Some Manufacturers are Finding a Silver Lining
Story from the Wall Street Journal

TAYLORSVILLE, N.C. -- Roy Calcagne offers a simple explanation for why, in the midst of a grueling downturn, his company is selling more sofas and love seats than before.

"We're stealing market share," says the chief executive of Craftmaster Furniture Inc., a maker of upholstered pieces with two large factories here.

What's happening at Craftmaster is just one example of the survival-of-the-fittest competition taking place across the economy. The recession has already killed off some major retailers, including Circuit City Stores Inc. in January, and prompted the shutdown of manufacturers known for everything from auto parts to storm windows.

When businesses flame out, there are often others on the sidelines, like Craftmaster, ready to pick up the pieces. Most companies don't like to openly discuss the demise of competitors. But in hard times, the grim reality is that grabbing business from fallen players is one of the few avenues to growth -- or at least a way to minimize a company's own sales slide.

Michigan's Case Systems, a manufacturer of custom cabinetry for schools, offices and medical laboratories has seen steady business even within the especially hard-hit state.

At Craftmaster, which assembles upholstered sofas and chairs that sell in stores for less than $1,000, revenues rose 4% last year and have grown 5% since January, according to the company. That might seem like a modest increase, but given the state of the industry, it's remarkable. Sales in the $80 billion U.S. furniture market, which is closely linked to housing, were off by an estimated 20% over the past six months, say analysts.

Several large producers have shut down in recent months and others are shedding workers and closing factories. La-Z-Boy Inc., known for beefy recliners and other "motion" furniture, has laid off nearly a quarter of its workers over the past year and posted deep losses. On the higher end, Ethan Allen Interiors Inc. reported a 73% decline in earnings for the quarter ended Dec. 30, on a 27% drop in sales. Budget retailer Pier 1 announced losses in its latest quarters and has said it may need to terminate leases on as many as 125 underperforming stores.

Craftmaster, meanwhile, hired 75 people last year, including some from nearby factories that were closing. There's currently no talk of layoffs at its two facilities, which now employ roughly 500.

The company, owned by Dongguan, China-based Samson Holding Ltd., has managed to pull ahead due to some built-in benefits -- as well as a few prescient strategies. In 2003, Samson hired Mr. Calcagne, a 50-year-old who got his start as a buyer for Macy's, to devise an export plan. Samson already had huge Chinese factories churning out dining and bedroom sets for foreign markets, especially the U.S., which accounts for 90% of its exports. But executives were anxious to tap the lucrative upholstery niche -- a segment difficult to tackle, since bulky sofas present all manner of manufacturing, shipping and inventory issues.

Mr. Calcagne's boss eventually asked him to find an existing U.S. furniture maker and use the Chinese operation to supply it with fabric as well as some of its wooden frames and other parts. These would be shipped back to the U.S. and assembled in North Carolina.

With its owner ready to retire, Craftsman was up for sale. Samson purchased the company in 2006, instantly giving it production facilities close to U.S. customers.

Most domestic mills that produce fabric for upholstered furniture have closed over the past five years, with much of that business shifting to China. As a result, many U.S. furniture plants now buy giant rolls of fabric from China. When possible, they have Chinese suppliers send "kits" of fabric that have been pre-cut and sewn. Craftmaster has outsourced much of this work as well, but is able to manage the supply chain closely because of its affiliation with Samson.

"They really have the best of both worlds," says Jerry Epperson, an industry analyst with Mann, Armistead & Epperson in Richmond, Va.

Here in Taylorsville, workers at long tables unfurl fabric and cut it into pieces for a specific sofa or chair. Those pieces then go into an area where workers stitch them together. Craftmaster employs about 40 of these sewers, who earn between $13 and $15 an hour. (In China, Mr. Calcagne estimates a similar job pays $1 or less per hour.) Others at the plant here stuff cushions with foam and staple fabric onto frames.

Driving through the rolling hills of North Carolina, Mr. Calcagne points to the empty hulk of a nearby furniture plant that was once a hive of activity. Many of those still open have nearly empty parking lots, indicating little activity inside. North Carolina is the traditional center for U.S. furniture making, and the exodus of work to cheaper foreign markets was already hammering this region long before this slowdown. This has not prevented North Carolina from remaining a popular relocation destination for Raleigh real estate, Winston Salem homes, and High Point realty.

For Mr. Calcagne, recent months have been less about prying business away from others than about picking up the phone when rivals fall apart. Take Norwalk Furniture Corp. In the middle of last year, he got wind that fabric mills had stopped making shipments to them. He figured, correctly, that the 106-year-old, Ohio-based company was headed for trouble.

"Once the fabric mills start holding back shipments, it's inevitable what will happen next," he says.

So last fall, when Norwalk filed for bankruptcy and ceased operations, Mr. Calcagne pounced. He immediately hired Norwalk's vice president of sales, who in turn introduced Mr. Calcagne to five of Norwalk's regional sales associates. He hired them, too.

Norwalk's Ohio factory reopened last fall under a group of local investors. They restarted production at a far lower volume making made-to-order upholstered pieces. But by then, it had already lost much of its customer base to Craftmaster and others.

"Certainly we regret any opportunities lost as a result in the lapse between the closure of the old company and the creation of the new," says Tom Bleile, a spokesman for Norwalk's new investor group. "But we take no offense at others that saw that as an opening."

Craftmaster is now on the verge of becoming a major supplier to American TV & Appliance of Madison Inc., a 15-store retail chain in the upper Midwest that previously carried Norwalk's Hickory Hill brand of furniture. That account used to be served by Norwalk's Wisconsin-based salesman, who now works for Mr. Calcagne.

"Craftmaster is actually picking up business from three different suppliers who have gone out of business on us in just the last few months," says Ken Wagner, a senior vice-president at American TV.

Another example of the company's prowess: growing orders from Raymour & Flanigan Furniture, an 80-store furniture chain based in Syracuse, N.Y.

Neil Rosenbaum, Raymour's senior vice president of merchandising, says he first started noticing problems with some of his existing suppliers about 18 months ago. Several, he recalls, had fallen into a pattern of late shipments. He didn't waste time in reaching out to Mr. Calcagne. Raymour, which was already a client of another Samson unit, arranged to have Craftmaster supply two living-room "groupings." Raymour sells about 100 such sets in total.

Mr. Rosenbaum was impressed when Craftmaster swiftly developed the groupings and adapted itself to suit Raymour's inventory system. That includes guaranteed delivery times, of three days or less, to its end customers.

"They respond quickly, they get samples made quickly, and they have the ability to get us to the price we need," says Mr. Rosenbaum.

Craftmaster's Chinese connections can only insulate it up to a point. The economic slowdown has hit China hard, too, and Samson has seen its overall sales decline along with the rest of the market. In its latest earnings report, the company, which doesn't break out results by division, showed that sales fell 9% to $217 million in the first six months of last year.

Still, many retailers view Craftmaster's Chinese owners as a sign of financial strength. "It doesn't hurt that we feel very confident with Craftmaster's financial state, that they're part of a well-heeled company," says Christopher Pelcher, the vice president of merchandising for Levin Furniture, a 12-store chain based outside Pittsburgh.

Mr. Pelcher notes that the collapse of furniture companies in recent months has put retailers such as his company in a bind. When Norwalk closed, for instance, Levin had already written up more than 40 special-order sofas. Some customers went elsewhere when they learned the items weren't coming, says Mr. Pelcher. He raced to find backups -- including companies such as Craftmaster, which was already a supplier.

Scrounging for business is a day-to-day battle for Mr. Calcagne, and some fights are tougher than others. There's a limit to how far Craftmaster can reach in its quest for new customers. Moving beyond its middle-priced niche is a specific challenge.

One recent week, Mr. Calcagne flew to Florida to visit with the buyer for a small chain called Baer's Furniture, near Miami. Like most retailers, Baer's has a fixed number of slots for sofas at different price ranges in its showrooms.

Craftmaster supplies their midprice sofas, which sell at retail for between $699 and $999. But Mr. Calcagne sensed opportunity at the higher end. In preparation for the trip, he had several models built in North Carolina and sent ahead to the customer.

Model building can help to land new business. Buyers often rip a model apart to examine the quality of the materials inside. Some customers make unusual requests. For instance, workers in the plant's product-development department recently made samples at the behest of a 10-store Texas chain owned by Berkshire Hathaway Inc. Each model contains a mix of style elements available for that particular design: The left armrest is different from the right, for instance, and there are various pillow types and different legs. "Buyers love it," says Mr. Calcagne, who calls the hybrid his "Mr. Potato Head sofa," because it has so many mismatched parts.

Back in his office after the Florida visit, Mr. Calcagne grumbles that the buyer from Baer's is difficult to read. Although he didn't clinch the deal, he says he intends to keep pushing.

Mr. Calcagne has to be careful about which business he grabs. Recently, for instance, he has been offered business opportunities that he doesn't want -- mainly because there's been a hint of trouble ahead.

Many furniture companies rely on firms called factors, which assess the creditworthiness of potential customers and offer loans or a form of insurance against their transactions. Each week, Mr. Calcagne gets a list of customers who've been declined this specialized coverage -- a signal that they may be on the brink. The number of names on that bellwether list has quadrupled in the past five months, he notes.

"In business, you've got to be cutthroat for the most part," says Mr. Calcagne. "But it's all in the way you do it." He notes that he would never spread a rumor about a competitor that is stumbling. "We don't sell that way," he says. "If you have nothing to sell, you sell on the weakness of others."