Cover Story: Merchandising SETTING THE STAGE

January 19, 2023  by HFBusiness Staff in Business Strategy, Industry   

Now, before we go too far, there is a need for people to live in a stylish home at an affordable price point. That is the major challenge. In today’s world of $1000 phones where does the beautiful room fit.

In a recent national consumer survey FURNITURE is faring well in position number two only behind cars compared to 2019 prior to the pandemic. The table below present the rankings. Maintaining that position of intent to purchase is the challenge in MERCHANDISING.

MERCHANDISING is the sum total required to create a product from design to manufacturing to transportation to marketing to the retail floor or website. Then the retailer moves forward creating the presentation along with the message that will be used in the marketing and down to the retail sales associate that communicates to the consumers. In summary, a product that excites the consumer at the price point. What is important to the consumer? In a recent national survey conducted by FurnitureCore, a sister company of Home Furnishings Business, consisting of consumers that had purchased furniture and when asked to rank the importance of certain features, QUALITY by far was number one in their minds. The table below shows the consumers’ ranking. When you made your most recent furniture purchase, the following are some features that may have brought that product to your attention. Rank these features in order from 1 to 7 of the importance of each with 1 being the most important feature, 2 being the second most important, etc. If you do not think a feature is important to you, please do not rank it.

When you made your most recent furniture purchase, the following are some features that may have brought that product to your attention. Rank these features in order from 1 to 7 of the importance of each with 1 being the most important feature, 2 being the second most important, etc. If you do not think a feature is important to you, please do not rank it.

Merchandising is a process not a flash of brilliance, nor is it a cold calculation of another point of gross margin. It is a creative process. In today’s diverse consumer base and competing needs for disposable income, there is a requirement for a more data driven approach. However, the numbers will never replace the creative input provided by the merchant. The following presents the elements in the process:

THE CONSUMER
Reflecting back, when you questioned the MERCHANT, how he – yes typically a male and for the most part the owner of the store – made the decision on the product he purchased. The answer was the people that were his customers, specifically, “Well, Mrs. Jones, they are well off and Mrs. Smith is as well, but sort of frugal, and Mrs. Brown has great taste, but they struggle” … and so forth. He really knew his customers not the specific purchase but the lifestyles of people.

Manufacturers that were considered to be PROJECT MAVENS, typically the owners, cultivated relationships with these merchants and got specific input on what would sell. This input continued as recently as 20 years ago, but more organized with dealer counsels at Broyhill, Booker and others.

Today the industry has moved away for the most part from this collaboration as retailers have gotten larger and more diverse and manufacturers have expanded their product offerings. The challenge to avoid the impact of “fast furniture” is to restore the “human hands” in the process. We can not return to the small factory in the foothills and the predominant local mom and pop community store. However, we can use a more analytical approach to determining the product promised and the product offered to the consumer. It may not be as good as “Mom’s apple pie, but, “not bad.”

Let’s start with a 35,000-foot perspective. There are 131.21 million households in the United States from single homes to condos/cluster home to apartments. Living in these shelters are approximately 100M furniture purchasers annually segmented by age/income as shown below:

These households are the targets for furniture manufacturers and retailers. Each year approximately 75% of these household make a significant furniture purchase. As of October of this year, based upon a national survey of furniture purchasers conducted for Home Furnishing Business by FurnitureCore, 17.8% were engaged in the shopping process significantly up from 13.4% in 2019.

This consumer target at a national level is interesting but not actionable to either the retailer or manufacturers. First, if we drill down to a market (MSA) level, we find the demographics vary 200% in age and 400% in income. In other words we have young markets (Manhattan, KS) and old markets (The Villages - Florida) as well as affluent markets (East Stroudsburg, PA) and less affluent (San Rafael, CA). The tables below present some examples.

The merchant must go beyond sheer demographics to identify those “Mrs. Smith’s that have the income but are frugal” and the “Mrs. Brown’s that have the taste level but lack the means.”

This introduces lifestyle into the equation or physiographic clusters. When a typical furniture retailers customer base is analyzed, we find that they sell to everybody, but specific clusters emerge. The graphic to the right presents:

The “chic society” and “doing well” are the descriptions that replace the mental image of “Mrs. Smith” and “Mrs. Brown.” The starting point for understanding the retailers customer base is who you are selling. Now, availability of data allows the determination of the age/income of the “Head of Household” simply by use of the home address. The processing of your sales each quarter allows the definition of your customer base, and when compared to the households in your market footprint a concentration factor can be produced. The concentration factor is simply the probability that a person in this age/ income segment would be a customer. The graphic below illustrates the concentration of a traditional furniture retailer:

Obviously, this must be drilled down to the product level and for some the store level which introduces the possibility for tailoring the merchandising line-up for those customers within a defined perimeter. Today, the concept of a “destination” store has disappeared because consumers will not drive the distances to shop.

As can be seen from the graphic, the retailer sells to everyone, but 73% are their primary consumer (shaded brown). A retailer or manufacturer obviously wants to sell everyone but too broad of a selection results in a confused customer. The goal is for the consumer to comment, “this is my store, it knows what I want.”

THE STYLE

As the United States has become more diverse and the Internet has exposed the consumer to a global lifestyle, along with the increase in the more visual social media platforms of Pinterest and Tik-Tok has stimulated the home furnishing consumer. As the styles evolved from traditional, manufacturers and retailers coined the term “transitional” contributing to a lack of clarity. Home Furnishing Business has found one of the better ways to communicate style is the use of a room scene along with a descriptor. The scenes to the right are the current descriptions:

In the recent consumer survey, TRADITIONAL, while still the largest descriptor (38.4%) continues to decline. When the consumer was asked their current decorating style, Cottage casual continued to increase. The graphic to the left presents the findings: But even more interesting is the increasing decline of the traditional style when the consumer was asked about their “dream” style. The statistics are shown below:

PRICE POINTS
The pandemic and the disruption of the supply chain has played havoc with the industry’s price structure. Unit prices have increased resulting in record sales in the furniture sector and specifically furniture stores as can be seen in the graphic: While revenue has increased as the average ticket increased, unit sales did not. The net results are the shifting of price increments.

While revenue has increased as the average ticket increased, unit sales did not. The net results are the shifting of price increments.

The graphics below present the unit sales by price point for a STATIONARY/FABRIC/SOFA comparing 2019 Q1 – Q3 to 2022 Q1 – Q3.

As can be seen from the graphic, the promotional price points < $399 declined 11.3 % with the opening price points of upper $999 – 1099 increasing by 9.0%. Will the price points shift back to the promotional price points? Will the value merchants (Big Lots/American Freight) and Mass Merchants (Home Depot/Costco) capture that price point? Should we care? The cost to buy/sell/deliver a $399 sofa is the same as a $599 sofa. What does your consumer want? What can your retail sales associate sell?

CREATING THE TOTAL ROOM
One of the most important elements that differentiate furniture stores from mass merchants and value merchants is the retail sales associate. The opportunity to inspire the consumer to not just purchase a sofa, but to create a beautiful room is the traditional furniture retailers unique difference.

But first it requires some cooperation between the upholstery buyer and the occasional buyer. The questions of “what goes with what” is often forgotten. There is technology that analyzes words in product descriptions to suggest purchase combinations. However, the talent of the visual merchandisers working with the buyers to create looks to include upholstery/occasional/ accessories has improved the consumer’s experience and increased the average ticket at the same time.

The pandemic mentality of “can we deliver what we sell” has cut short the effort to add to the ticket. The graphic on the next page presents the industry statistics for attachment rates.

PROFITABILITY
With the pandemic and the supply chain disruption came a significant increase in gross margin (48.71 – 51.93%). The table below presents the comparison.

GROSS MARGIN MAJOR PRODUCT
As is evident from the table, all product categories experienced increases especially outdoor driven by supply and demand as consumers moved outdoors for entertainment due to COVID.

The downside to this increase in gross profit was the increase in inventory. The measure of GMROI (Gross Margin Return On Investment) as shown below:
While overall, the measure fell slightly ($2.94 - $2.70) from pre-pandemic, the top retailers decreased substantially ($5.30 - $3.27). As can be seen from the graphic to the right for ALL RETAILERS the gross margin per square foot of selling space continues to increase driven by the larger retailers (red line):

MEASURING THE RESULTS
The final step in a more analytical approach to merchandising is to understand how effective the product line-up is in attracting those consumer segments that are part of the overall strategy. Again, a furniture retailer does not necessarily need to sell everyone. The very focused retail verticals such as Arhaus, La-Z-Boy, and Love Sac know their customers, a very focused target. Understand your targets as presented to the right. The approach to measuring the effectiveness is simply a more comprehensive “WAR ROOM” that is digital instead of the difficult to maintain wall of pictures with post-it notes. The same information is needed. Sales in dollars and units; Gross profit and average unit sales all in rank order. The table presents an actual example with some redaction illustrating top 10 performers. That could be expanded: the comparison of top sellers overall to top sellers by demographic segment, there is significant deviation in top sellers. A critical merchandising analysis of price point and style will give guidance to how to expand sales to this demographic segment.

While the knowledge of what is selling to who on the retailer’s floor is important input to the consumer preference, but this is after the fact. In the ideal world, sharing of this information with the manufacturer would be invaluable. Another approach would be for the manufacturer to solicit input from the consumer. While in person focus groups are ideal, the costs and logistics can present a challenge. However, the use of Internet focus groups can provide a broad sample of consumers on a timely basis. The use of digital model early in the project development process can avoid costly mistakes. The graphic on the next page illustrates the output. Merchandising has evolved from the intuitive perspective of the merchant. The challenge is to integrate a more analytical approach to deciding WHAT WILL SELL.