COMPETITIVE BATTLEFIELD

April 20, 2017  by Jane Chero in Business Strategy, Industry   

Competition in furniture retail has moved from a simple game of tic-tac-toe to a multi-dimensional game involving more than one player and more than one board.  A key characteristic of 3D tic-tac-toe is that it decreases the likelihood of a tie.

When furniture retailing occurred in a single market among family owned entities, while aggressive, the results, like in tic-tac-toe, was often a tie or a short time advantage reversed in a later move.

The equalizer of all is the economy.  The great recession created havoc, resulting in a loss of almost half of the 60,000+ furniture stores in the period 2007 to 2015. 

While this purge is behind the industry and growth has resumed achieving a compounded growth rate of 4.1% CPGR in the last five years, the competitive turmoil continues. 

Much of this competitive activity was instigated during the downturn as the exiting of smaller retailers created perceived opportunities for the larger independents and regional chains.  Additionally, the changing consumer buying process of shopping fewer stores (1-2), down from 4-5 a decade ago, encouraged retailers to open more stores in a market.  Moving away from a “destination store” to “stores of convenience” significantly changed the business model of the traditional furniture retailers.

The change of the traditional business model has created a need for additional revenue.  As more stores were added in the market, often in higher real estate cost areas with more dramatic store exteriors, occupancy costs had to accelerate. The traditional thought of adding occupancy and advertising costs elements together suggested that with a better location and outstanding facility, advertising cost could be reduced.  Unfortunately, the need to attract a declining base of shoppers put pressure on the advertising expenditure.  Additionally, the explosion of exposures from digital, either social media or email, diluted the power of television and almost eliminated the print alternatives 

The impact of competition has not been as much from the individual competitor as from new retail concepts that better satisfy the consumer demand for a different retail experience.  The graphic illustrates the share of furniture and bedding sales by distribution channel broken down by traditional and emerging channels. 

There have been significant shifts in the breakdown of sales in the traditional channel.  While in total, falling to less than 40% of sales, the independent dealers have lost almost half of their market share.  Some of the gains have gone to the regional chains.  However, the internet and verticals, such as Ashley Home have been the major recipients.  Another major impact has been the free standing bedding specialty stores where now almost 50% of consumers buy in the smaller footprint that promotes their product expertise and significant selection.  The table presents the shifts over the past five years. 

The internet has been the fastest growing non-traditional channel capturing 19% of total sales by 2015.  The rate of growth has declined in recent years reflecting the penetration of the consumer demographic that want to purchase a major consumer durable sight unseen. The major e-tailer, Amazon, has recognized this and, as was reported in the New York Times, is considering brick and mortar stores to facilitate the purchase. 

Why have furniture retailers attracted the attention of other retailer sectors?  Simply put, it is the growth that has occurred over the past five years when compared to the other sectors.  A growth in the furniture and home furnishing stores over the past five years of 24.4% compare nicely to the other retail sectors and total retail as well.  Only building material retailers grew more at 30.8%. The table illustrates the comparison.

The other attraction is the significant gross margin when compared to other product categories.  The challenge most national retail chains have today is, gross margin generated per square foot of selling space.  While multiple store locations increase the convenience of shopping for the consumer, the result is less gross margin per square foot of retail space.  The only solution is the closing of stores, which the furniture industry has, to date, avoided.  For the top quartile performers, the average gross margin per square foot of selling space is in the $9 range compared to a similar graphic of sales generated per square foot.  The graphic illustrates the range by size of the retailers. 

Relating these statistics to the average lease costs illustrate our challenge to control store expansion.  

While all retail segments are considering the furniture product category to date, only the internet has made any significant inroads.  The graphic illustrated the change from 2002. 

The bottom line is that the battlefield is littered with mines and booby traps that furniture retailers must consider as they plan their strategy forward.  While the traditional furniture retailers have seen significant loss of market share in the past 20 years, there is a 2.0 version of the traditional retailer emerging.  More sophisticated in terms of marketing, finance, and technology, this new generation will succeed.  The major retailers have concluded that the consumer wants what we have always provided – product displayed with style, delivered and placed in the home by people who care.  Now on to the next generation.

Is an Amazon Furniture Store Coming to Your Town? 
By Larry Thomas

Furniture industry tongues were wagging furiously last month when a New York Times story briefly mentioned that e-commerce behemoth Amazon has had discussions about opening brick-and-mortar furniture and appliance stores.

The story, quoting anonymous sources, said such stores “would be showcases” for large items that many consumers are hesitant to purchase online without seeing them or touching them.

According to the story, the stores would use cutting-edge virtual reality or augmented reality to give consumers a better idea of how the products would look in their home. And while the Times story didn’t mention it, these stores presumably would not have traditional, commissioned retail sales associates. (The story, which was mostly about Amazon’s difficulties selling groceries online, noted that the company is testing a cashier-less brick-and-mortar grocery operation where the customer’s account is charged as soon as the product is removed from the shelf.)

So if the store was only a product showcase with no sales people, a big key to Amazon’s success with a brick-and-mortar furniture store would be logistics — a category in which the company also claims to be a world-class provider. But while a small item such as an end table or lamp could be easily shipped via FedEx or UPS, that can’t be done with a large item such as a sofa or dining room table because they far exceed the shipping company’s 70-pound weight limit.

And can Amazon deliver those large items the next day — or even the same day — like many brick-and-mortar furniture stores?  That’s debatable.

“It’s not so easy to deliver quality assembled furniture to a consumer in that manner. Every internet company has trouble doing same day/next day with large products,” Pat Cory, president of Cory Home Delivery, said in a recent interview with Home Furnishings Business. “It’s very difficult for them to do, and it’s incredibly expensive because of the inefficiencies you have with the loss of productivity on a truck and loss of density on a route. It creates a huge cost increase that most consumers would not be willing to pay.”

But Cory was quick to point out that e-commerce companies such as Amazon and Wayfair “absolutely” could accomplish that feat with two- or three-day delivery in many markets.

The question there, of course, is will our “I want it all and I want it now” culture accept that “slower” delivery cycle? That’s a question that Amazon may well spend millions of dollars to find out.

Cory said Amazon already has opened two enormous distribution centers — as in 3 million square feet each — in central New Jersey just to serve the New York and Philadelphia markets. And while he says they have hired top people away from FedEx and UPS to try to develop their own logistics network, he remains skeptical.

“They came into logistics with a sense of arrogance…like the rest of us didn’t know what we’re doing,” said Cory. “It’s one thing to sell a product on a computer. It another thing to create a supply chain from scratch and be successful at the level of FedEx and UPS. Those are two different worlds.”

WAITING FOR THE INVASION

The die has been cast with major regional chains expanding into the large markets (markets with sales over $50 million).  The most aggressive is Bob’s Discount playing catch-up with infusion of Bain Capital.  The recent acquisition of Art Van by T.L. Lee can only indicate a further expansion of the Michigan powerhouse.  The remaining significant players, Haverty’s, Raymour and Flanigan and Rooms to Go, continue to expand, but not at a frenetic pace.   

While the industry has not outpaced other retail sectors, the demographic trends of the much-anticipated Millennials have been the focus of many of the larger retailer behemoths.  Recent statements by Big Lots and Target have all mentioned furniture in their future expansion plans.

On a daily basis retailers with 75+ year histories are announcing their closings.   Their reasons may vary, some because of the lack of a viable transition plans, others because of competition from a more aggressive chain.  The fact is that consumers’ shopping habits have precluded the opportunity for many.  The consumer’s shopping excursions are often limited to 2+ stores while they are relying more frequently on the Internet to narrow their choices.

At least the furniture sector has avoided the problem of being “overstored.”  Major retailers are announcing store closures weekly.  Unfortunately, from a strategic perspective, the addition of the furniture category to their product category with its comparatively attractive gross margin could provide an alternative to their lack of gross margin per square foot of selling space.

Bottom line, the larger markets will be a battlefield resulting in 2-3 surviving retailers with multiple locations.  This is similar to what happened in the home appliance sector with several major retail entities presenting limited brands competing primarily on price.

The major question for retailers in mid-sized markets is “When will the “war” come to my market?”  This is a similar position that building supply and hardware stores found themselves in 20 years ago when the new concept store, Home Depot, emerged on the scene.  The question was “How far down the market size spectrum would Home Depot go?”   They had the answer shortly when Home Depot came to town  along with the copycat competitors, such as Lowes and others.

What should a significant retailer in the smaller markets do besides wait for the inevitable invasion?  The first and most obvious action is to be acquired by the expanding retailer.  However, at this point the strategy of the expanding retailer has been to establish a presence and then capture market share.  The logic is that to modify the culture of the existing retailer to the culture of the acquiring retailer would not be economical.  

The rationale of “taking” instead of “acquiring” should be reexamined when considering the challenge of developing effective sales associates and building brand awareness.  The cost of attracting, training, and retaining those sales associates who can achieve a close rate of 35%+ and an average ticket of $1,500+ is well over $50,000.  In addition, achieving a brand awareness (to be considered) requires an expenditure of 3% to reach a growth of 5 points over a 3-year period.  The fact of the matter is that the invading retailer’s market share will level off at about 8-10% and then gradually compete with the existing substantial retailer.

Earlier we have addressed the major expansion of the larger retailers, such as Bob’s, expanding from the Northeast down to Washington, over to Chicago, and on to San Diego.  Haverty’s and Rooms To Go, while not being as aggressive, are quietly filling out their distribution capacity.

As in any war, the major concern is the battle map and where the battles are occurring. It is better to focus on the individual markets.  There are 401 distinct market areas in which 90.7% of all furniture is sold.  Graphic A breaks down the specifics of these markets. 

The current focus of expansion is in those markets with over $500M.  This represents over 50% of the industry.  These markets have the size to support both the distribution infrastructure and the advertising required to penetrate an existing market.  Interestingly, the larger the market, the better the per capita demand is for furniture.  

While it is somewhat comforting to know that the battle is at a distance, the faint sound of the artillery is enough to give a solid retailer a pause.  The strategy to prepare for the coming battle is complex.  The first step is to create a dominant market share that would cause the expanding retailer to pause before entering the market.  

There are many examples where the dominant retailer is executing this strategy.  For example, Steinhafel’s in Milwaukee, a dominant retailer for many years, has expanded its distribution north into Fox Valley (Appleton) and south into the suburbs of Chicago.  While Bob’s Discount has entered the Milwaukee market, Steinhafel’s dominance in the immediate market and the expanded market will present a formidable barrier.  The map illustrates.

One of the most competitive markets in the United States is the Minneapolis-St. Paul market.  The metro area is crowded with HOM Furniture, Schneiderman’s, Slumberland, and Becker Furniture along with a strong Ashley presence.  Even without the threat of additional competition, each retailer has expanded its footprint to neighboring markets.

The bottom line is not to wait for the invasion, but to maximize your market share and establish a marketing parameter within your 200-400 mile delivery zone.