most neologisms, an exact definition is hard to come by. Broadly speaking, it’s a retail environment where customers are encouraged to have an interaction with the product—which could mean anything from a racetrack-adjacent Porsche showroom to an Aveda shop where customers can get personalized skin-care advice.

While it’s tricky to pin down exactly what counts as an “experience,” experts agree why it’s important: In the wake of the internet’s continued assault on brick-and-mortar retail, presentation counts. “Just telling someone isn’t good enough anymore,” says Amberlee Isabella, a retail designer and strategist at Gensler. “You need to show them. And the most ‘sticky’ experiences are those that connect users to a larger purpose.”

Brands have taken note. In 2017, Kohler opened nine experience centers across the globe where designers and their clients can try out products (even showers, if they wish) and spec them directly from the store. It’s kitchen appliance companies, however, that have made the most of the concept. The opportunity is obvious—would you rather buy a range in a showroom that smells like a showroom and offers free mints, or one that smells like a bistro and serves French toast? The potential goes a long way toward explaining why an experience center has become de rigueur for a luxury brand looking to introduce (or reintroduce) itself to the trade.

Dacor is a case in point. Founded in 1965, the high-end appliance brand has a storied history but fell on hard times after the 2008 recession. In 2016, an acquisition by Samsung brought an infusion of cash and some new technology into the mix. The first step in introducing customers to the company’s new look? A 2019 rollout of three experiential showrooms that the company is calling “kitchen theaters.”

Signature Kitchen Suite

Signature Kitchen SuiteCourtesy Signature Kitchen Suite

Dacor’s New York location (Chicago and Los Angeles are forthcoming) is, in many regards, a standard showroom, with rows of gleaming ranges, refrigerators and wine cellars on the sixth floor of the Architects & Designers Building. However, the brand has added a high-tech functioning kitchen into the mix, where it will host a variety of classes. Company president Randy Warner says the new space is part of an attempt to cater the brand’s product to modern entertainers: “From partnering with sommeliers to floral styling sessions and lessons on how to plate and plan courses, we feel this approach will set us apart from our competitors.”

Fisher & Paykel, a premium appliance brand based in New Zealand, is already on its second experience center in North America. In 2016, the company opened an experiential showroom in New York, also in the A&D Building; last year, it attached a new 6,500-square-foot location to its U.S. headquarters in Costa Mesa, California. The center has all of the expected amenities—artfully designed vignettes, a demonstration kitchen, classes and events—but has taken pains to add touches of its brand DNA wherever possible. Customers are offered Kawakawa tea (a New Zealand specialty) as soon as they walk in.

Signature Kitchen Suite, backed by South Korean electronics giant LG, is hoping to up the ante by creating an experience that extends beyond the showroom walls. Its new 23,000-square-foot center is located in Napa, the heart of Northern California’s wine country. The idea is that, instead of squeezing in an appointment in the middle of a stressful after- noon at a design center, trade professionals will experience the brand as part of a leisurely day of wine tasting, good food and balmy West Coast weather.

But the location, 50 miles from the nearest major airport, is a little off the beaten path. Company general manager Zach Elkin notes the challenge, saying that it took “about six months of dialogue” with higher-ups at LGto greenlight the Napa location. However, given the story that he’s trying to tell—the brand targets its products at a tech-native, food- and wine-savvy, affluent consumer demographic it calls “Technicurean”—Napa was too good an opportunity to resist. “Nowhere else on earth do you have the convergence of technology, food and wine,” he says. “Anything else would have been settling.”

The fact that a major company would prioritize an immersive experience over easy access demonstrates how crucial the experiential side of the equation has become, and how far the experience arms race has progressed.

All that experience doesn’t come cheap. Most companies don’t share exact figures for the cost of their experiential locations, but they’re unquestionably more expensive than a run-of-the-mill showroom. Is it worth it? It depends on how you think of the expense.

“They’re looking at it as a marketing and advertising cost more than a profit center unto itself,” says retail expert Warren Shoulberg. “I don’t think these guys expect these stores to make any money—or if they do, they’re in for a rude awakening.”

There’s history there. Pirch, a multi-line home appliance and plumbing showroom, opened doors in 2009 and quickly earned rapturous applause from industry pros and media alike for its “Try before you buy” experience-on-steroids approach. Customers could take a shower on-site; Pirch chefs were constantly cooking on the in-store ranges. Ten locations were opened nationwide, awards were won, and investors came running. But by 2017, Pirch began to unravel, eventually closing all but its four California locations. The model, though innovative, wasn’t profitable at scale. The exact cause of Pirch’s contraction is complicated—Shoulberg attributes it to a combination of high real estate costs and a clunky product mix—but the takeaway was simple: Experiential retail is a powerful tool, not a silver bullet.

Executives from luxury kitchen brands have taken the hint, and most aren’t thinking of their experience centers as cash cows. Fisher & Paykel won’t even sell directly out of their Costa Mesa location. “It’s a brand pillar within the selling experience,” says Pierre Martin, the company’s vice president of marketing. “But depending on the audience, it could be the tool that makes the sale come through.”

Elkin is of a similar mindset—the Napa center is not a traditional, foot traffic–driven “Hey, honey, let’s go buy a stove” location. Instead, it’s a way to provide a total brand immersion to his company’s most valuable customers: the trade. “I look at the design community as multipliers,” he explains. “Individual homeowners may only do one kitchen in their entire life, but designers may do a dozen each year. We spent a lot of time understanding and investigating their pain points.”

The brands’ courting of trade organizations—the National Kitchen + Bath Association holds events at Fisher & Paykel’s center, and the American Society of Interior Designers is set to have its annual board meeting at Signature Kitchen Suite’s Napa location—drives home the point that even though consumers are savvier than ever, designers still have enormous sway over appliance purchases.

Is this the crest of the wave, or just the beginning? (What’s next, brands inviting customers to spend the night and be served goat cheese omelets by their CFOs?) Only time will tell. But if the trend line is any indication, experience centers are here to stay. Dacor still has two more to build, and Fisher & Paykel is hoping to add another in North America. Sit back and enjoy the experience.

This article originally appeared in Spring 2019 issue of Business of Home, Issue 11. Subscribe for more.
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