Insight: Italian home base hampers sofa king Natuzzi

Reuters
New Natuzzi's easy chairs named Revive, are pictured in a store downtown Milan
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New Natuzzi's easy chairs named Revive, are pictured in a store downtown Milan December 10, 2013. REUTERS/Alessandro Garofalo

By Francesca Piscioneri

SANTERAMO IN COLLE, Italy (Reuters) - From this hilltop town on the heel of Italy's boot, Pasquale Natuzzi has built an eponymous furniture company that is one of the country's most global brands. It sells sofa beds from Dallas to New Delhi and is one of a handful of Italian companies listed on the New York Stock Exchange.

Yet today, Natuzzi's home base is dragging it down. Best known for its brand Divani & Divani, the company hasn't made a profit in six years. In the first nine months of 2013, it lost 38.7 million euros, deepening year-on-year losses on a slight dip in sales to 328 million euros.

Though it sells in 123 countries, and has factories in China, Romania and Brazil, Natuzzi says the main reason for his company's woes is the high cost of making sleek sofas and armchairs at home.

The core of its production and half of its 6,500 worldwide employees are in Italy where high labor costs and strict employment laws make it hard for companies to keep up with more nimble competitors elsewhere.

It costs Natuzzi up to 10 times more to make a product in Italy than in its factory in China and although it has been proactive opening factories abroad is under pressure from Italian unions to keep jobs at home.

The result is that, as the recent economic downturns have hit Natuzzi's key consumer markets of the U.S. and Europe, the company hasn't been able to adjust its cost base to compensate for the fall in consumer spending.

"The orders we have are enough to employ 1,500 people, not our 3,200," the 73-year-old Natuzzi, who is company chairman and chief executive officer, said in a recent interview in Milan where he was unveiling the new Revive armchair.

Late last year, Natuzzi agreed to a government-brokered plan that will allow the company to avoid laying off more than a thousand workers, while pledging 242 million euros to breathe new life into the company's Italian operations.

Natuzzi's predicament is just another chapter in Italy's industrial decline. In the 1980s and 1990s, many Italian companies began exporting abroad helped by devaluations of the lira that allowed them to price lower than foreign rivals.

But that advantage was lost when Italy adopted the euro in 1999 - around the same time that European goods faced a flood of competition from low-cost rivals from China.

Italy's efforts to loosen its labor laws have stumbled, despite attempts - most recently in 2012 - to make it easier for companies to adjust their workforce to economic cycles.

Italy's social security and labor taxes are among the highest in Europe. Despite the 2012 reforms, it is still difficult for companies to downsize for economic reasons. Usually companies resort to state-funded furlough schemes in which workers are still employed by the company and receive a salary, paid largely by the state even though they don't work.

As a result, many companies, especially in the textile business, subcontract work to tiny firms to increase flexibility because they don't fall under the strictest of labor rules or to lower costs because they hire workers on under-the-table terms in order to evade taxes.

Until about a decade ago Natuzzi used subcontractors, but - under pressure from unions - stopped outsourcing its production and now operates fully-owned plants.

A fire in a factory last month in Prato, near Florence, that killed seven workers who had been sleeping where they sewed cheap clothes during the day thrust the spotlight on some 5,000 sweat-shops that often violate labor and health regulations.

After the fire, Natuzzi wrote a letter to Italy's president, complaining about "unfair competition" of rivals who use subcontractors that enjoy little regulatory oversight.

"This is a type of business that seems legal, but that breeds on illegality. In order to offer products at lower prices, these subcontractors almost always break the law," Natuzzi wrote in his letter.

Donato Caldarulo - president of one of southern Italy's upholstery districts where many of the small subcontractors are based - said in a statement that while there were some "irregularities" in the industry, "the respect of legality is something that all the companies operating in this district hold close to their hearts."

AMERICAN DREAM

Pasquale Natuzzi founded his company in 1959 together with three friends, but the brand's fortunes didn't really take off until the entrepreneur began selling in the United States in the early 1980s, taking advantage of Italy's weak currency to attract buyers in the world's largest consumer market.

Some 90 percent of the company's production is now exported outside of Italy, with 45% of its turnover made in the U.S.

In 1993, Natuzzi listed on the New York Stock Exchange, a major coup that gave its founder -- who was dubbed the king of sofa in Italy -- added cachet back in his home country.

Paolo Moramarco has been working in Natuzzi's Santeramo maintenance unit for 22 years. He says the name was enough to get him a mortgage when he and his wife were buying a house.

"Thankfully, I've finished paying the mortgage because today, if you show up at the bank with a Natuzzi paycheck, they ask for proof of another income," he said.

Problems for Natuzzi began in the early 2000s, partly because of the strengthening euro and because of the global economic downturn that followed the September 11, 2001 attacks on the World Trade Center in New York. Between 2007 and 2012, Natuzzi racked up 140 million euros in losses.

The decline in consumer spending hit much of the furniture industry of southern Europe. Between 2000 and 2012, the turnover from the myriad upholstery companies in Puglia and Basilicata regions dropped to 28.5 billion euros from 42.5 billion euros, according to industry association Federlegno-Arredo.

Last year, Natuzzi's sales fell to 468.8 million euros from 486.4 million euros the year earlier. In the first nine months of 2013, sales dropped by 6 percent in Europe, 7% in Italy and 1.5% in the U.S.

"Our efforts to make our company more competitive at the global level have been rendered vain," said Natuzzi in emailed answers to questions.

To balance his high labor costs in Italy, where Natuzzi operates five of its nine worldwide factories, it has expanded production to China, Brazil and Romania.

Production costs are 20 eurocents per minute worked in Romania and 10 eurocents in China. But in Italy, where 3,175 employees are based, the cost has soared to one euro per minute worked - a cost that is unsustainable, especially compared to rivals in Italy who use subcontractors that cost a fraction.

"To be competitive, we would need to get to 50 cents," per minute worked for our Italian factories, says Natuzzi.

Consofa, a consortium of upholstery makers - was recently fined for violating labor laws. In a statement, Consofa said that it believed authorities had "made an erroneous evaluation of its contractual relationship with subcontractors and suppliers," adding that it was sure it would "be able to confirm the correctness of our operations."

Michele Giannelli, who works on the assembly line in Santeramo, says he can understand fellow workers who accept under-the-table jobs with subcontractors. "If someone has lost his job, can't rely on unemployment schemes and faces the bank confiscating his house, then it's a matter of survival."

Natuzzi's woes in Italy reached fever pitch over the past year. The company has 1,450 of its workers on Italy's state-run furlough scheme and last spring warned it would have to begin a collective lay off scheme because of the worsening economy.

In October of last year, the company reached a deal with unions and the government in which it will offer buyouts to 600 workers and, in conjunction, bring part of its Romanian production back to Italy by creating two new local subsidiaries.

The challenge, Natuzzi says is still to bring down local labor costs, something the company is looking into.

"We aren't looking for the simplest way out, rather the best and fairest one," he said.

(Editing by Alessandra Galloni and Anna Willard)

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