Smartpack Kitchens takes the China heat
Wednesday, February 13, 2008/
How Australian manufacturer Smartpack Kitchens survived and thrived in the face of the onslaught of Chinese competition. By MIKE PRESTON.
By Mike Preston
How an Australian manufacturer has survived and thrived in the face of the onslaught from Chinese competition.
Smartpack Kitchens chief executive Mike Caminer (right) realised five years ago that if he didn’t take quick action, competition from Chinese imports would destroy his kitchen manufacturing business.
Today Smartpack still sells kitchens, but just about everything else has changed – its product is now almost entirely manufactured in China, a new digital strategy is reaping dividends and annual revenue from the core business has jumped 20% in the past six months. He is forecasting revenue of about $4 million in 2007-08.
The seeds of Smartpack’s change of strategy were sown when Caminer realised that a $2 million spraying machine he had bought for cabinet finishing – for both his products and those of other local manufacturers – was never going to deliver a viable return on investment.
It was because between 2000 and 2003 the local Australian furniture making industry was being swept away by a wave of cheaper Chinese imports. The kitchen manufacturing side of Smartpack was still performing well but Caminer saw that, unless some hard decisions were made, it too would soon become uncompetitive.
The first tough call Caminer made was to shut down the spraying part of the business, a decision that meant writing off millions in losses and putting most of the 20 people who worked on the plant out of a job.
“It was a very difficult time. Not only did we have to move out of our premises and relocate everything, but no-one here wanted to buy the machine – it was a sign of just how far the market had gone that we couldn’t sell for $50,000 in Australia a machine we had paid $2 million for five years earlier,” Caminer says.
The next big call was to radically change the business model of the kitchen side of the business away from local manufacturing – and that meant exploring options for sourcing core kitchen components from China.
Between 2004 and 2006 Caminer visited China four times, each time meeting as many people as he could and even hiring a professional firm to help him make connections in the relevant sectors.
“It was an eye opener,” Caminer says. “Once you start to investigate China, you realise it is not even a competition, there’s no way you can drop your margin, or cut costs to compete. The prices there are just miles ahead of anything you can do here, even taking into account shipping costs.”
He also came to the realisation that, as a relative newcomer to China, it was going to be both difficult and risky to deal directly with manufacturers himself. Instead, he formed a partnership with a Hong Kong-based firm with connections in China to act as a conduit between Smartpack and the manufacturers.
There are downsides to the arrangement – the partner takes a slice of the profit on everything Smartpack takes from China – but Caminer believes it has been useful in managing what he agrees are substantial risks in doing business in China.
“They helped us find the right manufacturer from a quality and reliability perspective. I think you need someone who is on your side and speaks the language to be confident in China. As an outsider people will tell you anything to get your business, but a local knows who is good and how to get things done,” Caminer says.
So far, at least, the change in strategy is paying off. Smartpack has now brought around 500 kitchens into Australia since the first container arrived early in 2007, allowing it to reduce its workforce from 50 people to 10 and increasing gross margins on each sale by 15%.
That has meant a 20% lift in revenue in the last six months to an annual figure of between $3 million and $5 million, an increase that has effectively meant that money flowing from the kitchen arm of business has replaced that lost from the defunct spraying business.
The software, which was developed through Caminer family connections in the software game, has been downloaded more than 30,000 times each month since it was made available in mid-2006.
The software is valued at $500,000, Caminer says, an amount the business is gradually paying to the software developer in staged repayments.
“People still like to look and touch things, but it’s a good starting point to be able to get on to your computer and play with ideas for your kitchen instead of sitting for hours with a designer. So obviously it has been a great way of getting our name out,” Caminer says.
Smartpack’s move from old style manufacturer to lean business built on low-cost Chinese products and a clever online marketing strategy has not been without pain, both for its owners and the staff who lost their jobs. But it has put the company on the path to growth.