Trudging Upward

December 17, 2013  by in Business Strategy, Industry   

2014 Should See More Business for Furniture Retailers, But Shapes Up for another Slow Growth Year.

By Powell Slaughter

First the good news: Furniture and bedding sales will rise again in 2014, and at a faster rate than this year. The not so good news: That rate of growth remains slow. Home Furnishings Business predicts furniture and bedding sales to reach $76.3 billion dollars next year, an increase of 2.4 percent over a projected total of $74.5 billion for 2013. While faster than this year’s 1.3 percent overall growth, our industry probably will advance less than half as fast as overall retail in 2014.

That’s a little frustrating, since indicators such as employment, housing and the stock market are trending well overall. As the nation creeps forward from the depths it hit in 2009, the only indicator that really seems to count in our business is consumer confidence—and that’s certainly been a roller coaster ride this year.

Ken Smith, managing partner of High Point accounting firm and industry consultancy Smith Leonard, said our forecast for 2014 is in line with what he’s hearing. “The consensus is we’ll bump along with the economy in general, and we’re looking at 2 to 2.5 percent GDP growth” next year, he said. One might think consumers are getting a little numb to Washington shenanigans, or other drags on their confidence. “I tend to agree in part that they are a little numb to some of the negative headlines—that seems to be all they get—but I do think there’s an impact when you start talking about shutting down the government and how that affects the world,” Smith said. “Everyone I talked with at Market said things were bumping along pretty well until the shutdown.

“I’ve about come to the conclusion … that consumer confidence is the key driver to our business. You look at all the other factors—housing’s coming back, we have great interest rates and the stock market’s doing well. All those positives are out there, but it’s still slow.”

Causes for Optimism

Industry analyst Jerry Epperson, managing director at Mann Armistead & Epperson, Richmond, Va., is optimistic about the coming year, when some of those positive indicators could start pointing more dollars furniture’s way. “We’re pretty upbeat. From an economic point of view things are in our favor—housing’s up, employment’s up, and mortgages are affordable,” he said. “We need to consider life outside Washington, D.C. ...

Political brinksmanship has become more like ‘crying wolf’ for the American consumer. “If you look back at the functions that determine our business, it’s been a long time that things were going our way like they are now. Housing wasn’t a driving factor until 2012, that’s kicked in, and that determines our fate. The economy’s been recovering, but we did not participate until now. Other sectors did, and now it’s our turn.”

What’s driving the outlook?

Indeed, industry sales continued to creep up this year, totaling $19.2 billion in third-quarter 2013, combined growth for furniture and bedding of 1.9 percent above the same period last year; and 6.2 percent ahead of this year’s second quarter. Despite breaking that $19 billion barrier in the third quarter, though, year-to-date furniture sales were flat after nine months, bedding up 2.5 percent. So what will impact business for the coming year? There are some demographic trends that should give retailers pause for the next few years, both in terms of age groups (see sidebar, “Baby Bust?”); and in population make-up.

America’s the melting pot, and the immigrant population—especially Hispanics—continues to grow. The best time for thinking about how you’ll approach the unfamiliar people you see in your marketplace is right now. These trends won’t change, and retailers have to figure out how these growing segments fit into their business; or whether they’ll develop and hone a more “traditional” niche. Household formations have risen steadily, close to 120,000 million in 2012. That’s good, but a lot of those could be younger people without a lot of spending power, or immigrants unfamiliar with the brands and retail experiences they see. And while households are forming, a lot of those are thinking about what kind of television they’ll buy versus what they’ll sit on to watch it.

Retailers need to get creative in getting potential customers to see the value in creating a comfortable environment for watching their latest Netflix selection.

A Pricing Conundrum

Average annual household spending on furniture peaked in 2005 at a little north of $450. Even before the recession, when such spending bottomed out at under $350 a year, that figure was in rapid decline, dropping under $400 by 2008. By 2012, the last year for which we have an average figure, annual household spending on furniture remained a little below $400.

Retailers still rely on “lower pricing” as a way to drive traffic, but that tactic hasn’t had much effect on overall volume. And it’s killing margins. In 1983, the Consumer Price Index for all items, furniture, new cars and housing was roughly the same at around 100. By this year, “all items” and “housing” were hovering around 230, “new cars” just under 150. “Furniture”? It was around 120.

This year, consumer prices for furniture fell 1.9 percent. It also hasn’t helped that the United States has moved toward a service economy. Personal expenditures for services, motor vehicles, non-durables, and furniture and equipment were not far apart from one other in pricing shifts. By 2012, services accounted for close to $8 trillion in personal expenditures, while furniture and bedding has essentially flat-lined in comparison. It’s no wonder there’s a problem with household expenditures on our products.

Retailers who’ve decided to compete purely on price as the motivating factor for their shoppers in the coming year will be forced even more than usual to watch costs and trim inefficiency in order to have any hope of maintaining margins at levels sufficient for making their business sustainable.

Confidence Remains a Problem

Home Furnishings Business projects unemployment under 7 percent by the end of the year. That indicator is moving in the right direction, but not enough to drive business to the furniture industry.

And while jobs are being added the number of people not in the labor force will grow as Baby Boomers retire. That will be a factor for another decade or so. Coupled with the slowness of economic recovery, the impact another round of Washington brinksmanship on consumer confidence could put a damper on industry performance the first half of the year.

Housing continues to improve, both in sales and new starts, but gradually. Home improvements are an area where furniture retailers might think about grabbing some consumer mindshare. Those were climbing steadily before the recession, and the downturn’s effect on people’s ability to sell their home kept that an area where they spent money. Retailers could get into the consumer’s thought process early by cross marketing with local home improvement specialists.

The Right Attitude

Whatever else is going on in the world around furniture, Epperson said retailers had best project confidence if they want to increase their business in the coming year.

“I’d take a look at my store and make sure I’m in recovery mode and not hunkered down in a recession mentality,” he said. “More people are moving, and that means more bedroom, more mattress sales. And there’s no reason furniture stores shouldn’t be getting ready for the holidays.”

A number of retailers are making moves—our newsletters are once again reporting on more store openings than closings; new store concepts; and special events that get people in the store and make it part of the community, and get employees excited.

 

Who’s Hot, Who’s Not?

Forecast is for low single digit increases – Individual results may vary.

While Home Furnishings Business forecasts furniture and bedding sales to rise 2.4 percent next year, it’s important to note significant variance could occur depending on the size of your market. Bottom line overall? The larger your market, the larger your chance is to meet or outperform the industry overall in terms of percentage sales increases.

Breaking It Down

We took a look at sector business in metropolitan statistical areas comparing third-quarter 2013 performance with the same period last year. Third-quarter business across the board was up 1.9 percent in this year’s third quarter. Keep that figure in mind when reading the following.

We found the 10 MSA’s that accounted for $1 billion or more in 2012 furniture and bedding retail sales accounted for 19.4 percent of overall business during 2013’s third quarter. Those regions were up 2.7 percent over the prior-year period, the largest increase among MSA groupings.

The 24 MSAs that rang up $500 million to $999 million—21.8 percent of overall business—saw an quarter-to-quarter increase of 2.2 percent in the third period. Forty-one MSAs running from $250 million to $499 million brought in 19.2 percent of U.S. sales in the quarter, and were up 2.1 percent over the prior year. There’s a pretty fair drop-off from there in terms of quarter-toquarter increases, as market size declines. Seventy-seven MSAs that had $100 million to $249 million in furniture and bedding sales last year, and 14.9 percent of third-quarter 2013 business, were up just 1.4 percent that period compared with last year’s third quarter.

The 71 MSAs in the $50 million to $99 million range in 2013— representing 6.5 percent of third-quarter national sales—increased 1.3 percent; and 100 MSAs doing $25 million to $49 million, accounted for 4.9 percent of Q3 sales, when they were up 1.1 percent over the prior year period. Sixty-one MSAs that did less than $25 million last year represented 1.5 percent of third-quarter sales; and were down 0.9 percent for in those three months. “Micro Statistical Areas,” which number 575 did 8.5 percent of third-quarter business, and increased 1.5 percent; while rural areas representing 3.5 percent of business in the quarter saw their furniture and bedding sales rise just 1.3 percent in the period.

Size Isn’t Everything

We also observed significant variation among markets of the same size. We took a look at those MSAs broken out by furniture and bedding sales in 2012, and compared performance from that year’s second quarter through the same period in 2013. Following are the best and worst performing MSAs in the same market size categories as above, and their percentage change in sales during the period measured.

 

Baby Bust?

Here’s a tidbit to consider not only for 2014, but for years to come—consumers ages 35 to 44 years, have been declining in numbers since the early 2000s. Traditionally a prime target for the furniture industry, this segment will continue to decline for the next decade creating a significant “head wind” for the sector.

The trend calls for strategic thinking from furniture retailers. Ken Smith, managing partner at Smith Leonard was in Chapel Hill, N.C., in mid-November, where as a board member of UNC Hospital, he heard a detailed presentation outlining changes in demographics— the baby boomers aging, the next generation coming along, the growing immigrant population. “That was all in reference to the effect on health care, but retailers, manufacturers and distributors are going to have to focus on where they fit into all of that,” he said. “You have a large number of new consumers coming along, but most of them won’t be looking for high-end product yet. “I think we’ve learned by now that you can’t be everything to everybody, and you have to figure out where you fit in the demographics you’re dealing with.”

There’s a lot to look forward to demographic-wise— the upcoming Millennial generation is big and will create a boom, but retailers will need to cater their shopping experience to this tech-savvy gang.