An Insight into the Russian Furniture Market: Today and Beyond

An Insight into the Russian Furniture Market: Today and Beyond By Marina Khaibulina, Lesnaya Industriya Journal

Russian furniture manufacturer First Furniture Factory has been specialising in the production of custom-made furniture for more than fi ve decades before focusing on kitchen furniture production in early 2000s.

In the past two years, the company saw its sales double within two years. According to Alexander Shestakov, chief executive offi cer of the company and president of the Association of Furniture and Woodworking Enterprises of Russia, it is necessary to invest up to 10% of annual revenue in development of new furniture collections to maintain growth.

Shestakov shared some of the recent developments in his company and his insights on some of the current trends and challenges seen in the Russian furniture manufacturing industry.

INCREASING CORPORATE SALES

Alexander Shestakov (AS): In 2019, First Furniture Factory saw a 12% increase in revenue to 2.2 billion rubles (US$31.6 million). This growth was largely attributed to the development of corporate sales, which included an increase in the number of contracts for the supply of furniture to state and municipal customers, as well as expansion supplies to private companies.

For example, at the Russia-Africa Summit held in October 2019, First Furniture Factory signed a series of large-scale contracts totalling 218 million rubles (US$3.1 million), one of which was with the Roscongress Foundation for the supply of chairs for the summit worth 109.5 million rubles (US$1.6 million). First Furniture Factory also made the furniture for the VIPs, as well as two 70-seater round tables, each about 12 metres in diameter, for the heads of state.

Also contributing to the company’s growth was cooperation with construction companies on the supply of furniture to new apartments. In 2019, the company’s furniture sales to construction companies exceeded 500 million rubles (US$7.2 million).

INVESTING IN NEW PRODUCT DEVELOPMENT

AS: To produce products that correspond with the latest trends in furniture fashion, have an optimal price-quality ratio, and at the same time are functional, ergonomic and demanded by consumers, it is necessary to launch seven to 10 new collections annually and invest up to 10% of revenue on these projects. The experience of First Furniture Factory confi rms the validity of this theory. We also came up with another theory: if 80% of new products are created by the company's in-house design bureau and 20% are made by invited designers, including recognised international entities, investments made in the development of new products are returned in the shortest possible time.

TOP QUALITY EQUIPMENT

AS: In 2017, First Furniture Factory completed its fi nal large-scale modernisation project for its production equipment. At a cost of about 50 million euros (US$56.7 million), the capacities of the Swiss Piatti plant were transferred to St Petersburg. Currently, these capacities are suffi cient and we are not massively updating the equipment park. Of course, there are expenses incurred for the maintenance and repair of the lines, but they fall within just 1% of the revenue.

The project to transfer the capacity of the Piatti plant from Switzerland to Russia sought to increase sales of kitchen furniture in Russia by about two to three times. I believe that this project has been very successful. Due to the launch of the latest ultra-modern technological equipment, the First Furniture Factory almost doubled its revenue from 1.3 billion rubles (US$18.6 million) in 2016 to 2.2 billion rubles (US$31.5 million) in 2019 – most of which are sales of kitchen sets. Since then, we have fully appreciated the capabilities of the new lines through the diversification of our product range. First Furniture Factory began producing new types of products, such as cabinet, offi ce and hotel furniture.

The kitchen sets in the “medium” and “medium plus” segments range from 70 thousand to 120 thousand rubles (US$1003 to US$1720). The company's also has “economy” and “premium” segments – the latter of which includes designer furniture sets created by world-class craftsmen exclusively for First Furniture Factory.

FURNITURE DEMAND WITHIN RUSSIA

AS: In Russia, the demand for furniture is growing slightly. The greatest demand is for kitchen sets, and furniture for dining rooms and living rooms, and the offi ce.

In 2019, the main growing trend was in furnishing new buildings. This is benefi cial to our industry, which receives a distribution channel, as well as customers who purchase furniture at wholesale prices and move into turnkey housing.

Unfortunately, however, there is little prospect of a sharp increase in demand for furniture in Russia. Household incomes are not increasing, borrowing is on the rise, and since furniture is not considered a consumer good, many potential buyers put off updating furniture to better times. Hence, there is demand but this is not refl ected in sales. The driver of growth in the demand and sale of furniture could be the adjustment of standards for housing under construction. This could mean the inclusion of preinstalled wooden furniture in new apartments and a simultaneous change in mortgage mechanisms, so that mortgage agreements would not just include the cost of the house, but furniture as well. All these initiatives have been discussed at the government level for more than half a year, and the Association of Furniture and Woodworking Enterprises of Russia is actively involved in this. We hope that in the near future, the market will see the results of their work.

In the past two years, due to state support, Russian furniture makers have become a strong competitor to foreign manufacturers. This was refl ected in in 2018, where the share of sales of domestic furniture rose to a record of 50.1%. Last year, the trend was confi rmed. Modern buyers are guided primarily by the pricequality ratio. The leaders of the Russian furniture industry are not inferior to, and even somewhat surpass, their foreign counterparts.

We forecast that in 2020, the market growth will remain at 5% to 7%; we do not expect a sharp jump in demand in one direction or another. Buyers will be more carefully prepared when making purchases and will be even more patient in waiting for discounts and promotions.

PROHIBITION OF PURCHASE OF FOREIGN FURNITURE AS: The entry of the well-known government decree number 1072, under State Law 44, on the prohibition of public procurement of foreign-made furniture played a crucial role in the development of the modern Russian furniture industry. It has been two years since the decree was passed and many enterprises have signifi cantly increased production and sales. The volume of furniture purchased by the state in 2018 and the fi rst half of 2019 increased by 15% and exceeded 35 billion rubles ($501.9 million). Companies were able to invest in updating collections, fi xed assets, training and hiring personnel, expanding dealer networks and developing new markets. POTENTIAL UPCOMING CHALLENGES AS: Furniture makers face similar problems to companies in other sectors: expensive loans and the lack of “long” money; an increase in tariff s of natural monopolists and domestic fuel prices; unpredictability of legislative changes; a drop in real incomes of households; and a small number of highly qualifi ed personnel. In addition, it is diffi cult to fi nd reliable suppliers of high-quality components inside the country, especially for furniture fi ttings.

In terms of online commerce or e-commerce, furniture – especially large items such as beds and cabinets – is still not the kind of product that is bought through the Internet. It is true that consumers save time and eff ort by using Internet resources at the stage of preparation for acquisition – they study the products online, look for the most favourable off ers and read reviews. However, at the fi nal stage, they would still visit the showroom of their selected manufacturer. Especially for products with a long lifespan, consumers would fi rst want to evaluate their capacity and convenience, compare selected models with others, and select their preferred colours, shapes and details.

EXPORT PROSPECTS FOR RUSSIAN FURNITURE AS: Currently, First Furniture Factory sells about 50% of products to corporate customers, including export contracts. The volume of the latter is constantly increasing but not as fast as we would like. The process of penetrating foreign markets turned out to be longer than we initially thought, but we are systematically developing in this direction.

However, the export of Russian furniture has indeed been growing since 2015. First, Russian manufacturers penetrated the markets of countries in the Commonwealth of Independent States. By 2018, Western Europe accounted for up to 20% of Russian furniture exports, and our products are especially popular in Germany and Sweden. There is also a demand for our products in the Middle East, India and South East Asia. In terms of quality and design, our furniture is in no way inferior to the best world standards, but at more democratic prices. Our entry into foreign markets is mainly constrained by bureaucratic procedures. Many permits and confi rmations of our furniture's compliance with the each country’s standards are required and it takes a lot of time.

LOOKING AHEAD AS: The plan is simple: grow, develop and improve. First Furniture Factory is a rather ambitious company; it’s not enough for us to be a leader in the Russian market and we strive to become a world leader in furniture manufacturing. P

This article was fi rst published in Lesnaya Industriya Journal.