Steelcase – Office Furniture Recovery Prospects amid
Higher Inflationary Backdrop – 28 June 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Tim Fennema (TF)
Former Director, Corporate Strategy at Steelcase Inc
Agenda:
1. Competitive dynamics across the office furniture industry
2. Steelcase's (NYSE: SCS) portfolio update across work-from-home and learn-from-home products
3. Global distribution disruptions and supply chain challenges including freight, labour and raw
materials
4. Office furniture recovery outlook for H2 2021 and 2022
5. Near-term risks and long-term expectations
Contents
Q: What’s your overview of the office furniture manufacturing industry? Could you discuss the main
subcategories and drivers?
Q: What were 2-3 trends you followed within the industry pre-coronaviurs?
Q: How have industry trends been altered by coronavirus for suppliers such as Steelcase and Herman
Miller? How did their strategies change in the pandemic environment?
Q: What’s your overview of Steelcase’s business and its competitive advantages in the office furniture
manufacturing market?
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Q: Could you elaborate on Steelcase’s product assortment vs other industry players’? I believe Herman
Miller and Knoll also play in some of the same categories, but there are other categories that they play in that
5
I don’t believe Steelcase does.
Q: Could you discuss the dealership network relationship and its importance for distribution in this
industry?
5
Q: How would you assess Steelcase’s performance during the pandemic? Where would you say most of the
shortcomings have stemmed from?
Q: Could you discuss Steelcase’s hyperfocus on the dealer distribution channel vs other channels such as
residential, and other ways to diversify their product offerings? What are the pros and cons of focusing just
on commercialisation and office furniture?
Q: Why do you think Steelcase decided to focus exclusively on the office or commercial channel rather than
opportunities within channels such as home office?
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Q: Could some of the challenges Steelcase would face shipping to residential homes be offset by passing over
7
to the retailer? Are there avenues where consumers could purchase these products through a third party?
Q: You mentioned Steelcase’s products are built to order, not built to stock. How does the company’s
product offerings and lead times compare to those of other players who can meet demand more quickly?
Q: What’s your overview of Steelcase’s channel strategy across verticals and customer segments, without
naming customers directly? How has that evolved throughout your time at the company? Could you discuss
the strengths of its channel strategy?
Q: Are there any verticals that stand out as areas Steelcase is strongest in? Does the company lack a
competitive moat in any verticals because of lack of scale or too many market entrants? Which verticals
would you note the most competition from? Where do you think the barriers to entry are too high for other
players to successfully enter?
Q: Steelcase seems not to believe that work-from-home is a viable model. Why do you think the company
isn’t reinventing itself to offer products that can meet customers at their houses, and working to overcome
logistical, freight and installation issues by offering a simpler product assortment?
Q: If Steelcase considers working from home as a short-term event, would it be wise for the company to
double down on this strategy and aggressively scale up?
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Q: How does Steelcase differentiate itself in product assortment? Why would a dealer want to take on its
product and pitch it to clients in new areas? Does the company’s product quality or design make it attractive
for businesses? Could you discuss its competitive moat around product quality and assortment and what the
customers care most about?
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Q: You touched on material shortages and lumber pricing. Could you discuss any inflationary pressures
impacting Steelcase or the industry? How much flexibility do manufacturers have to pass on price increases?
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Given the forms of contracts, do they have to take the brunt of many of those shortages?
Q: Could you assess Steelcase’s ability to quickly adjust capacity where demand drops off? How capable is
the company to meet unexpected demand from quicker-than-expected rebound in office environments, given
you mentioned plenty of talk from CEOs and employers to get their employees back into the office very
quickly?
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Q: Could you discuss contracts and dealer relationships around smaller business contracts vs the large
commercial clients, when it comes to financial and insurance firms? What are some trends you’ve noticed
around dealerships working with smaller players to gain business vs there only being a finite number of large
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players?
Q: What challenges do players face when operating on a global scale? Are global and US players facing
pressure from other players who can produce products at lower commodity price bases? How has this
affected the industry throughout your time?
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Q: How does the pandemic environment compare on commercial contracts to the 2009 financial crisis,
where many large finance players also had a large reduction in their headcount and demand? Is there
anything we can glean from that period that could be similar?
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Q: What could the office furniture manufacturing industry do to manage labour costs, given it seems a highly
labour-intensive process? What is your assessment of automation and the difficulty in producing these
products? How labour-intensive might they be and how has that affected costs?
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Q: Could you discuss industry consolidation and how it has evolved throughout your time? Do you think
Steelcase has missed opportunities during the pandemic to be more aggressive?
Q: Could you discuss innovation in the office furniture manufacturing market? How could Steelcase
continue to set itself apart throughout H2 2021? Where could it focus or prioritise innovation, whether on
product assortment, continuing to automate facilities or logistics? Where could it improve?
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Steelcase – Office Furniture Recovery Prospects amid
Higher Inflationary Backdrop
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Steelcase – Office Furniture Recovery Prospects
amid Higher Inflationary Backdrop. I’m Nyree Hinton and I will be facilitating today’s Interview with Mr Tim
Fennema, former Director of Corporate Strategy at Steelcase Inc.
Tim, before we start today’s Interview, please state I agree or I disagree to the following statement: You
understand the definition of material non-public information and agree not to disclose any such information,
or any other information which is confidential, during this Interview.
TF: I agree.
NH: Thank you, Tim. Could you start by discussing your background and various roles you’ve held in the
industry?
TF: I was with Steelcase for 25 years. That included a stint as Director of Corporate Strategy, as Nyree
mentioned, and also as Director of FP&A and Director of the Americas Finance. That was pretty much my last
10 years at Steelcase. In those roles, I handled a variety of analytics and competitive information about the
industry.
[00:01:15]
Q: What’s your overview of the office furniture manufacturing industry? Could you discuss the main
subcategories and drivers?
TF: There are a few main players in the industry. You have Steelcase, you have Herman Miller, which just
bought Kimball, and then you’ve got Knoll and then you’ve got HNI, and Teknion plays another role in there.
Those are the major players, and then the rest is pretty fragmented throughout a lot of non-aligned
manufacturers that go through all the dealerships that are, say, industry-specific dealerships or supplier-direct
relationships.
[00:02:16]
Q: What were 2-3 trends you followed within the industry pre-coronaviurs?
TF: One was, I’ll call it the residentialisation of the industry. What we were seeing is a lot more emphasis
placed on ancillary spaces, so you’d think of work cafes, spaces where they were not necessarily owned by a
person. We were seeing that happening quite a bit, and then also the need for flexibility in spaces, as well, so
spaces that could transform from an I-space to a we-space type of thing, where you could have teams that
would come together at certain points in the day and then go do their separate work, and have furniture that
supported that.
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[00:03:17]
Q: How have industry trends been altered by coronavirus for suppliers such as Steelcase and Herman Miller?
How did their strategies change in the pandemic environment?
TF: I think what you’re starting to see, if you look on some of the websites, is a transformation of safety along
with being able to collaborate, people feeling safe at work, and then actually having work be a place where
people want to come to rather than working at home. With everybody working from home for a big portion of
the time, some people are saying, “I like that,” so how do you make those spaces attractive and have them feel
safe for people to come back? You’re seeing some things added like Plexiglas shields or fabric things, things
that move up and down on a desk that can be modified to support those types of environments. It’s not
something that wasn’t thought of, I think, at points in time, but it just has become more prevalent since
COVID hit.
[00:04:41]
Q: What’s your overview of Steelcase’s business and its competitive advantages in the office furniture
manufacturing market?
TF: I think Steelcase’s primary competitive advantage is their dealer network. They have the best dealer
network in the world, in my opinion, at least. They are able to keep that network together and be able to
address all of the major markets, and even not-major markets, within the United States and Canada. Then,
they’ve done other things to solidify their position, both in Europe and around the globe, probably better than
anybody else, in terms of handling global accounts and things like that from a logistics standpoint. My opinion
is they’ve been able to handle the global piece of it much better and faster than anybody else has. When I was
there, we were thinking about that probably as much 10-15 years ago and what the transformation would be
for that. Other companies have followed, but they had a jumpstart on all of that.
[00:06:04]
Q: Could you elaborate on Steelcase’s product assortment vs other industry players’? I believe Herman Miller
and Knoll also play in some of the same categories, but there are other categories that they play in that I don’t
believe Steelcase does.
TF: Steelcase concentrates on the companies themselves, whereas Herman Miller has really deflected into the
residential piece of it. When they did that with the residential piece, they bought DWR. With Knoll, it’s more
designer-focused, and I’ll call it one-off pieces, if you will. Steelcase really focused on its customers and what
was driving them, and they also focused on share within the dealership. When I was there specifically, we
looked at other suppliers that were coming into the dealerships and how we could address those things. That
was a big piece of what we were looking at, and how to manage through some of the things that were
happening within the dealerships.
[00:07:36]
Q: Could you discuss the dealership network relationship and its importance for distribution in this industry?
TF: It’s more of a partnership with the dealers, so the dealer principals are very important, and then how the
dealer’s salespeople work with the Steelcase sales team is also very important. A lot of the Steelcase
salespeople are really focused on account management, whereas the dealer’s salespeople are really the day-to-
day, in the town, in the city, know what the projects are, bring those forward and head up the bids with a
Steelcase person. It’s a really close, tight-knit partnership with the dealers. When you look in terms of
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furniture itself, they all have their major categories, seating systems, storage solutions, etc. Really, what
happens is, in that realm, it’s more important to focus on the applications of the furniture and not just the
items themselves. I think that’s where Steelcase has had an advantage, in terms of applications and meeting
the customer’s needs when it comes to a project, or when it comes to something else like a continuing type of
agreement and standards and things like that. They really focus on what the customer wants specifically and
the applications around that.
[00:09:21]
Q: How would you assess Steelcase’s performance during the pandemic? Where would you say most of the
shortcomings have stemmed from?
TF: I think they reacted very quickly to COVID-19, at least from what I could see in the news. I know they
were in the middle of a lot of projects. They hunkered down a little bit with the shutdowns, and then really
monitored the space and did cost-cutting measures and things like that to maintain profitability. Obviously, it
affected everybody in the industry, specifically Q1, Q2 last year. As things start to open up, I think you’ll see
things start to come back, and then I think the biggest thing is the use of space going forward. Anytime there’s
churn in the industry, it creates volume. As customers are now reassessing what they want their space to do or
look like, it’s going to require that they look at that space differently, and that always creates some level of
demand as people try to come up with new solutions and make their employees happy in those spaces.
[00:10:59]
Q: Could you discuss Steelcase’s hyperfocus on the dealer distribution channel vs other channels such as
residential, and other ways to diversify their product offerings? What are the pros and cons of focusing just on
commercialisation and office furniture?
TF: You have to maintain a strong dealer network in order to satisfy that, so that’s one thing that you’re wed
to at that point. The other thing is, looking at the change a few years ago, what happened was space in new
construction even became less about drywall and more about furniture, so we said furniture was the new
infrastructure. As even real estate firms wanted to invest in buildings and things like that, they would want
some flexibility with their tenants, etc, what a space may look like, and rather than investing in brick-and-
mortar drywall-type solutions that were more permanent, they were using furniture to fit out those spaces and
then adjust. That’s one trend that I think has continued and will continue to happen, so partnership with real
estate companies is also important. You look at the JLLs of the world, the CBREs, those types of companies
and what they’re doing with commercial real estate, that’s going to have an impact. Vacancy rates obviously
have an impact.
Then, what those companies want to do with their spaces that they have available to attract tenants is also
going to be important, and furniture can play a major role in that. They do have an online presence and they
do do online sales, but I would say the vast majority of it goes through that distribution channel with the
dealers. I think the same is pretty much true for the other people in the industry. Even if they have an online
portion, it’s a fairly small piece. The bigger portion with somebody like Herman Miller is going to be DWR,
something like that, but for the most part, all the major manufacturers are still really focused on the dealers
and the customer. They don’t have their own installation crews, they don’t have their own ability to have a
sales force of 3,000 or 4,000 people, like the dealers, if you add them all up, might have.
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[00:14:03]
Q: Why do you think Steelcase decided to focus exclusively on the office or commercial channel rather than
opportunities within channels such as home office?
TF: There are a couple of different things when you get into residential. There are different safety
requirements when you start to go into homes and houses, so that’s one item. Vs just a business standard or
something like that that you have to have, now you’re talking about consumer safety, which is a whole
different thing, so you have to really watch some things there. All the manufacturers have to do that, and it
does increase your risk a little bit from that standpoint. The other one is installation itself. You either have to
make it really easy for people to assemble in-house or have it be a desk or a chair or something like that, and
then you also have a logistical nightmare when you do that, because you’re shipping truckloads of furniture to
either a dealer or to a job site. You’re not shipping it onesie-twosie to people’s houses, and it’s made to ship
that way. We actually had a FedEx pact, if you will, for certain things because of the damage that we would get
associated with some of that. There are all kinds of things, everything from freight, logistics, installation, that
add a whole other layer of complexity. Even the last mile becomes a really hard thing to do when you’re
shipping to people’s houses, and that can get really expensive really fast.
[00:16:01]
Q: Could some of the challenges Steelcase would face shipping to residential homes be offset by passing over
to the retailer? Are there avenues where consumers could purchase these products through a third party?
TF: They could, absolutely, but the dealers can do that, too. You could walk into a dealer showroom and say, “I
want a new desk for my office or a new chair,” or whatever, and you could actually buy that. They might even
have it in stock in their warehouse, where you could get something like that. It’s not to say that you couldn’t do
that. If you were going to pack it up and stick it in the back of your truck or whatever, you could easily do that.
The issue becomes, sometimes, just the scale of being able to handle that and do that. The dealers just weren’t
set up that way. They were set up more to go after the business-type opportunities within a city, and they’re
very entrepreneurial. Not to say that some of these haven’t changed. I’m sure they have.
If a company has a work-from-home programme, those things can take flight, too. I know that they’ve satisfied
some work-from-home programmes, as well, but again, those become a logistical piece, because you have to
get the order in from the customer, you have to know where to ship it, you have to have lead times, etc. Then,
how do you pay for it? How does the company pay for it? How does that all internally work to get that order
through? The other thing you have to remember is that most of the industry is built to order, not built to stock,
and so the building-to-stock piece is something that the industry historically hasn’t done. If you look at
Steelcase at the time I was there, it was basically a USD 3bn job shop. You could order any fabric, any colour,
paint, all that kind of stuff, and it was made to your specifications by the order. If you have individuals coming
in, then that adds a lot more complexity vs somebody shipping 1,000 workstations to a specific job site or
customer.
[00:18:18]
Q: You mentioned Steelcase’s products are built to order, not built to stock. How does the company’s product
offerings and lead times compare to those of other players who can meet demand more quickly?
TF: I think lead times within the industry are pretty standard four- to six-week lead times, except for specials
or things like that where you have some engineering work you have to do to accomplish that. I think those are
a little bit different, but standards are 4-6 weeks. The online presence, when I was there, we had a ship-in-five-
days programme, so there were select items and specific fabrics and a limited selection that you could get
within five days. Those types of things exist at all the suppliers. One of the things that customers also look at is
fulfilling items if their work environment should change. Say I hire a person, and I need a desk or a chair or
Private and confidential 7
whatever. I can order it right off my standard and get that within a couple of days from the dealer. Some
dealers will stock for major customers and things like that, as well.
[00:19:43]
Q: What’s your overview of Steelcase’s channel strategy across verticals and customer segments, without
naming customers directly? How has that evolved throughout your time at the company? Could you discuss
the strengths of its channel strategy?
TF: I think everybody tracks the same vertical markets, so I’ll speak to that. I think that’s the primary thing
that they’ll talk to on analyst calls, as well. If you think of the business in tranches, you’ve got the government
business, which is obviously their lowest-margin business, but can be pretty good volume depending on their
spend. That’s one end of it. On the other end, you’ve got the online piece, or you’ve got the retail piece which is
really good margins but it’s not as much volume. You’ve got those two bookends to it. Then, in the middle,
you’ve got project business, like I said. These are major projects that are going on, somebody is building a
building, wants to outfit the whole thing, etc. You’ve got that type of really competitive business, but it gets you
in and then you become the standard, and then you get that continuing business off of that contract for the
project.
Then, you’ve got continuing business, which is you’ve got a relationship with a customer or whatever and that
continuing business continues to happen. Those get rebid probably every 3-5 years on a continuing contract,
and those will take place. Then, if you look at verticals, I think Steelcase transformed over the years from being
highly dependent on the insurance and financial markets, those types of customers. You look at a Chase or an
AIG or places like that, Allstate is another big one, where you’ve got big customers that have this demand for
their product, and when that industry can tank like it did in 2007 (audio cuts out 22.14). (Awaiting
reconnection 22.14-23.53).
NH: Could you continue discussing Steelcase’s hyperfocus on insurance and financial customers and how that
transitions to other segments?
TF: It was exposed in 2007-08 but, even before then, had started to really transform out of those verticals into
other vertical markets. You saw, with the advent of companies from the Valley and things like that, that whole
area of the country has grown huge over the last 15 years. They’ve been a part of that, and having strong
dealers in that area or a strong dealer in that area has led to that. Same thing with, I would call it southern
California. Those types of things Steelcase was ahead of and addressing, so it wasn’t as exposed as it could
have been, probably, in the 2008 financial crisis. When I was there, we continued to try to broaden the vertical
markets as much as we possibly could, to alleviate some of that risk of being all in one place or all in one
vertical and having some risk that we shouldn’t have associated with that. When you look at other verticals,
there are a handful that they track, so technology, IT, those types of companies, at the same time as some that
you even have a hard time classifying, although everything is really done off the codes to really classify the
companies. The other one that they’ve grown a ton in over the years has been healthcare, so that whole advent
of the healthcare industry and how that looks and where they could service that. That’s another one, as well.
NH: Do you think there are any synergies among Steelcase’s verticals?
TF: I don’t know that there are synergies necessarily between them, but there definitely are items that are
designed specifically for certain verticals like healthcare. Then, they also take other items that are designed for
anybody, and maybe customise those to a specific vertical market or things like that. A lot of that, like I said,
could be specials, too, in terms of what they do for a specific situation like branches in a bank or something
like that. They might be able to do something there. Where somebody else couldn’t do it because of scale or
logistics or whatever, they’ve been successful in doing that, as well.
Private and confidential 8
[00:27:12]
Q: Are there any verticals that stand out as areas Steelcase is strongest in? Does the company lack a
competitive moat in any verticals because of lack of scale or too many market entrants? Which verticals would
you note the most competition from? Where do you think the barriers to entry are too high for other players to
successfully enter?
TF: I think there are some that are really focused on price. I think finance, for example, the banks are really
focused on price. That’s what they really care about. Where you see very analytic-type verticals, they can be
like that. Where you see other ones where it’s attracting people, they’re less focused on price and more focused
on, “Can I get the right applications and the right environments for my people?” In that case, it’s more of an
attraction-retention tool, and they’re thinking about it more of an HR perspective of, “If I’m going to spend
this much to hire this person, I don’t want to have to replace them in six months or a year or two years. I want
he or she to be happy where they’re working and not have that be an issue.” That happens, for sure, so there
are some vertical markets that are more attractive from a margin standpoint because of that. When you look at
the applications in that kind of way, that’s actually where Steelcase stands out, because (audio distorts 28.59-
29.07) to walk into the (audio distorts 29.09) goes, “I don’t know what it is but I want this,” kind of thing,
because the headquarters were basically a showroom. They would see it, and they would see people working
and collaborating and getting stuff done and they were impressed by that, so (audio distorts 29.24). Getting
them to visit was a really important sales tool to drive some of that competitive advantage for Steelcase.
[00:29:40]
Q: Steelcase seems not to believe that work-from-home is a viable model. Why do you think the company isn’t
reinventing itself to offer products that can meet customers at their houses, and working to overcome
logistical, freight and installation issues by offering a simpler product assortment?
TF: This is all what I believe, because I haven’t worked there during COVID so I don’t know specifically what
the conversations they’ve had are about that, but I do know that, when you have a strategy in place, they’re
going to follow that strategy. They’ll modify it, but they’re not going to swing it for something that could be a
potential short-term type of thing that’s going to affect the long-term piece. Obviously, they’re feeling that it’s
not going to be a long-term solution to work from home, and you’re starting to see that, I think, from
comments that CEOs have made about getting back to the office. I think you’re seeing some surveys come out
now where people might work a day or two from home, but they’re going to be three or four days in the office
eventually. Things are starting to open back up, obviously, and overall, they’re anticipating that this is going to
happen. I think one of their things is, if it’s a long-term type of play, obviously, they would have to figure that
out, and if it’s short-term, “How do we help our customers that are going through that and help them work
through it?” That’s what they would do, and that’s probably more their mindset right now, my guess.
[00:32:17]
Q: If Steelcase considers working from home as a short-term event, would it be wise for the company to
double down on this strategy and aggressively scale up?
TF: I think they’re scaled up. They could scale up in a minute if they knew that projects were coming and
things like that. If you look at it, coming out of what I’ll call the recession, the COVID-19 recession, essentially,
you’re seeing extremes come back. Things come back on an extreme basis really fast, like price of lumber, but
now it’s gone down 50% from the highs, where it was up 400%. A lot of that had to do with material shortages
from suppliers, so it’s a trickle-down thing, to the mills actually getting up and running to produce the lumber
that other companies needed. What you didn’t see is Home Depot and Lowe’s raising their prices a lot, because
they probably had contracts in place that insulated them from those types of things. They didn’t raise their
prices 400%. They might have raised them some, but not to the full extent of what they could have seen on a
raw-material basis. Why? Because they probably didn’t have that full price increase passed onto them, and
Private and confidential 9
number two is they knew that the mills were getting up and running and were going to honour those prices as
soon as they could. If you think of that kind of thing and you look at office furniture, once companies come
back and figure out what they need, that’s going to take a little bit of time. Then, “What do we need? How do
we need to transform it? What’s that going to look like? What are our needs?” That kind of thing. They’re
going to be out there looking at that.
Then, once you look at the real estate market, you’ve seen, obviously, residential prices go through the roof in
the last few months from pent-up demand. That’s probably not sustainable, but it will continue to modify itself
on the commercial side of things as people try to figure out what to do with those spaces. If you look at a
Google or an Apple, they’ve made huge investments in their buildings, their structures. What does that look
like going forward? How do they modify that? Will they call them all back to the office? Will they let them
work remote? Will it be remote part of the time? The latter is probably the thing that will happen, but how
does that all transform itself into really satisfying the customer’s needs? How do I best support LinkedIn,
Facebook, Google, Apple, whoever, Microsoft, etc, as they work with their workforce to attract and retain, and
then also satisfy what they need from either a work-from-home or work-in-the-office kind of workplace?
[00:35:23]
Q: How does Steelcase differentiate itself in product assortment? Why would a dealer want to take on its
product and pitch it to clients in new areas? Does the company’s product quality or design make it attractive
for businesses? Could you discuss its competitive moat around product quality and assortment and what the
customers care most about?
TF: I would say all the majors have good quality and good assortment, so being a Herman Miller dealer or
being a Steelcase dealer, you’re going to have the tools you need to go after it. I would say, in my opinion,
Steelcase’s partnership with the dealers is far and above the best. What do I mean by that? There’s not a lot of
dealer turnover. These guys are entrepreneurs in their market. They want that distribution. There is some
consolidation of distribution that’s happened as people retire and things like that, but Steelcase, they’re not
losing a dealer in the market and they’re not trying to find dealers in the market. They’re trying to maintain
the dealership that they have, and the market share and relationships that that dealer has cultivated over a
long period of time.
[00:37:03]
Q: You touched on material shortages and lumber pricing. Could you discuss any inflationary pressures
impacting Steelcase or the industry? How much flexibility do manufacturers have to pass on price increases?
Given the forms of contracts, do they have to take the brunt of many of those shortages?
TF: Steelcase and, I think, the whole industry watch a couple of main things. The price of steel overall is a big
driver for the whole industry, so that’s one. Plastics is another. Those two things are both drivers from the
raw-material perspective. Those can obviously be influenced a lot from the outside, so as the auto industry
uses steel and they ramp up or whatever, then the price of steel can go up, etc, or demand. Just getting stuff
can be a problem sometimes, so having multiple suppliers for steel is a good thing, because you can go from
one to the other in case one starts to fall short. If you look at plastics and polypropylene and things like that,
those are petroleum-based, so you look at the price of oil as a derivative of all that. Those types of things all
play an impact in the supply chain and the price increases. Inflation is watched very closely. PPI is probably
the index overall that they’ll use. The price increases are thought of well in advance, and they look at trends.
The whole industry really does look at trends. In my opinion, Steelcase leads in terms of price increases. If
they do one, you’ll see the rest of the industry follow. If they don’t do one, you may see some one-off things,
but pretty much everybody is going to stay with where they’re at, so my opinion is they lead with price
increases and then the industry follows from there.
In terms of passing those along, if it’s a project and you ordered it, that price is going to be the price. That’s not
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going to change. When you get into the day-to-day stuff like the top end we talked about, those can be passed
on right away. Those are the two extremes. Then, you have all these contracts that come up over a period of
time. Sometimes you can’t because of contractual obligations, but those are very few. I would say most of them
have some sort of agreement, or some sort of wording in the agreement, that allows you to pass on price
increases justified by inflation or inflation-plus or something like that, so those things can be alleviated. A lot
of times, they have to be over a period of time, so you have to look over a quarter or over six months, or a
sustained type of inflation that Steelcase is experiencing. You go back to the customer, you make that
argument with them, and then you can pass it along on orders going forward. There is a lag from the time you
announce the price increase, or there’s a lag from the time you think about it, decide on it, put it in place, and
then a period of time where you have to implement that. To get 100% of it, it can take as much as a couple of
years to get 100% of a price increase all the way through.
[00:41:03]
Q: Could you assess Steelcase’s ability to quickly adjust capacity where demand drops off? How capable is the
company to meet unexpected demand from quicker-than-expected rebound in office environments, given you
mentioned plenty of talk from CEOs and employers to get their employees back into the office very quickly?
TF: I would say a couple things. When I first started there, Steelcase was very vertically integrated. I actually
worked as an accountant at a company that moulded all the plastic parts for Steelcase. We were owned 100%
by Steelcase. We would mould the polypropylene and the casters or chair bases or whatever it was, mould
those parts and ship them to Steelcase, and they would assemble everything and go from there. Through, I
would say, the early 2000s, that transformed itself to a much more flexible manufacturing model with
suppliers. Integrating parts at the point of customisation is what I would call it, so the suppliers will handle
those parts up to a certain point, and then at that point, Steelcase will bring those parts in and customise them
to whatever order needs to be made at that point. That’s really what they do. Do they still mould and bend
steel? Yes. Do they do it to the extent they used to? No. Do they still make chairs? Yes. Do the suppliers that
make those parts own more of that inventory up to a certain point? Yes, because they bring it to a line. They
don’t have inventory just sitting around. I’ll use chairs as an example. If an arm is there in the morning, it’s on
a chair by the night, so through that shift or whatever, even faster than that, they can ramp up, and they’ve got
takt times assigned and things like that. Ramping up is not a problem, and then slowing down is really less of a
problem than it used to be, because now you’re not sitting on all this inventory you’ve got to figure out what to
do with.
[00:43:42]
Q: Could you discuss contracts and dealer relationships around smaller business contracts vs the large
commercial clients, when it comes to financial and insurance firms? What are some trends you’ve noticed
around dealerships working with smaller players to gain business vs there only being a finite number of large
players?
TF: I would say that’s where the dealer salespeople come in, and knowing a big player in a local market may
not be a big player globally. I live in Michigan. An example, just off the top of my head, is Spectrum Health.
They’re the largest employer in west Michigan. They’re a hospital chain, essentially. Now they’re talking about
merging with Beaumont, which would be the largest in Michigan, obviously, if those two merged, but they’re a
big player in a region. You won’t see them outside of Michigan, so is the dealer in Grand Rapids focused on
Spectrum Health? Absolutely. Is Steelcase treating them like they would a global account? No, they’re not, and
so that’s where the dealer salespeople really take over the project business with them, the relationships with
them, that kind of thing. Steelcase has it on what they might call a strategic account, but they’re not one of
their global accounts. I’ll just use UHG or somebody like that. That might be a global account for somebody,
and that could be a big deal.
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[00:45:53]
Q: What challenges do players face when operating on a global scale? Are global and US players facing
pressure from other players who can produce products at lower commodity price bases? How has this affected
the industry throughout your time?
TF: Problems faced globally, it depends on where you’re at. I would say if you’re talking about Asia, everything
has to go on a boat at some point in time, so that’s a logistical thing. That’s one thing with Asia that just is
more difficult. Then, of course, you’ve got certain things for certain countries, like China, that you’re dealing
with all the time. Those types of things are a little more complex. When you look at some other countries, like
India, for example, it’s just dense, and so being able to come up with a solution for India is going to be
different. Steelcase has done all kinds of studies on this. If you look at their 360 research and things like that
that they’ve put out, the amount of square feet or square metres people use for a space is different by country.
The needs of the workers are different by country. The expectations of workers are different by country. All of
those things weigh into that, so one application for the US might not be the same application they would use
for the same type of worker in India. You’re flexing on that, so you need to know your product portfolio, where
you’re going to sell it, your target countries, your target customers, that kind of thing. They do a really good job
of analysing that.
Then, where you’re going to make it, how you’re going to import it or are you going to make it locally, all those
things come into play, as well. Say you’re going to make it in Europe and the US. How does it get to Asia? How
is the most effective way? If you’re going to start something in Asia, can you take it and move it to the US? Is it
feasible or not? The standards can be different, and what people need. Those types of things, there’s a lot of
interplay and a lot of decisions that have to be made about what can work, what would work, what’s feasible.
Do you offer it globally or do you just offer it locally? When they’re developing a product, they ask all those
questions upfront, and then get aligned with the regions as to whether or not they think they could sell it or
not. “Is this something we go through in product development or not? Is it something we do afterwards, if it’s
really successful and we do some modifications to it?” That kind of thing. Same thing applies to supply chains.
If you’re looking at supply chains that are Americas-focused, what do I have to do if I have to import it into
Europe or a customer wants it in Bangladesh? What do I have to do to be able to do that? All of those things
come into play, and they have a lot of flexibility in how they do that. A lot of it is tied to taxes, duties, freight,
etc, to be able to do it, and to satisfy the customer that they’re going to get really what they wanted at the
locations that they’re asking for it at.
[00:49:42]
Q: How does the pandemic environment compare on commercial contracts to the 2009 financial crisis, where
many large finance players also had a large reduction in their headcount and demand? Is there anything we
can glean from that period that could be similar?
TF: I don’t think they’re similar, and this is my opinion about why they’re not. I think, in 2008, you had some
systemic problems within the economics of the banks that were rising to the top. You had some issues that
needed to be addressed, or you were going to have problems just getting liquidity out to companies at that
point. That was the biggest thing, and if you weren’t able to solve that, then you were going to have a bigger
problem on your hands, hence the bail-out, etc. What happened with the pandemic was you had a country that
was on fire, so everything was hitting, all cylinders were going, people were making investments, people were
busy. You didn’t see any hiccough at all, and now, all of a sudden, you go from going 100 miles an hour to zero
in three or four weeks, and then everybody is sitting on their hands going, “What do we do now?” Except for a
few things like logistics companies and things like that, everybody else is like, “Where do we go? What do we
do? How do we keep things going where we can and then slowly come out of it?” Now you’re seeing stuff
coming back. It’s just taking a little bit of time
I think people, companies, still have money. You see inflation rising, which is going to increase prices overall,
but you’re also seeing wages go up, so the good thing is that you’re not seeing any more, I’ll call it bifurcation
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of the upper class and lower class. You’re actually seeing that middle-class thing going to start to come back
because wages are rising, because people are just like, “If I can’t make this kind of money, I’m going to go
somewhere else.” There are enough jobs available for people to do that, whereas in 2008, you just didn’t have
that. If people were out of work, they were out of work and they weren’t coming back. You look at the
construction industry in 2008 and how many residential people building houses went out of business and
never came back, I think that’s part of what has led the demand in the prices on the residential side for
housing, because those companies just are gone. They went and did something else because they couldn’t
make any money. That’s not happening this time, so I think there are some distinct differences between the
pandemic recession and then the 2008 financial crisis.
[00:53:29]
Q: What could the office furniture manufacturing industry do to manage labour costs, given it seems a highly
labour-intensive process? What is your assessment of automation and the difficulty in producing these
products? How labour-intensive might they be and how has that affected costs?
TF: They’re not as labour-intensive as you’d think they might be. It’s pretty automated. You’ve got things like
paint lines that are automated, you’ve got assembly lines that are automated. Do they require operators? Yes,
but it’s not like there aren’t machines doing a lot of the work already. You also saw Steelcase, I don’t know, it
was probably 10 years ago, move their seating production down to Mexico. It was working fine in Michigan.
Why would they have done that? Part of it was, what if labour costs continue to rise? There’s going to be a
labour shortage. There are a lot of people retiring. It was anticipated that wage rates would go up in the US
because of all of that, so modifying where they were making things was an important part of the strategy to
offset some of the things they knew were going to come, in terms of labour rates going forward, and they’ve
continued to do that. When you look back, in 2005, we had a huge campus in Michigan. It was probably a half-
mile wide and almost a mile long of just manufacturing buildings. That’s all been since sold. Now it’s other
companies that own those buildings, and Steelcase has moved its production on a global basis to different
places to offset that.
[00:55:58]
Q: Could you discuss industry consolidation and how it has evolved throughout your time? Do you think
Steelcase has missed opportunities during the pandemic to be more aggressive?
TF: My opinion, no. They’ve done acquisitions in the past. I was the CFO for one of them that they did back in
2017. That’s been highly successful, but I think part of it is you have to decide, when you do an acquisition, are
they going to be hands-off, hands-on? How is that going to fit into your portfolio? What’s the overlap? Really,
what’s the net-out of the acquisition? When you take a look at a lot of acquisitions, you may be gaining
something, but it’s not nearly like A-plus-B. It’s A-plus-B-minus-C. How big is C? C can be pretty big. Just say
Steelcase were to go buy another manufacturer, say that manufacturer is open-line, and then say Herman
Miller cuts them out of all their dealerships. You’re going to lose X percent of their sales right there. If the
dealers push back, you might not lose it, but if they hold strong and eliminate them, you could lose a big
portion of the sales right there just from an open-line one. If you look at ones that aren’t open-line that are tied
to a major manufacturer, then what are you actually going to gain? If you go A-plus-B and you have both of
those in that marketplace, what is it, from that manufacturer standpoint, that you’re actually going to get
that’s not going to be something you already do? That’s where those acquisitions can become hard to
overcome. Some of the synergies that you might get don’t offset some of the things that you’re going to lose
from an overall top-line or profit standpoint.
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[00:58:37]
Q: Could you discuss innovation in the office furniture manufacturing market? How could Steelcase continue
to set itself apart throughout H2 2021? Where could it focus or prioritise innovation, whether on product
assortment, continuing to automate facilities or logistics? Where could it improve?
TF: I think one of their biggest things is their partnership with Microsoft. That’s something where they’ve
cultivated that relationship with Microsoft and are working with them. I don’t know what they’re working with
them on now, but lots of different things, collaboration tools and things like that. Integrating that technology
with the furniture, and now you see it even more through the pandemic with Zoom calls, etc, being able to
share information, being able to write down things and scribble and do all of that, save those documents, that
kind of thing, that’s all important-type stuff to be able to do virtually. Being able to do that, I think, is a huge
area for innovation, and then, who owns that space? Is it AV, is it IT, is it furniture? It’s probably all of the
above, to some extent, but getting companies to really focus on their spaces with everything integrated
between those is going to be an important thing. When I look at innovation, it really revolves around things
like that, in collaboration and helping companies be more effective and helping them become more innovative,
and Steelcase learns a lot from going through some of that stuff with customers, as well.
[01:00:35]
NH: We will now end the Interview there. Let me close by saying thank you, Tim, for your input, and thank
you, clients, for joining Third Bridge Forum’s Interview today. Clients, if you would like to speak to Tim in a
private call or meeting, please let your relationship manager know. Goodbye.
Transcription ends at 01:00:43 of the recorded material.
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