After IKEA: Can Russian Furniture Makers Fill the Market

Logistics issues, procurement challenges with imported components, and the sudden surge in the exchange rates of the dollar and euro in early March have significantly increased prices for Russian furniture, making the products of foreign manufacturers inaccessible to most buyers. The article explores how Russian players are adapting to the new conditions, why complete import substitution is currently not feasible, and how the departure of major Western companies will impact domestic producers, as explained by Efim Katz, the CEO and co-founder of the furniture factory 'Maria.'"

To change priorities

The Russian furniture market experienced serious upheavals after the events of February 24. This was particularly noticeable in the mid and high price segments, where the share of imported materials, hardware, and components is traditionally high.

Due to sanctions, disruptions in logistical chains built up over the years, and currency fluctuations, the cost of furniture increased by 35-50%. Logistics expenses also significantly increased: if the cost of one truck from Italy used to be €4500, it now reaches €13000. Despite attempts to take all possible measures to restrain price growth, the retail price of goods for customers increased on average from 10% to 30%.

Like any crisis, its beginning was accompanied by maximum excitement. In February-March, sales increased on average by 30%, and in some categories, even two to three times. Fearing further price increases, consumers tried to quickly resolve all issues related to furniture purchases. More than 50-60% of materials and components used by Russian furniture sellers are of foreign origin. Therefore, we are fully affected by exchange rates, disruptions in logistical chains, port closures, and customs delays.

The withdrawal of major foreign brands like IKEA from the Russian market can be assessed in different ways. On the one hand, it is a significant advantage for domestic companies as demand is partially redistributed among small and medium-sized players that were overshadowed by international giants. On the other hand, too little time has passed for global changes, and only large businesses with their own production and sufficient resilience are capable of surviving under current conditions.

In addition, foreign companies that have been operating in our country for years have invested tens and hundreds of millions of dollars in business development, so their return is likely a matter of time. Can our players reconfigure themselves in such a short period and reclaim the audience? Only a few can, but in general, the majority cannot.

According to our estimates, the furniture market may decline by 10-20% in monetary terms compared to the previous year. Therefore, the main task for Russian players is to maintain sales volume at the level of 2021: by introducing a new line of furniture in a different price segment and expanding the range of products. 

To import is impossible to perform.

A common saying: a crisis is not only about difficulties but also a time of opportunities. How can Russian industrial and manufacturing companies leverage the situation to accelerate their own development and capture the available market share?

Currently, everyone is exploring alternative options, considering partial or complete import substitution. However, for many domestic manufacturers (including our company), it is practically impossible at the moment. There are several components that are not currently produced in Russia at a satisfactory level. For example, the production of hardware in our country is very weak, and to strengthen it, we need not only years but also investments in the hundreds of millions of dollars, investments in equipment, technology, and worker training. Normal global practice involves the distribution of production. For decades, some European companies have honed their expertise in narrow expertise on specific components, and finding a similar replacement in the market is simply not possible.

We are fortunate that the majority of our suppliers have stayed with us. Additionally, some large companies have had their own production facilities in Russia for a long time and do not plan to suspend operations. However, in a rapidly changing situation, it is essential to have an alternative plan. It is important to start expanding the circle of partners, testing new materials and components from Brazil, Hungary, Turkey, China, and Russia. If all tests are successful, production can be initiated. Nevertheless, establishing a 'full-cycle' company is not a suitable option for every business.

The situation with suppliers of built-in household appliances is much more complex. Many popular brands have halted shipments to Russia, but haven't completely withdrawn yet. In our case, the main product is kitchens that come with built-in appliances. Many customers are accustomed to these brands and are not ready to switch to others. Nevertheless, Russian and Chinese manufacturers could serve as alternatives, having elevated their products to a new level in recent years and offering high-quality items with good designs at reasonable prices. If European manufacturers delay their come back, there is a high chance that they won't be waited for, and the market niche will be filled by others. Another option is legalization of parallel imports, but due to logistics costs, the price will be higher than before. In the end, what the buyer votes for will determine the outcome.

The Restructuring Period

According to the calculations by the Association of Furniture and Woodworking Industry Enterprises, the monetary value of furniture production in Russia in 2021 amounted to 310 billion rubles. This figure is one and a half times higher than the pre-pandemic indicators of 2019 and a third higher than 2020. Notably, the production of kitchen furniture experienced a remarkable growth of 30%, reaching 42 billion rubles. The driving force behind this surge can be attributed to the construction boom of 2020 and 2021.

If we consider the kitchen furniture industry alone, its main audience now consists of apartment buyers. Mortgage, personal financial calculations, and unwillingness to sudden changes in furniture costs will lead consumers to options for 'turnkey' apartments. The same is true for other furniture segments.

The direction that will be effective in the coming years is collaboration between furniture manufacturers and major real estate developers. Such a partnership is beneficial for everyone involved: for manufacturing companies, it provides a guaranteed sales channel; for developers, it enhances the attractiveness and competitiveness of their projects; for customers, it offers the opportunity to save time and money on furnishing their apartments with high-quality furniture from a well-known brand tailored to individual design projects. For example, "Maria" collaborates with developers such as "Samolet," "Pioner," "RG-Development," and "Gals." In 2022, the volume of deliveries is expected to reach approximately 2500 furniture sets for homes under construction in Moscow.

Despite the crisis, Russian companies need to invest in development. Thus, our investment volume for the period 2021-2022 will exceed 250 million rubles. This includes funds for modernization of the factory and acquisition of cutting-edge machinery from leading brands. It is crucial to continue expanding the sales network. One of the available methods is through a franchising program, both in the domestic market and in neighboring countries such as Azerbaijan, Georgia, Armenia, Tajikistan, Uzbekistan, and Belarus. The performance of existing stores should also be analyzed, taking into account the profitability of each one. Adjustments to lease agreements should be made, inefficient areas should be reduced, and a strategy for retaining foot traffic should be developed in collaboration with shopping center owners. In most cases, landlords are unwilling to lose reliable and proven partners, so they are willing to compromise.

Currently, both furniture manufacturers and retailers greatly rely on the support of the government and banks. Many furniture enterprises are significant taxpayers and employers in their respective regions, so they anticipate a reduction in interest rates on existing loans and obtaining new financing on favorable terms. Without this, the market faces significant disruptions.

The state talks a lot about the need to support enterprises, and we welcome that. However, it is important for banks to follow the government in supporting domestic manufacturers. The decline in working capital for businesses threatens the stability of processes. Few have a large financial cushion that allows sustaining the operations of large businesses without external financing.

Recovery of demand should not be expected in the near future: a significant surge in sales in March quickly faded away. In April, as anticipated, there was a decline in sales across all categories. Buyers prefer to postpone purchases and await price reductions due to the strengthening of the ruble. However, such a scenario is unlikely: raw materials, energy, and logistics have become more expensive, procurement prices for materials and components have risen, and no one is planning to lower them.

Source: Forbes

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Our geography

Furniture factory «Maria» is a great example of a dynamically developing company.

The network of brand shops includes 500 workshops «Edim Doma!», kitchen studios «MIA kitchens» and «Maria» in 165 cities of Russia – Moscow, Saint-Petersburg, Saratov, Ekaterinburg, Izhevsk, Tula, Rostov-on-Don, Voronezh, Orenburg, Volgograd, Samara, Ulan-Ude and others. «Maria» kitchens can also be purchased in the CIS countries. A wide model range is represented in Kazakhstan and Belarus.

No matter what studio or workshop you choose, you can always count on the top service, best quality and original design of «Maria» kitchens. All of the shops exhibit the whole variety of kitchen samples and qualified designers are always ready to create a unique design project and choose a kitchen that perfectly matches your preferences and taste.

After visiting a kitchen studio «Maria» you can choose the right kitchen together with a highly qualified designer, that perfectly matches your preferences and create a unique design project of your future kitchen or bathroom furniture.

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