Vaughan furniture maker sues IKEA
Vaughan’s Zsemba Apron and Upholstery Ltd. (ZAU) launches $25 million lawsuit for breach of contract.

Thestar.com
July 1, 2014
By Ashante Infantry

A defunct Canadian company which purported to be “the largest manufacturer of IKEA upholstered furniture in North America” has launched a $25 million lawsuit against the Swedish-born retail giant for breach of contract.

Vaughan’s Zsemba Apron and Upholstery Ltd. (ZAU) was one of the many independent suppliers Swiss based-IKEA Supply AG relied on globally to produce its retail divisions’ popular ready-to-assemble furnishings, from reference samples and drawings and sometimes through their own innovation.

But that once mutually rewarding relationship, which accounted for 75 per cent of family-run ZAU’s business, ended badly.

The Vaughan company filed for bankruptcy in May, two months after terminating its commitment to the furniture behemoth as a result of “wrongful acts and conduct” which the lawsuit asserts cost ZAU $5.5 million in lost profits from 2010-2013.

In allegations that have not been proven in court, ZAU said the companies enjoyed a strong relationship until 2010 when IKEA “unilaterally and substantially reduced the prices that it paid for products purchased from its manufacturing suppliers, including ZAU” and should have know that this would “cause them to operate at a loss.”

The statement of claim seeks to negate the original purchase agreements, citing a “power imbalance and the dependent relationship between IKEA and ZAU which was fostered and encouraged by IKEA when it required ZAU to dedicate the majority of its production efforts and resources to IKEA...

“In essence, the bargaining process was a “take it or leave it” process with ZAU now completely dependent upon IKEA and forced to sign whatever contract IKEA would require...

“By acquiring finished goods at unreasonably low prices, and by refusing to pay reasonable prices to reflect the actual costs with a built in reasonable profit, IKEA profited from those transactions to the detriment of ZAU.”

Houston-based Maria Carolina Perez, a spokeswoman for the IKEA Trading Services, Inc., which is also named in the lawsuit, said in an email that the privately-held, multibillion dollar brand was not aware of the ZAU claim and “we do not comment on potential litigation.”

IKEA Supply AG is a wholesale company, purchasing goods from various suppliers on a global basis, and supplying them to IKEA retail companies throughout the world. IKEA Trading Services, Inc. is a service company performing trade solicitation services in North America under a contract with IKEA Supply AG.

Perez added: “IKEA does not comment on specific and individual information regarding supplier relationships, however, I can tell you that Zsemba ended their business relationship with IKEA. In March 2014 they communicated to IKEA that they were not going to continue production. Throughout the business relationship IKEA fulfilled its contractual obligations...

“IKEA can confirm that we had ongoing discussions about several aspects of Zsemba’s performance, compared to our global requirements. IKEA will act as necessary to ensure that our products are produced according to the agreed quality, sustainability and working conditions. If the product does not meet these agreements, IKEA reserves its contractual right to stop deliveries to its stores, having the best interest of our customers in mind.”

Zsemba principals - father George, sons Gabor and Zsolt - told The Star a once collaborative relationship with the largest flat-pack furniture retailer in the world, which peaked with $34 million in sales in 2004, deteriorated as IKEA pushed them to deliver goods cheaper while raising quality standards.

In an interview the men said it was tough to compete for the IKEA business against jurisdictions with lower minimum wages and government subsidized plants. In 2009, ZAU lost a $9 million spring mattress contract to Mexico. The $4 million wooden bed bases order wasn’t renewed either the following year, going instead to North Carolina.

Now, the massive Highway 427 and Highway 7-area factory is a graveyard of sewing machines and contemporary seating. The lunch buzzer echoed through the plant as receivers audited the goods and equipment for auction, hoping to relieve a $2 million debt.

“I feel like crying,” a visibly emotional George Zsemba said as he took a reporter through the complex and detailed the demise of his 35-year-old company.

The family, including wife Anne, who died of cancer in 2011, emigrated from Hungary in 1978. Employed at cutting and sewing jobs in small factories, George, with the help of Anne and the boys, began making industrial aprons in their basement. They kept moving house to accommodate the growing operation which expanded to include cushions for wicker furniture.

In 1988, they got their first IKEA contract to make leather cushions for the comfy Poang chair. Six years later, the operation finally left the basement for a 12,000 square foot Brampton facility. By the late ‘90s, they’d moved out near the airport, eventually commanding four buildings on Fasken Dr. to accommodate the IKEA work which included slipcovers and mattresses.

ZAU settled into its finallocation seven years ago to meet IKEA’s safety and technological requirements, undertaking a 30 to 40 per cent increase in overhead costs, the family told the Star.

Longtime IKEA shoppers would recognize many of the loveseats and sofas that sat arm-to-arm inside the sample showroom, especially one low slung black leather classic.

“That’s the Klippan; it’s the one you see in clubs; and it’s the couch that Penny sleeps on in Big Bang Theory,” said Gabor.

Although the company, which shipped directly to 14 different IKEA stores, was bestowed with a quality award by IKEA in 2012, the Zsembas told The Star the relationship worsened in early 2013 when they were asked to reduce costs by 15 per cent.

According to the statement of claim, previously approved raw material and products were rejected; IKEA implemented a zero-tolerance policy allowing them to “reject any product no matter how minor its defect in quality;” and after IKEA said it would not accept merchandise otherwise, ZAU was forced to close the factory for two months last summer to address changes “IKEA unreasonably demanded.”

Additionally, the lawsuit alleges, IKEA executives “took steps to delay the approval” of a loan ZAU sought to defray some of the increased expenses. And the multibillion dollar furniture brand, sold in 52 countries, announced plans to reduce its commitment to ZAU purchases from $25 to $17 million.

George, 68, told The Star he used more than $1 million of his retirement fund to keep ZAU afloat, but the company lost $6 million over 12 months ending this February.

The lawsuit says “the relationship with IKEA became untenable. ZAU’s losses continued to mount and by March 2014, ZAU had no choice but to end its relationship with IKEA or face bankruptcy.”

The company wound up in receivership anyway when RBC called its $1.8 million loan last month, the family says, putting the last of the manufacturer’s 250 employees out of work.

The demise of one of Canada’s few remaining furniture manufacturers affected sub-suppliers, as well as, retailers like The Chesterfield Shop.

“It was kind of a shock,” said owner Steve Freedman who’d bought from ZAU for more than a decade. “I had quite a number of orders that I’m trying to make good on to customers, so it’s been a bit of a scramble.

“There’s really not a huge selection of choice of people that will make a good quality product and particularly customizable that you can change colours and sizes and configuration. Overall, they were nice people to do business with and I’m sad to see them go. It’s a loss for the Canadian furniture industry.”

Gabor is going into consulting and Zsolt is launching a small startup making beds. But George is turning his attention to gardening, soccer and foundation in his wife’s name.

“That was my life and that time is over,” he said.