Cover Story: Will We Ever Put Humpty Dumpty Back Together Again?

May 31, 2020  by HFBusiness Staff in Business Strategy, Industry   

After weeks of denials and minimization at the federal level, reality set in and “shelter in place” became a fact. The positives disappeared. The graphic shown below of traffi c into the stores fell precipitously. The statistics are a national sample of a range of free-standing independent retailers. Whatever the market or size of store, furniture retailing in brick and mortar stopped.

The retail activity across all furniture retail outlets, no ma er traditional furniture stores or the broader based home furnishings stores, stopped. In comparison to all other retail, the downturn in furniture retailing was signifi cant. Stocking up on hand sanitizer and toilet paper was in the forefront of consumer purchases. Along with this, consumer prices in April dropped by .8% —the most since the Great Recession—after falling .4% in March. The drop was weighed down by a plunge in demand for gasoline and services, such as air travel. However, furniture and bedding doubled that, falling 1.9% in April and 1.4% in March, which is 12 MAY/JUNE 2020 HFBUSINESS.COM the largest decline since December of 2008 during the fi nancial crisis. One thing you can rely on is as sales soften, furniture retailers will discount.

Where does the industry go from here? Unfortunately, the typical independent retailer cannot withstand a loss of more than 10% of sales before going into the red. The chart below presents the statistics. While the statistics are based upon 2018 fi gures, there will be li le change when 2019 results are completed. Obviously, larger retailers fare be er and can withstand a 23% loss of revenue.

WERE THERE PROBLEMS BEFORE?
Before this all started, the furniture / bedding industry model was developing some serious cracks. The impact of e-tailing, which emerged in the early 2000s, became a serious concern in the second decade of the new century with a level of 20% in 2019. With declining gross margin per square foot of selling space in the discount chains brought about by overexpansion of stores dictating the closing of stores, the furniture product category’s gross margin became attractive. With Target stores adding furniture collections and Big Lots focusing on the furniture category, the traditional furniture stores felt pressure in the lower promotion price points.

The traditional furniture stores, the home of middle price points and representing 50-60% of industry sales, have migrated into the lower part of the upper price points, forcing the upper end stores to compete at lower margins or close. This upper end collapse has created a market for interiors decorators that provide not only better design, but a shopping assist for the time starved consumers. Serving this market is also the lifestyle stores, such as Restoration Hardward, Arhaus, and Pottery Barn. With smaller stores focused on a target consumer, this segment has expanded. For the last fi ve years, regional chains have expanded signifi cantly, pushing out the small independents in the markets over $50m in furniture/bedding sales. While 2019 saw a decline in expansion, the major shock was the collapse of the Art Van franchise after being acquired. Widely accepted as a failure of execution by the venture capital fi rm, Thomas Lee, the result is still the same. This failure caused the re-emergence of the belief that a national furniture retailer is not possible – Levitz, Wickes – Heilig-Myers. What have Raymour & Flanigan, Haverty’s, and Rooms To Go discovered?

WHAT IS IN THE FORECAST?
At the writing of this article, the Commerce Department announced that the Home Furnishings category was down 66.25% in April compared to the same quarter last year. For traditional brick and mortar furniture retailers, the reaction was most likely, “I would be delighted with 33% of my 2019 April sales, in that my stores were shu ered.” However, the resilience of furniture retailers came through as they learned how to create VIRTUAL SALES via e-commerce, phone, social media, or by appointment. This 33% compared to last year is the starting point for rebuilding sales volume. It should be pointed out again that this 33% fi gure is signifi cantly below the breakeven point for all furniture stores, which is 10.3% down, as discussed earlier.

Understanding what that future holds is the major questions of furniture retailers as they reopen stores. As of the writing of this article, many retailers that reopened in the fi rst few weeks of May had a pleasant surprise, achieving sales that matched or exceeded 2019.

While the traffic was down 50%, the consumer came ready to purchase with close rate doubled and average tickets up 50%. The question is, will this result hold or is it the pent up demand from the six weeks prior?

To better understand the future, we need to understand the factors that impact the furniture industry’s performance. The chart below presents those factors that statistically influenced FurnitureCore’s Industry Model over the past 30 years. (FurnitureCore is the parent company of Home Furnishings Business.) These factors are presented below with the red highlight on the impacted factors in the past months.

How do these statistics translate into what industry sales will be for the balance of the year? There is no statistical confi - dence in projecting from these emerging numbers. However, when CONSUMER CONFIDENCE fell to the 86%+/- level, the industry declined 27.9%. Likewise, when UNEMPLOYMENT entered the 14%+/- range, the industry fell 35%. We all remember the 2007-2008 period. HOUSING STARTS, which fell 22% last month, interrupted a 20% growth rate. Housing starts are a factor impacting industry sales in Q4/2020.

In a survey conducted of larger retailers, the majority (35%) believed sales would decline 10-20%, but 20% believed the decline would be 20% or more. From the perspective of these same retailers, the deciding factor will be the consumer attitude. Getting them back into the stores (63%) and creating a clean environment (29%) were their major concerns.

The success of furniture retailers returning to a “new normal” will be determined by the management team being open to new ideas and accepting that it will not go back to what it was before. There were casualties in the Great Recession and there will be as well in the Pandemic of 2020. But furniture retailing will continue.