Incorporated: 1977
NAIC: 337122 Nonupholstered Wood Household Furniture Manufacturing; 337121 Upholstered Household Furniture Manufacturing
SIC: 2511 Wood Household Furniture; 2512 Upholstered Household Furniture
Shermag, Inc., is one of Quebec's leading designers, manufacturers, and distributors of residential furniture. Shermag products include both mass production home furnishings and custom, made-to-order furniture. Shermag offers bedroom furniture in 20 styles, including the Shaker-style Atlantic Collection, the elegant Bourbon Street Collection, the classical Chateauneuf Collection, the sleek Loft Collection, and the Asian-influenced Yao Collection. Youth and infant bedroom furniture in seven styles include bunk beds, cribs, changing tables, and related case goods. Also, Shermag is a leading worldwide producer of glider rockers. Shermag's 16 collections of dining room sets are produced in modern and traditional styles. Shermag offers customized sofas and chairs in fabric and leather upholstery. Accessories include accent side tables, office furniture, and home entertainment centers. Shermag furniture is manufactured with solid woods, such as birch, maple, and oak, and accented with wood veneer, such as cherrywood. Nearly 40 percent of Shermag's production is outsourced to China. Production in Canada is vertically integrated, as Shermag handles every aspect of production, from logging and processing wood solids and wood veneer, to assembling and distributing products to major department stores, mass market chain stores, and independent retailers of high-end furniture throughout the United States and Canada. Exports to the United States comprise approximately 65 percent of revenues.
Economics Professor Turns Entrepreneur
Shermag founder Serge Racine had two foundational careers before becoming an entrepreneur in the furniture business. As a professor of economics, Racine taught at Georgetown University in Washington, D.C., and then at the University of Sherbrooke in Quebec. In 1972 Racine left teaching and took the position of city manager of Sherbrooke. While in that position, Racine encountered an opportunity in furniture production in 1977, when a group of businesspeople sought assistance from the city of Sherbrooke to establish a furniture factory. Although the city did not support the project, Racine saw its merits and left his job, with an annual salary of $65,000, to become an entrepreneur in furniture production.
Racine raised $50,000 to start Shermag, along with silent partner Gilles Sirois. Racine acquired a small furniture company producing glider rockers and garnered first-year sales of CAD 2.5 million. With Racine earning a first-year salary of $22,000, Shermag struggled as he sought investors and gathered funds to acquire small, regional furniture-makers. Racine's goal was to develop the company into a full-line, home furniture manufacturer. Acquisitions included a bedroom furniture manufacturer in Disraeli and a dining room furniture manufacturer in St-Étienne-de-Lauzon, both in Quebec. With the addition of three factory acquisitions, Shermag produced a complete line of furniture under the brand names Marius Ouelette, Open Home, as well as Shermag. By 1986 Shermag's customers included 1,200 retail furniture and department stores throughout Canada.
After years of absorbing the losses of acquired companies, Shermag became profitable. For 1986, Shermag posted sales of CAD 23.2 million and earned a profit of CAD 2.2 million. The company solidified its position with a public offering of stock in July 1986. At CAD 5.35 per share, Shermag raised CAD 14.2 million, well above the original CAD 10 million, due to strong demand from investors. Shermag applied the funds to reduce long-term and short-term debt, to modernize its manufacturing facilities, and to fund working capital for further expansion. Shermag acquired a controlling interest in Conant Ball Company, of Massachusetts, and began distribution to retailers in the United States.
Acquisitions and Vertical Integration Fosters Growth and Profitability
Expansion at Shermag involved developing a vertically integrated structure for efficient sourcing and processing of raw materials, as well as to continue developing its product line. High lumber prices prompted Shermag to invest in hardwood production. Toward that end, in October 1986, Shermag purchased a 33.33 percent interest in Les Produits Forestiers Andre Poulin, Inc., a sawmill and wood-drying operation that processed oak, ash, cherrywood, and other fine hardwoods for furniture production. Shermag increased its interest in the CAD 10 million operation to 50 percent in early 1988, then acquired the remaining 50 percent interest the following December. Shermag sold one of two sawmills but retained the facility at Notre-Dame-de Montauban, which carried rights to hardwood logging on Canadian public lands.
Other acquisitions supported product and market expansion. In February 1987 Shermag acquired the Scanway Corporation for CAD 3.2 million. A Scandinavian manufacturer of ready-to-assemble, white melamine furniture, Scanway brought significant new customers to Shermag, including retailer IKEA Svenska AB of Sweden, and KIT A TOUT, a chain distribution company. The acquisition included manufacturing operations in St-Jean, Quebec.
Shermag entered the upholstered furniture market through two acquisitions. In August 1987 Shermag applied CAD 1.5 million in working capital to purchase Creations Mobilieres Chanderic Inc., based in Vercheres, Quebec. Shermag expanded the work crew from 50 to 65 employees with the expectation of increased sales through the company's customer network. A year later Shermag acquired another upholstered furniture manufacturer, Meubles Dema, Inc., a subsidiary of Domicil, Inc., of Montreal. Shermag doubled the staff to 20.
Other acquisitions in 1988 expanded production capacity and created new distribution outlets in the United States. The purchase of Nadeau & Nadeau included a manufacturing facility in St-François-de-Madawaska, New Brunswick. In September 1988 Shermag purchased a 30 percent interest in Grange Furniture, Inc., which handled France's Grange SA operations in the United States. Shermag already supplied 20 percent of the furniture inventory to Grange's 29 retail stores, located in major U.S. cities.
Operating profitably on approximately CAD 44 million in revenues during the late 1990s, Shermag began to modernize operations for productivity and efficiency. The Canadian government contributed CAD 1.1 million to the CAD 4.3 million manufacturing improvement project. Changes involved implementation of new technology and the upgrade of production equipment.
U.S.-Canada Free Trade Agreement Impacts Operations
Though Racine actively supported the free trade agreement between the United States and Canada, signed in 1988, the pact affected Shermag in a variety of ways. Initially, free trade hurt Shermag's business. Reduced restrictions on trade increased competition from furniture manufacturers in the United States. Moreover, in conjunction with an economic recession, Shermag's exports to the United States declined significantly. These conditions resulted in financial problems, first at Scanway, which accounted for 10 percent of Shermag sales. Shermag ceased operations at the subsidiary, which underwent federal bankruptcy reorganization. Accompanied by multiyear losses, revenues at Shermag declined to a low of CAD 27.7 million by 1992.
To deal with its overall financial problems, Shermag initiated a restructuring program in 1991. Reorganization of debt resulted in a merger of Shermag with its major shareholder, Corp. de Gestion Shermag, owned by Racine and Sirois. The move allowed new investment through a CAD 1 million debenture, convertible to stock, as well as the private placement of nearly three million shares for CAD 2 million by Quebec Federation of Labour Solidarity Fund. Negotiations resulted in a three-way ownership split, with Racine's Corp. de Gestion Shermag owning 32.63 percent, QFL Solidarity Fund owning 30 percent, and the public, 37.37 percent.
By the mid-1990s, Shermag's economic fortunes turned with the currency exchange of a weakened Canadian dollar against a stronger U.S. dollar. With free trade, the exchange rate made Canadian goods more attractive to retailers in the United States. Shermag began to serve that market with bedroom and dining room sets for department stores. Shermag offered new furniture in casual contemporary designs that appealed to the tastes of baby-boomers in the United States. These involved simpler lines and lighter wood stains than those used in the European-style furniture offered by the company. Also, Shermag began producing more furniture from solid wood, rather than the veneered composites popular during the 1980s.
Shermag's focus on the U.S. furniture market led the company to shift distribution from 900 stores of varying sizes in Canada to major retailers in the United States. Shermag became a major supplier to 18 of the 25 largest retailers in the United States. These included J. C. Penney, Bloomingdale's, Burdines, Jordan Marsh, Macy's, Dayton-Hudson, and Sears and involved 2,000 stores. Exports rose from 20 percent of production in 1991 to approximately 50 percent in 1995.
Expanding to Meet Demand in U.S. Market
Shermag reorganized and upgraded its facilities to meet the new demand for Canadian-made goods. In December 1994 Shermag began a CAD 1.5 million facilities upgrade and expansion at St-François-de-Madawaska. The following August Shermag invested CAD 1 million to transform a warehouse in Eaton, Quebec, into a 20,000-square-foot wood veneer plant. At the nearby Chanderic plant in Lennoxville, Shermag increased production by 50 percent to meet demand for glider rockers in the United States.
In late 1995 Shermag purchased Rosaire Bedard, Ltee, known for its solid wood dining room tables and chairs. Shermag planned to increase production at the St-Étienne-de-Lauzon, facility with the goal of doubling dining room furniture sales to CAD 10 million. A year later Shermag acquired Sofas International, Inc., expanding its capacity for the manufacture of upholstered furniture. The two-year-old Saint-Léonard, Quebec, company reported CAD 1 million in revenue for 1995. Shermag aimed to increase revenues to CAD 5 million in two years based on the natural extension of sales of upholstered furniture complementary to its wood furniture for family rooms and living rooms.
As business grew, Shermag experienced a shortage in the supply of hardwoods which, in turn, led to higher overhead prices. The company required 20 million board-feet per year to meet production. Hence, Shermag sought control over supply and cost by expanding its sawmill operations. In 1997 Shermag acquired Megabois, Inc., which operated a sawmill in Lac-Megantic. Then Shermag entered a 50-50 partnership agreement with Gerard Crete el fils, Inc., to build and operate a second sawmill in Notre-Dame-de-Montauban under the newly formed Scierie Montauban, Inc. Shermag obtained full ownership of that company in 1999. To supply its sawmills, Shermag found hardwood sources in the United States and obtained a 25-year extension on its timber-cutting rights on Canadian public lands.
As Shermag organized for efficiency and growth, the company applied CAD 7 million to expansion of its operating facilities. Shermag acquired a 120,000-square-foot distribution center in Sherbrooke, Quebec. The facility provided enough space to consolidate the inventory produced at Shermag's 11 manufacturing plants. The company converted its warehouse in Victoriaville, where furniture destined for North American retailers was stored, to a manufacturing facility. In 2000 Shermag tripled its veneer manufacturing capacity by adding 25,000 square feet to its Placages Lennox factory.
Success in upholstered furniture after the acquisition of Sofas International, led Shermag to expand that area of business. The company began producing leather furniture and introduced six styles of leather sofas at the trade shows in the fall of 2000. In May 2003 Shermag acquired Jaymar Furniture, a special-order upholstered furniture company, with leather and fabric options. The acquisition included a 150,000-square-foot manufacturing facility near Montreal.
In 2002 Shermag entered the youth market in bedroom furniture, initially as a private-label manufacturer for Drexel Heritage. Shermag produced bed frames in a sleigh style with accompanying dressers specifically for Drexel Heritage Home Stores. Upon closer look at its production, Shermag found that it already produced many items appropriate to the youth market, such as desks and hutches, as well as appropriate wood stains, in light colors. Hence, in early 2003, Shermag introduced a complete line of juvenile furniture, including bunk beds in maple wood. Later, Shermag developed a TV armoire compatible with video game equipment.
Success with youth furniture prompted Shermag to develop a full line of infant furniture. The line included cribs, changing tables, and twin and full beds, available in six styles and a variety of light wood stains and veneers. Shermag organized the infant and youth furniture under Chanderic, its glider-rocker division.
While comparable competitors experienced lower sales and profits, Shermag thrived on excellent product quality and customer service. Shermag obtained 75 percent of sales from exports to 50 accounts in the United States.
Business Conditions Lead to Restructuring and Layoffs
After nearly a decade of steady growth, bolstered by free trade and a favorable exchange rate, the weakening of the U.S. dollar in 2003 eroded the competitive edge of Canadian exporters to the United States. Furthermore, Shermag faced increasing competition from Asian furniture manufacturers.
In order to address the new business conditions, in February 2005 Shermag announced it would restructure operations. The company had begun to transfer manufacturing of high-volume goods to China in 2001. As factory workers resisted the changes, labor strikes quickened the pace of outsourcing in 2004 and 2005. For instance, a prolonged strike at the Disraeli plant prompted Shermag to outsource production of glider rockers to Asia; Shermag used Russian sources of birch to produce the rockers. This move fit with the company's strategy of exporting the manufacture of mass-produced goods to Asia.
Other restructuring involved layoffs due to excess inventory of home furnishings. In March 2005 the company laid off half of the 160 employees at Victoriaville; Shermag closed the plant completely by the end of the year. In August, Shermag laid off 83 workers at its St-Étienne plant in Quebec. Shermag consolidated its upholstery operations at the Jaymar facility in Terrebonne, Quebec. This involved closure of the Saint-Léonard, Quebec facility, and the layoff of 70 employees.
Shermag consolidated support operations as well. In December 2005 the company announced the consolidation of sawmill operations at Notre-Dame-de-Montauban. Shermag halted operations at Lac-Megantic and placed the facility up for sale as the company began sourcing raw materials overseas. Committed to maintaining a vertically integrated structure, Shermag rebuilt the Montauban facility after a fire in March 2006 destroyed it. Shermag consolidated all warehousing and distribution under one 350,000-square-foot facility in LaSalle, near Montreal. Shermag closed and put up for sale its Sherbrooke and Victoriaville distribution centers and closed the leased Jean-sur-Richelieu facility. Shermag expected the changes to reduce material handling costs, to simplify supply chain management, and to improve customer service.
In order to align production with demand, Shermag initiated a made-to-order production protocol, a move that also provided consumers with customized furniture options. Shermag opened a development center in Sherbrooke to speed the shift toward the high-end furniture market. New products included the new Land line of home entertainment centers, which offered flexibility to a customer's particular electronics setup. To increase its visibility in high-quality furniture, in April 2006 the company signed an agreement to develop, market, and manufacture a new collection of furniture in partnership with the prominent Metropolitan Home magazine. World-renowned interior designer Benjamin Noriega-Ortiz was chosen to design the fashion-forward Metropolitan Home Furniture Collection. Another strategy involved an exclusive agreement with The Rug Studio to distribute custom-made area rugs throughout North America.
Shermag's strategies failed to produce the desired results. The value of the U.S. dollar continued to decline against the Canadian dollar, eliminating economic gains from restructuring. A downturn in the U.S. housing market in late 2006 and an increase in competition from the improved quality of Chinese furniture both negatively impacted furniture sales. Further, sales of custom furniture did not meet expectations. As such, in September 2006, Shermag cut production at its bedroom furniture manufacturing facility in Disraeli, Quebec, and then closed the facility in early 2007. Also, Shermag halted operations at the St-Étienne-de-Lauzon dining room production facility. By June 2007 8 of 16 factories had closed, and the number of employees was reduced by half, from 2,400 to 1,200. Production output in Asia accounted for 35 percent of all production by the end of fiscal 2007.
Net revenues at Shermag decreased to CAD 188.71 million for fiscal 2006 and CAD 155.92 for fiscal 2007. Shermag reported a net loss of CAD 30.62 million in 2006 and CAD 17.29 million in 2007. Losses included more than CAD 30 million in extraordinary costs, such as employee severance pay and impairment of long-lived assets.
New Leadership Accelerates Change
Dissatisfied with the pace and quality of change at Shermag, investor activist George Armoyan raised his ownership interest in the company from 12 percent in the summer of 2006 to 20 percent in the fall of 2007. As a result, Armoyan qualified for a board seat, leading CEO Jeffrey Casselman to relinquish his seat to Armoyan's Clarke, Inc. After Casselman left the company in November, Armoyan increased the pace of outsourcing to Asia. Shermag closed four of eight remaining plants, two in Quebec and two in New Brunswick, including its state-of-the-art Edmundston facility. Layoffs of 320 people reduced employee count to 750 people. Armoyan expected to rejuvenate Shermag by focusing on the strong Canadian market for home furniture.
Principal Subsidiaries
Jaymar Furniture Co. Inc.; Scierie Montauban, Inc.; Shermag Corporation (U.S.A.).
Principal Competitors
American Leather; Basset Industries; Broyhill Furniture Industries, Inc.; Décor-Rest Furniture, Inc.; Durham Furniture, Inc; Dutailer, Inc.; Ethan Allen Interiors, Inc.; LADD Furniture Inc.; McCreary Modern, Inc.; Meubles Canadel, Inc.; Palliser Furniture Ltd.; Precendent, Inc.; Sklar Peppler Furniture Corporation; Stanley Furniture Company, Inc.; Superstyle Furniture Ltd.; Trend Leather Inc.
Further Reading
"Acquisition Costs Hit Earnings," Financial Post, February 16, 1988, p. 26.
Blackwell, Richard, "Shermag to Close Half Its Plants," Globe & Mail, December 11, 2007, p. B3.
DeCloet, Derek, "Armoyan Outlines Plans to Shake Up Shermag," Globe & Mail, October 10, 2007.
Dunn, Brian, "Shermag Gets into Leather," HFN: The Weekly Newspaper for the Home Furnishing Network, September 4, 2000, p. 24.
"Furniture Makers Find Profitable Niche in U.S.; Strong Rebound in Industry That Had Been Hard Hit by Bankruptcies," Globe & Mail, February 22, 1996, p. B29.
Gibbens, Robert, "Shermag Gets $65M to Restructure: Furniture Firm Transforming Itself to Make-to-Order," Montreal Gazette, June 13, 2006, p. B3.
------, "Shermag Must 'Stop the Hemorrhage'; Activist Investor Named Director," Montreal Gazette, October 11, 2007, p. B1.
Horsman, Matthew, "On Their Own: Furniture Maker Finally Finds His Niche: Ex-Teacher Turns Valuable Lessons into Profits," Financial Post, September 27, 1986, p. 20.
"Issue Brings $14.2 Million to Shermag," Globe & Mail, July 19, 1986, p. B6.
Jones, Robert, "Furniture Maker to Buy Failing Rival Nadeau," Globe & Mail, January 9, 1988.
Karleff, Ian, "Shermag Looks Within for Key to Market Expansion," Financial Post, July 18, 1998, p. 21.
Kitchen, Jane, "Chanderic Shift Focuses onto Youth, Infant Market," Home Textiles Today, October 20, 2003, p. S27.
Knell, Michael J., "Shermag Sets Sights on Youth Market," Home Textiles Today, April 7, 2003, p. S18.
Lamey, Mary, "Shermag Knocking on Wood; Furniture Maker Looks to Increase U.S.," Montreal Gazette, August 19, 1994, p. D1.
Marotte, Bertrand, "Shakeup at Shermag Sees Sudden Departure of CEO," Globe & Mail, November 21, 2007, p. B9.
------, "Shermag Facing More Layoffs, Plant Closings," Globe & Mail, June 15, 2007, p. B4.
Marowits, Ross, "Ailing Shermag Shipping Quebec Work to Asia," Toronto Star, February 13, 2007, p. D04.
"Metropolitan Home Magazine to Partner with Shermag for Signature Branded Collection," CNW Group, April 24, 2006.
"News Bulletins: Shermag in Talks," Globe & Mail, September 4, 1991, p. B2.
O'Mara, Sheila Long, "Drexel Heritage Enters Youth Bedroom Market," Home Textiles Today, November 18, 2002, p. S18.
"Serge Racine: CEO of Shermag Inc.," Report on Business 1000, July 1998, p. 56.
"Shermag," Globe & Mail, August 16, 1988, p. B2.
"Shermag Announces Consolidation of Upholstery Operations; Long Term Contract Signed at Jaymar Facility," CNW Group, December 1, 2005.
"Shermag Closing 4 Plants in Quebec and N.B.," Canadian Broadcasting Corporation, December 10, 2007.
"Shermag Enters into New Credit Facility Agreements," CNW Group, June 12, 2006.
"Shermag, Inc. to Purchase Jaymar Furniture," HFN: The Weekly Newspaper for the Home Furnishing Network, May 12, 2003, p. 3.
"Shermag Loss Falls As Cost Cuts Take Hold," Globe & Mail, November 14, 2006, p. B5.
"Shermag Must Repay Loan After Plant Closures: Minister," Canadian Broadcasting Corporation, December 11, 2007.
"Shermag Plans Two Shutdowns, 300 More Layoffs," Globe & Mail, February 13, 2007, p. B5.
"Shermag Reports Fiscal 2005/2006 Results," CNW Group, June 15, 2006.
"Shermag Signs Distribution Agreement with The Rug Studio," CNW Group, March 13, 2007.
"Shermag to Establish New Distribution Centre in Montreal," CNW Group, April 10, 2006.
Swift, Allan, "Shermag Strike a Drag on Revenues," Montreal Gazette, November 12, 2004, p. B3.
— Mary Tradii
