Cover Story: Competitive Battlefield

April 11, 2018  by HFBusiness Staff in Business Strategy, Industry   

The industry is expected to grow 4.1% to $107.4B in 2018 (Table A).

This growth rate will place Home Furnishings in the top quartile of all retail distribution channels with an expected growth rate of 12.5% by 2019 (Table B). This growth rate is being driven by the demographics of the 25-44 year olds that are entering their prime home furnishings buying years.

While this is good news for the industry, there is a bad news component for the traditional segment of the industry. While the traditional segment share of the consumer’s furniture expenditure has declined, this opportunity will not be overlooked by other alternative distribution channels.

The independent dealers that had lost 11.4% of their market share by 2016 from 2011 will continue to decline. Impact Consulting Services, the parent company of Home Furnishings Business, believes there will be another 2% decline in 2017 once numbers are finalized.

 The reason for the battle is the attractive gross margin that remains in the product category compared to other consumer products.

While the gross margin is attractive for the traditional brick and mortar retailer at 48-49% for retailers over $10M, many of the invading distribution channels will be targeting the total margin between first cost and the delivered price to the consumer at 70-78%. This restructuring of the total channel has been a viable strategy for many years.

This trend to collapse the channel is a significant challenge to the traditional manufacturers/suppliers to the industry. Increasingly they will be forced to solicit business from the alternative channels at a reduced margin. As the traditional industry consolidates, the entire selling process, such as markets four times per year, and territory sales representatives, will be pressured to cover more territory. An alternative strategy could be to pursue becoming a manufacturer vertical, such as La-Z-Boy and Ashley.

UNDERSTANDING THE BATTLEFIELD

Now we should understand the battlefield. The total furniture/bedding sold can be segmented into 982 markets, however, 95 percent is sold in 402 distinct markets. This foundation fact is the key strategic element in developing a plan to capture market share.

Each of these markets, dependent upon size, has a furniture retailer(s) presence that pursues the consumer. While the industry assigns different descriptions to the varying distribution channels — mom and pop, lifestyle, regional chains — the consumer selects where they want to shop based upon product selection / value / retail experience, along with eleven other factors that influence their shopping and ultimately the purchase decision. The challenge for retailers is to entice them into the stores by anticipating the expectations of each age group. Table D illustrates the current performance.

As is obvious from the table, no distribution channel has a dominant performance.

As would be expected, the millennial gravitates to the Internet, but more so to the mass merchants which includes IKEA along with Target and Wal-Mart in the mix as well. As these retailers expand their offerings, as Target is doing, they will become a major competitor for the traditional furniture retailer.

However, Generation X considers mass merchants but has an allegiance to regional chains and independent dealers as a retailer of choice for their furniture purchases.

Baby Boomers, along with the Silent Generation still prefer the local independent furniture dealer along with the regional chains.

The challenge for the traditional retailers is to facilitate that migration from the Baby Boomers they have served for decades to their children, Generation X. Yes, they need to anticipate the change required to meet the needs of the Millennials but for the next decade Generation X will purchase 40% +/- of all furniture purchased.

Now that we have defined the terrain of the battlefield and the population that needs to be satisfied, we will discuss the combatants.

UNDERSTANDING THE PARTICIPANTS

Mass Merchants

                  For the purpose of the article, we will forego the discussion of the mass merchants and recognize that 38.8 % of all consumers will consider this channel; 13.8% will consider but not shop; 21.9% will shop but not buy; and 25.5% will shop and buy.

                  For those markets with an IKEA, the statistics will be 29.1% will consider, 17.3% will consider but not shop, 19.9% will shop but not buy, and 33.7% will shop and buy.

Manufacturer/Retail Verticals

Prior to the meltdown, Furniture Brands International (FBI) in 2017 was executing a plan to open in total 400 stores for each of its recognized consumer brands. The failure to execute could not be attributed to a failed retail strategy, but to a massive consolidation attempt. Ashley Furniture HomeStores has executed the strategy and now is the largest furniture retailer with 567 domestic stores, both corporate and individually owned operations throughout the nation (see map).

The basic differentiation of these retailers are that they design and produce their product either in their own plants or through contract plants that produce their exclusive product. There are four major players with the two major focused in the promotional/middle price points selling to consumers through their stores or with retail partners (Ashley only) under an exclusive distribution agreement.

Ashley, a manufacturer vertical, has 567 stores that cover 286 markets for a market footprint of approximately 74% of all furniture sold. Value City/American Signature, a retail vertical, operates 117 stores that cover a market footprint of 26% of industry volume.

In competition with these value driven stores are other retailers with a different business model — using a franchise model. Badcock &more participates in 141 markets covering 19% of the industry volume along with Slumberland with 86 markets covering 7% of the market. It should be noted that Art Van is utilizing this franchise model to expand into smaller markets while using company owned stores in larger markets.

The map illustrates the coverage and conflicts.

As can be seen (Map 4), the national presence of Ashley with competition on the East Coast with Value City and Badcock &more.

La-Z-Boy and Ethan Allen, retail verticals, focus on the upper/premium price points representing 28% of all furniture sold. La-Z-Boy covers 155 markets with its 299 stores and a market footprint of $80B in upper/premium sales. Ethan Allen covers 124 markets with 187 stores and a market footprint of $256B in upper/premium sales.

The opportunities for better end product should grow as the as the discount department stores (Target, etc.) commoditizes the product resulting in disposable product. Other upper end brands, such as Stickley Home Stores, may meet this need for better product. It will be interesting to measure the results of Furniture Rows venture into better goods.

                  The new distribution channel (lifestyle stores), such as Pottery Barn and Restoration Hardware, are the direct competition to these upper end manufacturer verticals.

Independent/Regional Chains

Together these channels are just over 40% of total furniture sales. We have broken these retailers into three segments- National Presence, Regional Chain Expending, and Regional Chains: Grow or Be Acquired.

National Presences (More than 53 Markets – Revenue over $100M)

There are eight independent/regional retailers that have achieved somewhat of a national presence.

Of these retailers both Farmers Furniture and American Freight have increased their market footprint in excess of 20%. Market share of Rooms To Go and Slumberland, control more than 10% of their market footprint (total market).

While other retailers have begun to expand into additional markets, both Rooms To Go and Haverty have proceeded with a deliberate pace.

Regional Chains Expanding (10-52 Markets – Revenue over $100M)

For those retailers in more than 10 markets with sales in excess of $100M, it has been a year of growth for some.

 Within this group, both Art Van Furniture and Bob’s Discount Furniture have accelerated growth. Art Van, via acquisitions and expansion, and Bob’s Discount through expansion.

Many of these retailers have market penetration in their price points in excess of 10%.

Art Van expansion has been significant as was Bob’s Discount in 2017. Chicago was the first market for direct competition between the two. However, with the acquisition of Levins and Wolf there will be more opportunity to compete.

Bob’s Discount has taken the aggressive strategy, skipping over to the West Coast to engage Jerome’s, Living Spaces, and MOR Furniture For Less. While Art Van has limited expansion within six hundred miles to utilize existing warehouses/transportation, Bob’s Discount has established new warehouses to enable future expansion.

Big Sandy has moved outside of West Virginia, a state they dominate, to enter the Columbus, Ohio market. The existing competition of regional chain, Morris Home, and local independent, Front Room, will present a competitive challenge.

Grand Home Furnishings continues its growth with a dominant position in excess of 20% market share.

While shown as competitive, both Room and Board and Baers are major participants in the upper/premium market and do not compete with the more middle price point retailers.

Regional Chains – Grow or Be Acquired

                  Those regional chains that are in more than four markets with sales over $100M are faced with the dilemma to grow, defend, or be acquired.

Each of these retailers are powerhouses in their respective markets, having, in most cases, dominant market share. As the expanding retailers consider their expansion, each of these players will be a barrier to their expansion plans.

In Wisconsin, Bob’s Discount has entered several markets in competition with Steinhafel’s. Obviously, Chicago has become a hotbed of activity with both Art Van and Bob’s Discount entering the market in competition with Room Place and Darvin’s Furniture.

In the North East, Bernie & Phyls, Jordan’s, and Cardi’s Furniture are vying for the consumer furniture expenditure as indicated by the red shading on Map #2, Grow or Be Acquired.

In the last year Furniture Factory Outlet has increased their market footprint by over 130% along with Living Spaces with more than 120% with an additional expansion into Texas just announced.

While operated as separate entities, the Berkshire Hathaway companies when combined easily fall into the category of national presence with a presence in 20 markets and a market footprint of 14% nationally. With that presence they easily could be an acquirer and be included in the national presence category.

Regency Furniture is a silent participant, expanding by acquiring. From its base acquisition of Marlo Furniture, it has acquired Mealy Furniture and is continuing its growth.

Jerome’s has expanded from its San Diego base into Riverside and Los Angeles and will be a formidable competitor to the new expansion of Bob’s Discount.

City Furniture is continuing to expand in a very competitive market against Kane’s and Eldorado.

American Furniture Warehouse, a dominant player in Colorado, has entered the fray in Phoenix and just announced plans for Houston.

HOM remains a dominant force in the Minnesota market, sharing the space with Slumberland, Becker Furniture World, and Schneiderman.

Hanes Furniture, while having a traditional furniture presence in Virginia Beach, has a national presence with its The Dump brand. While a different business model, it is a significant competitor to both upper/premium retailers as well as the more middle market. 

We should not neglect to identify those powerhouse retailers that dominate their markets for any expanding retailer. These retailers typically, with more than 20% market share are difficult to unseat. The major retailers with a national presence with difficulty attain 5.8% market share. This fact should weigh heavily on the decision to acquire versus expand. Obviously, dominant market share is relative in relation to market size. The graphic is provided for strategic thought.

It is a critical time for retailers to decide their critical path. It is attractive to consider being acquired especially if there is no ownership/management identified. Likewise, it is attractive to expand to increase the potential value of the company. Expansion capital may be difficult to find without loss of equity. And the final thought is to stand a fight. All viable, all with risks and rewards.