VM+SD Fixture Survey 2005

Online auction fever may be abating; offshore competitors continue to gain
Posted August 2, 2005

Buoyed by strong sales results at its new "customer-centric" stores, Best Buy plans to open or convert 150 to 200 more of its spaces to that design during its current fiscal year.

"Because customers have reacted so positively, we're going ahead with an aggressive rollout of that model, which means we'll be spending more on fixtures this year than we did last year," says Mark Randall, director, display management, at the Minneapolis-based consumer electronics retailer.

Best Buy isn't the only retailer planning to spend more on fixtures this year, according to the 2005 store fixture survey conducted by VM+SD.

But where will those fixtures be built? In North America? Or in China? And how many contracts will be sourced through online reverse auctions? VM+SD's groundbreaking survey of both sides of the store fixture business offers some surprising answers to those questions.

Online or Off Line?

Controversy over online auctions has raged throughout the industry over the past several years. Many retailers have viewed such web-based bidding contests as an opportunity to buy fixtures more cheaply. And many fixture manufacturers say the practice forces some of them to take jobs at a loss, or leads to shoddy work finding its way into stores, while many conscientious manufacturers are being driven out of business.

Well, here's some good news for fixture manufacturers: Retailers' enthusiasm for online auctions appears to be cooling. More than half of the retail respondents said their use of such bidding contests is decreasing. (See chart A) Only about a third said such auctions are saving their companies money. And three-quarters of the retailers surveyed said they worry that auctions cause the quality of fixtures to suffer.

"Online auctions have been very detrimental to both retailers and manufacturers," says Michael Schirmer, director of store planning and design for Boscov's (Reading, Pa.), which operates about 40 regional department stores. "They force manufacturers to submit bids that are so low that the only way they can squeeze any profit out of them is to cut as many corners as they can. And that is bad news for retailers, who wind up with fixtures of questionable quality."

But online auctions have their backers, as well. Best Buy's Randall, for example, views them as a valuable resource in certain situations.

"They're a fast way to get multiple vendors involved in bidding for a job," he says. "While they're not for every type of contract – they work best for jobs involving simple metal parts and large production runs – we've found that they do offer us a way to lower our acquisition costs for certain kinds of fixtures without sacrificing anything on quality."

The vast majority of manufacturers who responded to the survey believe that e-auctions are a lose-lose proposition for their businesses and their retail customers. Over 80 percent of the respondents said they don't believe retailers are benefiting from such auctions in the long run; a whopping 90 percent said they felt auctions were causing the quality of fixtures to suffer; and 75 percent are convinced that online bidding contests are threatening to drive fixture manufacturers out of business.

Dan Dunn, vp, sales and marketing for Boden Store Fixtures (Portland, Ore.), told VM+SD: "Sure, it can look great on a retailer's bottom line if it uses an online auction to get a bid of $600,000 for a job that used to cost $1 million. But the real question is, do those lower costs really translate over the long run? Chances are, the winning bidder has had to cut some corners to keep from losing money on the job. And if the manufacturer can't deliver what it promised on time, the retailer is faced with premium freight charges and possible delays in store openings. And what if the fixtures are made of inferior materials that last only six months, rather than two years? The retailers save some money up front, but it'll cost them over the long run."

In fact, manufacturers ranked e-auctions as the second-largest threat to their profitability. The top-ranked worry is the current spike in the cost of energy and raw materials. (See chart B.)

"Higher energy costs, along with higher steel prices, are really putting pressure on our margins," says Jeff Uhri, executive vp, sales, at Leggett & Platt Store Fixtures Group (Niles, Ill.). "While we work to factor those higher costs into the bids we put in for jobs, we also face a constant need to keep our prices competitive. Unfortunately, we don't look for those higher energy and materials costs to relax anytime soon."

The Chinese Are Coming

Also looming large in the minds of U.S. fixture manufacturers is the growing presence of offshore manufacturers. Nearly three-quarters of domestic manufacturers responding to the survey said their businesses are being impacted by foreign competition.

China, with its huge pool of cheap labor and access to metal, is the most oft-cited source (accounting for roughly 55 percent of the responses). Next largest are Taiwan and Mexico, followed by Europe and India. (See chart C.)

More than half the retailers surveyed said their businesses are turning to foreign sources for fixtures, with, yes, China again leading the way. Nearly 40 percent said they buy directly from a foreign manufacturer, while 32 percent said they work with a North American manufacturer that has a foreign partner. The final third work with brokers based either in the U.S. or abroad.

Best Buy purchases fixtures from U.S. companies with overseas partners. "Our current vendors have plants in China and other overseas areas, so we have the option of buying domestic or foreign products from the same business," Randall explains. "We'll use an overseas vendor when we're looking for lower labor content or have a longer lead time for the job in question."

Thomas Morbitzer, design director at design firm Cowan & Associates (Worthington, Ohio), says his firm's retail clients utilize foreign fixture manufacturers for rollouts – but not for prototypes.

"When it comes to putting together a prototype store, U.S. retailers prefer to hire North American suppliers that they've worked with before and are comfortable with," Morbitzer explains. "But once they've built the prototype and worked out the various bugs that are typically associated with its fixture package, then they're willing to have overseas manufacturers produce the fixtures in volume."

Not surprisingly, cost was the most popular reason retailers and contract design firms cited for turning to foreign fixture sources. Longer delivery times were not a significant factor in their sourcing. (See chart D.)

Still, some retailers – such as high-end apparel chains, which tend to populate their stores with custom cabinets and cases – steer clear of overseas suppliers. For example, John Mulliken, vp, store planning, at LVMH Americas (New York), says his company typically won't buy fixtures from Chinese companies because of the distances involved and the potential for communications problems.

"We'd rather be working with millworkers from places that are closer to our stores, in North America, to create the sophisticated kinds of fixtures we use," says Mulliken, whose company's stable of retail brands includes Louis Vuitton, Celine, DeBeers LV, Dior, Fendi, Thomas Pink and Pucci.

To combat the inroads foreign fixture-makers are making in the U.S., many domestic companies are joining forces with overseas firms. For example, Boden said it is partnering with companies in China and Taiwan to produce some high-volume commodity metal and wire fixtures.

"We've found the partnership arrangements have allowed us to learn how the international markets work on a small scale, with relatively low risk," says Dunn. "The most important thing we've learned so far is that you really need to do your homework when it comes to choosing a foreign partner that is reliable and trustworthy. We've been fortunate in that regard, but we've also heard some real horror stories about deals that went sour because of miscommunication or worse."

Spending on the Rise

Despite the competitive challenges facing fixture manufacturers on all sides, many are upbeat about their prospects for the remainder of 2005. (See chart E.)

"We're seeing an uptick in spending on fixtures for both remodeling projects and new-store construction," says Leggett & Platt's Uhri. "It's not been dramatic, but the ongoing strength of the economy is keeping us cautiously optimistic that retailers will continue to expand and upgrade their stores."

Retailers support Uhri's expectations. More than a third of the respondents say that added spending will be pumped into a growing stable of new-store construction and renovation projects. Also driving optimism are an improving economy, improving consumer confidence and bigger capital budgets. (See chart F.)

Better Fixtures, Better Sales

One national specialty apparel retailer says the added money it plans to spend this year will go toward new fixtures to augment its existing product presentations. "We believe you have to invest in the business to keep the customer excited, and that better presentation equals better sales," said a senior design official at the retailer, who asked that his name not be used. "So, we're adding onto our fixture package on an ongoing basis."

Cowan & Associates' Morbitzer says his design firm is seeing an uptick in activity, as well. "Our business is definitely on the rise. We're getting more contracts for both new-store designs and renovations."

The minority of retailers who expect to spend less on fixtures this year pointed to an economy that was not as strong as expected and their companies' scaled-back plans for store-openings this year. Some said they were going to close stores. And about a quarter said they were going to continue pressuring their manufacturers to produce fixtures for less.

The push and pull in the store fixture world seems as if it will continue for another year.