HNI Corporation (NYSE:HNI) is the second-largest maker of office furniture in the world with a 16% market share of the industry. It is also the largest manufacturer of fireplaces and stoves, capturing 30% share of the $1.5 billion U.S. hearth products market. The sale of office furniture accounted for the majority (83%) of HNI's total revenue, while sale of hearth products made up the remaining 17%.
Since HNI's core product is office furniture, its revenues are heavily influenced by new office construction or renovation as well as employment growth or decline. In an economic downcycle, office properties see slower growth, and this hurts HNI's overall sales. HNI has countered slow U.S. sales with an expansion effort overseas. In 2006 HNI acquired Lamex, a Chinese manufacturer of office furniture, in order to take advantage of the Chinese market for office furniture that is at $3B and growing. As HNI tries to gain share in international markets, however, it faces challenges in its domestic market- the percentage of office furniture imports to the U.S. (as a percentage of total consumption) increased from 14% to 19%, while exports stayed at around 3%-4%. Low-cost imports from Asian countries, especially China, threaten to take away HNI's strength, its ability to sell products at lower cost than other domestic competitors..
HNI mainly sells its office furniture products through dealers, wholesalers, and retail superstores to government, education and health care organizations, large corporations, small businesses and individual consumers. Individual consumers and small businesses buy HNI's products through retail superstores such as Staples, Officemax (OMX), Office Depot (ODP), and Corporate Express, while large government and corporate accounts are mostly handled by office furniture dealers. HNI's revenues are split fairly evenly between the two main types of office furniture customers - the contract segment and the commercial segment. The contract segment includes large corporations that buy office furniture for new office facilities, relocations and office redesigns. These customers often need custom-designed furniture. The commercial segment includes smaller orders of office furniture purchased by small businesses and home office users. The office furniture market is influenced by the general economic outlook, corporate profits, new office construction and white-collar employment.
HNI's hearth products are sold through dealers, distributors and company-owned retail outlets to home construction companies, builders and individual customers. The company sells approximately 70% of its products to the constructors and builders of new homes. Hearth products are typically purchased by builders during the construction of new homes, and homeowners during the renovation of existing homes. The market is thus sensitive to new home construction and remodeling projects and is heavily influenced by the general housing market.
In 2009, HNI earned total revenues of $1.66 billion. This represents a major decline from its previous year's revenues of $2.48 billion in 2008. As a result, HNI's net income was significantly impacted. Between 2008 and 2009, HNI's net income went from $45.5 million in 2008 to a net loss of $6.26 million in 2009.
HNI breaks its operations into two business segments: i) Office furniture products, and ii) Hearth products.
The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furniture which includes storage products, desks, credenzas, chairs, tables, bookcases, freestanding office partitions and panel systems and other related products.
The hearth products segment manufactures and markets a broad line of gas, electric, wood and biomass burning fireplaces, inserts, stoves, facings and accessories, principally for the home.
The economic slow down caused by the 2007 subprime mortgage crisis has lead to decreasing corporate profits, especially for banks and real estate firms. This will affect the demand for office furniture, as office furniture purchases depend heavily on new office construction, renovation and employment.
The recent subprime mortgage crisis has greatly affected the U.S. housing market, leading to plummeting housing prices and consumer confidence. As 70% of HNI's hearth products are purchased for new homes, this lowers demand for HNI's hearth products and affects the company's net sales.
The percentage of office furniture imports to the U.S. (as a percentage of total consumption) increased from 14% to 19%, while exports stayed at around 3%-4%. This trend is expected to continue as low-cost imports from Asian countries, especially China, rise. As HNI's primary strength is their ability to sell their products at a lower cost than domestic competitors, these low-cost imports will compete with HNI's share of the U.S. market.
China's office furniture market, estimated at $2.5 to $3 billion, is one of the fastest growing in the world. The market demand for new offices and new office furniture in China is expected to rise even more with the recent construction boom in China's major cities (which has lead to more prime office space), zero import tariffs for furniture, and a GDP growth rate that remains at 10%. As HNI acquired Lamex, a Chinese manufacturer of office furniture, in 2006, HNI will be able to use Lamex’s strong local presence to expand their sales in China. Lamex already has showrooms and sales offices in Hong Kong, Shanghai and Beijing and a network of franchisees throughout Mainland China. This opportunity to expand in the Chinese market would then lead to increased revenues for HNI.
The office furniture industry is highly competitive, and the low-cost niche market that HNI competes in is particularly price sensitive. HNI's main competitors in the office furniture industry include manufacturers Steelcase, Haworth, Herman Miller, Knoll, and Kimball International.
In the hearth products industry, HNI primarily competes against other large manufacturers including Travis Industries and Lennox International.