Cover Story: Merchandising – Keystone of Furniture Retailing

January 19, 2018  by Jane Chero in Business Strategy, Industry   

From an architectural definition, “keystone” refers to the final piece of an arch which, when put in place, locks all the stones together, allowing the arch to bear a distributed weight.  In the furniture industry, merchandising is the keystone to success.  The responsibility for merchandising lies with both the supplier and retailer.  In certain distribution channels where the entity is both supplier and retailer, it would appear the challenge of merchandising would be simpler.  However, the “creative tension” between the two entities contributes to a better solution.

What is this lynch pin of success called merchandising?  It sounds straightforward – the selection and presentation of products to a pre-determined group of consumers displayed in such a way that stimulates interest and entices the customer to make a purchase.  The reason for pursuing a topic and expanding effort to better understand the specifics is to improve performance. Can improved merchandising improve performance?

In total, compared to other retail sectors, home furnishings did quite well in 2017 and is projected to continue to prosper into the future.  In fact, only electronic shopping (Internet) has a better growth rate, as can be seen from the accompanying table.

In direct comparison are the lifestyle stores, which unlike their competitors the furniture stores merchandise a more complete product selection of everything for the home.

The first thought is consumers are purchasing more of the accessory products than furniture which is what is contributing to the performance growth.  However, this is not the case.

The following articles explore the various elements of the merchandising function and approaches to better accomplish the task.

TARGETING THE CONSUMER

The tendency of most traditional retailers is to be everything to everybody – with the fear of losing a sale offsetting any consideration of inventory turns or productivity of selling space.

The result is 100,000+ square-foot showrooms built outside the shopping areas frequented by consumers on their weekly trips for pet supplies, groceries, and the other necessities of living.  Furniture stores are often destinations unlike their competition – lifestyle stores, which are in the mix of other retailing.

Even with this abundance of space, most traditional retailers fail to satisfy the consumer.  As can be seen from the graphic, the major reasons for not making a purchase is “could not find what I was looking for.”

Unfortunately, included in this category are several distribution channels - some winning, some not faring so well.  Traditional furniture stores are one of the channels that fall into the latter category.  In fact, while the total home furnishings sector has grown, furniture stores have declined.  The graphic below shows the decline.

The challenge of satisfying all consumers is the diversity of the United States consumer.  The most basic segmentation of the consumer is Age/Income of the households.  The graphic illustrates the consumer breakdown.

Complicating this today is the emerging generational divide.  Retailing for the past forty years has been dictated by one generation – Baby Boomers, defined as those consumers born after 1946 who were greatly influenced by the disruptive 60s.  However, when they settled down they became the most driven generation ever.  The sheer size of the population significantly changed the furniture industry.  This generation, though still purchasing 37.2% of all furniture sold, is declining in purchasing power. 

Retailers today must connect with the emerging generations, while continuing to meet the needs of the Baby Boomers.  The table below defines the challenge.

Targeting requires understanding the consumer the retailer is selling or more importantly, the consumer the retailer is NOT selling.  The following graphic illustrates (shading) the propensity of an upper/premium traditional furniture store to sell a demographic cell.

Developing a merchandising strategy to attract those consumers who are not being sold is the challenge for the furniture retailer going forward.

The strategy involves not only product selection, but also advertising to communicate to the underperforming demographic.

The understanding of the consumer can be further refined by understanding the psychographics (lifestyle) of the consumer to whom your merchandising strategy is attracting.

On the demographic profile in the figure above, it shows that the Upper/Premium furniture retailer sells all the ages/incomes.  The understanding of the psychographics provides a way to attract those consumers who have lower incomes, yet purchase furniture at higher price points. 

The accompanying graphic illustrates the psychographic profile of the consumer who purchases from this same upper/premium retailer.

Further complicating this demographic explosion is the changing ethnic mix of the United States.

The U.S. population is still a majority of non-Hispanic Whites, but in the younger age groups, that demographic is changing rapidly. Between 2010 and 2016, the total White population lost 2.6 percentage points falling from 63.9 percent of the population to 61.3 percent.

All other ethnic races gained ground with the Hispanic population gaining 1.1 percent points reaching 15.6 percent of the population.

Baby Boomers (now ages 55 to 74) have dominated consumer spending and the home furnishings industry for decades. Of note is that currently 73.3 percent of all Baby Boomers are non-Hispanic Whites.  As they continue to age and the population dwindles, minority groups will gain more influence rapidly.

For Millennials (ages 15 to 34), White, non-Hispanics, have fallen to 55.2 percent of the group, and for the youngest Generation Z (ages 0 to 14) only 50 percent are now considered White.

Over one-third of the White, non-Hispanic, population is over the age of 55 reflecting the massive aging of the Baby Boomers. This compares to only 15.2 percent of the Hispanic and 22 percent of the Black/African American population.

For younger Americans, looking at each ethnic group, 58.2 percent of Hispanics are under the age of 35, compared to 40.2 percent Whites and 52.2 percent Black/ African American.

 

This is not to say different ethnic backgrounds do not assimilate into US retailing.  However, when the customer base of traditional furniture retailers is analyzed, we find there is a failure to attract the emerging population.  The graphic below presents the percentage of sales of a major regional retailer compared to the population in the market.

There are many factors which influence the procurement of consumers – product selection, advertising, retail experience – all of which constitute merchandising.  Into the future, retailers will need to monitor how well they are serving the consumers in their market.

Merchandising was, at one time, quite simple.  Today’s data driven retailers are taking share from traditional retailers with a total focus on the specific consumers they intend to sell.

SELECTING THE PRODUCT

The challenge of merchandising is the selection of products which appeal to the targeted consumer.  A combination of price and quality constitutes value.  Unfortunately, the latter part of the equation is difficult to communicate to the consumer.  The absence of recognized brands leaves the challenge to the retail sales associate.  The industry recognizes price segments which define merchandising segment of promotional, middle, upper, and premium.  These ranges are presented in the table below.

Unfortunately, consumers do not recognize the factors that differentiate between price points.  The result is consumers are under purchasing in relation to their household income. 

The graphic illustrates the percentage of traditional fabric sofas purchased by household income.

Regardless of household income, purchases by these merchandise price segments are fairly stable.  The graphic illustrates.

Within the price segment, there are shifts influenced by the economy.  Currently, the price point distribution for fabric sofas (stationary) peaks at $499, based upon unit sales.  The graphic presents the bell-shaped curve.

Most retailers can recite these best-selling sofa frames by units (not $).  However, understanding best sellers by generation is not so easy.  There is a significant difference here.  Targeting products to consumer segments is the next level of merchandising.  If Generation X purchases 34% of all furniture, should the retailer’s merchandise assortment reflect that same percentage?

Retailers taking this data to the next level would share this information with their sales associates to guide the consumers through the product presentation process.

Additionally, targeting email and direct mail to these consumers with product that they most likely prefer will improve the effectiveness of advertising.

Product merchandising is more than price and must involve styles.  The industry has had a significantly long period without the emergence of a new style which captures the imagination of the consumer.  Not since Bob Timberlake has the market responded to a must-have product.

The result is the furniture product becomes a commodity.  How do we measure the value of this new commodity?  We believe the share of income spent on the category by income quartiles (in the table below) shows the same relative expenditure no matter the income segment.

Yes, the higher the income segment, the more the consumer spends, as illustrated in the table.  However, the expenditure is consistent.