CHESS 2008 Meeting Summaries

The 2008 Chief Housewares Executive Supersession (CHESS), held Sept. 9-10 in Chicago, was a strategic and networking event, with valuable information on manufacturing in China, housewares design, consumer trends, the current retail environment, and factory compliance. CHESS attendees were welcomed by Phil Brandl, president of IHA, and Dan Rafterty, who served as the meeting facilitator.

Keynote Address: China's Futures—From El Dorado to Armageddon, by Peter Navarro
Peter Navarro, a business professor at University of California-Irvine, and a regular contributor to CNBC and author of the book, "The Coming China Wars," spoke to attendees about the challenges and benefits of manufacturing in China.

"Is China a cost-effective location for your manufacturing facility? Has your company done an appropriate risk assessment in setting your China exposure?" he asked CHESS attendees. "The answers depend on how the future unfolds. It could be El Dorado or Armageddon."

Navarrao noted that the perception of China is that it is so attractive because of the cheap labor. "But that's not entirely true," he said. "It's a complex equation, and it relates to the China price, to the fact that China can undercut foreign competitors by 50% or more." In addition, China manufacturing includes network clustering, where whole cities produce single products or components, which create tremendous economies of scale. "It's like Akron-Detroit-Pittsburgh on steroids," he said.

In addition, Navarro said, the labor force in China is well educated, well-disciplined and productive, and that makes them outstanding versus just being "cheap."

Navarro also discussed other issues that a U.S. manufacturer would need to address before establishing manufacturing operations there, including currency manipulation, counterfeiting and piracy, and health and safety and environmental regulations.

He concluded, "I painted you a difficult picture of China. I think that they are facing some changes. And I hope that you will look more formally at the risks involved in manufacturing there. Conduct a proper risk assessment before you invest in China and all that is involved."

Design: Carpe Diem! Seize the Day!, by Gregg Davis, IDSA
Davis, founding principal and president, Design Central, has expertise in strategic thinking, emotional connections to design and brand strategy and innovative methodologies. He spoke about what they can do to come out ahead in the competitive landscape while the economy slows. He specifically discussed new tools in neuroeconomics and marketing, consumers' emotional buying habits and using innovation as an engine for change. (Neuroeconomics is the science and marketing surrounding why consumers often don't make "logical" purchase choices).

The use of neuroeconomics, Davis said, can provide tools to connect with consumers more deeply and more successfully. It can help a company to understand consumers' emotional connections with products.

He also discussed the increasing use of functional MRI, or fMRI, which shows that more purchase decisions take place "in the gut" than do "in the brain."

"Businesses can use these understandings to place greater validity on appealing to consumers emotionally," he said. "People call it irrational behavior, but it is only irrational when you don't know why it's being done. But if we can understand, it is not irrational. What is fascinating is that is making headlines in business."

Davis used housewares manufacturer OXO, as a successful example of connecting with consumers through design and emotion. "The category that OXO is in was flat, but OXO has figured out what it takes to emotionally connect. Many of its products are not that powerful; most are more extensions of an idea that makes people feel that there is something there that is worth spending double or triple the price point. It really is about design and not new technologies or new technologies," he said.

Davis also discussed how design is playing a crucial role in the emotional connection with consumers. "Design satisfies the emotions," Davis said. "And frankly, it does not cost more to produce an ugly shape than a beautiful one. If you make the right design choices you will sell more. Design is an investment into your future."

Consumer Trends: Home—the Place to Be, Again by Marshal Cohen
Cohen, chief industry analyst for The NPD Group and author of the book, "Why Customers Do What They Do," spoke about what he called The New Economy and how it is affecting consumer trends and housewares sales. Cohen said, "We have seen more changes in the past six months than we have seen in the past six years with consumers."

"The new economy is about learning how to rethink what we do and the messages that we communicate and the products that we built," he said. "Just because it's always been that way doesn't mean it's right. We need to rethink our messages and the method."

"No matter where you are, you impact the end result," Cohen told CHESS attendees. "Whether you are in design, sales or production, you are just as responsible as the other one. If you rely on the retailer to communicate directly to the consumer about your product, you are wrong. They are too busy. Plus, the retailer has to cut expenses and their staff is going first. Be proactive, rather than reactive."

Cohen discussed what everyone in the audience already knew: these are difficult economic times and housewares are suffering, as are most industries. "It does not help that the media is driving interest and concern," he said, "half the consumers wouldn't know [about the economy] if wasn't headline news. The debt that the average consumer has is tremendous, and the consumer is dying for help. You need to recognize that."

He said that the average consumer lives paycheck to paycheck. Yet as long as they have money coming in, they will spend. "Women, more recently have lost their jobs," Cohen noted, "which affects your business in a big way. They make up the majority of your business, and it's really affecting the housewares market."

"Am I concerned? Yes. Am I alarmed? No," he said. "Although 79% of consumers think that we are heading into a recession, I believe that we are in an economic downturn." He predicted that the economy will improve after the November Presidential election, and grow stronger within a year.

So what does a housewares company do? This holiday will be part of hesitation, Cohen said. To overcome that, you need a new product to sell, as "newness trumps all. It's also about creating fictitious demand for product."

"It's also about a product that crosses generations," he said, noting that the surprise well-sold item of 2007 was the GPS system, which all generations can use.

"And it's also about getting back to business basics," Cohen added, noting that Ugg boots tried to expand its product line to sportswear and failed. They are not again, he said, only because they have re-focused back on footwear.

Cohen also recommended using the Internet as a great sales tool, as more people are shopping online and by differentiating with color." During tough times, color becomes a big draw, to create newness of products. Other industries have figured it out, like the automotive and cell phone industry."

The State of the Retail Environment: the Good, the Bad, the Ugly
A panel composed of top financial professionals discussed the state of the retail environment from a lender's perspective, and how a housewares manufacturer can be prepared. The panel included Timothy Cropper, senior vp and chief customer credit officer of CIT Commercial Services; Richard Heller, partner, corporate revitalization for Carl Marks, and Thomas Scotti, managing director and COO of appraisals, Appraisal and Valuation Division for Gordon Brothers.

The panelists discussed their individual companies' early warning signs of retailer financial problems and ways to protect a company. They gave guidance about what a supplier can do after its products are on the retail shelves and the invoices are late.

According to Timothy Cropper, "The current retail environment is the worst that people have seen. It's actually a perfect storm, with the credit crunch, housing crisis, unemployment, low consumer confidence and rising food costs. Retail sales are down dramatically on a month-to-month basis. Purchases are discretionary and people are putting them off."

In addition, he noted, many companies have second or third line debit, their assets have been encumbered and there's nowhere to go. So what is a vendor supposed to do? Cropper suggested being diligent with the basics of financial management, including monthly projections and financials, versus quarterly; managing your credit risk; and working with a retailer to ensure that payments are made on time.

Thomas Scotti echoed Cropper's comments, and added that understanding a retailer's liquidity is important as well. "Maintaining a 92% liquidation value is key for a retailer. Do you know that number for your retailer?" he asked.

Richard Heller recommended several ways that a housewares company can come out ahead in these challenging retail times. First, he said, reduce your SKUs. "Minimize your inventory and get rid of the SKUs that are not performing. It can improve your liquidity situation. You all have obsolete inventory: sell it. Turn it into cash, because it's not doing you any good sitting there."

He also recommended increasing collection efforts. "If you are not all over this, you need to be," he said. "Quickly get after slow payers. Hold them accountable to paying on the terms that you originally agreed upon." When a CHESS attendee asked if doing so would damage a relationship with a customer, he said, "In my opinion, you will not strain relationships by getting back to the agreed-upon terms. Protecting your business is more important than protecting your relationship."

"Keep customers on a short credit leash," Heller said. "For those slow payers, start restricting their credit lines." In addition, he recommended that a CEO perform a regular credit review with his financial staff. "You will know about things sooner and make decisions quicker, and you will send a powerful message internally to your troops who will be much more watchful."

Heller also advised minimizing costly new initiatives, for now. "These are great ways to grow your company," he said, "but in these challenging times when liquidity not what it used to be, you have to truly understand the downside of these initiatives. Be conservative on these growth initiatives."

While the panelists would not discuss certain retailers' situations, they did give a prediction on how long the economic downturn would last. Heller, in particular, said, "There are some large and fundamental problems [with the economy] that will take a long time to work out. The real estate market, for example, will take 1-3 years to fix. When you have problems that do not quickly fix themselves, then the turnaround takes long as well."

Breakout Session: Managing Factory Compliance & Assuring Product Safety, by Gene Rider
Staying on top of factory compliance and the shifting issues surrounding product quality and safety has become a big challenge. Gene Rider, president, Intertek's Consumer Goods North America Operations, gave CHESS attendees information on the critical elements of a robust but practical quality and safety audit process throughout the product life cycle: from supplier selection, to design appraisal, pre-production assessment, production and delivery.

Rider updated attendees on the Intertek Quality/Safety Process elements for suppliers, which include: a quality system, laboratory certification, social accountability, security compliance and carbon footprint.

He also provided an overview of the newly passed Consumer Product Improvement Act, which imposes a number of new requirements on product manufacturers, distributors and retailers to ensure that products entering the U.S. market are safe. In particular, it requires manufacturers to submit a test report by December 2008, for some products, by a laboratory that has been registered with the Consumer Product and Safety Commission.

Rider emphasized that manufacturers should keep their brand safe. "Your brand represents a value statement and makes you competitive," he said. "Thus, when you study whether or not you will use a factory, you need to find out whether it shares your values. Companies differentiate themselves through their values. There is too much at stake not to."

Rider stressed that it's important to address safety into the product design. "You cannot test quality and safety into a product," he said. "Don't do a test after the product is made to find out how well the design was made. Other than food and cosmetics, the vast majority of all product recalls are the result of design defects. It was not about production. Yet when most do a quality program, most of the money is put into manufacturing. That needs to change. Testing should be done in concept, design, and engineering."