The profitability of the furniture industry in July reached the level of the end of 2019.

Sold production of the Polish furniture industry was above the record-high level of 2019.

The industry has a chance to close 2020 at a similar level to 2019, thanks to a rapid rebound of the domestic market.

In 2021, furniture export will return to growth of 4+% year-on-year.

Heavy blow, effective Anti-Crisis Shield

Warsaw, 09 Oct 2020
Optimistic forecasts from the beginning of 2020 crashed under the impact of a very heavy blow from the crisis caused by the covid-19 virus. In April, when the burden of the restrictions resulting from the epidemic was the greatest, the sold production of large and medium-sized enterprises decreased by about 50 percent year-on-year, while the volume of wooden furniture production decreased by over 60 percent compared to 2019. Negative forecasts in such a market situation assumed a decrease in the value of sold production in the whole 2020 by over 40 percent.

"The launch of the aid measures allowed companies from the furniture industry to maintain liquidity and employment until the economies of the most important exporter countries began to open up gradually. As a result, since the end of June, the sold production of the Polish furniture industry has been above the levels of the record-breaking year 2019, while in July alone, the growth was as much as 10% above the monthly average of the previous year. The key question should be to what extent this is due to the materialization of the postponed demand from the period of the greatest restrictions, and to what extent we are dealing with a real improvement of the economic situation ," says Kamil Mikołajczyk, Director of Industrial Production Sector at Santander Bank Polska.

From the beginning of the year, the furniture industry has made up for some of the losses from April, so the value of production sold after 8 months of 2020 is only 4.8% lower than in 2019.

Payment delays are the most significant barrier to growth

The crisis caused by the coronavirus pandemic has changed the furniture industry companies' perception of the barriers to further growth. According to the Central Statistical Office data, the pressure on employment costs has decreased compared to the beginning of 2020. The assessment of foreign demand has also normalized and for most companies has returned to pre-pandemic levels. 

"Uncertainty and late payments are the results of liquidity concerns on the part of companies, as indicated by the data for June and July. In earlier months the indicators did not reflect that, due to the assistance from the Anti-Crisis Shield  offered by the Polish Development Find at the time. However, it seems that this is a temporary situation, taking into account the fact that insufficient demand both on the domestic and foreign markets is not a current barrier for an increasing number of furniture manufacturers," explains Kamil Mikołajczyk. 

Export slumps, but profitability rises

By June 2020, the value of Polish furniture supplies to foreign markets decreased by 15.7 percent compared to the same period last year. Supplies to Germany, the largest importer of Polish furniture, fell "only" by 14.5 percent year on year, compared to a 15.7 percent drop in total exports. 

"The collapse of exports in March was accompanied by a loss of profitability for about 10 percent of large and medium-sized furniture manufacturers who have not had such problems so far. As a result, every fourth company was below the profitability threshold at that time. The biggest impact of the pandemic could be observed in the first quarter of 2020. The financial situation of companies in the second quarter already looked relatively normal compared to the results from previous years," points out Maciej Nałęcz, sector analyst from Santander Bank Polska. 

Another factor that could have supported the profitability of sales in the first quarter of 2020 was the downward trend of wood-based panel prices on the EU market. There is a lack of detailed data from the domestic market, however, at the European Union level, the price drops of panels began even before the pandemic, in the second half of last year.

Prior to the outbreak of the pandemic, the rate of salary growth was maintained in the industry at the level of about 6-7 percent year on year, while in April and May this year, the drops reached about 6 percent year-on-year. In those months, the number of full-time employees decreased by about 3.6 percent year-on-year. Part of the decline was due to the reduction of working hours, which is also reflected in a decrease in average wages. The data indicate that since June the number of employees has started to grow, which clearly shows the improving mood of manufacturers and a gradual return to normalcy.

Production growth coupled with lower employment

In July, the average wage in the industry returned to the trend of 6 percent year-on-year growth, but production sold was as much as 23 percent above the July 2019 level. This means that the very rapid recovery of production was not accompanied by an adequate rise in employment. 

“In July the number of full-time employees was still at the May level. As a result, in July alone, the productivity index, understood as the value of sold production per employee, was 14 percent higher than the average for the whole of 2019, and in August about 8 percent higher,” adds the Santander Bank Polska analyst.

The spectacular increase in production in July was partly due to the fact that this was the holiday season, when production is normally at a lower level so the 2019 reference level for comparison was relatively low. However, even when referring the July performance of the industry to the more typical months, it would be the second highest result since the beginning of 2018 in terms of the value of production sold. This means that the furniture industry is operating close to its maximum production capacity. 

To sum up, in the period from April to May, the furniture industry suffered a huge blow reflected in almost every statistic tracking the performance of the sector. However, since June the situation has been clearly improving, both in terms of production volume and value, and the growth of export, employment and wages.

This is confirmed by the results of a survey conducted by Santander Bank Polska among selected industry representatives. The vast majority of companies expect that the remaining part of this year will be as good as the last months. The bank asked furniture manufacturers, among other things, how they estimate the level of orders for the fourth quarter of 2020 compared to the first quarter of this year. As many as 83% of respondents noticed an increase in orders, and only 17% said that the number of orders remained unchanged, with no one reporting a decrease.¹

^{[1] Santander Bank Polska’s own survey, September 2020.}

Prospects for 2021

The prospects of furniture manufacturers in the second half of 2020 and the following year will be influenced by the supply of new apartments and, perhaps more importantly, the willingness to carry out redecorations, i.e. replace furniture in the existing houses and apartments.

The data indicate that in the case of the Netherlands, currently the third most important export market, the consumer indicators for the residential market have not changed significantly since the beginning of the year, which allows us to believe that sales to this market may continue to rise slightly. 

On the other hand, France, which is one of the main customers for Polish furniture, belongs to the group of countries most severely affected by the coronavirus pandemic in Europe. This is evidenced by a very  strong decrease in the planned volume of new residential buildings in the second quarter of this year. Even more pessimistic information comes from the United Kingdom, where construction activity in the residential segment has been on the decline and the number of building permits issued does not indicate a recovery in the near future. The negative picture is complemented by the lowest consumer propensity to build or buy a house since 2014.

“Summing up, the outlook for the most important export markets, we expect that the rebound in demand in the second half of 2020 associated with the relaxation of restrictions and the return of economic activity as companies and consumers have become used to the presence of coronavirus, will allow them to make up for a large part of the losses from the second quarter of the year. Assuming the continuation of the current rebound path in terms of sold production and the related export rebound path, we expect the value of exports at the end of the year to be between -5 percent and 0 percent of the result for 2019. Due to the faster pace of domestic market recovery from the crisis triggered by the pandemic, we expect furniture production to close the year with a result between -3% year-on-year and a slight increase (0-1.5%) in the positive scenario," Maciej Nałęcz concludes.