The Great Recession wasn't easy for those who supply office work stations, chairs and other furniture. For industry leader Herman Miller (MLKN -0.78%) competition seemed to pop up like relentless Whack-a-moles in arcade.
Serious global competition
For starters, competitors closed the innovation gap. Herman Miller built its reputation on innovative products, most notably the Aeron Chair. But competitors like Steelcase (SCS -0.47%) closed the gap with its ergonomically functional Gesture Chair designed to accommodate different activities from traditional keyboard to tablet presentations.
Rival HNI (HNI 0.17%), has an advantage in the commercial market by combining furniture with its hearth-products segment. And Knoll (KNL) was the only one of the major competitors to show even minimal growth during the Great Recession.
And let's not forget the constant threat of overseas competitors with their built-in advantage in labor costs, which is forever baked into the bread of competition for furniture manufacturers.
But ironically as overseas advantages lessen due to rising costs like fuel and wages, and as manufacturing returns to the United States, another threat to Herman Miller rises from one of its own customers, the federal government.
Unicor's new window of opportunity
Unicor is the fancy name of a federally owned manufacturing company -- in existence since the 1930s under the name Federal Prison Industries -- that uses inmate labor throughout the Department of Corrections to make things, such as jeans, electronics and yes, office furniture.
Unicor operates numerous factories using inmate labor that often pays less than a dollar an hour. It is a serious player in this competitive marketplace, holding 14.5% of the market for cabinets, lockers and shelving and 9.3% of the office furniture market.
Herman Miller has lobbied Congress about Unicor's unfair labor practice for years, which may have had something to do with Federal government contract GS-28F-8049H, awarded to Herman Miller in 2010, giving the company a slice of the government's business.
Laws that limit the company's ability to directly compete with companies like Herman Miller because of its unfair labor do not succeed in an outright prohibition. As a result, Unicor remains a significant threat to Herman Miller, expanding that threat to the commercial sector.
Unicor even has gone so far as to list its office furniture products on its website for purchase. Anyone can browse the site and order just as they would from say, Office Depot, or Herman Miller.
So bail out, right?
In the face of this brutal competition it would seem like a prudent move to stay away from all of these office furniture companies, especially Herman Miller. As Fool.com writer Mark Lin pointed out, the established brands of big companies like Herman Miller don't offer the stability and security one would expect.
But this may be one example of watching the trend and going in the exact opposite direction. In fact, for a long-term solid position with projections of significant growth in the next three years, I suggest Herman Miller might be the exact company to consider. Here's why:
1) As Fool.com's Dan Caplinger pointed out back in 2011, Herman Miller showed serious signs of having weathered the recession storm and using its considerable financial strength (its earnings in 2013 topped $1.8 billion) to position itself for growth.
"If it can keep up its recent earnings momentum, though, Herman Miller could quickly move much closer to perfection in the years to come," Caplinger wrote. Two years later the company looks more poised for the revenue growth and debt reduction Caplinger hoped for back in 2011.
2) The changing nature of offices means big business in the years to come. Like it has several times in the past, Herman Miller's is poised to profit from it. An overwhelming number of managers surveyed by both Herman Miller and other agencies say they want work spaces that are more flexible, modern and conducive to both multiple-device work platforms and interaction among employees.
From its report to investors in 2013, the company stated, "By 2015, non-dedicated team areas are anticipated to be the single largest allocation of space (averaging 35% of the office), as dedicated individual workstation space continues to decline (between 11-22%, by region)."
The bottom line is companies everywhere will be radically redesigning and refurnishing their work spaces. In "early 2014" Herman Miller will launch its completely renovated offerings known as Living Office Spaces.
Investment analysts are taking notice. Four different analysts project massive revenue growth in office furniture by 2015 and for Herman Miller in particular to benefit.
On the surface Herman Miller looks to be a 20th-century brand whose time, like big-box retailers, has come and gone. But dig a bit deeper and take a second look. From its government contracts, ability to lobby to challenge Unicor's advantages and its new product line to align itself with cutting-edge technology, Herman Miller is worth a serious place on your watch list in 2014.
I will be watching it closely and will report a more detailed financial picture once its Living Office Spaces is fully launched.