Sep 09 2020

Industry insight: What are the benefits of the VAT reduction?

One issue, three perspectives: It’s a good two months since the German VAT rate of 19 per cent was suddenly cut to 16 per cent. Now it is time to take stock. What benefits is the VAT reduction generating? We asked Carmen Tappeser, Leif Kania and Hans Hermann Hagelmann – three absolute experts in the furniture trade.

A good starting position

The furniture industry has weathered the coronavirus crisis relatively well so far. This is something that the Association of the German Furniture Industry (VDM) and the Association for Modern Kitchens (AMK) agree on following a joint study that they commissioned.

In July the study concluded that, in the future, a well-prepared furniture and kitchen industry will be in a position to continue to serve customers who want to invest, and it forecast a maximum fall in sales of ten per cent for 2020 – a figure that the VDM corrected in a press release on 24 August. The industry association now expects the dip in sales to amount to a maximum of five per cent.
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Leif Kania is a trainer and coach for the furnishing industry, drawing on over 20 years of sales and management experience in the kitchen and furniture trade. The former managing director of a large VME company with craft and commercial training knows the problems of his customers first-hand and knows how to solve them sustainably. As an accredited trainer according to Insights MDI®, the industry expert focuses on the recognition of individual strengths, which allow sales teams and managers to reach their full potential according to their personality. The focus of the sales training courses is on type-specific advice as the key to increasing sales.
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This positive impression is confirmed in ambista’s Industry Insights. Leif Kania coaches customers in the kitchen and furniture trade. He says: “I don’t know hardly any furniture showrooms that are on the same level as last year. Instead, all of them are way, way above it. 

I put this down to the fact that people are staying at home a lot, and this creates a desire to make changes or improvements. They also have a lot more time to talk about new purchases and about the money that is suddenly available, for example if their holiday is refunded. I think that is a big factor.”

Kitchen consultant Carmen Tappeser shares this assessment: “I think that the extra free time has given lots of people the impetus, true to the saying ‘I’ll do that when I have the time.’”
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Carmen Tappeser has an affinity for furniture and interior design in her blood. Her mother is a seamstress in a furniture store and thus responsible for the creative side that the kitchen consultant and vintage lover also shows in her private life when she tailors her clothes. Her father - who has been working in the furniture industry for over 30 years - was and is Carmen Tappeser's role model in her profession. She likes to discuss furniture topics with him passionately. It is therefore not surprising that she turned her back on her original career in hotel management after completing her training. In 2010 she ventured a career change in a furniture store and discovered her talent for consulting, planning and sales. Since 2013 Carmen Tappeser has been working in the kitchen retail trade near Cologne. Customers appreciate her direct and honest way of communication.
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The pandemic as the turbo drive

Then came the VAT reduction. Would that make everything even better? It looks as if it might at first glance. But Hans Hermann Hagelmann, who has good connections to the specialist kitchen retail trade through his association activities, has his doubts: “From what I’ve been hearing, July was one of the best months of all time. But the specialist retailers rarely advertise with percentages.

I think that many incoming orders are more to do with the coronavirus itself and less to do with the VAT reduction. The pandemic is acting like a turbo drive that is strengthening already existing tendencies. This applies to the position of the kitchen retail trade, which was strong in any case, and to cocooning, which has boomed in my view and moved out of marketing theory and into marketing practice.”
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Hans Hermann Hagelmann studied business administration in Bochum and Frankfurt before embarking on a career in marketing and product management in the early 1980s. Among the professional stations of the business graduate are Pepsi-Cola in Offenbach and BASF in Mannheim. In 1990, Hagelmann switched to the furniture industry and initially worked in the supply industry. In 1999, he became a member of the management board at Nolte Küchen, and in 2001 he became managing director for marketing and sales. At about the same time, he joined the board of the marketing company A30 Küchenmeile and was spokesman of the board of AMK from 2004. He held both positions for around ten years. Since 2013, Hagelmann has not only been the owner of 3H-con Unternehmensberatung in Bad Oeynhausen and 3H-Distribution for the kitchen brands Pronorm and artego in France, but also President of the German Association of Medium-sized Kitchen Retailers (BMK). In 2017 he completed additional training as a certified business mediator.
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The problem is time ... and the lack of skilled staff

The engine seems to be well oiled. Does it need additional purchase incentives in the form of a VAT cut? And can even more orders actually be processed? 

We asked Carmen Tappeser: “I think that many retailers have the good problem of full order books. The industry is delivering seamlessly again in my experience. But often there simply isn’t enough supply capacity to get the kitchens out, too.”

Leif Kania takes a similar view: “It is a well-known fact that kitchen fitters don’t grow on trees. That’s why it is such a big challenge at the moment to get the goods out and to deliver the desired quality. I think it’s going to be a massive issue at the end of the year when everyone wants to get their items for 16 per cent while they still can, especially for kitchens because they simply take a lot of time.”

Hans Hermann Hagelmann expects to see a degree of tolerance: “I’d put it like this: More orders are always good to have. The problem is time. But I’d say that the industry has got to cope with that. Delivery times are currently four to five weeks, plus processing time at the retailer’s end. That is certainly a challenge, but I think that, because of the last few months, customers have a certain degree of understanding. They realise that things can’t happen at the click of a finger anymore.”

Delighted response to the cut

But how are customers responding to the VAT cut? It’s comparatively easy to show the saving on the price tag for tables or sofas. It’s different with kitchens, which are complex and require intensive planning. What is the best way to communicate the 16 per cent here, and what benefits does it generate?

“The best thing to do is to calculate the final price and then take the three percentage points off,” recommends Hans Hermann Hagelmann. According to the expert, pricing is ultimately flexible, and a good sales adviser can make up the difference with appliances or services while the customer is pleased to get more for the same amount.

When it comes to the question of whether the VAT reduction really carries any weight, Carmen Tappeser says: “It doesn’t actually make any difference for new sales. It’s more relevant to customers who ordered before 1 July and whose kitchens are being delivered now. They are ‘saving’ around Euro 630 on a purchase value of Euro 25,000.”

Three per cent ... that’s nothing!

The VAT reduction is only going to make a real difference in a few cases, then, especially as the furniture trade advertises with discounts of a quite different calibre. Leif Kania agrees – and he sees a very different problem: “I think that the majority can’t or don’t want to even calculate the three per cent, or they’ve simply got it in their heads that ‘Three per cent – that’s a piddling amount! I get 70 per cent from places like XXXLutz.’ That’s what the lion’s share will think in my opinion.”

On the question of the effectiveness of the cut in advertising, he adds: “You can now also see that many retailers are moving over and saying 3 per cent plus another 10 or 15 or 17 per cent makes 20 per cent in total. They’re simply aggregating it with other discounts. That could work very well.”

The power of large numbers

So, are we talking about the power of large numbers, coupled with difficulties with maths? Hans Hermann Hagelmann sees it much the same way: “When the VAT rate was raised in 2007, we had consumers who genuinely believed that, by increasing the rate from 16 to 19, they would save 19 per cent.

That’s what people working in retail told me and asked what they should do. I replied: ‘Nod and keep on serving!’ That’s just the way it is. I always make the same point: ‘Even if you were to tell them it was 120 per cent, they’d still queue at the checkout wanting to pay.’ The ability to calculate percentages is a virtue that our population is increasingly losing.”

However, Hagelmann also suggests that more and more customers are developing a buying behaviour in which discounts no longer play a decisive role in their purchasing decisions. Quality, good advice and competent service now appear to be much more important with value for money being the ultimate deciding factor.

Nothing but an expense

So, what is it all about? Leif Kania takes the following view: “I believe that the reduction in value added tax has first and foremost created a lot of work and effort for furniture retailers. As far as the perception of customers is concerned, it’s inconceivable that this 3 per cent cut has caused the upswing that we’re definitely seeing at the moment, since customers in our industry are spoilt for choice when it comes to big discounts.”

Carmen Tappeser confirms this from the retail perspective: “In my experience, customers have not been buying any more or any less since 1 July. Those who want to invest anyway – and are able to do so – are making purchases as normal. Regardless of VAT.”

The final push

Discounts create work. That much is clear. An assessment which, incidentally, was confirmed in the business climate survey conducted by Germany’s Association of Small and Medium-Sized Companies, the Mittelstandsverbund, in the second quarter of the year – with 14.1 per cent of the association’s members operating in the furniture and kitchens sector. 

It will only be possible to assess what impact the reduction has really had in retrospect, as shown by a study from 2015 in which German-based market research company GfK and the Booth School of Business in Chicago examined the effects of the VAT increase in Germany in 2007. The result: consumer spending rose significantly beforehand and didn’t drop back to the previous level even once the rise had come into effect.

Hans Hermann Hagelmann, who consulted this study when preparing his comments, says: “So now we have scientific proof that it worked before an increase. But what about a cut to VAT, and what about the current situation with regard to the coronavirus? I don’t think it will have a significant impact. But a psychological signal will surely be sent out in this whole confused situation. 

In my opinion, this shouldn’t be underestimated. If someone has been thinking about buying a kitchen anyway but has been hesitating, perhaps the lower rate of VAT will push them over the last hurdle. I don’t think it will be the trigger to inspire a purchase, rather that it may have a leverage effect with a positive influence on the overall picture.”

Assistance must be practical

In the light of these findings, the VAT reduction seems like a shot in the dark. So, what would be a more effective way of supporting trade through the coronavirus crisis?

Leif Kania is in favour of tax reductions to increase the inflow of capital: “I think it would be better to grant tax incentives in various areas, such as on business tax or profits. There are many different possibilities. And then there are things like protection against dismissal. Where employees have been hired to help a company handle its current additional workload, it should be made easier for the company to dismiss them in the event that they are no longer needed in January or February – which I anticipate.”

Carmen Tappeser has tax in her sights, too – just not value added tax: “I think a tax exemption on indirect costs, such as rent or electricity, would make more sense, especially for smaller businesses. In certain instances, this could have saved jobs.”

Hans Hermann Hagelmann feels that it’s important to seize new opportunities where they arise. If a lot of money is already being spent on subsidies, why not specifically promote good ideas?

“For example, there are office buildings in Berlin containing firms that are now having to let people go or are asking them to work from home,” he explains. “In other words, they no longer need this space. Office space is now becoming superfluous very quickly. What should we do with all this space? This is where the subject of tiny homes comes to the fore, with architects starting to turn the space into nice, affordable, flats in order to bring employees closer to the workplace again. And that in turn has a turbocharging effect for our industry.”

Outlook

Developments like these are encouraging. They could also represent an opportunity to avert the downturn feared by many when the VAT rate is put back up in January. It remains to be seen whether this would also apply to the furniture industry or whether a slack period is on the horizon for the sector because a large proportion of purchases have already been made.

Leif Kania gives his opinion: “I would argue that the increased demand we’re currently experiencing – leading to a rise of 30, 40 or even 50 per cent in some cases, according to reports from my customers – will be met, with the result that we’ll fall into a hole by January. But that may only last for two, three or four weeks, and then the industry will be promoting hard to compensate for it.”

Equally possible is a second lockdown with alternative solutions. After all, the infection figures are currently on the increase again. That’s why Hans Hermann Hagelmann says: “In the present situation, I would not be tempted to make a prediction. That would be like reading coffee grounds. What we’re all suffering from right now is an inability to plan, a lack of strategies and the resulting uncertainty.”

By contrast, Carmen Tappeser expects another busy year of work ahead: “The market for kitchens will remain stable. After all, people will still be building and moving home in 2021! Let’s hope for the best!

Author: Christine Piontek

Join the discussion!

What has your experience of the VAT reduction been? Share your opinion with the experts. What suggestions do you have for dealing with the crisis? We’d love to read your comments on the article!

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