Fully.com Acquired By Knoll in Unprecedented Nod to Immutable Trend Towards E-Commerce
Many industry pundits have predicted that the “contract” furniture industry would never, ever, ever embrace e-commerce. Multi-billion-dollar behemoths like Steelcase (NYSE:SCS), Herman Miller (NASDAQ:MLHR), Hon (NYSE:HNI), Knoll (NYSE:KNL) and Haworth, which all sell their office products exclusively through independent contract furniture dealers, have long despised and disparaged e-commerce sellers. Especially at the dealer level, the contract furniture makes generally consider e-commerce purveyors a much greater existential threat than the enemies they used to keep most closely in their sights on, each other.
From a Wall Street perspective the entire group of publicly-traded office furniture companies has been significantly underperforming against the major market indices ever since Knoll’s own IPO in December, 2004 (see chart below comparing their market valuations versus the Dow Jones Index). Like many industries, the contract furniture sector took a major hit as a consequence of the 2008-2009 financial crisis—from which it has never fully recovered.
By the time the financial crisis was officially over, equity research analysts starting asking these companies’ chief executives two questions more and more vociferously in response to their flagging growth:
- What are you doing to combat cheaper products made in China that are stealing market share?
- What are you doing about Amazon and other e-commerce sellers who are increasingly stealing more and more of your smaller-order business?
In answer to the first question all of these manufacturers started sourcing more and more parts from China to make their products more competitive, which ironically has lead to a new headache for all of them with the new tariffs imposed on Chinese goods.
For the longest time the response to the second question was silence, denial or token admissions of acquiescence, such as when Herman Miller acquired Design Within Reach—a major online retailer in the premium residential furniture space, and thus not a direct affront to its office furniture dealers.
It’s no surprise that these deeply entrenched incumbents who still command a 40% share of the $46B domestic office furniture industry would view retail and e-commerce as their natural enemy. As one Haworth executive recently stated at an industry insiders’ conference, “94% of contract furniture buyers today start their process with online research, making it hard for the contract dealers to respond competitively against ecommerce prices.”
Contract furniture commonly costs 2x-3x more than e-commerce sources because it has many more mouths to feed on every transaction, often including the dealer, installers, interior designers and architects, project managers, manufacturers’ reps, and sales rep commissions at every level.
Most contract dealers will not even respond to requests for quote for less than a few hundred workstations for this very reason, as their business model makes it difficult to process such small orders profitably. For the longest time, e-commerce sellers fed off the crumbs that fell from the big boys’ table. But sellers like Fully, UpLift, iMovR and Varidesk now routinely take six-figure orders from the same large enterprise, government and educational institution accounts that the big boys have had on their top customers roster forever.
It’s a rapidly changing world, and a potentially scary one for these gargantuan contract furniture companies that have been extremely slow to change their ways. Let’s face it, there aren’t a lot of e-commerce experts or software developers in Grand Rapids, Michigan where most of these companies are headquartered. The labor force there knows everything there is to know about stamping metal, laminating wood and cutting fabrics, but virtually nothing about selling their products through online channels.
While often referred to as the Silicon Valley of the office furniture industry unfortunately it has also become an echo chamber within which the impact of the internet on their business fundamentals has been highly filtered for years.
From its tortured quotation process (think obfuscating MSRPs and discount structures) through batch process production to installation on the customer site the contract purchasing process can easily span four to six months, if not longer. In contrast, a purchasing agent who starts their research online can also buy online now, and have their employees standing at their new desks in a matter of just a few weeks. And at a third to half of the cash outlay.
For example, iMovR’s factory pre-assembled Lander desks have become a huge hit with enterprise customers because they ship one week from order, professional installers are not needed for their two-minute, no-tools installation, and the advanced 3D-laminated surfaces and Bluetooth-sync’d smartphone apps are features that simply cannot be found in contract furniture dealers’ catalogs today.
With more online sellers now having their products ANSI/BIFMA certified (e.g. iMovR and UpLift), there remain even fewer reasons for institutional furniture buyers to keep paying more and waiting longer for contract furniture vendors, whose products also tend to be less technology-forward than the leading online brands’.
True, iMovR or UpLift won’t fly you on their corporate jet to their Grand Rapids showroom or take you out for a golfing and fine dining boondoggle, but those sales tactics are increasingly becoming a thing of the past, too, as competition from e-commerce has squeeze gross margins.
Of course our interest here at WorkWhileWalking and WorkWhileStanding is how the $2.5B standing desk segment is morphing. We’re less concerned about seating, cubicle systems and file cabinets, though these categories as well are shifting fast toward retail and e-commerce every day.
Amazon, IKEA, Staples and Office Depot, and smaller pure-play e-commerce players like Varidesk, Fully, UpLift, iMovR, Flexispot, et al, are now commanding a 60% share of the office furniture market, and all indications are that their slice of the pie will continue to grow faster than the contract industry’s slice.
The Shot Heard ‘Round the World
In a momentous event, $1.3B office furniture maker Knoll has acquired online office furniture pioneer Fully.com. Fully, which rebranded from its original name, ErgoDepot, a couple of years ago, is known for their popular Jarvis standing desks, Capisco chairs, Topo standing mats and various ergonomics accessories.
In the past two weeks since the announcement we’ve surveyed a number of senior executives in the OEM industry—the companies that make parts like linear actuators and desktops that are sold to both contract furniture manufacturers and e-commerce desk markers alike—to get their take on the transaction. Universally, none thought that this would ever happen, or at least not before they had personally retired from the industry.
Indeed, for Knoll to acquire a company that its exclusive distribution channel—its contract dealers—perceive to be the enemy, is a bit like tinkling on the third rail. It could turn out to be a cataclysmic move that leads to the departure of many of their dealers to other brands that continue to honor the exclusivity of the contract channel.
But the Kentucky windage on our polling of industry veterans suggested that it’s much more likely that the other contract furniture companies are going to use this event as the excuse to go on their own shopping spree for e-commerce acquisitions. They’ve all be under the same pressure from Wall Street, same marketplace pressures, and now Knoll’s move finally makes it easier for them to say “hey, they did it first and now we’re forced to do the same, it’s not like we really wanted to but we have to now or Wall Street will punish us for lagging the trend.”
What Happens Next
The problem is, there aren’t that many acquirable assets out there today when it comes to pure-play office furniture e-commerce players that are big enough to warrant acquisition by a $1B+ company. Varidesk would be the largest, but with its precipitously dropping market share and cloud of patent litigation it might be a challenging buy. Most of the other companies who sell exclusively through e-commerce, like UpLift or iMovR, are significantly smaller. After the first few names, not all of which may even be interested in an exit event, there are just a lot of really small players with annual revenues under $1M. Acquiring Amazon or Office Depot is not something a relatively puny furniture giant can afford, so what’s moves can they make?
What’s more likely to occur next is a heightening of interest from private equity funds will come in and roll-up a handful of smaller companies, build them up to a descent size that can move the needle for a large strategic acquirer, and then flip the company up to a Steelcase, Haworth or Technion in a few years. This isn’t the tech industry, it’s one of the most glacially-paced, old-school industries in existence, and so this kind of timescale is probably more realistic for the rest of the industry to respond to the Fully acquisition.
While there has been a lot of private equity activity in this sector for more than a decade, none of those PE-owned companies have an e-commerce business model. Most barely have a website because they don’t want to spook their contract dealers with perceived channel conflict.
As for Fully itself, the official press release (below) makes it sound as if it’ll remain completely independent from Knoll’s contract business. But that’s what most acquisition announcements say, and we know this won’t remain true for long. Office furniture companies are not known for running a federated business model. Sooner or later they’ll look for economies of scale by sharing supply chains and customers across the boundary. In fact, Knoll and Fully are both major customers for Chinese-based standing desk base manufacturer, Jiecang.
Not mentioned in the press release is Fully’s recent spin-out Able Desk Co, a millennial-targeted, simple e-commerce site for selling super cheap, Asian-made standing desks in response to increased competition from the likes of Autonomous. As with its popular Jarvis desk line, Fully has blazed a path to a high volume commodity desk business with low prices and heavy online advertising—the very thing that makes being a sales person for a contract furniture dealer in 2019 a hellish job with increasingly diminished income expectations.
While there’s no mention yet of Knoll on the Fully website we have heard rumors that a major website overhaul is planned soon. Once the new site goes live the thing we’ll be most curious to see is how Fully messages its new relationship with Knoll to its traditional customer base, and how it will set its price targets in the future. They may continue on their current course, with Knoll viewing the Fully & Able Desk Co channels independently as just a lower-tier market segment they need to continue to reach with commodity products. Or they may adjust their pricing upwards to minimize competitive pressure on Knoll’s dealer base. Time will tell.
The potential culture clash between these two very different companies is also something we’re curious to see playing out. Knoll is more than eight decades old and publicly traded since 2004, with 24x the revenue of the company they’ve just acquired. Fully was originally launched as ErgoDepot.com in 2005. Portland, Oregon-based, its cultural leanings led it to convert to a B Corporation a few years ago. It’ll be interesting to see how integration goes over the next few years.
But one thing is for sure. Fully founder David Kahl is highly respected in the office furniture e-commerce world, one of its true pioneers and unquestionably a highly disciplined business manager. Growing any business from nothing to $54M in just 14 years is a major accomplishment, especially in an industry as slow-to-change as this one. If the powers that be at Knoll actually take his guidance they’ll be miles ahead of their Grand Rapids peers in short order.
What do you think will happen? Is this a good thing for the industry, as the press release would have you believe, or a bad thing? Please leave us a comment below if you’d like to chime in with your thoughts.
Following is the complete press release from Knoll:
EAST GREENVILLE, Pa., Aug. 26, 2019 (GLOBE NEWSWIRE) — Knoll, Inc. (KNL) today announced the acquisition of Fully, the Portland, Oregon-based ecommerce furniture brand that helps people get moving, engaged and feeling their best at work.
Founded in 2006 by David Kahl, Fully pioneered direct-to-consumer sales of high-quality, high-performance adjustable height desks, ergonomic chairs and accessories principally for individual home offices and small businesses through fully.com. Fully first earned B Corp Certification in 2015. Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency and legal accountability.
The acquisition of Fully represents a digitally native platform for Knoll, allowing the Company to reach a new audience principally outside of its current distribution while simultaneously leveraging Fully’s product portfolio across channels, increasing the breadth of ergonomic designs available to Knoll clients and dealers. It also further advances the Knoll strategy of building its capability as a go-to resource for workplaces and homes, including the commercial contract, decorator to-the-trade and consumer markets.
Andrew Cogan, Knoll Chairman and CEO, stated, “We are pleased to welcome the Fully team to the Knoll constellation of brands. This acquisition aligns with our strategy to reach clients wherever and however they work. Fully’s design-driven products and unparalleled commitment to customer service reflect our goal to reach new consumers and small businesses, while broadening our range of products and price points as well.”
Commenting on the transaction, David Kahl, Fully Founder and CEO, said, “We are excited to draw from Knoll’s 80+ years of office furniture experience and unparalleled design pedigree to fuel our unique, human-centered approach to the workplace. Since Knoll also shares our deeply-held values, they were the perfect partner for us.”
Fully, with trailing twelve months revenues of $54.0 million, will continue to operate as an independent company and B Corp (BLS) headquartered in Portland, and will maintain its spirited, independent brand identity and website.
To acknowledge a shared commitment to Certified B Corporations, Knoll, Fully and Big Path Capital, who represented Fully in the transaction and is also a B Corp, will make a contribution to the non-profit B Lab (BRLI). B Lab oversees B Corp Certification and B Impact Management programs that support businesses in meeting the highest standards of social and environmental performance, public transparency and legal accountability to leverage business as a force for good.
The acquisition of Fully is for $35.0 million plus contingent future payments dependent on the performance of the business over the next four years. The acquisition is expected to be accretive in the first year. The Company noted that it funded the acquisition through cash on hand and borrowings under its credit facility.
Knoll, Inc. is a constellation of design-driven brands and people, working together with our clients to create inspired modern interiors. Our internationally recognized portfolio includes furniture, textiles, leathers, lighting, accessories, and architectural and acoustical elements brands. These brands — Knoll Office, KnollStudio, KnollTextiles, KnollExtra, Spinneybeck | FilzFelt, Edelman Leather, HOLLY HUNT, DatesWeiser and Muuto — reflect our commitment to modern design that meets the diverse requirements of high-performance workplaces and luxury interiors. A recipient of the National Design Award for Corporate and Institutional Achievement from the Smithsonian`s Cooper-Hewitt, National Design Museum, Knoll, Inc. is aligned with the U.S. Green Building Council and the Canadian Green Building Council and can help organizations achieve the Leadership in Energy and Environmental Design (LEED) workplace certification. Knoll, Inc. is the founding sponsor of the World Monuments Fund Modernism at Risk program.