Retail management copes and continues to execute change as the retail model evolves to the new normal: higher inventory, higher wages, changing consumer interface and necessary true “partnerships” between suppliers and retailers. With these changes have come new ways to manage. As discussed in the feature article: IS LESS MORE IN A POSTPANDEMIC INDUSTRY? We are moving from “endless aisles” to a curated assortment to a targeted consumer segment.
And we see a change to INITIATING THE CONSUMER ENGAGEMENT on the phone (voice/text/chat) integrated with the retailers’ website, moving to the store with an appointment. All this requires retail sales associates with different sales skills. A MOVE TO NEW KPI’s as increased prices inflated previous measures, are sales per retail sale associate, sales per delivery truck and so forth.
As we focus on managing the challenge, we need to remember the source of the bottom line – the increased contribution margin created by increased volume and increased gross profit as illustrated below.
The obvious result was significant pressure on the retailers to expand their floor assortment to accommodate the demand. With these major line extensions came a deterioration of the manufacturerretailer partnership. The rationale – our product line is broad enough to sell multiple retailers in the same market without duplicating product. Thus marked the beginning of the disintegration of the manufacturer’s brand from a consumer’s perspective. You see it everywhere, no exclusivity.
What Did Retailers Do?
Retailers responded in the ensuing decades with expanded store size facilitated by the bankruptcy of many of the big box chains. The result was increased sales but not in direct proportion to the increased square footage. Currently sales per square foot is $240 annually. Interestingly larger retailers ($100M+) and smaller retailers (<$5m) achieved an advantage of 50%.
The productivity has declined as store size increased and furniture retailing abandoned its “store as a designation” to pursue multiple stores in the same market. Decades ago, furniture stores’ selling productivity (inflation-adjusted) exceeded today’s performance metrics – Less Is More?
Even the freshman majoring in business has been exposed to the concept of 80/20. In other words, 20% of the product line would represent 80% of the product sold. This is not true for furniture retailing where the top 20%’s product line represents less than 50% to 60% of sales.
This concept raises the question – can we do with fewer products and produce the same volume of sales? During the supply chain disruption brought on by the pandemic, retailer merchandise assortment declined. The graphic below presents the comparisons.
Interestingly the impact on upholstery (stationary/fabric) was felt immediately while casegood assortments were maintained. There is an obvious relationship between domestic and offshore production and the delivery cycle. The decision to remove and replace the slot was delayed with anticipated delivery.
The rotation out of the top slot did shift significantly from quarter to quarter as may be seen by comparing the current quarterly ranking of SKUs to pre-pandemic rankings. Note the movement in ranking by SKU from quarter to quarter in a typical traditional retailer with over $10M in sales.
What did change significantly was average unit selling price. As may be seen from the graphic, upholstery was stable ($654/unit) from 2019 Q3 to 2020 Q3 but exploded by 24% a year later (2021 Q3) to $810 per unit. Casegoods performed similarly but dining (tables) moved slower from $391 per unit to $426 per unit, an increase of 9%. This deviation by price points is more obvious when we compare a price distribution curve for stationary upholstery (fabric) for sofas/loveseats in 2019 and 2021 Q3 YTD.
It should be noted that the percent of units sold in 2021 Q3 in the below $499 price range decreased from 38.5% to 21.1% in 2021 Q3. In terms of dollars, the percent declined from 22.5% in 2020 Q3 to 11.1% in 2021 Q3.
What Did Manufacturers Do?
Contrary to retailers’ opinion that manufacturers just increased prices and sent delayed delivery notices, manufacturers scrambled to satisfy demand. As was discussed earlier, manufacturers – unbridled with capacity restraints – pursued all retailers that could be sold. Armed with the justification that their lines were broad enough that multiple retailers could include their merchandise assortment without cannibalization, manufacturers continued to sell to as many retailers as possible in a market. This foundation strategy assumption overlooks that there are limited sales and purchasers in each market (MSA). The fact is, many manufacturers cannot determine their sales in each of the 404 specific markets (MSAs) in which 95% of all furniture is sold. The table below illustrates the required business intelligence (ILLUSTRATION ONLY).
It should be noted that this lack of sales in smaller markets is an opportunity to sell to retailers in those markets or directly to consumer via e-commerce. Most manufacturers, lacking this more in-depth knowledge of where they sell, resorted to using an axe instead of a scalpel in adjusting their retail distribution. Manufacturers were forced to reduce their retail base in order to improve their delivery. It is difficult to measure the impact of the 20+ year relationship that was destroyed. Now that the painful cuts have been made, the old familiar term of PARTNERSHIP has emerged. Maybe it will be more than a one-night stand and evolve into an enduring profitable relationship. Again, can SELLING FEWER (RETAILERS) BE MORE?
In addition to curtailing their retailer base, the focus became merchandise line reduction in order to improve the delivery time. In the past decade, the focus was “endless aisles”. The emerging term is a “curated assortment”. The impact of the broken supply chain has been a reduction in the product line-up. As may be seen from the graphic below, the post-pandemic consumer has shifted from design to a combination of value and quality – a challenging blend. The table below presents a percentage of consumers ranking each element in preference order. With the reduction in their retailer base and a curtailing of their merchandising assortment, manufacturers will be able to improve service levels to the normal four-to-six-week cycle. While the adjustments have been painful on both the manufacturing and retail sectors, the demand continues as illustrated below.
Though this graphic is reassuring, we need to understand that this is revenue demand – NOT unit demand. In other words, sales have increased based upon the average unit price and increased close rate – NOT increased traffic into the store. Thus the challenge is still there to create product that attracts consumers to the store or to the website to buy.
A popular choice for consumers looking to combine technological advances in foam with innerspring is a hybrid option, offering the best of both worlds. Finding luck with their best-selling hybrid model, Mlily USA’s President Stephen Chen says, “A good night sleep is a pathway to a healthier life but it’s what’s inside the mattress that really counts. Consumers love the Fusion Luxe because it’s backed by science and includes seven layers of quality materials that combine the strength and support of individually pocketed innerspring coils with the cool plush comfort of our adaptable foam technology for comfort and support.”
When discussing Southerland’s success with the Signature Hybrid Collection, President and CEO Bryan Smith “continues to see an increased number of consumers looking for a hybrid sleep experience, which is one of the reasons this collection is such a big hit. It’s the Goldilocks tale – three of the models are copper-infused latex hybrids, and the other three feature the gel memory foam- but there is one just right for every consumer.”
Along with a growing number of consumers willing to spend money on premium and luxury bedding products, the vast array of choices leads many to spend more time researching online. Over the past decade, the mattress market has grown exponentially. The direct-toconsumer model has produced an explosion of online companies and a variety of options for potential buyers. According to a FurnitureCore Inc. survey developed by Impact Consulting Services, parent company to Home Furnishings Business, of consumers that recently bought a mattress, 27.78% spent one-to-two hours online before making a purchase, 31.95% spent threeto-four hours, 14.58% spent five-to-sevenhours and 12.50% spent seven hours or more.
Increasingly, manufacturers and retailers are looking for ways to improve their sustainability efforts. Consumers are paying closer attention to fabrics and materials, whether that is looking for products that are sustainable and environmentally friendly or hypoallergenic. According to Nick Bates, president of Spring Air International, the best-selling Nature’s Rest line “provides Spring Air’s retail partners with a product offering that attracts consumers who believe natural is better and who have an appetite for a more sustainable natural sleep experience.” In addition to the growing list of mattress options paired with specific personal requirements, the consumer’s awareness that a mattress needs to be replaced periodically keeps this industry thriving. However, the timeline does vary among consumers. Based on the same consumer survey, the majority of consumers, 50%, believe a mattress should be replaced every six-to-10 years. 6.94% of consumers believe that it should be replaced within 5 years, while 34.73% replace their mattress every 11-15 years and 6.94% every 16-20 years. The remaining 1.39% replace every 20 years or later.
Based on the FurnitureCore Industry model developed by Impact Consulting Services, research shows that the bedding category took off in the second half of 2020, finishing the year at $16.74 billion. In 2021, sales skyrocketed 52% from the first quarter to the second quarter. At $15.58 billion in the third quarter of 2021 year-to-date, sales were 25% higher than 2020 Q3 YTD. In this highly competitive category, manufacturers are taking sleep seriously and working hard to provide each consumer with the perfect mattress.
Housing Industry’s Struggle to Meet Demand The housing market had four distinct growth phases over the tenyear period that has brought it to today’s dilemma—namely, how to catch up with demand (Table A). Phase 1. 2011-2013: Post Great Recession. Coming out of the Great Recession the housing industry accelerated. Builders geared up, prices climbed, interest rates were low. The annual spending for new and existing homes grew over 20% each year in both 2012 and 2013. Prices climbed over 10% a year. Meanwhile the furniture industry struggled post-recession growing at an annual rate of 3% over the two years.
Phase 2. 2013-2017: Economic Growth. Things settled down for four years as the economy grew. The housing market averaged 7.1% growth over the four-year period and the furniture industry a similar 7.4% annual increase.
Phase 3. 2017-2019: Housing Industry Slumps. The housing industry got in a big hole between 2017 and 2019 when demographics dictated it should be growing. Over a two-year period, the housing market fell 1%. In 2018, sales were down 2.4% and up only 0.4% in 2019 as prices fell 0.7%. According to the Federal Reserve, declining affordability, higher mortgage rates, higher construction costs and declines in equity prices slowed the U.S. housing markets.
Phase 4. 2019-2021: Pandemic and Recovery. The pandemic brought a wave of low inventories and high demand and even higher prices. Builders powered through labor problems and new and existing home sales dollars grew annually just over 10% in 2020 and 2021. Meanwhile, couped-up pandemic consumers went wild buying furniture, with sales up 9.2% in 2020 and 21.5% in 2021 (preliminary) to an average of 15.2% for the two-year period.
This issue of Statistically Speaking looks at the housing industry’s recent struggles to address pent-up demand as household growth is set to further explode. Housing demand at its basic level is about building enough units to satisfy the annual increase in household formations plus replace older homes no longer habitable or units in geographic areas no longer desired. For the first time since the 1970s, when the Baby Boomers hit the home buying scene, home and apartment builders have scrambled to catch up in the last decade (2010 – 2020) as more households were formed than units built. In the last two years, the construction industry has tried to close the gap all while in the midst of a pandemic and its recovery. As shown in Table B and Figure 1, a historic housing crunch occurred between 1971 and 1980 as Baby Boomers began entering the housing market. After 1980, new housing completions were able to stay ahead of household formations until 2010, a 30-year stretch. Our current housing crisis has been a decade long one with 1.1 million fewer homes and apartments built since 2011 than households formed.
The housing industry is pushed forward by various drivers and stumbles when faced with industry barriers (Figure 2). Demographics are poised to be the primary industry driver as Millennials are currently entering their prime home buying ages. Alongside this driver is a barrier as older home owners are choosing to stay put as rising prices deter them from moving up. While household formations have stalled in recent years, there are indications that they are now on the rise. Low mortgage rates are also a key driver, but rapidly rising inflation will likely make those rates go higher. The two major barriers are low inventories and rising housing and apartment prices. And Fannie Mae predicts inventories will stay low for the next 10 years. Affordable prices for homes and rentals may have leveled off at the end of 2021, but no sign yet that they are falling. Rising apartment rates are a major economic concern going forward.
Alongside these housing industry’s consumer drivers and barriers is the construction industry with its own set. Unwavering demand is the main construction driver. However, labor and material shortages and supply chain bottlenecks and may further hinder the industry going forward (Figure 3). Lumber prices peaked in May of 2021 and fell 70% before year-end, but in December they began climbing again and the supply chain was still unstable at press time. Labor shortages appear to be easing. Adding fuel to the fire, the National Association of Home Builders (NAHB) reports 76% of builders in Fall of 2021 cited the low supply of buildable lots as critical.
The housing industry not only has a lot of catching up to do, but is facing a tsunami of new households in the next 15 years that should bode well for the furniture and housing industries. In 2014, the age group 25 to 39 surpassed the older 40 to 54 segment in size as Millennials began to pour into ages 25 to 39. These post-college Millennials, though initially slow to get out on their own, are key drivers to household formations and the leading edge of primary furniture buyers. The smaller Generation X which now solidly sits in the 40 to 54 age group are in their prime income years and have driven the furniture industry in recent times. These higher earning 40-to-54-year-old consumers will grow as leading-edge Millennials transition into this older age segment. As shown in Table C, the important thing about 2022, is that this year both age groups key to the housing industry and especially the furniture industry will be increasing at the same time until around 2030. In 15 years, the Millennials will have aged into the 40 to 54 age group and the 25 to 39 age groups will start to decline as the smaller Generation Z emerges.
Over the last year housing starts geared up and began to dig out of the pandemic setbacks and address the pent-up demand. Recent November data from the Census Bureau signals a positive step forward. Table D details the monthly path for housing starts and housing completions beginning just before the pandemic in December 2019 through November 2021. During the two-month period at the end of February 2020 through April 2020, Covid-19 brought housing starts to trickle, falling 41%. But starts came roaring back last year and peaked at an annual rate of 1.725 million in March 2021 then struggled until November, when they jumped 11.8% over October to 1.68 million annual units, a significant indicator for the housing recovery (Table E). With supply chain disruptions, housing completions have become longer drawn-out affairs. Since the peak in March of last year of 1.5 million annualized completions, the number of finished houses, condos, and apartments in November is still 14.4% below that peak compared to March.
Both single-family and multi-family starts posted double digit one-month growth last November compared to the previous month. Single family starts of 1.17 million were 11.3% higher than October and multi-family starts in November were at an annualized rate of 506,000 units, up 12.9%. Year-to-date November 2020 to November 2021, starts increased 15.4% for the one-year period to an annualized rate of 1.58 million units with multi-family unit starts growing slightly faster (Table F). Single-family starts grew 14.7% over the one-year period to 1.12 million units (annual) and multi-family units increased 17.3% to 466,000 annualized units. Regionally, starts in the Northeast grew the fastest, up 24.2% overall (single-family and multi-family), followed by the West with 18.0%, the South at 14.4% and Midwest the lowest at 9.0%. The Northeast and West had the highest oneyear growth in multi-family unit starts, 32.3% and 33.2% increases respectively. The other three regions are a majority of single-family housing starts with the South showing the lowest growth in multifamily units at 7.3%.
While multi-family starts are growing quickly, for the total U.S. last year (November 2021 YTD), 70.6% of housing starts were single family (Table G). Leading the way was the South at 76.2% single family. Meanwhile, for the Northeast, multi-family units totaled over 50% of starts.
Housing units permitted (seasonally adjusted at an annual rate) provides a window into the near future a few months ahead. And while not all permits materialize as housing starts, they are a key indicator of what lies ahead. Permits peaked last January 2021 at 1.88 million units and transformed approximately three months later in March as peak starts of 1.72 million (annual rate). Last January was the single highest month for permits since May of 2006, just prior to the Great Recession. Since January 2021, permits have followed a general up and down trend until September growing steadily through November to 1.71 million units (Table H). This three-month growth in permits will translate into starting in the first part of this year.
During the pandemic, housing inventories fell to 3.5 months in September, October and November of 2020, the lowest levels on record (since 1963). The month’s supply is the ratio of houses for sale to houses sold. The months’ supply indicates how long the current for-sale inventory would last given the current sales rate if no additional new houses were built (Table J). Inventories began to ease in March of last year with over 6-months of housing supply by the end of last year.
Home prices exploded throughout the pandemic and through last year. The National Association of Realtors projects that prices softened a bit toward the end of last year 2021 and will continue to moderate and grow more slowly in 2022. In 2021, the median existing home price was estimated to be $340,200 and $385,200 for a new home. This is a 14.7% increase for existing home prices and 14.3% for new homes over one year. The National Association of Realtors forecasts prices to climb in 2022 - 2.8% for existing homes to a median price of $349,800 and 4.4% to $402,000 for new homes (Table K). Unfortunately, the rising prices will continue to keep new home buyers out of the market and stuck in a cycle of paying high rent without the ability to save for a down payment on a home.
The challenge for the furniture industry since the Great Recession has been an unrelenting loss of consumer share of dollars spent on paying for homes and apartments. The Consumer Price Index quantifies price increases not just for furniture and bedding, but also the CPI for rent for primary residences and another category called “owners’ equivalent rent of primary residence” which is defined as the amount of rent that would have to be paid in order to substitute a currently owned house as a rental property. Table I shows historically that as the furniture industry struggled to get prices up after the Great Recession, rents and owners’ equivalent rents grew steadily. The CPI for furniture and bedding fell 7.3% between 2010 and 2018. In 2019 the furniture industry finally saw an increase of 2.3% before the pandemic shoved prices down again. Then by November 2021 furniture prices had exceeded the 6.8% growth in overall inflation increasing 7.5% year-to-date. For rents and owners’ equivalent rents, since 2015 prices increased between 3.3% and 3.8% annually for both. In 2021 (November YTD) that growth slowed to 2.1% for rent increases and 2.4% for owners’ equivalent rent. Note that rent and home price growth are slower to show up in inflation figures. Rents usually don’t impact inflation until a lease turns over. So even though rent prices fell in 2021 in the CPI, recent month-to-month increases are some of the fastest in 20 years. Apartment List estimates that new lease price increases for apartment rents will be up 16.2% in 2021.
Low interest rates have been a key driving force in home sales. In the second quarter of last year, 30-year fixed rates moved higher than 5/1-year hybrid adjustable mortgages and the gap has widened since (Table J). In the first quarter of 2019, a 30-year fixed rate was at 4.37%. 30-year rates hit their lowest point in 2020 Q4 at 2.76%. As of November 2021, a 30-year fixed rate was at 3.07% and a 5/1-year hybrid adjustable rate was at 2.51. Inflation is expected to take the rates higher in this year.
The end of 2021 was shaping up to be a good start to returning the housing and furniture industries to a steady pattern of demand and growth. That is, if the many economic and social challenges, as well as other unforeseen Covid obstacles, don’t derail the process.
The major concern is how long will the demand continue. In our last issue we forecasted an increase of 5.9% over 2021 which we forecast to be a 18.8% increase over the previous year. However, furniture retailers don’t have the luxury to reflect because they must react to external factors that are challenging their ability to manage:
• Increasing prices at retail to offset the increased freight transportation cost with containers moving from $3,500/ container to north of $15,000 (read this month’s Statistically Speaking), not to mention inbound freight.
• Increased product cost from vendors because of their increase in imported raw material and labor.
• Personnel shortages. Even with increased wages of 15-20%, stores remain understaffed and some have had to close stores temporarily
• With furniture prices up 12%, will consumer demand continue even without increasing advertising back to normal? • While struggling to find merchandising and coping with unexpected inventory build impacting both warehouse space as well as cash flow
Believe me retailers are not complaining about the significant increase in net operating income. But watch the financial key performance to make sure your vital signs are in line with the industry.