From Home Furnishing Business
Cover Story: State Of The Industry
Without a doubt, the traditional segment of the home furnishings industry is going through a “sea change”, defined as a significant or systematic transformation. An appropriate image in light of what is happening in Houston and Florida. What started as a gradual change is gaining momentum. However, from a macro perspective, the home furnishings industry is doing just fine, but what about a more micro perspective of the independent furniture stores?
As an industry, we should be pleased that the home furnishings category, at retail, is out performing other retail sectors, as can be seen in the accompanying table.
TABLE C (REPEAT FROM FORECAST SECTION)
The furniture/bedding sector has steadily increased since the great recession and we estimate an industry volume of $103 billion for 2017, up 3.4% from the previous year. The graphic below illustrates our performance through the most recent quarter.
INDUSTRY SALES GRAPHIC
Unfortunately, this growth has not been shared with the traditional furniture stores, but instead has gone to home furnishings stores such as Bed, Bath & Beyond and Restoration Hardware or other alternative channels. The graphic below illustrates.
The fact is all retailing is facing challenges in the first half of 2017. A Credit Suisse report indicated 8,640 retailers will close doors, up 40% from 2008. The ripple effect of this will be, according to Credit Suisse, 275 malls will close within the next five years. All “brick and mortar” retailing is going through a transformation.
Contrary to popular belief, e-commerce alone is not causing this Armageddon. It is the changing consumers, not just the emerging millennials, but the downscaling baby boomers. The fact is the U.S. is over retailed. This so-called commercial real estate bubble goes back three decades. The major question is will the bubble cause another great recession like the housing bubble?
The furniture store share can be broken down by; regional chains, large independents (multi-markets within a state) and what we refer to as “mom and pops” (independents). The following table breaks down the growth by channel.
For the furniture industry, this abundance of commercial real estate has fueled the expansion of the regional chains. Attracted by low occupancy costs, stores such as HH Gregg have been retrofitted to furniture stores. Unlike other retail sectors, furniture retailers are not over-stored.
The major question is why all the interest in home furnishings? Simply put, it is our gross margin. Currently, gross margin is running at 48-49% for retailers over $10 million. This performance is accomplished in stores within a 50K – 60K footprint. This translates into an attractive gross margin per square foot of selling space at least to other retailers. The graphic below provides the monthly statistics.
The other major sea change is the collapse of the total channel, blurring the distinction between manufacturer and retailer. The objective is to capture more margin, while tailoring the purchasing experience for the consumer.
The graphic illustrates the transformation. Remember the gross margin percent for a retailer who produces or contracts the product itself captures an additional 20-30% million dollars.
For example, the varying gross margins by publicly held entities involved in the channel:
Obviously, what occurs below the gross margin line on the profit and loss statement involves the consumer experience. Matching what the consumer demands against the price the manufacturer or retailer is willing to charge is what is driving the proliferation of different ways to supply furniture to the consumer. The table below illustrates the give and take.
The only given is, a business entity must make a profit to survive long-term. The rocks are littered with bankruptcies which had a new idea. Several companies are getting closer to the shoals.
Moving forward to our forecast. Remembering other retailers or manufacturers strategies - good or bad - will impact you in the short term. It must always be a long-term strategy.