Cover Story: After the Shock and Awe: Is it the Quiet Before the Storm?

April 1, 2019  by HFBusiness Staff in Business Strategy, Industry   

Thoughts of the aftermath of the wave of acquisitions in the manufacturing sector that saw the transfer of ownership from family to nameless equity firms that had better ideas to wake up the stodgy furniture makers caused trepidation.

In the past year, the industry has watched as Bob’s Discount defied industry norms and skipped over the nation from Chicago to Los Angeles, opening multiple stores in the same week. And Art Van reorganized with significant personnel shifts and exits. At the same time, cornerstones of furniture retail such as Rooms To Go, Raymour & Flanigan, and Haverty’s keep their powder dry. What is in the wind?

In the business press, not just the industry press, the performance of the furniture retail sector has been the topic of much discussion. While the “pending” purchase explosion of the millennials will fuel the home furnishings industry, that is after they begin to furnish their first homes, and after they actually make that decision in light of college debt. The decisions may be ten years later than generations before.

But for now, Baby Boomers still have the highest number of households representing 34.4 percent of consumer units compared to 26.8 percent for Generation X and 25.1 percent for Millennials. While the Millennials are inching closer to Generation X in the percentage of consumer units, the percentage of consumer spending for furniture/bedding is still over eight percentage points (7.7 percent) higher for Gen Xers and almost ten points higher for Baby Boomers.

But even with this delayed race to purchase by both generations, the industry in 2018 totaled $106.33b- an increase of 6.8 percent over 2017. Furniture excluding bedding grew a healthy 7.6 percent to $90.2b and bedding increased 2.6 percent to $15.51b.

The generational terminology is tossed around much like our style trends. The table provides the commerce department definition unaltered from marketers that “bend” the definition to match their marketing campaigns.

At the end of 2017, the most current year of consumer expenditure data by generation, Millennials’ total $71.9m and range in age from 21-36 with an average age of 28.5.

                  The next, older Gen Xers at an average age of 44.3 are smaller in population at 65.7 million but will have the most current impact on the furniture industry.

                  Baby Boomers at the average age of 61.1 are rapidly retiring but are not showing signs of lessening their influence on the industry.

                  Why the discussion of demographic trends in an article about retail competition in the furniture industry? Simply put, it is the consumer that will influence the type of retailer that will prosper into the future, and therefore what the market demand will be for retail distribution types into the future. There have always been changes in distribution channels in the furniture retail landscape. Fifty years ago, over 50 percent of the furniture volume was delivered by national chains such as Montgomery Ward, Sears, and JC Penny with the balance of the market controlled by department stores and small mom & pop stores often specializing in weekly finance payments.

                  The ensuing fifty years has seen almost the final demise of the national chains and the growth of many mom & pop stores, losing the tag of “dirty window stores.” Emerging in the same period was the lifestyle stores, such as Restoration Hardware (RH) and Pottery Barn, and the verticals, dominated by Ashley Home that both produces and sells their own product. But most notable has been the internet or e-commerce retailers which began as entrepreneurial “pesks” policed by manufacturers that vowed not to sell them to major purchasers such as Wayfair that are pursued by manufacturers.

Traditional furniture retailing now controls 24.4 percent of the industry with sales on the uptick with regional chains but declines of 11.4 points with independents. The internet’s beginning with rogue retailers in the late 90’s captured 10.5 percent by 2011 and slowed to 15.6 percent in 2016- but has settled in at 18 percent plus today. Mass merchants (warehouse clubs and superstores) have grown only slightly in share 20.1 percent in 2011 to 20.4 percent in 2016. Everyone can remember the Costco scare that has faded into the past.

While each of these channels could be (and have been) the subject of a significant report we will focus on only the independents and the regional chains.

The consolidation of the industry continues after a cumulative loss of 19.8 percent of stores from its peak in 2007. The trend reversed in 2018 with a gain of 1.8 percent in store count.

As can be seen from the chart, there are almost 5,500 fewer furniture stores and an additional 500 stores in 2018.

Before getting excited, this does not mean a surge of new mom & pop stores. It is more a reflection of a trend that has been around in other retail segments that furniture retailing has avoided — a retail location on every corner. Furniture retailing has long been a destination location. However, with the time starved consumer, the need for a more convenient retail experience has lead retailers to more stores to serve the same markets. According to FurnitureCore, the sister company of Home Furnishings Business, the average household per store location for the Top 300 traditional furniture retailers is $212k households, down 10 percent in the last 5 years. The Top 300 retailers covered a range of $9m-$2.5b.

The demise of the mom & pop stores has been accelerated by the growth of regional chains.

Total furniture retailer sales of all products are estimated at $65.5b for last year. However, these retailers include retailers not classified as traditional furniture retailers. They also include lifestyle stores, such as Pottery Barn.

The Top 100 represented only traditional independents, large independent, and regional chains through consolidation and attribution. These retailers have increased sales by 66.1% percent since 2013 compared to the broader classification, which grew 10.6 percent.

Now, what should your strategy be if you are a traditional furniture retailer? No matter small independent, large independent (sales over $50m – one state), or regional chain with expansion of the mind, changes are coming.

First, let’s start with the “elephant in the room” or maybe we should say the large fish in the ocean. Specifically, those regional chains with national on their mind. Nothing motivates a furniture retailer to expand more than outside capital. With the acquisition of Bob’s Discount by Bain Capital and Art Van by HD Lee Partners, excitement was created in 2016/2017 that resulted in a 5.3 percent increase in market footprint for Art Van and 6.4% for Bob’s Discount. While Bob has expanded by opening new stores, Art Van has combined acquisitions with opening new stores.

Much more entrepreneurial has been Furniture Factory Outlet (FFO Home) with seven additional markets, and typically, in markets under $50min furniture/bedding sales. However, recently larger markets have been targeted.

American Freight, a quiet retailer out of Ohio with the low overhead but high value consumer experiences, continued to expand their market footprint into an additional eleven markets.

Anticipating an acquisition proposal or at least a deterrent to entering the markets, well managed regional chains are filling in their existing markets and moving into adjacent markets. No matter the motive, regional chains are taking advantage of the good market. Also stimulating this expansion is the availability of great real estate deals — catnip to furniture retailers.

Moving into a new environment, Big Sandy expanded into the Columbus market, joining Morris Home, the large independent.

Room Place expanded outside of the Chicago market into Peoria.

Steinhafels expanded its footprint into the outskirts of Chicago-Naperville-Arlington Heights market with a new store in Crystal Lake.

Living Spaces has continued its expansion strategy after San Diego into Austin and now into Las Vegas.

Cardi’s Furniture quietly expanded into New Hampshire in competition with Bob’s Discount.

While other regional chains have expanded into adjacent markets, many have been content to add presences within their existing markets. Surprisingly, the sleeping giants Rooms To Go, Haverty’s, and Raymour & Flanigan have been content to grow their marketshare and improve their performance. Many question the strategy. However, Rooms To Go’s acquisition of Carl’s Patio venturing into the outdoor category and Raymour’s accumulation of leases could indicate surprises to come.

As formidable as the regional chains are the large independents, often with more revenue than some regional chains, have been content to remain within their states and grow. While there is no state strategy, the fact is that some states are larger than some of the regional markets.

The major strategy with the large independents has been to create a dominance in each market to prevent other regional chains form considering invasion.

The major story has been about the Stevens Point-based Appliance & Appliance Mart as it is in an additional market and adding stores, including some free standing Ashley stores.

Jerome’s continues with its market expansion entering El Centro with free standing bedding stores and expanding store coverage.

City Furniture added an additional market (Sebastian-Vero Beach), plus expanded its store complement by six.

Johnny Janosik expanded into a neighboring market with expansion into Wilmington.

The centerfold map provides a visual perspective.

But what about the independent stores below $50m in revenue? An answer could be a franchise. Slumberland and WS Badcock have long provided a solution. The map indicated their coverage in the Midwest and South. The franchise fees are more than offset by the increased buying power and almost elimination of inventory. Assistance with advertising and store operation support are an added benefit.

Art Van has also supplemented their distribution in smaller markets with franchise operations.

As always, furniture will be sold. Enterprises will continue to find ways to satisfy the consumers’ demands. To survive retailers must be open to change- are you ready for the battle?