Industry Overview

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1. Executive Summary
1.1 Market Segmentation
The global upholstered furniture industry had estimated revenues of USD42.0 billion (RM147.0 billion) in 2008. This represented approximately 13.9 percent of the global furniture industry in 2008.
Home Upholstery Industries Sdn. Bhd. (HUI) is a proposed wholly owned subsidiary of Homeritz Corporation Bhd. (Homeritz). Homeritz was incorporated in Malaysia as a public limited company on February 6, 2008. Homeritz’s principal activities are those of investment holding and the provision of management services. The company is a special purpose vehicle incorporated to undertake the flotation exercise of HUI.
HUI is currently involved in the design, manufacture and sale of upholstered home furniture. Upholstery is the process of providing furniture, especially seats, with padding, springs, webbing, and fabric or leather covers.
At present, HUI exports most of its upholstered home furniture products with about 80 percent being exported mainly to Europe and Australia whilst the rest are being sold to New Zealand, North America, Asia and South Africa.
The main products of upholstered home furniture include, but are not limited to, the following items:

Upholstered sofas


Upholstered bed frames


Upholstered dining chairs

 

This research service will, therefore, be largely focused on the upholstered furniture market In Australia and Europe, with analysis of the competitive landscape in Malaysia. Australia and Europe, with upholstered furniture market sizes of approximately USD33.5 billion (RM117.3 billion) and USD2.5 billion (RM8.8 billion) were chosen, as they contributed approximately 80 percent of HUl’s revenues in 2008.
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1.2 Key Industry Participants
The upholstered home furniture manufacturing industry in Malaysia is a largely fragmented and competitive one. At present, there are approximately 60 to 70 medium to large upholstered home furniture manufacturers in Malaysia, out of which more than 80 percent focus on the manufacture of sofas. The major upholstered home furniture manufacturers in Malaysia are located in industrial areas mainly in Johor, Penang, and Seiangor. Out of these 60 to 70 are medium to large companies,
Figure 1-1: Upholstered Home Furniture Market: Competitive Structure In Malaysia, (2008)
Number of Companies In the Market Approximately 60 -70 medium to large companies
Key Participants In the Market Approximately 6 large sized companies
DIstribution Channel Export of more than 80 percent of manufactured output

Source: Frost & Sullivan
Figure 1-2 presents the six major uphoistered home furniture manufacturers that are based in Malaysia and their product portfolios.
Figure 1-2: Product Range of the 6 Major Upholstered Home Furniture Manufacturers In Malaysia, (2008)
Manufacturer Upholstered Sofa Upholstered Dining Chair Upholstered Bed Frame
Horne Upholstery Industries Sdn. Bhd. -/ -/ -/
Master Sofa Industries Scln. Bhd. -/
Sin Wee seng Industries Scln. Bhd. -/ -/
Virtual Couch Industries Scln. Bhd. -/ -/
White Feathers Industries (M) Scln. Bhd. -/
Yew Hoong Sofa Products (M) Scln. Bhd. -/ -/ -/

Source: Frost & Sullivan

 

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1.3 Industry Share Analysis
The Malaysian upholstered home furniture industry mostly consists of companies focused on the manufacture of sofas for export. Most of these companies are originai equipment manufacturers (OEM) and original design manufacturers (OOM) of uphoistered home furniture and they export these to retailers and distributors in Europe, US, and Australia. More than 80 percent of the products of most manufacturers are exported at present.
Since the focus of this study is the upholstered home furniture manufacturer’s export markets, market share of these companies in Malaysia is not covered. Moreover, most of these companies do not sell the majority of their products in the Malaysian market.
Therefore, Frost & Sullivan has ranked the major upholstered home furniture companies in Maiaysia soleiy based on company revenues as shown below, which is an estimated industry share based on revenues. Oniy Maiaysia-based companies are profiled in this study and ranked.
Figure 1-3: Estimated Industry Revenue Share of Malaysian Upholstered Home Furniture Manufacturers, (2008)
HOME
Upholstory
Industries Sdn
Bhd.

10.7%
Source: Frost & Sullivan, Companies Commission of Malaysia
Note: 1 Other Major Participants include Master Sofa Industries Sdn. Bhd.• Sin Wee Seng Industries Sdn. Bhd., Virtuai Couch Industries Sdn. Bhd., While Feathers Industries (M) Sdn. Bhd., Yew Hoang Sofa Products (M) Sdn. Bhd.
2 Others include participants nollisled in the Other Major Participants category
Based on HUI’s revenues of RM92.5 million in 2008, and estimated total revenues for the Malaysian uphoistered home furniture industry of RM870.0 million, Frost & Sullivan estimates

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that HUI’s industry revenue share was approximately 10.7 percent in 2008, ranking it fourth among the Malaysia-based upholstered home furniture manufacturing companies in that year.
This is a broad based comparison as some of these companies are solely in the manufacture of sofas, while some have a diverse product mix, ranging from upholstered home furniture made from a variety of raw materials (for example, leather, polyvinyl chloride (PVC), and fabrics) to upholstered dining chairs and upholstered bed frames.
In this respect lies HUl’s key differentiating factor from many of its competitors. HUt appears to be one of the only two companies in Malaysia with a complete range of upholstered home furniture. which includes upholstered sofas, upholstered dining chairs, and upholstered bed frames. Frost & Sullivan believes the only other manufacturer with the same product mix as HUI is Yew Hoong Sofa Products (M) Sdn. Bhd. Although Yew Hoong has more than 20 years of experience in the industry compared to HUI’s experience of more than ten years, HUI has managed to catch up with Yew Hoong. In 2008, HUI had revenues of RM92.5 million compared to Yew Hoong’s revenues of RM67.0 million.
Companies in this category (that is. the other major participants’ category) are estimated to have individual industry revenue shares ranging from apprOXimately 7 to 18 percent. It is estimated that the top 3 companies in Malaysia have a combined revenue share of 47.0 percent and the 3 companies below HUI. the fifth to seventh placed companies, have a combined revenue share of 18.1 percent.

 

1.4 Barriers to Entry
Generally, the upholstered home furniture industry is perceived to have relatively low barriers to entry and the challenge for furniture manufacturers is to maintain a leadership position in the market. However, despite the relative ease in entering the market, it is not easy for a company to succeed in this industry. Numerous critical success factors have to be fulfilled before a company can thrive in the industry.
The barriers to entry for the Malaysian upholstered home furniture industry in 2008 are as in Figure 1-4.
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Figure 1-4: Barriers to Entry for the Malaysian Upholstered Home Furniture Industry, (2008)

Source: Frost & Sullivan
Manufacturing Setup Start-up Costs
The setting up of any manufacturing facility requires a significant amount of start-up costs. This is the same with the upholstered home furniture industry. Machines such as industrial sewing machines, automatic PVC/PU cutting machines, wood cutting machines, and dust collecting systems require a significant amount of capital investment. A huge amount of factory and warehouse space is also required as upholstered home furniture are bulky and fragile objects that cannot be stacked and which need to be handled with care to avoid any storage damages.
Designs that are Accepted in Key Markets
Effective designs that cater to the tastes of key customer markets in developed countries such as European countries, the United States and Australia are essential for any manufacturer wanting to thrive in this Industry. However, changes in consumer tastes and demand are quite frequent. An upholstered home furniture manufacturer needs to be constantly able to update its designs and keep pace with these changing needs of the customers. Thus, only manufacturers with a suitable level of experience and skills can survive.
Efficient Supply Chain
The manufacture of upholstered home furniture requires a number of raw materials that has to be sourced from countries around the world. Wood frames made from plywood, tropical wood, and rubber wood are usually sourced from Malaysia, foam from Malaysia, leather/ PVC/Polyurethane (PU) from Vietnam, South Korea, Thailand, and India and fabric from China.
This diverse supply of raw material requires a certain amount of experience to manage; not only to ensure timely delivery, but also to ensure raw material quality.

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1.5 Critical Success Factors
The critical success factors for the Malaysian upholstered home furniture industry In 2008 are as in Figure 1-5.
Figure 1-5: Critical Success Factors for the Malaysian Upholstered Home Furniture Industry, (2008)

Rank Critical Success Factors
1 Penetration into key developed country markets
2 Moving up the value chain
3 Exposure resulting from furniture exhibitions
4 Availability of rubber wood and timber
5 Experienced management and workforce
6 Diversified and well established client base

Source: Frost & Sullivan
Penetration into Key Developed Country Markets
As an export oriented industry, the ability to penetrate the key furniture markets of the United States, Europe, and Australia is critical to any manufacturer’s success. Not only does it ensure a significant and steady quantity of orders, it also helps them to charge a higher premium on their products due to the higher exchange rates.
Moving Up the Value Chain
To insulate themselves from undue pricing pressures from manufacturers in the low end of the upholstered home furniture market in Vietnam and China, Malaysian manufacturers need to position themselves in the medium to high end market.
This is mainly because in the medium to high end market, pricing is not so important a buying factor for a purchaser as is design or reliability.
Exposure Resulting from Furniture Exhibitions
As the Malaysian upholstered home furniture manufacturers do not enjoy any significant advantage through branding at present, they need to take part in furniture exhibitions to further publicize their products and to gain further exposure.

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Furniture exhibitions in Malaysia such as the Malaysian Furniture Exhibition (MAFEX) and Malaysian International Furniture Fair (MIFF) are a main source of sales for Malaysian furniture. Organizations such as Malaysian Furniture Industry Council (MFIC) have also been eagerly promoting these events and these are the main source of interaction between furniture manufacturers and end users from all over the world.
Such initiatives are likely to continue to boost sales in the industry at a steady pace.
Availability of Rubber Wood and Timber
Malaysia has adequate resources of timber and rubber wood for furniture. The Government has also ensured the continuous development of plantations to ensure the availability of rubber wood.
Experienced Management and Workforce
Despite facing a threat from the manufacturers of China and Vietnam, Malaysia has a longer history of furniture making with skilled craftsman compared to those countries. The craftsmen have been in the business for several years and thus understand the needs of the market and specifications required for each destination country.
This is an important advantage that Malaysia has, keeping it ahead in the learning curve. However, in the long term, unless the local craftsmen improve their design capability, Malaysia may see its share of imports taken up by China.
Diversified and Well-established Client Base
A diversified and well-established client base across vast geographies is essential for a manufacturer to survive in the global market. Manufacturers with such advantage will not be affected by any economic setback in a particuiar region.

 

1.6 Relevant Laws and Regulations
There are currently no relevant laws and regulations in Malaysia governing the upholstered home furniture manufacturing industry.
However, the Government in its efforts to stimulate and promote the growth of the manufacturing sector has put in place various incentives which are particularly pertinent to the furniture industry as discussed below.
In Malaysia, tax incentives, both direct and indirect, are provided for in the Promotion of Investments Act 1986, Income Tax Act 1967, Customs Act 1967, Sales Tax Act 1972, Excise Act 1976 and Free Zones Act 1990. These Acts cover investments in the manufacturing,
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agriculture, tourism (including hotel) and approved services sectors as well as R&D, training and environmental protection activities.
The direct tax incentives grant partial or total relief from income tax payment for a specified period, while indirect tax incentives are in the form of exemptions from import duty, sales tax and excise duty.
1. Incentives for the Manufacturing Sector
1.1 Main Incentives for Manufacturing Companies
The major tax incentives for companies investing in the manufacturing sector are the Pioneer Status and the Investment Tax Allowance.
Eligibility for Pioneer Status and Investment Tax Allowance is based on certain priorities, including the level of value-added, technology used and industrial linkages. Eligible activities and products are termed as “promoted activities” or “promoted products”. (See List of Promoted Activities and Products -General)
(i) Pioneer Status
A company granted Pioneer Status enjoys a 5-year partial exemption from the payment of income tax. It pays tax on 30% of its statutory income”, with the exemption period commencing from its Production Day (defined as the day its production level reaches 30% of its capacity).
Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company.
To encourage investments in promoted areas Le. the States of Perlis”, Sabah and Sarawak and the designated “Eastern Corridor”+ of Peninsular Malaysia, applications received from companies located in these areas will enjoy a 100% tax exemption on their statutory income during their 5-year exemption period. Applications received by 31 December 2010 are eligible for this incentive.
” Statutory Income is derived after deducting revenue expenditure and capital allowances from the gross income.
+ The “Eastern Corridor” of Peninsular Malaysia covers the States of Kelantan, Terengganu and Pahang, and the district of Mersing in the State of Johor.

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” The State of Perlis was declared as one of the promoted areas with effect from 2 September 2006 and companies undertaking promoted activities or promoted products in this state will be eligible for incentives presently given to such areas.
Applications for Pioneer Status should be submitted to the Malaysian Industrial Development Authority (MIDA).
(i1) Investment Tax Allowance
As an alternative to Pioneer Status, a company may apply for Investment Tax Allowance (ITA). A company granted ITA is entitled to an allowance of 60% on its qualifying capital expenditure (factory, plant, machinery or other equipment used for the approved project) incurred within five years from the date the first qualifying capital expenditure is incurred.
The company can offset this allowance against 70% of its statutory income for each year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised. The remaining 30% of its statutory income will be taxed at the prevailing company tax rate.
For the promoted areas i.e. the States of Perlis, Sabah and Sarawak and the designated ‘Eastern Corridor” of Peninsular Malaysia, applications received from companies located in these areas will enjoy an allowance of 100% on the qualifying capital expenditure incurred within a period of five years. The allowance can be utilised to offset against 100% of the statutory income for each year of assessment. Applications received by 31 December 2010 are eligible for this incentive.
Applications should be submitted to MIDA.
1.2 Incentives for Relocating Manufacturing Activities to Promoted Areas
In order to reduce the costs of doing business and to provide a competitive business environment, existing companies which relocate their manufacturing activities to the promoted areas, are eligible for the following incentives:
I. Pioneer Status with income tax exemption of 100% of statutory income for a period of five years; Unabsorbed capital allowances as well as accumuiated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or
II. Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within a period of five years. The allowance can be utilised to offset against 100% of the statutory
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income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until fully utilised.
Applications should be submitted to MIDA.

1.3 Additional Incentives for the Manufacturing sector
(i) Reinvestment Allowance
Generally, Reinvestment Allowance (RA) is given to companies engaged in manufacturing*, and selected agricultural activities that reinvest for the purposes of expansion, automation. modernisation or diversification of its existing business into any related products within the same industry on condition that such companies have been in operation for at least 12 months. This condition has been revised to at least 36 months, effective from the year of assessment 2009.
The RA is given at the rate of 60% on the qualifying capital expenditure incurred by the company, and can be offset against 70% of its statutory income for the year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised. A company can offset the RA against 100% of its statutory income for the year of assessment if:
The company undertakes reinvestment projects in the promoted areas i.e. the States of Perlis, Sabah, and Sarawak and the designated “Eastern Corridor” of Peninsular Malaysia; or
The company attains a productivity level exceeding the level determined by the Ministry of Finance. For further details on the prescribed productivity level for each sub-sector, please contact the Inland Revenue Board (see Useful Addresses -Reievant Organisations)
The RA will be given for a period of 15 consecutive years beginning from the year the first reinvestment is made. Companies can only claim the RA upon the compietion of the qualifying project, i.e. after the building is completed or when the planVmachinery is put to operational use. With effect from the year of assessment 2009, company purchasing an asset from a related company within the same group where RA has been claimed on that asset is not allowed to claim RA on the same asset.
Assets acquired for the reinvestment cannot be disposed off within a period of two years from the time of the reinvestment and with effect from the year of assessment 2009 this provision is extended to five years.
Companies that intend to reinvest before the expiry of its tax reiief period, can surrender their Pioneer Status or Pioneer Certificate for purpose of cancellation and be eiigible for RA.
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Applications for RA should be submitted to the Inland Revenue Board (IRB), while applications for the surrender of Pioneer Status or Pioneer Certificate for RA should be submitted to MIDA.
·With effect from year of assessment 2009, manufacturing activities will be given a more specific and clear definition under Schedule 7A, Income Tax Act 1967.

1.4 Tax Exemption on the Value ofIncreased Exports
To promote exports, manufacturing companies in Malaysia qualify for:
A tax exemption on statutory income equivalent to 10% of the value of increased exports, provided that the goods exported attain at least 30% value-added; or
A tax exemption on statutory income equivalent to 15% of the value of increased exports provided that the goods exported attain at least 50% value-added.
To further encourage the export of Malaysian goods, a locally-owned manufacturing company with Malaysian equity of at least 60% is eligible for:
A tax exemption on statutory income equivalent to 30% of the value of increased exports, provided the company achieves a significant increase in exports;
A tax exemption on statutory income equivalent to 50% of the vaiue of increased exports, provided the company succeeds in penetrating new markets;
A full tax exemption on the value of increased exports provided the company achieves the highest increase in export in its category.
Claims should be submitted to the IRB.

 

1.7 Environmental Issues and Concerns
The upholstered home furniture manufacturing industry does not have any major environmental issue or concern.

1.8 Key Supply Conditions
The upholstered home furniture industry in Malaysia relies on several raw materials, the key ones being leather and wood.
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Leather
Leather is a material created through the tanning of hides and skins of animals, primarily cattle hide. The tanning process converts the skin into a durable, long-lasting, and versatile natural material for various uses.
Leather is the main cost component for the manufacture of upholstered home furniture. Traditionally, leather is mostly sourced from countries such as Italy, the US, and Brazil. However, there is a recent trend of companies sourcing from China. The Chinese leather industry has increasingly been able to provide significant savings on leather products with flexibility and depth of product range.
However, it has to be noted that leather from China are still mostly used for low-to medium­end products. High-end leather is still sourced from countries such as Italy.

Wood
Upholstered home furniture manufacturers in Malaysia mostly use plywood, tropical wood, and rubber wood to produce wood frames for their furniture. These are all raw materials that are abundant in Malaysia.
There is an abundant supply of rubber wood in Malaysia with the MTIB developing plans to plant more than 25,000 hectares of rubber forests plantations annually. Together with existing plantations of 1.7 million hectares of rubber plantations and the ones in the pipeline, the country is well placed in terms of raw material supply for future furniture industry demands.
Labour Situation in the Upholstered Home Furniture Industry
According to the Third Industrial Master Plan (IMP3), in 2005, the Malaysian wood products and furniture industry employed a total of 373,800 workers. The total number of workers is expected to grow at an average annual growth rate of approximately 1.7 percent to become 405,800 in 2010.
Presently, the furniture industry in Malaysia is very labour-intensive. Shortages of labour are common mainly due to the locai perception of the industry as a dangerous, dirty, and unskilled industry. It is estimated that about 60 percent of factory floor workers employed by most manufacturers are from developing countries such as Nepal, Vietnam, and Bangladesh.
This situation is further exacerbated in the upholstered home furniture industry, where handmade furniture is usually associated with high quality and premium pricing. The amount of non-mechanical processes used to manufacture upholstered home furniture is usually one of the determinants of the pricing premium that can be commanded in the market.

 

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This situation is similar to the events that are and have been occurring in Europe, especially in Italy, also called the sofa capital of the world. Most Italian upholstered furniture manufacturers such as Natuzzi and Poltrona Frau have moved their high volume, low to medium end manufacturing to countries such as China and Vietnam to capitalize on the abundant low-cost skilled labour available there. High-end upholstered furniture production, which is just as labour intensive, is still maintained in Italy; mainly due to the very high premium these manufacturers are able to command having a sofa manufactured in Italy.
Several global upholstered furniture manufacturers such as Natuzzi and Poltrona Frau have been successfully listed on their respective bourses (New York Stock Exchange and Milan Stock Exchange) despite the labour-intensive nature of the upholstered furniture industry.
The inherent nature of upholstered home furniture manufacturing, with the required need of an operator to conduct manual sewing and stitching, the assembly of springs and sponges, makes it almost impossible to automate. There is currently no substitute machine or equipment for the human eye and hand that can handle the complex intricacies that is required in the upholstered home furniture manufacturing process.

 

1.9 Reliance and Vulnerability to Imports
The upholstered home furniture manufacturing industry in Malaysia is mainiy for exports and therefore, is not vulnerable in any way to any foreign imports.

1.10 Product Substitution
There are currently no direct substitutes for upholstered home furniture. Upholstered home furniture operates in a separate market from pure wood furniture. Although wood furniture can be considered an indirect substitute for upholstered home furniture, usually this is not the case. Upholstered home furniture has high value added and is usually categorized as more upscale and trendy compared to wood furniture, and typically command premium pricing.

1.11 EU27 Market Size and Growth Forecasts
1.11.1 Market Growth
In 2008, the EU27 upholstered furniture market was valued at USD33.5 billion (RM117.3 billion) having grown 4.4 percent from 2007. The market is expected to grow at a CAGR of approximately 4.3 percent during the forecast period of 2009-2013.
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A growth rate of 4.4 percent might seem low at first glance; however, in the EU27 upholstered furniture market a growth rate of 4.4 percent translates to a significant value of approximately USD1.4 billion (RM4.9 billion), as was experienced by the industry in 2008. Therefore, growth rates in EU27 upholstered furniture market should not be taken at face value, because they represent a fairly large quantum in terms of dollar value.
Figure 1-6: Historical Revenue Growth for the EU27 Upholstered Furniture Market, (2005-2008)
Growth Rates
Approximate Market Size
Year
(USD billion)
(%)
26.8
0.4
2005
2006
28.7
7.1
11.6
2007
32.1
33.5
4.4
2008

Compound Annual Growth Rate (2005 -2008): 7.7%
Note: All figures are rounded

Source: Frost & Sullivan

1.11.2 Future Outlook and Prospects
The EU27 upholstered furniture market was valued at USD33.5 billion (RM117.3 billion) in 2008. It is a mature market expected to grow at a compound annual growth rate (CAGR) of 4.3 percent in the forecast period of 2009 to 2013.
A CAGR of 4.3 percent might seem low; however, a 4.3 percent growth in an USD32.8 billion (RM114.8 billion) market represents a fairly large quantum, where the approximate annual growth is USD1.4 billion (RM4.9 billion).

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FIgure 1-7: Revenue Forecasts for the EU27 Upholstered FurnIture Market, (2009-2013)

Compound annual growth rate (2009-2013): 4.3%
Note: All figures are rounded

Source: Frost & Sullivan
1.11.3 Key Growth Segments
Eastern European countries are expected to provide the bulk of the growth expected from the EU27 upholstered furniture market. Although these countries represent only less than 10 percent of the total EU27 market, there is a high degree of opportunity for growth in this part of the EU27. It should be noted that although these countries are strong from a manufacturing point of view, much of their output are exported. This is mainly because it is much more profitable to export to western European countries that provide better margins, while importing low-to medium-end products from other developing countries for domestic use.

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1.12 Australia Market Size and Growth Forecasts
1.12.1 Market Growth
The Australian wood and upholstered furniture market was estimated to have a market size of USD2.5 billion (RM8.8 billion) in 2008. During the forecast period of 2009-2013, the market size is expected to grow at a CAGR of 2.6 percent. Overali, the market is mature with a significant amount of imports from developing countries.
Figure 1-8: Historical Revenue Growth for the Australian Wood and Upholstered Furniture Market, (2005-2008)

Compound Annuai Growth Rate (2005-2008): 2.2%
Note: All figures are rounded.

Source: Frost & Sullivan

1.12.2 Future Outlook and Prospects
The Australian wood and upholstered furniture market was vaiued at USD2.5 billion (RM8.8 billion) in 2008. Similar to the EU27 upholstered furniture market, it is a mature market and is expected to grow at a CAGR of 2.6 percent in the forecast period of 2009 to 2013.

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FROST & SULLIVAN
Figure 1-9: Revenue Forecasts for the Australian Wood and Upholstered Furniture Market, (2009-2013)

2009 2010 2011 2012 2013 2.49 2.53 2.59 2.67 2.76 (1.19) 1.61 2.37 3.09 3.37

Compound annual growth rate (2009-2013): 2.6%
Note: All figures are rounded

Source: Frost & Sullivan
1.12.3 Key Growth Segments
As a mature market, the Australian wood and upholstered furniture market is not expected to experience very high growth. Any increase in purchases of furniture will mostly depend on the consumers’ perception of how well the economy is doing and the amount of disposable income they possess. As mentioned above, furniture is a durable good and its purchase is easily differed if there is any change in the country’s economy.
Revenue growth is expected to come mostly from replacements of furniture that have reached their end of life (EOl). The rate of replacement of wood and upholstered furniture will largely determine the growth of the market for the short to medium term.

 

 

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