Herman Miller – Refreshed Design Portfolio Post-Knoll
Acquisition – 24 August 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Paul Iles (PI)
Former VP, Finance & Operations, Nemschoff Inc at Herman Miller Inc
Agenda:
1. Retail positioning and product rationalisation, highlighting Herman Miller's (NASDAQ: MLHR)
opportunity to invest in new categories ahead of market normalisation
2. Portfolio update following Herman Miller's July 2021 Knoll (NYSE: KNL) acquisition, including
potential overlap and related challenges
3. Herman Miller’s high SKU count in retail, highlighting possible impacts on inventory management
4. Commercial contract outlook, highlighting post-pandemic opportunities
Contents
Q: How have sales and volume shifted throughout the different furniture manufacturing channels during your
4
time in the industry?
Q: Can you help us understand the dealer network and its influence on the overall furniture manufacture
industry? What are key dynamics? How crucial is it to key manufacturers getting their products to the end
5
user? Why has it become such a proliferated channel?
Q: What macro trends are you monitoring in the industry across H2 2021 on the contract or retail side?
5
Q: Can you give an overview of how Herman Miller has enhanced its portfolio over the last few years? It has
evolved from a fairly commercial environment to residential, then a mixture of residential and commercial.
5
How have its offerings shifted to encompass more of the current environment?
Q: You mentioned the resimercial trend, which I assume is building product offerings that are to be sold
through the commercial and residential sides. How have other players built out versatile capabilities? How
hard is it to build a presence in retail vs commercial? It seems the common-sense approach is making products
all-encompassing and universal. What are the challenges to building out product lines that appeal to both
6
residential and commercial customers?
Q: You said that the contract industry has remained a USD 14bn industry for the last 15 years. Why continue
to invest in this segment when the pool of opportunity is stagnant vs retail’s many avenues such as new home
sales and work from home? Is there a margin factor here? What’s stopping Herman Miller and other players
making a more aggressive push into retail if building longer-lasting quality products in commercial requires
6
more investment?
Q: How might Herman Miller’s July 2021 acquisition of Knoll
7
Q: What does the overlap between Herman Miller and Knoll mean for Knoll’s integration, given these two
newly combined companies are probably trying to sell to the same customers? Could you outline the potential
7
disruption there, including supply chain impacts?
Q: Knoll doesn’t have a strong international contract presence so Herman Miller will mostly gain volume and
market share from the acquisition. How might the company leverage these resources to expand more
8
aggressively in international markets?
Q: Are there differences in Herman Miller’s European contracts, dealer networks or any other intricacies that
may impact sales or margins? Are there fundamental differences between North American and European
8
contracts, such as regulations or overall preferences?
Q: How can Herman Miller continue its strong growth in retail? Is the company doing anything differently vs
any other players? Is it just benefiting from overall category demand from the work-from-home environment?
9
Q: What would it take for Herman Miller to get into the volume-centric market? We touched on the dealer
network and its importance on the contract side. Could you discuss the omnichannel strategy on the retail side,
9
including the need for designers or design capabilities?
Q: How sustainable do you think the explosive demand is on the residential side? If demand tapered off, how
10
much pressure would it put on Herman Miller to reorganise and be more cost-effective?
Q: How would you assess Herman Miller’s ability to command strong pricing in the contract, commercial or
10
retail sides?
Q: Could you outline the supply challenges you noticed during your time in the industry? What impact do they
10
have on the ability to meet demand or lead times?
Q: Herman Miller claims to have introduced more than 17,000 new products to its retail portfolio. How much
pressure does managing that many SKUs put on the company? Is it perhaps better to be leaner? What would
11
you say is the optimal SKU mix?
Q: You alluded to Herman Miller consulting with Boston to take advantage of price arbitrage opportunities.
What pricing trends have you noticed across categories? Have some categories been more able to hold onto
11
pricing or pass it through vs other categories?
Q: How does the showroom aspect play into the retail market? How do they enable companies to get closer to
the consumer and immerse them in the product? What marketing and brand outreach have you noticed from
Herman Miller or other competitors? How do they ensure the consumer knows who the company is, what the
11
offering is and how it can be purchased?
Q: What under-appreciated aspects of the Knoll acquisition do you think investors should pay attention to?12
Q: How does Herman Miller’s high SKU count affect inventory management? It sounds chaotic. Has the
12
company ever been unable to meet demand for SKUs that have taken off quickly?
Q: Could you expand on Herman Miller’s category offerings on the contract side? Contract has performed
badly due to the pandemic, although some pockets such as health seem to have opportunities. Could you
outline the trends here? Does the company have the category offerings to push into healthcare or is money
12
flowing from all aspects?
Q: Why do you think Steelcase decided to double down on the contract side?
13
Q: Is anything commonly overlooked in contract or residential furniture manufacturing that investors should
13
pay attention to?
Herman Miller – Refreshed Design Portfolio Post-Knoll
Acquisition
Transcription begins at 00:00:03 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Herman Miller – Refreshed Design Portfolio Post-
Knoll Acquisition. I’m Nyree Hinton and I’ll be facilitating today’s Interview with Mr Paul Iles, former VP of
Finance and Operations, Nemschoff Inc at Herman Miller Inc.
Paul, before we get started with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and you agree not to disclose any such
information, or any other information which is confidential, during this Interview.
PI: I agree.
NH: Could you start with a brief introduction to your background?
PI: I had a long career in Herman Miller. I started in England early in the 1990s, in finance roles. I led
Herman Miller’s European finance operations, which included teams in the UK, France, Germany, Italy,
Netherlands and some other places. I was in that role when we implemented the euro. From my finance roles,
I switched to channel development. For five years, I was responsible for building out Herman Miller’s dealer
channel everywhere outside the North Americas. In 2007, I transferred to the US and was VP of Distribution
for North America, so I was responsible for the North American dealer channel and was involved in lots of the
early omnichannel efforts, which I’m sure we’ll talk about today. After that, I became VP of Finance for
Herman Miller’s healthcare division, where the healthcare provider is the main customer. Then in the last
couple of years I was with Herman Miller, I spent a year running a manufacturing plant in Wisconsin that
focused on seating for the healthcare industry and then did a six-month stint in mergers and acquisitions,
which included two European acquisitions, including the Hay brand that Herman Miller acquired in 2018.
Since then, I’ve left the industry. Today, I’m in the healthcare fintech space, working for a venture-backed
start-up.
[00:02:28]
Q: How have sales and volume shifted throughout the different furniture manufacturing channels during your
time in the industry?
PI: My experience is largely in the contract furniture industry, which is the sale of large projects to
corporations and government departments, which has always been around about a USD 12bn-14bn industry.
Sales were always through or with an independent dealer that is aligned with one of the major manufacturers
and that industry is heavily influenced by the architecture and design community. The two other channels you
think about when you think about furniture are obviously the retail channel and then what I term the big box
channel, so Staples, obviously, but OfficeMax and those types of places, so the office supplies channel. Herman
Miller for many years was really only in the contract channel, but increasingly in the last 10 years has focused
more and more energy on the retail channel. Also, over the last 10 years, there’s been a coming together of
trends, the trends and solutions between retail and commercial in that as the cubicle has disappeared,
assigned workstations have reduced in quantity. When you walk into most office buildings now, you’ll see lots
of different settings. Many more informal meeting settings, social settings, where they’re using furniture
products which can also be used in retail settings.
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[00:04:46]
Q: Can you help us understand the dealer network and its influence on the overall furniture manufacture
industry? What are key dynamics? How crucial is it to key manufacturers getting their products to the end
user? Why has it become such a proliferated channel?
PI: It’s a question you often get when people look into the contract industry. When you think about the
contract industry, there are four or five major manufacturers. Herman Miller, Knoll, Steelcase, Haworth,
Teknion-Global Group probably being the main ones. Everybody operates through their own dedicated
channel of largely independent dealers. The main role that the dealers provide is twofold. They actually
provide a consolidator role for the end user. In any furniture project, something like 60-80% of the solution
will come from the main manufacturer, but the remaining portion will come from a handful of what is
hundreds of other players in the industry. A typical furniture dealer will have their major principal like a
Herman Miller. They will have a portfolio of 12-20 other manufacturers they work with regularly to fill out the
offer, but they’ll also have on their shelves a catalogue of hundreds of other providers. The consolidator role is
very important for them and the end user. For the major manufacturer, what they’re doing is two things. They
provider services. They provide the detailed design and planning services it takes to specify out furniture for a
major office facility, so all the CAD drawings and all that work that goes on, but they also provide the local
installation services for the initial project. Then on an ongoing basis, they provide all the day two services to
support that client, so the move outs and changes that go on over time and keeping the facility looking good
and coping with the client’s growth.
[00:07:34]
Q: What macro trends are you monitoring in the industry across H2 2021 on the contract or retail side?
PI: I think that by far the overwhelmingly biggest trend to be watching is what does the post-pandemic work
world look like? Will people return to the office? Will they return full time? Will it be a hybrid model where
people have the choice of when they go in? Over time, as office lease renewals come up, will major
corporations simply be leasing less office space? Will they be taking up smaller footprints, or will they be
forced to invest more in making the office an attractive place where people choose to come and work? That
trend also has a very heavy impact on the retail furniture trend as well. A lot of Herman Miller’s growth in
retail in the last 12 months has come from people buying a great work chair, because they’re working from
home, they’re sitting in the chair for 8-10 hours and they need a comfortable chair to perform their work in. As
we all think forward, if working from home is something we all begin doing permanently, that’s going to lead
to changes in the way houses and apartments are designed and people will be spending more of their money
on the office or the study in the home.
[00:09:38]
Q: Can you give an overview of how Herman Miller has enhanced its portfolio over the last few years? It has
evolved from a fairly commercial environment to residential, then a mixture of residential and commercial.
How have its offerings shifted to encompass more of the current environment?
PI: If you go back, let’s say, 15 years, you’re right, Herman Miller was only talked about as being a player in
the contract furniture industry. It always had a small retail presence with its mid-century design classics, the
designs of Charles Eames, George Nelson, and also its seating products always found an outlet through
specialist retailers, but it was very small and there really wasn’t much focus on it. Over the last 15 years that
has increased. Retail was added as a segment with focus maybe 10 years ago. Then, as I say, the last 10 years
you’ve had this, what they call, I hate the word, but this resimercial trend in the contract sector, where the
solution set has altered. It’s made having those soft solutions in your portfolio even more important. Some of
Private and confidential 5
that, Herman Miller achieved internally through designing and launching products.
More of it was achieved through acquisition. Probably the two most significant acquisitions, one was the
Design Within Reach retail channel that was acquired, I think, maybe 12 years ago now. Which while it
obviously brought with it retail channel, both physical bricks-and-mortar design studios, but also an online
presence, but also Design Within Reach authors and commissions designers to produce products that they sell
under their own label in their stores. That added product channel. Then in 2018, Herman Miller acquired the
Hay brand, which is a young Scandinavian design brand, which is attractive to a younger generation, the not-
rich-yet, but with design aspirations. People who’d love to own a Charles Eames lounge chair, but probably
aren’t going to be able to afford it for the next 10 years, they found a product there in Hay that they could be
attracted to, so you start to build that lifetime connection with the brand there.
[00:13:02]
Q: You mentioned the resimercial trend, which I assume is building product offerings that are to be sold
through the commercial and residential sides. How have other players built out versatile capabilities? How
hard is it to build a presence in retail vs commercial? It seems the common-sense approach is making
products all-encompassing and universal. What are the challenges to building out product lines that appeal to
both residential and commercial customers?
PI: I think the place to start is to talk about what is the residential furniture and what are people doing when
they’re buying residential furniture? At one end, you’ve got almost this disposable mentality, where you’re
going to go to Wayfair or Ikea and you’re going to buy a product because it’s fashionable and it works for you
right now, but your expectation is it’s only going to last you 3-5 years. Maybe when you move to the next stage
of your life, you’re not going to take that furniture with you. On the other hand, when you think about the
contract industry, when you’re selling furniture to major corporations, one feature of the contract industry
that’s carried over into this resimercial sector is many products carry 10-, 12-, 15-year or even lifetime
warranties, which the major corporations hold the manufacturers to regularly.
There’s a very different quality standard required when you’re designing products for the contract market.
Where those products do have applicability in the retail channel is for long-lived items, so if you’re buying that
cherished item, like the Eames lounge chair, and you want to last it for your lifetime and potentially even as an
heirloom to hand on with the family, then you want those quality attributes of a product that is designed and
built to last a very, very long time. It’s not straightforward. One of the challenges they’ve had as they’ve tried to
play in both channels and cross the products over the channel, is getting clear about what the value
proposition is of the different brands. Making sure the consumer, whether that’s an individual consumer or a
corporate consumer, understands the choices they’re making when they’re making different product choices.
[00:16:00]
Q: You said that the contract industry has remained a USD 14bn industry for the last 15 years. Why continue
to invest in this segment when the pool of opportunity is stagnant vs retail’s many avenues such as new home
sales and work from home? Is there a margin factor here? What’s stopping Herman Miller and other players
making a more aggressive push into retail if building longer-lasting quality products in commercial requires
more investment?
PI: First of all, you’re absolutely right about the contract industry. It grows at the rate of GDP, it’s a very
mature industry, it’s a very competitive industry. Market share really hasn’t moved between the major players
any time in the last 20 years. Not a great, exciting prospect for investors, but, at the same time, just as Ford
can’t switch over to 100% electrical vehicles tomorrow morning, neither can the contract manufacturers
decide tomorrow morning they’re going to be 100% in retail. That just explains the previous question, the
product attributes are very different between the two industries and we haven’t even touched on the fact that
in the contract industry, you’re working with tremendous product variations, almost limitless catalogues, 20-
Private and confidential 6
30% of product is modified to order to some extent. It’s all just-in-time manufacturing, which is very different
to retail, which is limited portfolio, selling from inventory, being able to work with long international supply
chains. They’re two very different industries that both happen to sell furniture.
[00:18:37]
Q: How might Herman Miller’s July 2021 acquisition of Knoll improve its breadth and expertise across
channels?
PI: It is a really interesting one. I think the timing of it speaks to a lot of what was going on there, in my
opinion. As you just touched on the contract industries, it’s not growing. It doesn’t grow. When the acquisition
took place, they were actually in a mini slump caused by the pandemic. I think that’ll recover reasonably
quickly, providing people go back to work. How do you generate returns from there? One of the strategies,
obviously, is consolidation. You see that in mature industries all the time, so there’s consolidation play. I think
more importantly, the major opportunities will come in the ambitions of both Herman Miller and Knoll in the
retail space. Both companies have been following a fairly similar strategy. I touched on Herman Miller buying
the Hay brand from Denmark. Knoll bought Muuto from, I think they’re a Finnish company, but certainly a
Scandinavian company, for probably exactly the same reasons that Herman Miller bought Hay. Looking at it
from a Knoll perspective, Knoll’s major retail channel would have been Design Within Reach, which was
owned by a competitor, so that was probably creating them with challenges of access into the market and
pricing challenges, all of which have been solved by the acquisition.
Together they’ve got just a tremendous product portfolio without any doubt and by a big distance, the best
collection of mid-century design classics. They’re bringing the Florence Knoll alongside Eames and Nelson and
all that stuff. Lots of good things there. The questions when I look at it are around the contract side, because I
don’t see lots of easy synergies. I see lots of overlap. I see lots of not so much complementing products or
complete overlapping product. In every category, workstation, seating, storage, etc, both Knoll and Herman
Miller had all the bases covered. They both have very good solutions and their solutions, in some areas they’re
incredibly similar. Not immediately obvious how you take that and generate profitable growth out of that.
Certainly, I think the top-line growth could be challenging. Therefore, what I think they will deliver cost
synergies. I think they’ve got all sorts of synergies they can get in terms of manufacturing supply chain, the
obvious synergies of bring two large organisations together. I think they will be challenged to sustain and grow
their revenue in the compound channel, going forward.
[00:22:09]
Q: What does the overlap between Herman Miller and Knoll mean for Knoll’s integration, given these two
newly combined companies are probably trying to sell to the same customers? Could you outline the potential
disruption there, including supply chain impacts?
PI: My understanding is at the moment, they’re going to maintain both brands, operating at arm’s length
within the contract channel, which means they’ll maintain their products, they’ll maintain their separate
distribution channels, at least for the time being, which, to some extent, will avoid some of those potential
conflicts and challenges. I think that will enable them to get working on some of the back-room integration in
terms of common IT platforms, going after some of the supply chain savings, because I’m sure they’re both
sourcing from very similar companies, so just leveraging volume there. Then over time, my guess would be
that you’d say their R&D strategies begin to bifurcate, so would allow Herman Miller to maintain its focus in
the categories it’s best at, which is, without doubt, high-performance seating. That seating sells across all the
channels and maybe Knoll becomes the expert in the furniture solution, going forward, or something like that.
Herman Miller certainly has a much stronger reputation in terms of manufacturing. It’s a leader in lean. Knoll
often had a reputation for not being great in order fulfilment, on-time completion, things like that, so I’m sure
Herman Miller’s knowledge will leverage Knoll and help them drive some improvements from that side.
Private and confidential 7
[00:24:33]
Q: Knoll doesn’t have a strong international contract presence so Herman Miller will mostly gain volume and
market share from the acquisition. How might the company leverage these resources to expand more
aggressively in international markets?
PI: I’m a little out of date in terms of international markets, but if I went around the world, I would say not a
lot of difference between Knoll and Herman Miller in South America. Both largely depend on an export model
out of North America, working through independent dealers. Both brands held in high regard in the markets
they operate down there. In Europe, both Knoll and Herman Miller are smaller players than Steelcase and
Haworth. Steelcase is a market leader in France and Germany and Spain, and places. Haworth acquired lots of
brands in Italy and Germany, so they have a stronger presence there, whereas Herman Miller’s major presence
in Europe is in the UK and Ireland and the Middle East market. Knoll has a very small manufacturing
presence in Italy, does reasonably well in other markets, but not a major, major player in the way that
Steelcase and Haworth does. Bringing them together, I’m sure there are some opportunities for them to
increase their presence through combining their strategies in Europe.
Then as you move out to Asia, as far as I’m aware, Knoll never made any acquisitions in Asia, so whereas,
again, Steelcase, Haworth and Herman Miller all bought businesses in China in the last 15 years, Herman
Miller operates through the Posh brand, which gives them product and channel. I think Knoll was largely
operating, again, just as an importer out of North America over there. Bringing the Posh channel together with
the Knoll brand probably gives them opportunity for growth and profitability improvements for Knoll in
international.
[00:27:21]
Q: Are there differences in Herman Miller’s European contracts, dealer networks or any other intricacies that
may impact sales or margins? Are there fundamental differences between North American and European
contracts, such as regulations or overall preferences?
PI: It’s a good question. There are two or three primary differences. The most important one to understand is
actually buildings are different in Europe, compared with the US. The way power is distributed to the user in
Europe, most of the time that’s achieved through electrical distribution distributed through raised flooring.
Whereas here in the US, getting power to the US so often achieved using the furniture solution, so the power is
attached to the panelling and travels to the user through the panelling, so because the building is more
intelligent in Europe, the furniture has tended to be dumber, if you like. For many, many years, the furniture
solutions between the US and Europe were very, very different. The European product was lighter,
dematerialised, no high panels, very, very simple desking solutions. The markets have come together some in
the last 10 years, but they are still different.
In terms of the desking workstation solutions, it’s different products sets that sell between the two markets. If
you figure out storage, well then you’ve got different paper sizes and planning is metric vs planning with
imperial so those solutions are different as well. Where Herman Miller has been able to leverage, it’s always
been through the high-end seating, so the Aeron, Embody Chairs and things like that. They sell across the
world in all markets, so they’re able to leverage their investment in those products, but in all other products
it’s been much more difficult. Probably the final difference is really just the scale of the customer in North
America is very, very different, when you’re working with a Goldman Sachs or JPMorgan, who’s got hundreds
of thousands of employees in offices. You don’t get very many of those in Europe. Although there’s a single
market, it’s made up of 15 or 20 different countries and every country has different things they value, whether
it’s aesthetics or finishes or many other different things. It’s why, when you look into Europe, you’ll see the
players here often have different brands and companies in each of the different countries. It’s very difficult to
get scale and leverage in Europe.
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[00:30:32]
Q: How can Herman Miller continue its strong growth in retail? Is the company doing anything differently vs
any other players? Is it just benefiting from overall category demand from the work-from-home environment?
PI: Short term, it is the category growth that’s delivered the growth and profitability for them in retail. A very,
very large percentage of that will come from selling the seating to people in the home. You will see actually,
Herman Miller has added a new focus, a new category. They’re now focused on the gaming chair. They’re
hiring gaming ambassadors and trying to reach out to a different new audience. The gamers, again, are sat in
the same place for many, many hours at a time and saying, “Get yourself a great chair to sit in.” The office
chair, not the office chair, the task chair will always be very, very central to what Herman Miller does. Their
retail strategy is really addressing people who have design aspirations and design awareness, who are looking
for designed products by named designers and that’s the part of the market they’re in.
They certainly have opportunities in terms of categories of product. For instance, they do very, very little in the
bedroom today. That gives them the opportunity for growth there, as they reach into some other segments.
Design Within Reach helps that, because it means they have the ability to demonstrate those settings and
rooms and maybe attract people to think about Herman Miller in the bedroom, not just in the office. For them
to go a long way in retail then, the question would have to be, can they get into the volume market, the sorts of
volumes that Wayfair would be doing, or whatever channel it is that Joanna Gaines is selling her product
through. How do you approach those sorts of volumes in those markets which are more price-sensitive, less
aware of the designers that are involved.
[00:33:16]
Q: What would it take for Herman Miller to get into the volume-centric market? We touched on the dealer
network and its importance on the contract side. Could you discuss the omnichannel strategy on the retail
side, including the need for designers or design capabilities?
PI: The first question about what does it take to get into that volume sector, I think a lot of that has to do with
the branding and what your brand allows you to do and how far you want to stretch your brand. If Herman
Miller wanted to move into that volume, lower-price segment where it’s more disposable, then they probably
wouldn’t want to do that with the Herman Miller brand, because you don’t want Herman Miller furniture
that’s falling apart and breaking after four or five years because maybe the consumer doesn’t understand they
bought the lower end of Herman Miller and it creates a poor conversation for the overall brand. Branding
would be a big part of how they do that. They have their supply chains, they have the contacts in China. In fact,
the Hay brand is very, very good at leveraging lower-cost supply routes. They almost exclusively make their
product in eastern Europe and China, so they can deliver lower-cost price points if they need to.
NH: Why hasn’t the industry been more aggressive on an omnichannel strategy?
PI: Certainly, omnichannel was something we talked about when there was investment in both the Herman
Miller online presence and the Design Within Reach online presence. I know that investment has stepped up
since I left. If you look at the leadership that’s been on board the last three years, with Andi Owen has come in
from Banana Republic and some of the people that she brought in from Boston Consulting. Lots of very, very
strong retail experiences brought in there, so I’m sure what they’re doing in omnichannel today is a long way
ahead of what was happening three years ago, when I was closely involved.
Private and confidential 9
[00:36:29]
Q: How sustainable do you think the explosive demand is on the residential side? If demand tapered off, how
much pressure would it put on Herman Miller to reorganise and be more cost-effective?
PI: I think for sure what we’re seeing at the moment is a short-term growth driven by the home working and
people buying chairs, no question about that whatsoever. The advantage of that, what it does do, is give them
the time and space to make the investments in the other categories, so that the segment as a whole becomes
more sustainable for them. I’d be looking at them and looking at what they’re doing in other product
categories, what they’re doing to reach out to be able to address all the needs in the home and not just be the
deep specialist in one area. Ever since the Design Within Reach acquisition, the question is what happens in a
downward cycle? They’ve got 35 or 40 retail leases around the country, which, if it was anything like 2008,
would be a lot of fixed cost that they wouldn’t shake off. In contrast with the contract segment, where Herman
Miller has had a very good reputation for managing a very good variable cost structure and being able to flex
well with the cycles. Yes, there are challenges and opportunities ahead of them, but I know the management
team there is very focused on it.
[00:38:26]
Q: How would you assess Herman Miller’s ability to command strong pricing in the contract, commercial or
retail sides?
PI: On the contract side, all the major manufacturers would have regular price increases every 12-18 months
and would always make a portion of that pricing stick. What was happening is, if you look at the major
manufacturers, they have long-term contracts with the large corporations and government departments and
they’re able to apply price increases to those long-term contracts, so that’s the side that sticks. The side that
doesn’t stick is in the competitive bidding on the next large project that comes up, where, although it’s not
exposed to the customer, everybody is pricing on a cost-plus-margin basis. The customer generally doesn’t feel
the impact of the price increases in that space. On the retail side, one of the things Herman Miller did working
with Boston Consulting was look at pricing, and they were able to exploit certain pricing inefficiencies and
they actually increased their pricing quite significantly in some areas and were able to make it stick. They also
looked at the promotion campaigns and how they used pricing and free shipping and things like in those
promotions to drive volume as well, so because they’re not playing in that super-sensitive, high-volume
segment, they’re able to manage pricing pretty well.
[00:40:32]
Q: Could you outline the supply challenges you noticed during your time in the industry? What impact do they
have on the ability to meet demand or lead times?
PI: Right now, furniture is going to be facing the same struggles that everybody else in terms of stretched
supply lines, shipping challenges. They’re seeing increased shipping costs. I’m sure their expediting costs have
gone through the roof, as they’ve got to rush parts over from the Far East to get them into the market here, so
you have that. If you look back through Herman Miller’s press releases over the years, you’ll see from time to
time, commodity pricing will be a challenge. Steel pricing is the commodity that impacts the industry the
most, followed by plastics and wood. When there are shortages of steel, the prices increase, the industry does
struggle there, but, at the same time, at different times, they’ve been able to implement pricing surcharges, or
brought through, put through short-term price increases to offset some of that.
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[00:42:02]
Q: Herman Miller claims to have introduced more than 17,000 new products to its retail portfolio. How much
pressure does managing that many SKUs put on the company? Is it perhaps better to be leaner? What would
you say is the optimal SKU mix?
PI: You’re right, the catalogues, they’re almost infinite actually. Even if you just think about the Aeron chair,
you can have choice of different casters, you can have different base metal finishes, you can have different
fabrics, with arms, without arms, with locks, without, there are the variations, so even for the Aeron chair
you’ll get to 100,000 permutations very, very quickly. What it means is the industry has been very, very good
at supply chain management, inventory management, just-in-time manufacturing. It’s the reason that the
contract industry is largely an onshore industry and has never been seriously threatened by Asian
manufacturing, is because the very high variation, plus the customisation that I touched on earlier, all
delivered just-in-time in about eight weeks. I think it’s both a strength and it’s a weakness. If you try and move
away from it, if you try and limit SKUs, what you’ll find is the architects and the designers, they will keep
stretching you and pulling you to get exactly the solution that they think that they need for their particular
client and you end up going back into doing more and more customisation work. Of course, the retail side is
very different. In retail, you can manage the offer tremendously, so although they sell the same Aeron chair,
they wouldn’t have anywhere near the number of SKUs in retail than they would on the contract side.
[00:44:35]
Q: You alluded to Herman Miller consulting with Boston to take advantage of price arbitrage opportunities.
What pricing trends have you noticed across categories? Have some categories been more able to hold onto
pricing or pass it through vs other categories?
PI: It’s not just pricing. It’s actually the solution. If you start with the workstation and you think back 15 years,
and everybody was in high-panelled cubes, and if you were in the banking world that would be finished out
with veneers and things and it wouldn’t be unusual to be spending USD 5,000 per person to see people in a
workstation. Over the year, the panel heights have come down. As we’ve moved from PCs to laptops and
mobile devices, and the size of the workstation has got smaller, we’ve done away with dedicated workstations
to where you’ll get a group of people working quite closely together. You can get down to the situation where
today, the spend per person is down to USD 1,000 or even less in extreme circumstances. It’s not so much the
price of the individual widgets that are being sold, but the dollars per user have reduced tremendously over the
years. In the contract furniture world, the workstation always has received the most focus and that’s the most
competitive, and that’s always been the most challenging to sustain margin and increase pricing on. For
Herman Miller, one of the reasons they’ve always focused on the high investment in the task seating, is they’ve
always been able to drive differentiation, which has sustained superior pricing and margins.
[00:46:48]
Q: How does the showroom aspect play into the retail market? How do they enable companies to get closer to
the consumer and immerse them in the product? What marketing and brand outreach have you noticed from
Herman Miller or other competitors? How do they ensure the consumer knows who the company is, what the
offering is and how it can be purchased?
PI: I think there are several things been going on. One thing Herman Miller has done in some of the major
markets, certainly in New York and Chicago, is to attempt to bring all their brands together into one location.
With Design Within Reach and the retail presence on the ground floor and the contract brands and support on
the upper floors of a single building. That’s been very successful for them, both in terms of brand presence and
it’s a more efficient way of managing their facilities footprint. I think the other major thing that’s been
happening is investing with and through the dealers, so the dealers’ showrooms and settings are of a higher
standard, which tell the Herman Miller story stronger than many they did in the past. There have been periods
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where the dealers’ presence wasn’t managed as well as it should have been, so there was a varied telling of the
Herman Miller story market by market, which I think they’ve addressed in the last few years. Then recently, I
think they’ve also added a new concept, so they’ve got the Design Within Reach retail, but then actually within
the last, actually it’s within the last 18 months, that they’ve actually introduced Herman Miller seating stores,
which are, I think, relatively small, but are places where people can just go and see and sample and try the
seating, which is so central to the offer.
[00:49:23]
Q: What under-appreciated aspects of the Knoll acquisition do you think investors should pay attention to?
PI: I think maybe the under-appreciated one is actually textiles. Herman Miller owns the Maharam brand.
Knoll has KnollTextiles and Edelman Leather and I think a couple of other textile brands. I think they’ve
created a real textiles powerhouse by bringing those different brands together, so it’ll be interesting to see
what they do with those, going forward. I think otherwise, to me, I’m looking more at how do they resolve the
overlaps? You’ve got Hay and you’ve got Muuto. Do you really need both of those? If you do, how do they play
together or how do you maintain the separation between them? I think they’ve got lots of work to do in terms
of the portfolio there. As I said earlier, I think I’d fully expect to see maybe Knoll spend less time trying to
catch up in the seating area and they may be given the lead on the furniture side a little more. I think they can
leverage their respective strengths in different parts of the furniture portfolio.
[00:51:00]
Q: How does Herman Miller’s high SKU count affect inventory management? It sounds chaotic. Has the
company ever been unable to meet demand for SKUs that have taken off quickly?
PI: I’m not aware of there ever being particular challenges, other than at the very early stages of a product. If
you have a product that takes off quickly and the supply chains are limited, the first 6-12 months of a product’s
life can sometimes be a bit rocky, but it stabilises quite quickly. Particularly for the seating, Herman Miller has
such a finely tuned, just-in-time manufacturing process and you can see the videos online. They’re knocking
out an Aeron chair every 20 seconds and every chair that comes down that line can be a different spec. They
don’t manufacture in batch. They manufacture each thing to order. It’s a fairly short supply chain for the
seating there. Where the supply chains are getting longer would be in other areas, in soft seating, sofas, if they
move into bedding, things like that, then those supply chains will get longer and predicting the demand could
be more challenging and you could see some more interesting sales at the end of periods, I would imagine.
[00:52:40]
Q: Could you expand on Herman Miller’s category offerings on the contract side? Contract has performed
badly due to the pandemic, although some pockets such as health seem to have opportunities. Could you
outline the trends here? Does the company have the category offerings to push into healthcare or is money
flowing from all aspects?
PI: Again, good question. Often when the commercial side of contracts has been down, government spending
has been up. In fact, Knoll and Herman Miller are number one and number two in terms of suppliers to the
government through GSA. They’ve both always been very good on the government side. Herman Miller has
had a focus on healthcare. They’ve actually been in healthcare for 50 years, but it was named as one of the
segments and over the last 10-12 years, they invested in the Nemschoff brand, they did some product designs
in that category. They’ve always been focused on that segment and there are always opportunities for growth
there, and it’s a relatively complex industry to supply. It’s got different quality needs, it’s got different
purchasing channels, things like that, so you do need to focus on it. After that, there’s higher education and
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both Knoll and Herman Miller focus on higher education, would look to be doing more on that category.
Yes, there are always some areas that they can focus on, but you’ll always come back to the fact this is a pretty
mature industry. Beyond the top five or six players, there are hundreds of people in this, hundreds of
manufacturers in this industry. There are not tremendous barriers to entry in the industry, so it’s very difficult
to find an underserved niche which you can exploit for growth. I would actually contrast, Herman Miller and
Knoll had the focus to grow into the retail sector and their brands allowed them to do that. Steelcase has been
the one that’s doubled down on the contract segment and said they’re going to be the masters in the contract
segment. I would imagine they’re probably the most challenged right now. Haworth is privately owned.
They’ve done a very nice job of growing over the last 25 years in the industry. They acquired a lot of
resimercial products, particularly from Italy, themselves, so they potentially may have some opportunity for
growth in retail as well.
[00:56:03]
Q: Why do you think Steelcase decided to double down on the contract side?
PI: I think for them to move from that segment, they’ve probably got a bigger challenge than anybody else,
because they don’t have the design associations of anybody else. Their designs are mostly in-house. They don’t
credit their designers in the way other people do. They’re the market leader. Before the acquisition of the
combination of Knoll and Herman Miller, they were nearly double the size of everybody else. They’re super
strong in the finance, insurance, real estate markets, so get among the big banks, and they dominate. Yes, I
think it would be difficult for them to try different avenues to move into.
[00:57:14]
Q: Is anything commonly overlooked in contract or residential furniture manufacturing that investors should
pay attention to?
PI: I think you did a good job. You touched on the areas, the big SKU counts, the customisation that takes
place. The importance of this independent channel. It’s an industry, it operates in its particular way. It’s very
mature, it’s very established in that and it’s an industry that’s not going to see a lot of growth going forward. I
think you’ll always have to pay attention to the macro and the economic trends when you look at the industry.
It does track GDP fairly closely with a little bit of a lag and then the things that really changed the trend over
time have typically been technology changes. Go back to the adoption of the PC and then the move from the
PC to the laptop or the laptop to mobile work, and it’s been those kind of technological and social changes over
time that are the times when you want to take particular interest in the industry, but I think we covered all of
it.
[00:58:58]
NH: Paul, I think that’s a good place to end the Interview. Let me close by saying thank you for your time and
input today. Clients, thank you for joining Third Bridge Forum's Interview today. If anyone would like to speak
with Paul in a private call or meeting, please let your relationship manager know. Paul, thanks again.
Transcription ends at 00:59:08 of the recorded material
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