“We will consider Chinese analogues”: how the furniture business is changing

Raw materials and materials for furniture have risen in price by 40%, and after the strengthening of the ruble, prices have not fallen. EDG CFO Ilya Antonenko talks about the transformation of production and problems with expensive European equipment

Smolensk slabs and a new focus

What challenges has your business faced in recent months?

— The main difficulty is a sharp rise in the cost of materials that we purchase for production. Raw materials increased in price by 20-40%. At first, this was due to a jump in the exchange rate. But when the ruble strengthened, we did not see a price drop.

Even those materials that are produced in our country contain an imported component. For example, we work with Egger wood-based board, it is made in the city of Gagarin in the Smolensk region. The paper, resin and glue needed to make it come from Europe.

In addition, all related services have risen in price: carriers and other contractors. Logistics, for example, rose in price by 20%. The disruption of supply chains has affected every aspect of our operations.

Were there delivery delays?

“We are buying kitchen parts, and their supply has slowed down noticeably. The logistics routes themselves have also changed. Previously, Chinese equipment went by sea, now only by rail. There are also difficulties with customs clearance. In general, what used to take one month now goes from three to five.

– Because of all these problems, you have not changed the business model?

– Not yet. As we worked with large networks, retailers, we continue to work. But the focus will probably need to be shifted. We are now developing a new direction, we are going to work with large developers. Let’s focus on them.

— Are your partners mostly companies or foreign ones?

– These are legal entities that are representatives of European companies. For example, suppliers of components, accessories.

Has your relationship with them changed?

— No, representative offices of European companies with which we have been working for a long time are trying to support us. Even if there are difficulties with deliveries, they try to find offers for us from other partners.

Personal contacts with specific people in these missions help a lot. Yes, they understand that the European company can leave. But at the same time, it will change its sign, the production itself will remain in our country, and maintain partnership relations with us, the work will continue.

Now we have many partners. But in the early 2000s, we worked with IKEA, we were their supplier. They gave us 97% of the revenue. If today we worked only for one such client, then after his departure we would cease to exist.

Shortage of spare parts and cheap China

— Do you have imported equipment in production?

– For the most part, yes. Of course, there are certain risks associated with its maintenance. Last year we bought a modern production line, German machine tools. Now this line is idle, we cannot start it, because there are difficulties with the supply of equipment, with the invitation of adjustment specialists.

But for our main fleet, we try to select all the spare parts that are available. We save them for the future with the understanding that we may face a shortage of spare parts when suppliers run out of stock.

If this happens, we will look for alternative procurement options. Previously, parts came directly from Europe. Now through Turkey or the UAE. We will consider Chinese counterparts.

— Are there no Russians?

There are very few of them in the woodworking industry. And they have not proved to be reliable. Therefore, we either use German used machines and machines that can work for decades, or lower quality and cheaper Chinese equipment.

Growing sales and a satiated consumer

Have you raised the price of your products?

— Yes, unfortunately, for the end consumer in the b2b sector. As our suppliers raise prices, so we are forced to pass them on to our customers. This leads to an increase in the cost of products on the shelves.

But we do not lay any additional interest, except for those caused by a rise in the price of raw materials. We just try to include the cost of purchased semi-finished products into the price of the finished product, so as not to go into negative. There is no cheating on the end user.

— Has your sales dynamics changed in the last three months?

— In March, compared to March last year, sales increased by 2–2,5 times. Apparently, buyers have a need to go into the product.

Since mid-May, we have seen a gradual decline and a decrease in the number of orders. Consumers have satiated their needs, so they do not go to the shops.

Business without forecasts and search for partners

— Did the experience gained at the Skolkovo School of Management help you?

— What they teach us at Skolkovo helps a lot in terms of personal development, vision of the situation and the picture as a whole. The understanding comes that everything goes in a spiral, crises always happen. Knowledge is somehow structured, it becomes clearer where to go next.

And it is also very useful to discuss business problems with classmates in the mastermind format. We get together and look at problems on a general basis or on a specific case. There is an appropriate module, my classmates and I can go to the teacher, to one of the experts, and bring the issue up for discussion.

Is your business in a sustainable position?

I wouldn’t say it’s sustainable. The position is precarious. We don’t know what will happen in a few months. We do not know how things will be with the supply of raw materials, what will happen with orders.

There are some seasonal issues. In May-June, there is a recession in the furniture business, and it is combined with the general economic downturn. We don’t know if the demand curve will go up. There is uncertainty.

So you don’t make predictions?

— No, our planning horizon has narrowed. We used to plan 6-8 months ahead. Now the nearest horizon is 2-3 months.

— How would you assess the prospects for the development of the furniture industry in our country?

“Furniture has always been a commodity of great demand. There will always be a buyer. In times of crisis, two segments win: either super-economy or luxury, exclusive and expensive products.

We worked somewhere in the middle of these two segments. We will either have to cut costs and make products less expensive for the client, or sacrifice marginality, which we would not like to enter the economy segment, to stay afloat. The luxury segment is more for retail, where b2c works. And in b2b economy is more relevant.

— What advice would you give to entrepreneurs who work in conditions of uncertainty?

– Look for partnerships, unite in groups. One company is limited by resources, funding sources. Partnership in related areas will provide additional points of support.

Well, even during the crisis, many enterprises leave the market. We are now following the announcements: enterprises that sell businesses are closing, you can buy equipment from them. You can even try to acquire such a company. Someone leaves the market, but someone else will definitely take his place.