Synergy House brings innovation to the table

THE furniture business can be a tricky one. Putting aside the challenge of having to compete against low-cost producers like China and Vietnam, players also need to be agile to adapt to eCommerce trends.

One company that seems to have understood this well is Synergy House Bhd.

Trading at a price-to-earnings multiple of 18.53 times, Synergy House’s share price has more than doubled since its initial public offering in June last year, closing at RM1.40 yesterday.

The group’s net profit also tripled year-on-year (y-o-y) to RM9.01mil in the first quarter ended March 31 (1Q24), underpinned by better operating leverage and an optimised sales mix.

Unlike the majority of listed local furniture companies, Synergy House is a pure-play furniture distributor that fully outsources its manufacturing activities.

The group’s lean operations allow it to focus on the design and development (D&D) and sale of ready-to-assemble home furniture online, freeing up cash flow for greater investment in research and development and marketing.

But then again, how hard is it for competitors to emulate its business model? And is it a sustainable one?

“It looks easy to copy, but difficult to excel in. Timing, team dynamics, and expertise are crucial factors,” executive director Elon Teh Yee Luen tells StarBizWeek.

Teh says the company made the strategic decision to venture into eCommerce, particularly the overseas business-to-consumer (B2C), right before the onset of the Covid-19 pandemic.

While many businesses have made a similar pivot, Teh points out the group’s market expertise and know-how provide it an edge over its peers.

“In the first phase of eCommerce, many young entrepreneurs who are good in online operations, started their own businesses.

“They would buy and sell what they procured from factories because they do not have their own designs. This is feasible because these entrepreneurs know how to create traffic for their products online.

“Now, things are different. Unlike the first phase, where everyone was selling me-too products.

“The real winners are those who know the industry well and are able to create designs and churn out stock keeping units (SKUs) at a high rate. This is our strength,” he says.

To date, Synergy House has more than 1,600 SKUs for its B2C segment and targets to hit 2,000 by the end of this year.

The group’s main growth engines are its business-to-business (B2B) and B2C sales models.

In the B2B segment, Synergy House primarily exports to the United States, Britain, United Arab Emirates amongst others and caters to local customers as well.

Teh says the business environment, as in the traditional approach of manufacturers selling directly to importers or retailers, has changed.

“In the past, manufacturers can get a lot of responses or sales by going to exhibitions, but now this method is not really effective anymore.

“While the focus of the industry has not entirely shifted to B2C, this segment has shown very good results in these three to four years for us.”

As for B2C, the group reaches local consumers via third-party eCommerce platforms, like Lazada, Shopee, and TikTok as well as its in-house online store.

For international markets, Synergy House is present on platforms such as Amazon.com, Walmart, and Wayfair.

“Our traditional business, the B2B segment, was our bread and butter in the past, where we sold to wholesalers and retailers who then sold to end consumers.

“We will still be maintaining the B2B business, but we see exponential growth in the B2C segment and this will be the group’s direction going forward,” says chief financial officer Kenneth Ng.

Recently, the company made the news when it was appointed as American eCommerce firm Wayfair LLC’s authorised service provider in Malaysia.

Teh says the “sky is the limit” with this new engine of growth.

“In the past, our B2B business, which has been with us for over 20 years, served as our primary growth engine. Before the Covid-19 pandemic, we introduced our B2C segment, marking it as our second growth engine.

“The third engine is when we were appointed as Wayfair’s authorised service provider. The first two are definitely driving the top line, while the third one is more on providing services, which will impact our bottom line,” he says.

Synergy House will facilitate the integration of local manufacturers and vendors onto Wayfair’s eCommerce platform.

The group will also provide support services to vendors in terms of operating in the platform, like strategic advice on product selection, linkage to other service providers, advertisements and promotions and troubleshooting issues.

The company targets to enable vendors to successfully list their products on the Wayfair eCommerce platform by 2025, and to achieve stable sales and profit contributions from 2Q25.

“Firstly, there is no need for us to inject huge capital in this segment.

“Moreover, we intend to charge a fixed percentage of 10% of the onboarded vendors’ sales, for every item they sell.

“This is where the main revenue is coming from for this segment. So when they grow, we grow as well.

“Wayfair’s revenue was about US$12bil based on the 2023 financial results. Malaysia’s total furniture export was around RM11bil, so even if we gather all the local furniture exporters for this venture, it is still very small for Wayfair.

“Hence, the opportunity here is big,” Teh says.

Not discounting the fact that many local players already have a foot in the US market, Ng says most of them have a presence there via the B2B business model, through retailers, wholesalers, and importers.

“They have not directly reached the end consumers yet. This new venture we have with Wayfair will fast-track their entry into the B2C market.

“Furthermore, they are generally focused on manufacturing, while our strengths lie in D&D, sales, and marketing.

“As such, we complement their capabilities and we can work together with them to reach out to the end consumers,” he says.

The weakening housing demand in the United States has been reported to greatly contribute to the slump in furniture exports and it is one of the largest export markets of the group.

Nevertheless, Ng says the group is not affected much by the downturn.

“When people say the property market is down in the United States, they typically refer to landed properties.

“This is not our target market. Our target customers are young adults and students – those with high mobility who are always moving around and have no budget for expensive furniture.

“Our furniture is in the affordable price range between US$100 and US$300.

“Therefore, we don’t see a direct correlation between the US property market downturn and our furniture sales in the United States.”

Even so, Ng acknowledges that market sentiment can be unpredictable.

“To safeguard ourselves, we do not rely solely on the US market.

“We have expanded into Britain, Canada, Germany, France, and other countries. This helps us to mitigate any potential impact if the US market experiences a sudden downturn.

“Even within the US market, we try to operate on as many platforms as possible to reach a wider audience.

“This strategy minimises the risks for the group,” he says.

Synergy House is present on multiple overseas platforms including Wayfair US, Amazon US, Wayfair UK, Amazon UK, and Cenports Commerce in the United States, which connect the group to other platforms like Home Depot and Target Plus.

Additionally, the group also operates on Mano Mano UK, Wayfair Canada, Wayfair Germany, eBay UK, Amazon Canada, Amazon Germany, Amazon France, and Mano Mano France where the company recorded its first sales two months ago.

“Wayfair US is the primary platform we started with in July 2020 for our overseas B2C business.

“In 2023, Synergy House’s sales through Wayfair US alone generated annual revenue of RM92mil, reflecting a 146% growth from the previous year. Our next target is Amazon India,” Ng says.

There is a lot of trial and error in the group’s efforts to diversify across multiple platforms, Teh says.

The company typically requires about six months to a year to evaluate whether a new platform is viable.

“We venture into Wayfair Germany because we already know how Wayfair operates in the United States.

“This expedites the process. However, while Wayfair is very strong in the United States, it may not be the same in Germany, where there is competition with other platforms,” he says.

Regardless, Teh maintains that the group is not unduly worried about competition.

“In eCommerce, it is more about running your own marathon.

“The focus is on making the right product selections, maintaining good quality, setting the right prices, and providing good after-sales service.

“Good product reviews are crucial online, so in a sense, you are competing with yourself to maintain high standards rather than worrying too much about competitors.” he says.