Cover Story: Is LessMore In a Post-Pandemic Industry?

January 19, 2022  by HFBusiness Staff in Business Strategy, Industry   

The obvious result was significant pressure on the retailers to expand their floor assortment to accommodate the demand. With these major line extensions came a deterioration of the manufacturerretailer partnership. The rationale – our product line is broad enough to sell multiple retailers in the same market without duplicating product. Thus marked the beginning of the disintegration of the manufacturer’s brand from a consumer’s perspective. You see it everywhere, no exclusivity.

What Did Retailers Do?
Retailers responded in the ensuing decades with expanded store size facilitated by the bankruptcy of many of the big box chains. The result was increased sales but not in direct proportion to the increased square footage. Currently sales per square foot is $240 annually. Interestingly larger retailers ($100M+) and smaller retailers (<$5m) achieved an advantage of 50%.

The productivity has declined as store size increased and furniture retailing abandoned its “store as a designation” to pursue multiple stores in the same market. Decades ago, furniture stores’ selling productivity (inflation-adjusted) exceeded today’s performance metrics – Less Is More?

Even the freshman majoring in business has been exposed to the concept of 80/20. In other words, 20% of the product line would represent 80% of the product sold. This is not true for furniture retailing where the top 20%’s product line represents less than 50% to 60% of sales.

 

This concept raises the question – can we do with fewer products and produce the same volume of sales? During the supply chain disruption brought on by the pandemic, retailer merchandise assortment declined. The graphic below presents the comparisons.

Interestingly the impact on upholstery (stationary/fabric) was felt immediately while casegood assortments were maintained. There is an obvious relationship between domestic and offshore production and the delivery cycle. The decision to remove and replace the slot was delayed with anticipated delivery.

The rotation out of the top slot did shift significantly from quarter to quarter as may be seen by comparing the current quarterly ranking of SKUs to pre-pandemic rankings. Note the movement in ranking by SKU from quarter to quarter in a typical traditional retailer with over $10M in sales.

What did change significantly was average unit selling price. As may be seen from the graphic, upholstery was stable ($654/unit) from 2019 Q3 to 2020 Q3 but exploded by 24% a year later (2021 Q3) to $810 per unit. Casegoods performed similarly but dining (tables) moved slower from $391 per unit to $426 per unit, an increase of 9%. This deviation by price points is more obvious when we compare a price distribution curve for stationary upholstery (fabric) for sofas/loveseats in 2019 and 2021 Q3 YTD.

It should be noted that the percent of units sold in 2021 Q3 in the below $499 price range decreased from 38.5% to 21.1% in 2021 Q3. In terms of dollars, the percent declined from 22.5% in 2020 Q3 to 11.1% in 2021 Q3.

What Did Manufacturers Do?
Contrary to retailers’ opinion that manufacturers just increased prices and sent delayed delivery notices, manufacturers scrambled to satisfy demand. As was discussed earlier, manufacturers – unbridled with capacity restraints – pursued all retailers that could be sold. Armed with the justification that their lines were broad enough that multiple retailers could include their merchandise assortment without cannibalization, manufacturers continued to sell to as many retailers as possible in a market. This foundation strategy assumption overlooks that there are limited sales and purchasers in each market (MSA). The fact is, many manufacturers cannot determine their sales in each of the 404 specific markets (MSAs) in which 95% of all furniture is sold. The table below illustrates the required business intelligence (ILLUSTRATION ONLY).

 

It should be noted that this lack of sales in smaller markets is an opportunity to sell to retailers in those markets or directly to consumer via e-commerce. Most manufacturers, lacking this more in-depth knowledge of where they sell, resorted to using an axe instead of a scalpel in adjusting their retail distribution. Manufacturers were forced to reduce their retail base in order to improve their delivery. It is difficult to measure the impact of the 20+ year relationship that was destroyed. Now that the painful cuts have been made, the old familiar term of PARTNERSHIP has emerged. Maybe it will be more than a one-night stand and evolve into an enduring profitable relationship. Again, can SELLING FEWER (RETAILERS) BE MORE?

In addition to curtailing their retailer base, the focus became merchandise line reduction in order to improve the delivery time. In the past decade, the focus was “endless aisles”. The emerging term is a “curated assortment”. The impact of the broken supply chain has been a reduction in the product line-up. As may be seen from the graphic below, the post-pandemic consumer has shifted from design to a combination of value and quality – a challenging blend. The table below presents a percentage of consumers ranking each element in preference order. With the reduction in their retailer base and a curtailing of their merchandising assortment, manufacturers will be able to improve service levels to the normal four-to-six-week cycle. While the adjustments have been painful on both the manufacturing and retail sectors, the demand continues as illustrated below.

Though this graphic is reassuring, we need to understand that this is revenue demand – NOT unit demand. In other words, sales have increased based upon the average unit price and increased close rate – NOT increased traffic into the store. Thus the challenge is still there to create product that attracts consumers to the store or to the website to buy.