Thoughts for 2012

As my father and I prepare for 2012, I keep coming back to one primary concern: Europe.
My concern is not so much about whether or not specific countries default on their debt, the EU finds a way to muddle through somehow, or even if the currency falls apart.  My main concern is about lending and the crisis’s effects on confidence and spending. Unfortunately, uncertainty about the various possible outcomes have already had an impact in this area – European banking institutions have reportedly been shoring up their balance sheets by repatriating assets and curtailing lending and there are also reports US institutions are curtailing their daily overnight lending to those same European banks.

If this condition persists and credit becomes less and less available, it will work its way through the European and US economies down to the level of small firms’ and individuals’ sources of credit.  The prospects are similar to 2008, when central banks increased funding to banks to help them weather the mortgage crisis: that increased credit did not continue much further past the banks’ balance sheets.  Our experience was that the impact of this on our industry seemed to be felt about a year or 2 later, in late 2009 and 2010, which, besides natural lags, was I think probably due to the lead times associated with most projects.

So, our concern is: the longer the uncertainty of any resolution to the European crisis persists, we will have a continued general reduction in the availability of credit.  And I believe this uncertainty will translate into reduced economic activity, in a broad sense.  However, within our industry, recent activity seems to give reason for some optimism.  Our experience is that this activity has been centered around the higher end spectrum – either truly style defining pieces or commissioned pieces that address a clients exact needs. In both cases, pricing has been essential to reinforce the value proposition of a piece or project to the client.

Here is what it boils down to in our in house discussions:

• We expect the euro to lose value against the dollar for at least the 1st half of 2012
• We are watching for borrowing costs to start increasing in the US sometime near the middle of the year.
• To insulate against any potential slowdown, we suggest modeling budgets around flat and/or lower revenue expectations for 2012.
• Cutting costs associated with high cost/potential client marketing – in other words cutting expensive marketing efforts with limited potential client exposure in favor of efforts that enhance our web presence.
• Pricing pieces and projects to reinforce the value represented by a piece to clients will remain key.
• We believe we are only seeing the beginning of a new-ish trend focusing on the unique character of a piece. We believe that clients will be increasingly sensitive to owning items unique to them or to a very limited number of people. Items that set them apart from their peers and define their home or taste.

Happy Holidays and best wishes to you and yours for 2012!
Freddy & Tony

Notes for 2011

The last few weeks of 2010, as I try and think about what we might expect from 2011, reading the headlines alternating between recovery and recession themed stories has been frustrating. For every legitimate story evidencing the nascent recovery, there is at least one or more that cause me to pause. Most recently, the holiday shopping period was generally considered successful and stronger than last year, but how much of this was due to steep discounting is hard to tell. Is this really a sign of economic strength or is it an illusion created by significantly reduced prices?

There are some encouraging metrics that support the recovery side of the debate. As of October, disposable income and personal consumption were both up slightly less than 4% year on year, and consumption of durable goods was up 8.5% year on year (according to the Bureau for Economic Analysis). All this while inflation is hovering around 1%. Consumers are also continuing to reduce their overall debt levels.

But on the negative side of the ledger, there is relatively high unemployment, which no one expects to substantially improve any time soon; relatively tight credit; and seemingly no pricing power. So we have something happening that intuitively is not what you’d typically expect: significant areas of weakness along with pockets of legitimate strength, sometimes in areas that you would expect to be dragged down by that same weakness.

Discounting has been especially interesting in the luxury market. Technology and mobile phones have made price information and comparison a reality and sites like Gilt and One Kings Lane have made high priced luxury goods available at bargain prices. Both of these trends have helped blur the line between luxury and ordinary. So if luxe and ordinary goods are closely priced, are mass market consumers “trading up” while luxe goods are “trading down”? I am betting that when anybody gets a luxe good at discount they still feel like they got a “deal” and value for their money.

That people are more careful with their money today is a foregone conclusion. But that does not mean they are not spending it. In fact, spending on “luxury goods” is at or above pre-Recession levels based on studies by American Express and Bain & Co (stories here: http://www.luxurydaily.com/luxury-sector-sales-rebound-to-historic-high-of-2007-bain/ and http://www.luxurydaily.com/luxury-spending-higher-than-pre-recession-levels-american-express/ )

So just like in the broader economy, we have a bifurcation taking place between strength and weakness, or in this case “true” luxury goods and discounted or mass market goods where luxury goods that can establish their authenticity and value actually have some degree of pricing power. The difference now is people need to understand the value behind a good versus the branded image it is trying to portray. More like an informed and discerning demand vs. conspicuous consumption.

When prices between luxury and ordinary goods are blurred and both high-end and mass market consumers are justifiably taking advantage of discount pricing, the way for a luxury good or service to set itself apart will be to clearly establish its superior quality and originality. If price does not set a luxury good or service apart from their mass market counterparts, then what does? The intense creative development process and an uncompromising attention to detail and quality.

Ironically, how companies convey this will be thru the same medium that this shift to quality is moving away from – the brand. However, instead of the superficial, carefully manufactured brand of the 1990’s, companies will need to let clients into the creative process so that they can see the brand is an accurate reflection of what the company produces. If you want to be associated with quality and authenticity, then clients need to see this in what goes into making their good and throughout their experience with you. Thankfully, the same technology that has made price comparison so easy makes other types of information also available, including information to help them discern luxury versus ordinary.

So, how are we preparing for 2011?

We plan to reinforce our attention to our clients and their experience with us from the first phone call or web visit, through development, and after their purchase or project is complete.

We plan to continue with introducing our own in-house line of limited edition pieces and signature items.

We will continue and broaden our efforts to illustrate to clients our development process and the craftsmanship and level of detail that we put into our pieces.

Price and Quality, this weekend in Massachusetts

This weekend I was in western Massachusetts, in an outlet store, and I stumbled across a perfect example of an issue I’ve been thinking about since I started working with my father: the trade-off between price and quality. It was a chair very similar to the one in this image.



It’s a knock-off variation of our Rope chair pictured here.

Perhaps “knock-off” is the wrong word to use. It is clearly a bergere form, whereas the back of ours is open. Plus, the original chair was not our design anyway (I believe we are perhaps the only firm with patterns based on the 1870's Napoleon III original, however) and “knock-offs” are a part of this business anyway. What shocked me was the price. The bergere was selling for about $2,000 in the store.

Suffice it to say, we could not carve, finish and upholster one of our chairs for even close to that cost!

Now, there are some important differences that must be pointed out. Ours is a gilt finish. Ours has tufted upholstery. Ours has a stretcher. Our carving has greater detail. The proportions of our rope is consistent. The tassels of our arm-posts are free-standing from the posts. And so on...

But at some point you have to ask, does the client signing the check care? Would they rather have the more expensive, detailed example of fine craftsmanship, or would they prefer the inexpensive example that gives a similar idea of the original?

I believe that more and more, clients are opting for the later.

Certainly, the current recessionary times do not help, but it’s my opinion that the average client is more interested in the “idea” behind a piece and the look or feel of their home as a result. You could call them the “aspirational” client. The apsirational client may make the choice based on price, or simply because they are unware of the custom option, or the reasons behind the cost difference. But, for whatever reason, they decide to spend their money based on how they want their home to feel.

Now, there is still a client out there that does want the detail and does want the craftsmanship, and is willing to pay for it. But, similar to knowledgeable collectors becoming fewer and fewer, I think there are fewer and fewer of these clients around. From a personal perspective, when these clients place an order it is exciting from the production end, because these are usually jobs that push your boundaries a bit and require you to really engage your creative side. But if I am right and there are fewer of these types of clients, it means that high-end customized furniture and craftsmanship will continue to be relegated to its niche. And, without getting too Malthusian, we will continue to see a dwindling of the bespoke production trades in America. Small talented craftspeople and firms will need to find others ways to stay relevant.

I pulled this post together quickly and did not take the time to find supporting hard metrics. Most of my opinions here are a result of my observations and then stumbling across this chair. So please tell me what you think, or if you feel differently. I would love to know. Just one clarification: I do not place a value judgment on these two diffferent client groups – one is not superior to the other. The 2 groups are themselves a gross over-simplification I used to illustrate what I think I see happening in our business. In fact, sometimes the same client can act both "aspirational" and more custom oriented. I simply want to note these observations to help us make more informed business decisions, and if I am lucky, some of our readers’ as well.