Let’s explore the four “P’s” of merchandising with the first being PERSISTANCE. That is what it will take as the merchandising team balances short term profitability with long term BRAND that is the percentage of consumers in your market that will consider you when they started the shopping process. The table below present 2023 results by distribution channel.
Over half (53.9%) of consumers did not consider independent retailers while shopping but 46.1% did. 16.2% of consumers considered shopping at independents but didn’t follow through. and 16% shopped but did not purchase. Thankfully 13.9% did. Compare the many competing distribution channels – more on this in the next issue of Home Furnishing Business. What does this mean to the merchandising team? EVERYTHING. Merchandising influences all the factors that drive success – driving the consumer to consider to shop and to purchase.
This article is focused on the traditional furniture sector including both manufacturers and retailers. However, we realize that some traditional manufacturers and retailers are exploring other strategies as as illustrated in Figure 1.
Industries are always in a state of transition. With furniture manufacturing centers shifting from Jamestown, New York to Grand Rapids, Michigan to Western North Carolina. Likewise, distribution channels move from department stores and national chains to independents and regional chains to retail verticals and e-tailers. (Table B) But returning to the traditional channels, what can reverse the downward trend?
In the last 30 years we have seen the second generation expand the family’s single store/single market business to multi-markets, with many stores becoming corporations. Unfortunately, several have moved on to venture capital or public ownership with mixed results.
While the Commerce Department still recognizes over 20,000 furniture stores and home furnishing stores as shown in Tables C and D, the majority of the TRADITIONAL RETAILERS revenue is generated by the top 300 retailers (20.9%) of the TOTAL industry.
After the significant increase in revenue enjoyed by independent retailers, which created a financial windfall during the pandemic, many independent retailers are closing. The main reason for exiting is the lack of a family transition plan. PRODUCT – “THE FOUNDATION OF RETAIL“ There is much confusion about the definition of furniture store and home furnishing store. Here is the official definition from the Commerce Department:
Well, that didn’t help much. However, it does give some guidance to the revenue statistics shown in Table E. For traditional furniture retailers currently, the products would be defined as shown in Table F. It is interesting to note the merchandise line-up difference between the total industry and the larger stores as well as the change from 2017 to 2023.
If we went further back, we would see that other product categories have disappeared from the traditional furniture stores – small appliances, linen, dinnerware and so forth. Why? The most common response is competition from discounters. It is true that the “category killers” become part of the retail scene and drove many products from furniture retail stores. Recently these same “category killers” have met their demise, Babies R Us and Bed Bath and Beyond, to name a few. Today, the category killer is the INTERNET with the focus on the rug, accessory and bedding category, and yes furniture in 2023 with 18% of furniture sold on the Internet according to FurnitureCore, sister company to Home Furnishings Business and its research arm.
Today, there is much discussion about store traffic or lack of such. If we are limiting the reasons for shopping to items that are only purchased every two or three years, what is the impact? Even with a loyal customer base the time between purchases is significant. Consider Table G with 25%± of purchases beyond seven quarters. We should consider the RETAIL VERTICAL distribution channel that now provides 28.2% of all furniture sold. New entities such as Arhaus have 16,000 sq. ft. stores selling on average $10M per store by merchandising the total home. Difficult to execute, but so is a GOB. Harsh? But true. The industry’s emerging customers, the millennials and Gen Z, want more than just a sofa. Shop a Home Goods store and see the “lookers.” Wouldn’t you like that traffic in your store? Maybe they would discover that sofa that they couldn’t live without.
It may be time to take our product categories back. Should we reconsider infant furniture? PRICE POINTS – WHAT WE CAN AFFORD OR WHAT WE WANT? It took a pandemic to allow the furniture industry to attain a price increase. For decades the industry has bemoaned the fact that in 1964 a new Mustang cost $3500 and a sofa was $300 and now a Mustang is 15x that and the industry is still selling $399 sofas. The Consumer Indexes graphic (Graphic 1) illustrates.
Yes, the industry got a bounce, but so did the automotive industry. The price increase obviously accelerated industry growth after the initial shock of the pandemic store closures as can be seen from Graphic 2.
Where this situation resulted in a price increase driven by increased transportation cost, material cost and yes, an increase in gross margin at retail. Gross margin per square foot of selling space accelerated from the $6/sq ft level to the $10/sq ft level in 2021 peaking in 2022 at $12/sq ft before beginning to stabilize at $10/sq ft in 2023 as seen in Graphic 3.
Obviously, this was an increase in revenue but not units sold. However, the pandemic did cause a shift in traditional retailers’ merchandising price points measured by units sold by price point. Using upholstery/ stationary/sofa-love/fabric as a datum, the % of units sold in promotional drop from 24.2% in 2019 to 8% in 2023. This shift caused a 45% increase in average unit selling price of stationary-fabric sofas ($704 --$1027). Graphic 4 presents the comparison.
There is a reason that the furniture industry has been able to continue in existence without any significant price increases – the most frequent answer is the transition to offshore manufacturing. Yes, there was a cost savings after factoring in transportation cost. Now imports represent 26.9% of all furniture sold in the United States. The pandemic disruption caused a reconsideration of the offshore model. However, the many barriers of reshoring are significant. However, the major reason is the gradual reduction in quality. We say gradual because the consumer has a general perception of quality decline but not specific. How or why did the industry pursue this strategy? Gradually the marketing of furniture moved away from quality statements such as “EIGHT WAY HAND TIED” and discussion of wood species – “pecan/cherry/solid oak” to mixed hardwood or construction of “dovetailed drawers.” To illustrate the 2018 consumer awareness of eight way handtied at “did not know” at 41% in 2013 declining to 64% in 2017 and probably nil now. The results are the consumer not being educated about quality differences to justify the price differential. There is a difference between a $399 sofa and a $999 sofa, but does the consumer know or for that matter, does the retail sales associate know? The results are consumer’s purchase without a quality differential. The influence of the consumers income has little impact on the purchase. In fact, currently, in 2023 if the consumer’s household income is $100K - $150K, the probability of purchasing a $400 - $999 sofa is 1.7x compared to 2.1x for purchasing a $1000 - $2000. Graphic 5 presents the percentages.
The retailer’s communication of price/value is critical in the selling process. How important, on a scale of 1-5 of importance? PRICE/VALUE as would be expected ranks 4.55 no matter the age or income. As can be seen from Table H. The distribution channel that delivers the best price/value by far is regional chains as can be seen in Graphic 6.
But concern should be noted about the consumer’s perspective of mass merchants, Internet compared to the independents.
SELECTION - FOUND WHAT I WAS LOOKING FOR
The concept of selection has emerged as a focus. The question is HOW MUCH IS ENOUGH? No matter the breadth of selection it is important with all ages and incomes. From consumer surveys in 2023 it was the number two behind price/value. (See Table I) While many retailers still have 100,000+ square foot stores, using a destination store strategy, in the last decade others have reduced their store footprint and moved the stores closer to the time starved consumer. The results have been an increase in occupancy cost offset by a reduction in advertising expense reflecting the retailer’s presence in a retail shopping area. Currently (2023) for traditional retailers, the performance is averaging $204/square foot (annual). Graphic 7 presents the monthly statistics.
This performance measure has increased since 2019 due to the average unit selling price the performing values between smaller independents ($145/sq ft) the larger regional chains ($275/sq ft).
The question is —store size versus consumer’s drive distance. The retail/ manufacturing verticals have more stores per household in the market but smaller stores (15M – 35M). However, the stores perform. Consider Arhaus store at 16,000 sq ft on average producing $625 per square foot, a statistic that makes traditional retailer’s question – how can they provide enough selection in that small footprint? The answer is simple. Arhaus focuses on a smaller segment of consumers (29%) than the typical regional chain serving 77% of the households in the market.
The major challenge in merchandising is the generation shift as the Baby Boomer exits and the next two generations become our prime customers. In fact, it has already occurred in 2020 when Generation X surpassed the Baby Boomers. (Graphic 8). With each generation comes a demand for a new style. In a recent survey, we compared from the consumer’s PERSPECTIVE their current style to their dream style. The results are shown in Table J.
While this is a significant challenge for the merchandise team, the extent of the challenge is to compare the dream styles of the Millennials to the Baby Boomers as shown in Graphic 10. Obviously, from the graphics above, retailers must get MODERN and INDUSTRIAL ready for the Millennials. The challenging merchandising question is, what is the definition of style from the consumer’s perception? Remember, it is in the eye of the beholder. Style quizzes have been overused and abused as website interceptors. However, those that are based upon research can help refine YOUR definition of style. Using your buyers’ perception of style as the product is placed in the merchandise lineup, survey your target consumer. When you present your style interpretation and they concur, the process of style refinement begins. (Graphic 11).
The ultimate measure is what sells. In most retailers, a “war room” exists displaying best sellers. A digital version of best sellers for upholstery/ stationary/sofa-line/fabric. (Graphic 12). Note that only one of the SKUs that are best sellers for Millennials are in the Top 5.
PARTNERSHIP - A REAL SHARING OF OBJECTIVES
What is required to reverse this downward trend? -- Simply put, PARTNERSHIP. A return to sharing between manufacturer and retailers, specifically.
The industry is undergoing a generational shift. This shift from the Baby Boomers that fueled the transition from department store and national chains to independent furniture stores has been unstable for the past decade with Generation X now generating 36.7% of the industry revenue and their children, the Millennials, following close behind. (Table K)
The feature article in the Nov/Dec 2023 issue of Home Furnishing Business addressed the consumer. Now we will address the most critical component, the product, and how retailers and manufacturers can address the merchandising task.
It has been a long time since the term “product maven” and “merchant” have been used to refer to furniture leaders. The truth is, it was never the individual that produces the magic, but a team that includes the manufacturer, retailers and the sales representative. For traditional manufacturers and retailers to reverse this trend requires getting the team back together. So, now let’s begin the process of sharing to create improved performance for both manufacturer and retailer. Just follow the red arrows below.
The opportunity to tie mattress sales to health benefits is top-of-mind for today’s mattress manufacturers and suppliers. From new yarns and fibers to innovative adjustable bases, product features are being developed and marketed to entice consumers with health benefits. At Therapedic, these advancements are in the form of copper yarns and copper-powered fabrics proven to be absorbable by the skin for wellness benefits. “Our Immunity collection contains the highest copper content of any mattress made for consumers; it consists of copper woven into the fabric cover and infused in the mattress foam,” says CEO and president Gerry Borreggine. “Research shows that copper is anti-bacterial, anti-microbial, reduces inflammation, and may increase circulation, all benefits that appeal to consumers.”
At top price points, luxury models continue to benefit from this wellnessdriven market dynamic. “The consumer’s quest for a healthier sleep experience elevates the importance of the luxury mattress segment,” says Bill Hammer, president of Shifman Mattresses.
For Norway-based Stressless, its newest model—Sky—reflects decades of product knowledge and innovation. “At Ekornes we are not new to the mattress category,” says Peter Bjerregaard, president. We’ve been producing mattresses since 1937 and have a deep understanding of the factors that account for good sleep, and why it is essential for a healthy life. We have combined our extensive sleep insights with the Nordic lifestyle, which promotes good health in harmony with nature, to create the Stressless Sky.”
According to industry research and estimates from the FurnitureCore model developed by Impact Consulting Services, parent company to Home Furnishings Business magazine—sales in the bedding category declined in 2022. At year end, 2022 finished at $17.8 billion compared to $18.51 at the close of 2021. This 3.8% decline contrasts with the preceding 21.6% annual growth of the segment from 2020 to 2021.
Mattress sales in 2022 appear to be lost to other home furnishings categories as bedding’s percentage of total furniture industry sales also declined from 12.9% in 2021 to 11.8% in 2022. The downward trend continued in 2023, with sales down 3.5% year to date at the close of third quarter, with $13.44 billion in sales compared to $13.93 for the period in 2022.
How Manufacturing Performed in 2023 Figure 2 summarizes the more current data from last year through October. This data highlights two time periods: (1) the first 10 months of 2023 compared to the same period in 2022, and (2) the most recent month-to-month comparison of October 2023 to September 2023 (one month). Shown are shipments, new orders, inventories, and unfilled orders for the two time periods. Also included are import numbers.
Over the last year, manufacturer’s shipments, new orders and inventories have slowed, and growth has been flat. Meanwhile over the year, unfilled orders are down 6.4%. This is against a backdrop of U.S. imports that were down 22.8% during the first 10 months of 2023 over the same time period in 2023. Data month-overmonth for the most current month (October versus September 2023) shows a similar picture with shipments and inventories down, but only slightly, and new orders up 1%. Unfilled orders growth is also flat. Meanwhile imports for October rebounded to grow 11.1% over September. Consumer spending has slowed, but for how long? And when it picks back up, will the consumer be forced to return to long wait times.” The road getting here has been interesting, with furniture manufacturers enjoying the backlog of consumer demand created during the pandemic. Table A shows that quarterly furniture and related products shipments peaked in the fourth quarter of 2022 at $20.78 billion but really began to slow in the second half of 2023, (down 2.9% by the end of the third quarter).
Along the way, U.S. manufacturers caught a break as foreign imports, Chinese in particular, struggled to keep supply chains up and running. Available data through the first three quarters of last year show foreign imports peaking at $15.4 billion in the second quarter of 2022 then ultimately falling over 30% to $11.01 billion in Q3 of 2023.
Monthly data in Table B details furniture shipments and imports December 2022 through October 2023, adding the extra month into the fourth quarter. For U.S. manufacturers, the final dip began in February of 2023 and has not yet recovered. Between January and October of last year, U.S. shipments fell 3.7%. Meanwhile, imports continued to struggle, falling 14.5% January to September last year, but rebounded 11.1% in October over September 2023.
Over the last 10 years, domestic manufacturers’ shipments of furniture and related products peaked in 2022 at $82.1 billion and are expected to be down less than ½ of 1% in 2023 (Table C).
The value of shipments began to decline in 2019 by 3.6% and fell further in 2020 by 5.8%. Shipments began to rebound in 2021 by 7.5% as shutdowns continued in China, and grew further by 8.5% in 2022. At the end of last year, domestic shipments were down 0.04% through the third quarter (Table D).
Also detailed in Table D is a comparison of the growth in manufacturers’ shipments to the growth in the producer price index for furniture 2014 to 2023 October. This graphic shows that until 2019, when inflation was low, manufacturers’ shipments grew faster than price increases/ inflation. However, the pandemic upended that trend somewhat. In 2021, when inflation surged, demand stayed high and ahead of price increases. Since that time, inflation has outpaced the growth in shipments, especially in 2023 when producer prices/inflation for furniture grew 4.5% while shipments have shown no growth October year-to-date.
Table D shows the annual dollar shipments since 2014 with preliminary estimates of $82.07 billion for 2023 yearend. Although not an exact apples-to-apples product comparison, the tables have turned for manufacturers and retailers when it comes to inventory levels. Throughout 2022 and the first half of 2023, furniture and related product manufacturers carried a much higher ratio of inventoryto-shipments compared to retailers’ inventory-to-sales ratios (furniture and home furnishings products) (Table E).
But by the summer of last year, retailers’ inventories stayed stable as manufacturers declined, with consumer demand eating into manufacturer’s inventories as imports dropped sharply. By October of last year, the ratio of inventories to dollar shipments for manufacturers was similar, 1.56X for manufacturers compared to retailers at 1.53X.
After unfilled orders increased consistently month-to-month throughout most of 2021, manufacturers began to whittle down the sizable backlog in 2022 and picked up more steam in the second half of last year. Coming out of the plant shutdowns in 2020, unfilled orders grew a total of 27.9% in 2021 and 3.8% in 2022 before going negative by 8% in the first 10 months of 2023. Table F details the reduction in unfilled orders.
In the years leading up to the pandemic (2018 – 2019), manufacturers’ monthly unfilled orders/backlog was mostly consistent at 130% of the value of shipments (ratio 1.3X). The ratio peaked in December of last year at 1.87X as unfilled orders approached double the shipment volume. In May of 2022, the backlog ratio dropped to 1.66X before popping up slightly to 1.69X in June (Table G).
New orders, the life blood of manufacturing, grew throughout 2022 finally peaking in January 2023 to a onemonth high of $7.01 billion. Then between January to July, new orders fell to $6.48 billion before rebounding in August of last year and growing monthly to $6.74 billion in October, the most available data at press time (Table H).
While manufacturers’ shipments grew consistently coming out of the Great Recession, the number of manufacturing establishments declined rapidly (Table I).
In 2011 the number of companies manufacturing furniture and related products totaled 18,985 before falling 7.2% over the next five years to a low 17,623 in 2016. A small two-year uptick that began in 2017 didn’t hold through 2019 and 2020 during the pandemic. But since 2020 the number of manufacturing establishments grew to 18,346 by 2023 Q2, an increase of 14% (Table I).
But while the number of stablishments was falling, employment was growing by 12.2% by 2012 to 2017 peaking at 93,100 employees. But by the end of 2018, employment was declining and has not recovered, even with the growth in establishments. Between the peak of 2017 and June of 2023, the most recent data, employment fell to 360,900 which is 8.2% below the 2017 peak.
Annual hourly wages for all furniture manufacturing and related product employees have increased every year over the last decade but the biggest gains were made in 2020, 2021, and 2022 growing 4.6%, 4.3%, and 4.8% respectively. In June of last year, average annual wages totaled $54,549 an increase of 1.35% over 2022. Wages last year were 39% higher than 2012. (Figure 3).
One of the major problems facing many U.S. industries is the slowing of worker productivity. And this is true as well for furniture manufacturers. (See Figure 4 for a definition.) The productivity index shown in Table K, indexed to 2015, indicates that over the seven years ending 2022, the most recent data, productivity has declined 10.5%. Meanwhile wages increased 26.8%.
In December of last year, the Feds announced that inflation was cooling and promised to reduce interest rates in several stages this year. Election years are usually stable for the economy. Yet with the turmoil of a contentious election coupled with international conflicts and a crisis deepening on our border, there could be surprises in store for the year. American Furniture manufacturers may also be sitting on pins and needles wondering if China will get its act together with imports and begin to take sizable share of the market away from U.S. manufacturers again.
While the industry, at least the traditional industry, is experiencing a downturn, the total industry including furniture and bedding sold through all channels is holding steady, as can be seen in the graphic above.
The product sold through furniture stores, those retailers that derive at least 70% of revenue in the furniture/bedding products are declining at a greater pace than total consumer furniture purchasers. The graphic here compares: The first consideration in your market: what percentage of your target consumers consider you when they start the purchasing process (57.7%); what percent follow through and shop (48.3%); what percent fail to purchase (48.2%); and what percent purchase (51.3%) reflecting your market share? The statistics are for regional chains nationally.
The next consideration is what percent of your sales are to Millennials (26.9% nationally); to Generation X (36.7% nationally); or Baby Boomers (29.5% nationally)? Simply put, if you are not performing. First examine your operation before saying it’s the industry.