We were able to grab a few minutes with Bob Gaylord, president of Agio-USA, just prior to his departure on another flight to China. We wanted his take on the economic problems China is facing, the status of his business with mainline furniture stores, and the competition faced by specialty patio retailers.

Hearth & Home: How is the situation in China affecting business these days?

Bob Gaylord: “What’s in the news today is their overall stock market, their oil consumption, or lack thereof. I guess it’s important only because our country reacts, and Europe seems to react to it. The economy is slowing over there just because they’ve already embraced every aspect of manufacturing (that) makes sense to be done in a place like China. Obviously a significant factor is the slow growth in the United States and Europe, and the emerging nations.

“You know, it’s ironic that China and the rest of the world felt their economies would be healthy, overall, when China’s economy moderated.

“Their growth rate has gone from the high double-digits to around seven percent, and now there’s talk about it possibly dropping to five percent, which would really surprise me. But on the other hand, it wouldn’t be the end of the world. Europe is experiencing anywhere from negative growth to one percent or two percent, and the United States isn’t that much better.

“Quite possibly, the overwhelming factor in this slowdown for China is the announcement they made a few years ago that the emphasis was not going to be on export, but on building their infrastructure, especially in areas away from the coast. The coast is where about 90 percent of their growth has taken place in the last few years.

“You’ve got a country with 1.4 billion people and only the 400 million or so who live on the East Coast have really taken advantage of the economic boom over the last 25 years. So they are spending all sorts of money building the infrastructure. They are trying to become a service and consumption-based economy, which will be good for them in the long run.

“There’s no doubt that the cost of manufacturing in China is going up dramatically – because incomes are rising, because it is being mandated, and because the government wants to put as much money into the hands of consumers as they possibly can.

“The only thing that’s keeping (manufacturing) prices down at all right now is the price of commodities, from oil-based products to the costs of aluminum and steel.

“But there has been very little attempt to move outdoor manufacturing outside of China, especially in terms of metal. There has been woven business outside of China, but we don’t see anything really moving out unless something dramatic were to happen.”

China.

Even if another nation had the talent and the factories, and the casual industry sought to move its manufacturing, wouldn’t a transition take years?

Gaylord: “Yes. It almost comes down to sheer numbers. China could very well end up with not enough workers. Something that is plaguing us in China is the available workforce, because the government is doing nothing to urge people from the western provinces to come east (to work in industrial zones). So it gets tougher and tougher to find people who want to weave chairs, weld, grind, etc.”

Tell us about Agio’s move into the mainline furniture store channel. Is that still going well?

Gaylord: “I had the idea at the 50th Apollo Awards dinner in 2009. Today, we have over 100 indoor furniture accounts. For us, it’s more about quality than quantity, and the marching orders that I gave our people was, this is going to be a marathon, not a sprint.

“More importantly, our message was that any successful venture into the (mainline store) business would only happen if top management backed the effort and were willing to invest the space and the money to build the business. That hasn’t happened in all cases.

“Fortunately, we’ve been able to bring some of those people into the business and, hopefully, in the right way. One of the biggest things we say to people is this: The day you get in the casual furniture business, Mr. Indoor Retailer, nobody owes you a dime for the business. It’s got to be earned.

“You’ve got to pay your dues by your customers seeing that you are in the outdoor business when they visit your stores to purchase indoor furniture or mattresses or whatever. You’ve definitely got to advertise, and use social media and all the rest of that stuff. You can’t sneak into the business. If you try, that will pretty much guarantee a less-than-successful outcome.”

Macy’s became an Agio customer early on. Is that still going well?

Gaylord: “Yes, it really is. They’re very happy. They’ve done a real nice job, and they’ve paid their dues. This business has been extremely good for them.”

Macy’s recently announced some store closings. Are those closures going to affect your business with them?

Gaylord: “No, I don’t believe so. First of all, the majority of our furniture business with Macy’s is in their freestanding furniture stores. I think the closings refer to the department stores. Outdoor furniture is about as healthy as it gets for them, and you can’t ignore the dot-com side of their (outdoor furniture) business, which has been phenomenally strong from the very beginning.”

Macy’s in New York.

Name some of the other mainline furniture stores who have signed with Agio.

Gaylord: “We’re well represented by the top 100. We have significant people like Art Van out in the Midwest and Jordan’s Furniture up in the Northeast. We have a real Who’s Who of people going into the business. I know we have pilot programs going on. I believe right now we are with Rooms to Go, and with Haverty’s.”

Talking about those bigger accounts, is Nebraska Furniture Mart a customer?

Gaylord: “Oh, yeah. But they’ve been in the business forever.”

Has Nebraska Furniture Mart’s new Texas store made a difference for you?

Gaylord: “Oh, yeah. It’s absolutely amazing. A significant increase.”

Let’s talk about Millennials, those people under 35 or so. What are you thinking about them as casual furniture customers?

Gaylord: “Well, we’re thinking about them, but there is no doubt that the Baby Boomers and the older Gen Xers will be driving this business for at least the next five years, and that’s a long time in our business. Let’s face it, it’s where the money is, and that group represents over 70 percent of the dollars spent on casual furniture. Now, they are saying that Millennials are making up the other 30 percent, and I don’t doubt that is true.

“The Millennials to me are more likely to buy online at much lower price points. They’re still very far behind in terms of marriage percentage and single-family home ownership and incomes.

“To me, it’s very simple. Every retailer has a customer base, and you train that customer base to feel comfortable at a certain price level, whatever that might be.

“With some specialty retailers, you can hardly buy a set of furniture for under a few thousand dollars, and you can easily go $5,000, $6,000, $7,000, even $10,000 or more. So you have to be very, very careful about just throwing something on the floor and saying, ‘Hey, this is for the Millennials.’ The Millennials are more likely to buy online at much lower price points.

“I think it’s better for us to wait for the Millennials’ incomes to rise and for them to get married, for them to be in single-family homes, and so on.”

A Hearth & Home survey earlier this year found that a number of casual retailers experienced a big jump in sales late in 2015. That coincided in many cases with unseasonably mild weather. There’s speculation that the late arrival of cold weather is a symptom of climate change. Is climate change going to be a factor in this business?

Gaylord: “I don’t think the sales bump relates so much to climate change. We have had two very significant changes in our industry, and that’s the emergence and growth of fire pits/chat, and deep seating. I think those contribute more to 12-month sales, fall sales, winter sales, whatever you call it.

“Without a doubt, climate change that extends the season could make people feel a lot more comfortable about their purchases. But I think the significant sales in the fall and even in the winter have more to do with deep seating and fire pit/chat than anything else.”

With more mainline furniture stores getting into the casual furniture business, and with so many other channels competing, how should specialty merchants position themselves?

Gaylord: “They have to take advantage of their strengths, which is certainly selection, and also offer full-line extensions on the most important collections – dining, deep seating, fire pit, chat, etc.

“That is what’s going to separate them the most from the mass merchants, if not the dot-coms. Dot-coms are a huge, huge threat to specialty retailers. There’s no doubt about that.”

Expand on that please. Earlier you said that Millennials are likely to shop online, and we know they don’t have the income to purchase higher-end goods typically offered by specialty retailers. So how are the dot-com merchants such a threat?

Gaylord: “In the same way that you have a lot of consumers who, regardless of income, have bought furniture at Big Box stores, from mass merchants, from home centers and everywhere else.

“During this recession, a lot of the Big Box guys went down-market. They went down-market so far that they’ve virtually lost the person who was willing to spend some decent money, maybe not at patio-shop level, but decent money. You can’t get a whole lot of furniture for under $999 and some of the Big Box guys were trying to keep it under $499. You don’t get anything for that kind of price.

“So a lot of the mass retailers, by going so far down-market, are not serving anybody. And here’s the ironic thing: The growth for the mass retailers – the Big Box guys, home centers, the wholesale clubs – is coming in their dot-coms, where the price points are much, much higher.

“So here they are, in their brick-and-mortar stores, taking retail prices way down – and it’s not working. But their growth is in their dot-coms, where the retail prices are double, triple, or even quadruple what they have on their floors.”

So if we were to go to a home improvement store website, for instance, to check out the outdoor furniture, would we see higher prices than if we walked into a store this spring to shop for outdoor furniture?

Gaylord: “Absolutely, because the retailers don’t have a vested interest in a lot of what’s available on their dot-coms. The inventory is all drop-shipped from either distributors or manufacturers. So, in some respect, they don’t care what’s online. They’re not taking a risk at all.”

Is Agio’s mass merchant business growing, whether sold off the floor or through a dot-com?

Gaylord: “Absolutely, yes. But this is an amazing statistic. There hasn’t been much growth in the category, at the Big Boxes, over the last five or six years in the brick-and-mortar stores. The increases at dot-com are phenomenal. There are some Big Box retailers out there where the dot-com volume in casual furniture is surpassing the brick-and-mortar volume.”

Las Vegas Market.

What is Agio’s experience with the Las Vegas Market? How is that working out?

Gaylord: “I have a very large showroom, 22,000 sq. ft. My people have been very happy with the quality of the traffic. I still haven’t been in it; my schedule hasn’t allowed me to make it.

“Our reason for going into it is this: The Las Vegas Market made a big splash about having a casual furniture area. Oliver (Wang) and I have been together in business since the mid-’70s, and we’re marathoners.

(Ed. Note: Oliver Wang is Agio’s co-founder.)

“We want the indoor retailers to be in the outdoor furniture business. So we have to be at the Vegas show, just like in High Point and at the Casual Show. It’s part and parcel of a message that we need to give to the trade.

“By the way, the biggest thing that I didn’t expect with the indoor guys is how low they wanted their price point to be. This crushing recession over the last seven or eight years, for indoor, made them very price sensitive. We’re telling them that there is a huge middle ground out there. You cannot be the highest end, but you don’t want to be in this crap that (store name deleted) and (store name deleted) are selling.

“There is this super, super fertile ground out there. They are comfortable from $999 to $1,999, but they are not as comfortable as they should be from $2,000 to $3,000, although it’s certainly getting better.”

Final thoughts?

Gaylord: “We can’t think of anything more important right now than dot-com, because we ain’t gonna stop it. I don’t have to tell you about the growth; you’ve seen it, you know it. The younger the people are, the more comfortable they are with shopping online.

“But virtually everybody, from Boomers down to the Millennials, is buying online. So we’re going to be as big a part of it as we can – which also means encouraging the specialty end of the business to go after that category.

“They are still the experts in the business.

“They still offer the finest selection, and the finest quality in furniture. There is always room for that.

“By the way, as far as specialty (retailers) goes, I think that their opportunity over the next two or three years is going to be phenomenal. That’s because the brick-and-mortar Big Box guys have gone down-market so far that the consumer is not being satisfied.

“Specialty retailers have a huge opportunity.”