Mood Swings

November 12, 2013  by in Business Strategy, Industry   

No doubt about it, consumers shopping for furniture are antsy these days. Things were cooking along pretty well this year at San Diego-based Jerome’s Furniture—until September, that is.

“This year had been very strong because the housing market turned up, and less people are underwater on their mortgage; and as housing values firm up there’s a wealth effect to the stock market going up, and we think that’s going to flow our way,” said CEO Lee Goodman. “That all helped us until May, when interest rates started rising again. That’s led to a gradual cooling off. Then in September, with the Syria situation creating some nervousness and then the shutdown, we saw slower sales.

“We were running 10 percent ahead in July and 20 percent in August. September was off more than 6 percent.” Jerome’s business model gives the retailer a sense of overall consumer appetite for and interest in furniture. “Our message doesn’t change. We don’t run sales, we’re talking about Jerry’s Price, about our own brand, the customer experience, so we think we’re a good barometer of the macro-economic situation,” Goodman said. “When we see a change in our business level, it’s usually macro-economic related. All things equal, we’re more likely to see macro-economic indicators impact this year’s business.”

In conversations at High Point Market, plenty of other retailers reported taking a hit on sales, and most cited consumer preoccupation with the government shutdown and debt-ceiling brinksmanship as a big reason.

PREOCCUPIED CONSUMERS

Britt Beemer, CEO of America’s Research Group in Charleston, S.C., believes consumers have plenty to worry about besides political games in Washington, especially when it comes to personal finances, and the impact of taxes and healthcare costs. He cited an ARG consumer study after Labor Day that indicated 19 percent of people said they take home less than they did a year ago because of health care cost increases in their paycheck.

“You have a third of Americans saying someone in their household is unemployed, working part time, or working for less than they did a year ago,” Beemer said. “Forty percent of parents are worried about paying for their kids’ college because they can’t rely on the equity in their home. For the backto- school season, 44 percent of parents were telling us they’ll do most of their apparel shopping for that in December, when prices are lower.

“Thirty percent of families told us after Labor Day that they didn’t take a vacation of four days or longer this year because they couldn’t afford it.” Beemer doesn’t think uproar in Washington was an issue for consumers, but some measures indicate that it was. The Conference Board’s Consumer Confidence Index fell sharply just before press time, from 80.2 in September to 71.2 last month, a nine-month low.

“Consumer confidence deteriorated considerably as the federal government shutdown and debt-ceiling crisis took a particularly large toll on consumers’ expectations,” said Lynn Franco, Conference Board director of economic indicators. “Similar declines in confidence were experienced during the payroll tax hike earlier this year, the fiscal cliff discussions in late 2012, and the government shutdown in 1995/1996. However, given the temporary nature of the current resolution, confidence is likely to remain volatile for the next several months.”

Other drags on the Index: Those saying jobs are “hard to get” rose in October from 33.6 percent to 35.8 percent; and those expecting business conditions to improve over the next six months fell to 16 percent from 20.6 percent, while those expecting business conditions to worsen increased to 17.5 percent from 10.3 percent. Other measures of consumer confidence indicate similar worries. The Thomson Reuters/ University of Michigan Index of Consumer Sentiment fell to 73.2 in October, the weakest score this year, from 77.5 in September; and its Expectations Index is at its lowest level since late 2011.

That survey indicated that consumers believe the Federal shutdown and other restrictions on government spending would slow the overall pace of economic growth over the next several months.

It also found consumers increasingly moved toward the view that the government is the main obstacle to more robust economic growth. When asked to describe recent economic developments, the number of consumers that negatively mentioned the federal government in October was the highest in the survey’s 50-plus year history. “This was the third time in the past three years that negative references to the government’s impact on the economy set another half-century peak level,” according to the survey report. Indeed, after each repeated advance in optimism during the past three years, a revival of the DC follies promptly reversed the gain. It is hard to imagine how economic uncertainty will decline in the next few months since nothing was settled, only postponed.”

And in its survey of planned holiday spending, the National Retail Federation, for the first time, asked holiday shoppers if the political gridlock in Washington around U.S. fiscal concerns would affect their holiday spending plans.

On average, 29 percent of respondents said the situation would somewhat or very likely affect their spending plans. Nearly one-third of those between the ages of 55 and 64 said political gridlock in Washington was somewhat or very likely to affect their spending, the highest percent among all age groups surveyed. When asked specifically about the overall state of the economy and how it would affect their spending plans, more than half (51 percent) of consumers said the economy would in some way impact how they spend this holiday season, with 79.5 percent plan to spend less overall, looking to cut corners and tighten budgets.

Beemer worries that the importance of “the deal” in getting consumers’ attention will eat into furniture retailers’ profitability. “It’s all about the deal. How much margin are you willing to give up to get the deal?,” he said. “That’s what’s driving the consumer today for the most part. I think you’ll see more retailers impacted by this margin squeeze (they’re already tight). It takes bigger and bigger deals to get consumers in the door and close the sale. I’m concerned we’ve reached the point of no return on this.”

WHAT RETAILERS SAY

Retailers contacted for this article believe the shutdown and debt-ceiling battle did impact their business. For example, in reporting on its first fiscal quarter, which ended Sept. 30, Ethan Allen said that the government shutdown had impacted written orders. “While we had a strong first fiscal quarter with total written sales increasing 11.4 percent and a comparable increase of 13.8 percent on top of a 9 percent increase in the previous year, we believe the bickering in Washington and the continuous focus of the news on the subject created concerns and also reduced our written business in September,” said Farooq Kathwari, CEO of Danbury, Conn.-based Ethan Allen.

Belfort Furniture, located near the center of any political firestorm in Dulles, Va., saw store traffic continue to increase, but no commensurate gain in sales.

“People are showing interest in home furnishings, but they’re not making commitments,” said CEO Mike Huber. “We actually saw an increase in traffic recently, but there were a lot who were looking. Getting them to buy was a whole other story.

“Immediately after the shutdown, we had cancelled orders because the customers weren’t sure when they’d be getting their next paychecks, and we gave them their money back. Now that things are back to normal, or what passes for normal, I’m hopeful, but I can’t say they all came rushing back in.”

Circle Furniture, Acton, Mass., had a very strong August and September, but also saw a dip in October. Queen Been Peggy Burns said it’s important to project a positive attitude in the store no matter what’s going on in the larger world.

“The minute people start thinking traffic is down because of the shutdown, they start reacting instead of serving the customer the right way,” she said. “We’re concentrating on giving the best, positive service we can, and creating the best possible atmosphere.

“The way we approach it is the world can be going to heck, so you have to make your home a haven. You have to be very positive. We just do what we always do.”

THE BRIGHT SIDE

Some retailers believe their customers are a little more used to negative headlines; and don’t foresee a return to the all-out gloominess of the recession. “It’s not like it was (in 2009) when people worried about the economic structure collapsing, the spigot hasn’t just turned off like it did then,” Goodman at Jerome’s said. “It’s noisy, but it’s not debilitating.”

Goodman believes consumers have developed some numbness to troubling news, but it would help if the politicians would make some long-term decisions on things such as the debt ceiling instead of short-term fixes. “They keep kicking the can down the road. We know it’s coming—Americans have a short attention span,” he said. “The government shutdown is a real issue on consumers’ minds, but it’s not their first time at the rodeo.”

Kathwari anticipates another round of soft conditions when the debt ceiling issue comes up again early next year, but agreed that consumers have grown more resilient. “The debt ceiling issue will remain as an ‘overhang’ and will impact consumer confidence,” he said. “However, its effects are minimized as consumers are getting somewhat numbed to the workings of Washington.”

BEST FOOT FORWARD

Burns at Circle isn’t alone among furniture retailers who’ve decided to get proactive and upbeat with consumers versus griping about what they can’t control. Belfort Furniture, for example, focuses on everyday low price in general, but moved fast this fall to boost business.

“Immediately after the shutdown, we went to a 36-month extended financing program, the longest we’ve ever done,” Huber said. “And if we think we’re going to have a slowdown, we advertise more. In addition to the 36-month financing, we came out with a 32-page circular. We typically do 12 pages, but we decided to show more product, put our best foot forward.” It helps to build some excitement in the store, as well.

“With HGTV Home, we’ll have Genevieve Gorder in the store on Nov. 9 when we launch that collection in the showroom,” he said. “That’s generated quite a lot of interest. Don’t get caught up in negativity—that filters through the organization and customers pick up on it.

“With our salespeople now, when we have a customer in the store—you know so many of them researched online what they’re looking for, so they’re ready to buy—we are working hard to improve the close rate,” Huber said. What is Ethan Allen doing to break through negative headlines and get consumers thinking about buying home furnishings?

“Our current focus is very exciting,” Kathwari said. “We are moving from being a leader in furniture to a leader in home fashion. This will also help people focus on home.”

“New Eclecticism” is the umbrella message for Ethan Allen’s product direction, and the company is reaching out to customers directly with a new vehicle.

“We have launched a 60-page magazine in October that focuses on eclecticism,” Kathwari said.

“We believe consumers are ready for fashion, which means color and the fun of mixing styles. Our variety of styles, our values, our 2,000 professional designers and about 300 Design Centers give us a good opportunity to make an impact.”

Looking at a looming big picture issue, Burns at Circle Furniture has a message for her fellow retailers concerned about the impact of health care reform. “I know there’s a lot of concern about the ACA, Obamacare, whatever you want to call it, but here in Massachusetts we’ve already gone through this with our former governor’s plan several years ago,” she said. “There were some costs that went up for some, but we’ve been living with it, and we’ve survived. It’s not the end of the world.”

It also helps to remember that some macro issues are happy ones. “This past month we’ve been promoting getting your home ready for the holidays,” Burns said.

“That’s a happier thought.” HFB