Art DeFehr (Palliser Furniture)

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David Noël: Hello and welcome to the Manitoba Business Podcast, featuring interviews with business leaders and entrepreneurs based in our wonderful province. I’m David Noël.

Today’s guest is part of a Manitoba business dynasty. In addition to his significant non-profit work, he oversees a company that employs hundreds of Manitobans—in addition to many more employees outside of Canada—and generates hundreds of millions of dollars in revenue every year. Our conversation explores his storied past, and how to lead a gigantic international enterprise part-time.

If you enjoy today’s episode, and I hope you do, please consider adding a review on iTunes. Positive reviews will have a big impact on the success of the show, especially a brand new one like ours. Of course, please don’t be shy about sharing the show with your as well—the website is www.manitobabusinesspodcast.com

Without further ado, here is Arthur DeFehr:

[to Art] Thank you so much for taking the time to do this.

Art DeFehr: Oh, good to be here.

David: Can we start by having you just tell us a little bit about… I think a lot of people listening will have some idea of who you are, but I’d like to hear it in your words who you are and what you do.

Art: My name’s Art DeFehr. I’m CEO of Palliser Furniture or I was CEO until a few months ago, and I’ve been involved with Palliser virtually all my business career plus additional activities in other parts of my life.

David: Fantastic. Can you tell me about the beginning of your tenure at Palliser? If I understand correctly, your dad started the business. Is that right?

Art: My father started the business in 1944, and I entered the business officially in 1967 after grad school.

David: Okay. First of all, did you want to take it over or was it something that you kind of inherited and your dad wanted you to do it? How did that happen?

Art: Oh, I didn’t want to be in business at all. During university, I decided to become a diplomat and applied to the Canadian Foreign Service, was accepted and had a position. And then I got an extra degree in the U.S., got a deferral, and during that year, it was the middle ’60s and interesting times. I became engaged in civil rights, anti-war stuff, and the FBI thought it was not appropriate. And whatever action they took, it lost my security clearance in Canada.

David: Wow. So I’ve heard about this a little bit. I obviously did some research ahead of time and I read about this story. How was it communicated to you that you no longer had a security clearance?

Art: Well, I had the position with the one-year deferral, and then somewhere along the line, they asked me to drive to Windsor just for an update. I was in Indiana. And I drove up there and had an interview and all they did was just check what had happened. In the meantime, I had another degree, got higher marks the previous year and everything was fine. I didn’t ask any questions. I got back to my college, and sometime later I got a letter that I no longer qualified.

I had already qualified the year before with a position, so I called back and I said, “Well, in addition to whatever you did, which was just updating my education, what else would you do to determine I hadn’t qualified, because I had another degree with high grades?” The person on the phone was honest and said, “Well, the only thing I can think of, they would do a security check again before the appointment.” And I said, “Well, how would they do it? I haven’t been in Canada for the last year?” And he said, “Well, if you’re living in the States, then they would ask the FBI to do it. They have this reciprocal arrangement.”

And so I went to my dean, I said, “If the FBI comes on campus, do you know?” He said, “Yes, they register.” So he checked to ensure they had registered and even who they had talked to, which is all the right-wing guys on campus.

David: Oh, my goodness.

Art: And so I got shafted and I got this letter that I no longer qualified.

David: Wow.

Art: So I decided to go to grad school and run my own life.

David: Yeah, yeah, and so you didn’t just go to any grad school. You went to Harvard Business School.

Art: I went to Harvard, yeah.

David: Wow, so what was the thinking process there? Was it kind of like you had done this year of school in the States and you’d been active in the civil rights movement and then you realized that you weren’t going to get this diplomatic position that you had been shooting for? And at that point, was it kind of like, “Okay, I might as well jump into business. This is kind of the next option”? Or what was the thought process there?

Art: Well, no, I had a Business and Economics degree, and so I said, “I may as well learn my trade.” And I had a family business, so I said, “I will…” And then I went to Harvard and then I could’ve again chosen what to do, but at that point, I said, “I may as well as learn to do business so that it becomes a career option, and also the fact that it becomes a way of earning a living because earning a living gives you freedom.”

David: Right.

Art: And I then chose not to go with major companies. I was one of the top 1% in class, so I had a lot of options.

David: Wow, at Harvard you were in the top 1%.

Art: And so I could’ve worked almost anywhere. In Wall Street or in Switzerland, I had job offers. I decided to come home and learn the business and sort of not climb the corporate ladder and said, “The idea being…” My wife and I said, “We’ll work five years maximum and then go back and look into some other career options once I learned how to function business.” So that was how that decision was made. And at the end of five years, I did get the opportunity to go to Bangladesh during or at the end of the civil war, and it gave me a start in my other activities.

David: Right, so you kind of saw a way to use business as a springing board to your other activities, and other activities for the uninitiated, Art has been involved in…. You worked with the U.N., I believe. You’ve worked with the MCC very actively.

Art: A variety of agencies on my own. I’ve done a lot of my own projects. So the idea was, in business, not only that I wanted to do other things. When I did other work, I basically based probably a lot of my activity on my business skills. In other words, I could learn to go into difficult situations and manage my way out of a tough problem. So it wasn’t that I suddenly went somewhere else and became different. I was using those skills in a different setting.

David: Right, so it wasn’t like business was just an excuse for you. It was actually an enabler in more than just financial ways. The lessons you were learning in business carried into your other activities and vice versa.

Art: Correct, yeah.

David: Okay, interesting. Certainly out of the people that I’ve interviewed so far for this project, you’re the only person I’ve spoken to has a Master’s Degree in Business from the Harvard Business School. I think you’re, if not unique, there are very few of you running around in Winnipeg, we’ll put it that way. Do you think that your education specifically had an impact on your ability to jump in and run the business when you came back to Winnipeg?

Art: I’m not sure of that. Hopefully what they teach you in two years there or any business school should be helpful and I would say certainly in certain ways it was. I think, in my case, it’s also what I took there. I took things like strategy and those things. So I chose some things that weren’t maybe in the normal running a business sense. That was partly choice, but I think what Harvard also does is it gives you a lot of connections, it also gives you a certain confidence, and I think confidence is very important in what you think you are and what you think you can do.

So coming out of Harvard and doing well, I assumed that I could compete with anybody in the world, and so it never occurred to me that I couldn’t compete in the U.N. or I couldn’t compete in my industry or something. So in that sense, it’s probably now confidence can also be arrogance, but I do think it does position you. You make good friends who are similar and you approach things a certain way. The market also gives you the benefit of the doubt. If you say you’re from Harvard, as you’re impressed with that, people are impressed with that, which is helpful. It’s one step closer to closing a deal.

David: Sure, yeah. It’s an extra credibility factor. You mentioned the connections you made at Harvard. Have those been instrumental for you moving forward or were they kind of a bonus?

Art: They were a bonus. I’ve retained touch with some people, but like I said, even all through life, it’s with other things that give you sort of that credibility, one of the three or four things people talk about you. And then of course that leads to opportunities, which in itself then builds on the resume, if you will.

David: Sure. Okay, so then jumping back into that time period, you had been denied from your diplomatic position, you went to Harvard, you came back home and now you were basically poised to take over the family business. What was that process like? And keep in mind what I’m asking here. There are a lot of family businesses that fail in the second generation or third generation. That succession is very, very difficult. So was that a factor? How did your dad approach passing the business off to you and how did you approach it?

Art: Well, I think my father had made a decision a couple of years earlier when he built our first factory near this location and was basically, “Are the boys interested?” If they’re not, he would’ve kept the business small and make a living out of it.

David: Right.

Art: And when he felt that we were at least open to the idea, he started building a bigger business. So that was some background over there. My older brother had already entered the business and he’s a more operating person, very good manufacturing and other person. And so I came into the financial, legal and marketing work. We were a very good pair. My father was still active in those early years, and really with that, my brothers, we ran it till say the late ’70s. And then when my mother died, my father kind vacated the business in the late ’70s and then the boys took over.

David: I see.

Art: That was about 10 years after joining the business.

David: I see. Since then, a lot has happened obviously since you began to be involved with Palliser. What would you say the biggest changes were that happened in your tenure? And among those changes, what were some of the more difficult ones I guess? What were the challenges that you faced as a company?

Art: Well, I think as a company, we had many years of very genuine success through the ’70s, the ’80s, the ’90s, and the early 2000s, and I think we were good at certain things. We were a very strong operating company. We were vertically integrated. During the ’80s, we had gone to the States, began to work there. Later on, a different story, we’d gone into Mexico a bit later and that became part of the current story more.

But I think we were often ahead of the curve. We were technologically innovative. We were into Europe with new techniques, equipment long before other people or certainly at the front edge. So we were leading edge not only in design, but in product manufacturing and integration. And we built what was the largest company in Canada and one of the top 10 in North America. I think two things happened. One is the family, as the third generation, I think had different ideas where to go. So in the late ’90s, we split and I took part of the company, which is the part I have now. But my goals were a little different. By then I was already very active in other things, so I ran the company really on a half-time basis. So I didn’t have the vision to build something really big there anymore. It wasn’t my goal anymore. So for me I wanted to keep a healthy business as a source of income and as a good business.

The other part of the business ran into more difficulty when China came along, and that part of the family didn’t really want to go to Asia, which would’ve been necessary to keep the business large. So the business became smaller on that side and some different things happened.

For the Palliser you know today, which is really an upholstery business plus a lot of real estate, we made a very critical decision about ’97-’98 to look at Mexico. And part of it was to get at the southern U.S. market. We really weren’t thinking of China in those years. So we got into Mexico, and when China became really strong in wood around 2000 and upholstery about ’03, ’04, ’05, it would have been a little late to make a major move then.

But being in Mexico, we had an alternative in that we had a lower cost base. We weren’t low enough to compete in the volume business, which had been our historic home, if you will. We were dealing with the biggest guys in North America, whether it’s Brickley, Sears, J.C. Penney, Levitz, and these people all went to China. Having the Mexican base, it allowed us over a period of years to shift strategy from a volume supplier to a higher design custom supplier. You can’t do that in a day and the process fortunately didn’t all happen in one year. So over a number of years, we changed from volume to today we’re literally everything one-at-a-time custom. That’s a smaller business or a specialized business, so the company is smaller today than it was at that time, but it’s viable, it’s profitable and it has a very good market position.

David: So you said when you initially made the move to Mexico, the goal wasn’t really lower cost labor, it wasn’t really having China in mind, it was to target the southern U.S. Is that right?

Art: Well, we were all ready active in China and Asia from the middle ’80s, and so we knew Asia well, and we were doing a lot of business. And so the question is in this part of our business: to go to China or not? And there’s a famous business school case, Palliser Furniture in Mexico versus China, which a lot of students study at the MBA level in Canada and some in the States as well. And the question there is how do you make a decision between China or Mexico at a time when it wasn’t evident yet what China would become. So how do you decide? For us, China can be a very big manufacturing center, but in areas where you didn’t own your intellectual property, China didn’t have staying power for most people in that the Chinese eventually learned what you did and said thank you very much with very limited exceptions.

My feeling was two things happened. One of them is I had a family history in China. I knew Asia very well. I’d been working there since ’72, so I was comfortable in a number of countries, and our feeling in China was China would be successful, but China didn’t need us and I could not be personally long-term successful there. China would be but not myself. And that’s what happened to most of my competitors or many of them. On the other hand, Mexico wasn’t maybe as low cost as China but the Mexican situation is different. The Mexicans will not take it away from you. They will work for you but they’re not an alternate.

And the other part is that my family came out of communism and I was enough into China to know they’re still communists. I didn’t trust them. I’ll buy from them, I still do but I don’t want to own any business there. So it was partly an ideological personal decision, not a pure financial one, but it turned out for us, it’s given us a good alternate, which today makes us unique in the market and we’re quite happy with that positioning.

David: So how did you identify then? You said that once you had already made the move into Mexico and then you realized you needed to get out of the volume business, A, how did you identify that problem? And B, how did you actually go about… You said it was like kind of a several year transition. How did you guide that?

Art: We were always in the custom business to a degree. In Canada, we were supplying everybody special order, but we also had the big guys like Brick and Leon’s, you recognize today, and they’d be truckload. They wouldn’t be special orders. So we had both markets, but the volume was the bigger market.

I did an analysis for one of the banks probably about 11-12 years ago, but when this transition was taking place or was well into it, I had looked back about 5 years and I took our top 20 accounts. And of those, I marked those who were primarily volume accounts like no special order. So I took 14 accounts, included most of the top 5 or 6 and then a bunch of the others. And I looked at what we had done say in 2000 and what we were doing in about ’07 or ’08. And the volume of that group of really, really big accounts had dropped 95%.

David: Oh, wow.

Art: Literally my top 10 disappeared.

David: Wow.

Art: And if you could imagine any business where most or 8 of your top 10 disappeared and survived. And so on the other hand, I had a much longer list of accounts who might be one store, three stores, ten stores specialty stores including some big ones like J.C. Penney and Sears who’ve remained in the custom business, but most of the big guys walked on us.

So it was a progressive thing and I had to also then downsize the business particularly Canada, because Canada wasn’t viable manufacturing at all, so we downsized to one factory and survived. Then the Recession hit and of course the Canadian dollar declined or went up from 62 to par. So I used to have a big export program. Well, at 62, 68, 70, it worked. At par, it didn’t work, so I had to literally shut down most of [Canada]. We had three problems. We had a China problem, we had a currency problem, and then we had the financial crisis. So by the financial crisis came, it was no big deal anymore.

David: You were used to problems.

Art: It was just a little more pressure.

David: Sure. So is there still a Canadian factory today?

Art: Yes, yes. The next road over, we have 600 people, but of the 600 in Winnipeg in the Palliser upholstery window, 300 of them are administrative, R&D, engineering. Whereas in Mexico.. we’re 50-50 here; in Mexico, I’ve got 1200 people, but probably 85-15 manufacturing there. I have my local administration, but mostly it’s pure manufacturing.

David: Wow.

Art: All of the intellectual work is done, all the marketing, the order desks are all up here.

David: I see. Now you mentioned that the business previously had several entities and they got split off. When did that happen again?

Art: 1996.

David: 1996, okay, and what other companies are the result of…?

Art: Well, the main one was a couple of them. One of them was DeFehr Furniture on the next street, which is much smaller than it used to be, they used to have a big plant in Transcona and that. We only have one factory now and it’s running. My nephew runs that. We had an import business, which we spun off, and it operates on the name of Casana Furniture. It’s a separate company. I’m part owner, but different management. Actually it operates out of the same building further down. We have EQ3, which is in the same building, which my son-in-law runs.

David: Oh, interesting.

Art: That survived under a little different ownership. It moved out of Palliser. So we were also connected with an airport business, Arconas, a Winnipeg airport. My other son-in-law runs that out of Mississauga.

David: Oh okay.

Art: So in the real estate, some of it was just empty factories. We emptied out 2 million feet of buildings, and my brother and I split that. So he’s got a bunch of buildings, I have a bunch, and so now we’ve redeveloped those buildings into different purposes.

David: Yeah, okay, and you said the purpose behind that was mostly just different owners wanting to go their own way, or was there like a strategic decision to spin off some of these groups, or what was the thought process there?

Art: I think there were two things. One of them is our interests are very different. I was very international both in my other interests and my work, and the other part of the family didn’t want to go to China, and you really had to go to China to remain as big as you were. And so that was a philosophical difference. And the other one is we had a bunch of next third generation coming along and just sometimes I just felt that I didn’t want my children to be part of a gang of 11. I happen to have adopted children, so I didn’t want them to have to compete with the others, and so I said, “I’d rather do my own thing with you.”

David: Interesting, I see. So does that factor into what you’re building now then? Are you thinking that this is going to get passed onto your children?

Art: But I’ve told my children that I don’t want them to work… they have to show… if they want to be entrepreneurs, then work on your own. Run your own business and figure it out. But I don’t like this idea of having kids figure they’re owed a living by being coupon clippers, so I said, “If you want to be in business, then take a piece of it and build it.” So I have that philosophy.

David: Right, okay.

Art: Not necessarily build the biggest business, but I think both of my daughter-in-laws happen to be both mainly at home with the children, but my two son-in-laws are both very, very good entrepreneurs. And I think they feel much happier running their own business than being part of a big group and going for the ride.

David: Certainly. So in terms of Palliser then, what does the succession plan look like?

Art: Well, Palliser is a little different, because my two son-in-laws already have gotten their own businesses. I didn’t have the ideal person to head this, and so here we’ve taken the path of making it a professionally run company so that Palliser Furniture with 2000 employees is run now by externally hired people trained internally or from the industry. So it’s a business which can run indefinitely if we want it to, but it’s a free-standing business, which we manage with a board of directors.

David: Now especially in light of the fact that you said you ran it half time previously, and now I don’t know how much time you spend here, but I imagine it’s less. How do you get the team in place that’ll allow you to do that?

Art: Well, over the years, we’ve had some incredibly reliable people and I have a lot of people who’ve stayed with me. I have a number of people still relatively young, they’ve been with me 25 years. And then with the transition to professional management, a couple of them are newer people, because now I have to… Normally the family often took the senior positions, and as I replaced myself and others like that, that we had to then either, in some cases, develop internally. And in a couple of base cases, we brought in outside people. But we’ve built a team now that covers the bases.

David: In those cases, I think a lot of people can imagine growing your management internally. I think bringing in from the outside is the scarier prospect for a lot of people. How did you approach that?

Art: Well, it’s not simple and there are some people I hired in sort of senior positions. It didn’t all work out over the years, but because we have a strong base team, you’re adding off one at a time. The person who is CEO now joined me about six years ago as Head of Sales and Marketing and then joined us. Eventually we felt he was the right person, and the big challenge for him was he was an American living in Texas. And to be CEO, I said, “The job’s up here.” So a year ago, he moved up here.

David: Wow, wow. Once people are in place, what are the metrics to decide if they’re doing a good job? Are you just looking at the numbers? Is it a balance sheet question for you?

Art: No, we have. Certainly the balance sheet is important, but we set goals. The financial goals are annual goals. They’re very important. So is market position in terms of our strength today in terms of the marketplace, the branding and that. I think it has a lot to do with sustainable strategy that we’re developing with balancing Mexico and Canada, and that we can say that what we’re doing long-term is going to work. The fact that we’re trying to build positions in our market that are as unique as possible, special orders, special products, and then the other side is probably building a team. So we’re putting a lot of pressure on the human resource development exactly for the reason you mentioned. Like this time, we did a transition with outside people. Ideally the next transition should be from the inside, grow our own people.

David: Yeah, we’re coming close on time here. So I’m going to ask you one final question and it’s purely about Palliser and about the furniture industry in general, but I’m curious do you think there’s growth potential for Canadian-owned furniture businesses, for the furniture industry in Canada? And if so, where do you think it is? What do you think people are doing that’s right?

Art: Well, I can’t speak for the industry. You can only speak for your own company. What happened is during the ’60s, ’70s, ’80s, during that period of time, it was quite possible, but really North American, for firms to move into multiple segments of the market and become sort of a logistic and other presence in the marketplace. And one part of your business, wood bedroom furniture and dining room and upholstered, one would support the other.

What happened when China came along, everything became very price-oriented. The Chinese guys are virtually all highly specialized, very low cost. So the fact that we had multiple businesses got in the way, and like in our case, by dividing the business, we became specialized again. So we’ve survived partly by being specialized. As this thing with China and you’ll read in current news China is becoming a little less competitive, we have some opportunities to regain the market share again. So now we can say, “How do we become bigger? Do we become bigger in our niche? Do we become bigger by adding adjacent products? Do I make a strategic purchase?” Now I can grow back into it. Being Canadian or American, it doesn’t matter. It’s a management team and there’s no longer a Canadian business in the sense that depends on my manufacturing here. We’re simply based here and if it works, we’ll manufacturing here. If we can manufacture more, we’d love to, but we’re not basing our future on the fact that we’ll manufacture more here. It’ll be based on how the market allows us to do that.

David: Yeah. Well, Art, we’re right on time here. So thank you so much for taking the time to chat.

Art: Thank you.

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