Analysts Urge Steelcase 'Flattening'
Despite the cost-cutting and downsizing that has already occurred, Steelcase needs to shed even more costs and flatten its vertical business structure in order to return to consistent profitability, as the industry seeks to rebound from its worst-ever sales plunge.
“At this point, they’re re-evaluating the whole business structure and how they’re going to survive in the future,” said Bill Isenberg of Isenberg Research in Grand Rapids, a market research firm. “They’re going to have to make some fundamental changes.”
The extent of those changes should become clearer early next year under a restructuring plan that Steelcase, the industry leader globally in sales volume and market share, is now developing for the North America division.
In a letter earlier this month to employees, division President Frank Merlotti Jr. indicated the plan will outline “fundamental changes” for the company and that Steelcase is “no longer a manufacturing giant residing in western Michigan.”
The restructuring plan will take a “comprehensive approach” in looking at Steelcase’s North America business unit, which at $1.49 billion is far and away the corporation’s largest division, accounting for 57 percent of fiscal year 2003 corporate revenues.
“They’ll really be looking at all facets of the North American operations and look for ways to take cost out,” Steelcase public relations manager Jeanine Hill said.
Hill could not offer specifics about what’s on the table and said additional job cuts “are not out of the realm of possibility” for Steelcase, which has cut its work force in West Michigan from 10,800 people to 5,400 in the past three years. In North America, Steelcase has cut its work force from 18,900 to 11,800.
Michael Dunlap, of Michael A. Dunlap & Associates in West Olive, sees the need for Steelcase to “streamline and flatten” its vertically integrated structure that has the company doing more in-house production of components and products than competitors. Steelcase needs to outsource more of that work, Dunlap said.
“Almost nothing is sacred at this point,” he said. “Steelcase is certainly not done reducing the work force.”
Steelcase has done a “remarkably good” job of late removing layers of the corporate structure, “but they’ve just needed to do more,” Dunlap said.
Word of the pending North American restructuring came just days after Steelcase lowered its projected shipments for the third and fourth quarters of FY 2004 by 5 percent and warned investors of losses for each period.
The earnings warning, issued in reaction to a significant downgrade in the industry forecast for 2004, came on the heels of downgrades in Steelcase’s debt rating by both Standard & Poor’s and Moody’s, which indicated that a major change in the company’s structure is possibly needed. The negative rating that Moody’s gave Steelcase reflects the potential that the company’s business model “may require a fundamental and permanent shift away from that of a vertically integrated manufacturer to enhance its industry competitiveness, and the commensurate stress on company management,” the ratings agency stated.
While Steelcase has done much to slash costs since the industry downturn began three years ago and has reduced production capacity by about 35 percent, intense pricing pressures through discounts, rebates and incentives have largely offset the benefits of cost reductions, Moody’s stated.
Moody’s believes pricing pressures “could be indicative of more aggressive competition within the industry going forward.Increasing competitiveness among market participants for project wins could challenge Steelcases ability to realizethe full benefits of its restructuring efforts and may apply incremental pressure to its margin performance.”
One of the problems that Steelcase, as well as all industry players for that matter, faces is that those customers that are buying furniture are demanding greater incentives or looking at low-cost providers, Isenberg said.
“There’s been a major shift in consumer attitudes,” he said. “People are considering office furniture more and more as a commodity. They’re completely re-evaluating their view about office furniture.”
In that arena, customers “have really done a tremendous job pitting one (furniture maker) against the other,” Dunlap said.
The office furniture industry has seen sales fall from a peak of $13.2 billion in 2000 to $8.89 billion for 2002, and to a projected $8.4 billion for 2003.
During that period, Steelcase’s sales have fallen from $3.9 billion in FY 2001 to $2.58 billion in FY 2003. Midway through FY 2004, sales were off another 8 percent from the previous year.