From Home Furnishing Business
However, it was not until around 2005 when online shopping kicked into high gear only to get stymied by the Great Recession. It was five more years in 2010 when e-commerce retailers, identified as those whose primary business activity is in furniture and home furnishings, really took off. But even then, it took until 2014 for brick-and-mortar furniture stores to fully realize how rapidly they were losing ground. At that same time, Wayfair, with its subsidiaries, went public and other furniture and home furnishings e-tailers began to flood the marketplace. E-commerce sales grew swiftly until last year when the pandemic accelerated growth even faster with online furniture and home furnishings sales reaching an estimated $97 billion in 2020 (Table A).
In this feature, we explore how e-commerce retailers with furniture and home furnishings as their primary business activity have impacted brick and mortar stores and how these traditional retailers are attempting to slowly catch up. Furniture and home furnishings retailers are now divided by the Census Bureau into three categories –
(1) Traditional brick and mortar stores, where e-commerce sales, if any, are fulfilled from within the store or a common distribution center,
(2) Omnichannel stores which are larger retail chains with separate brick and mortar and e-commerce operations, and
(3) Pure Play stores that are online retailers with no brick-and-mortar presence and who only operate online.
Note, that some Pure Play retailers are opening brick and mortar stores, primarily as clearance stores. Also note that the old mail-order category is becoming a grey area and is generally incorporated into e-commerce sales as most transactions are online.
As shown in Table B, e-commerce sales from omnichannel brick and mortar stores reached $14 billion in e-commerce furniture and home furnishings sales in 2020 – gaining a share of 7% of total furniture and home furnishings sales. However, the competition of Pure Play e-commerce now makes up 40% of the total industry with $84 billion in sales. While still the majority share at 52%, store front sales are quickly losing ground to online retailers. Store front sales (non e-commerce) had small but positive growth from 2017 through the first two months of 2020 before the pandemic resulted in a drop of 5.6% for the year (Table C).
After e-commerce sales increases above 20% in 2017 and 2018, traditional smaller brick and mortar retailers experienced a large downturn in sales in 2019 of 17.5% most likely the result of either retailers crossing over from traditional brick and mortar stores into the omnichannel or smaller traditional retailers unable to grow their online businesses. Omnichannel brick and mortar store sales catapulted 47.7% in 2020 after annual steady growth between 11% and 13% from 2017 to 2019. A few pure play retailers are sticking their toes in the omnichannel category, opening mostly brick and mortar clearance centers for now. Sales growth among pure play retailers has remained consistently high since 2017 with 2020 growth at 29.2%.
Over the last four years the gap has widened between pure play e-commerce sales and omnichannel brick and mortar sales among furniture and home furnishings stores (Table D). While store front sales are down from $111.4 billion in 2017 to $109.6 billion in 2020, pure play e-commerce sales have almost doubled – increasing by $40 billion.
Brick and mortar omnichannel retail sales have also almost doubled 2017 to 2020 to $13.9 billion. Pure play e-commerce retailers have grown from contributing 27.3% of total furniture and home furnishings sales in 2017 to 40.1% in 2020. While omnichannel retailers keep increasing their share of total sales – finishing 2020 at 6.6%, the growth from 2019 to 2020 was 1.7 percentage points compared to the pure play e-commerce category’s increase of 6.6% (Table E).
Looking only at e-commerce sales, when it is all said and done, omnichannel retailers have made little headway in cutting into the market share of the pure play furniture and home furnishings retailers. In 2017, omnichannel businesses controlled 13.7% of e-commerce sales and in 2020, 13.9% (Table F).
The internet’s impact on brick and mortar furniture and home furnishing store sales last year cannot be overstated. Wayfair alone acquired five million new customers in just three months, something that normally takes a year to achieve. Despite the pandemic and all its restrictions, Wayfair fulfilled nearly 19 million orders in the second quarter – a 106% increase from the same quarter a year ago. Brick and mortar companies that have successfully transitioned into omnichannel retailers with dedicated e-commerce business models have made progress in keeping up with pure play growth but have gained little market share away from them.
What is unclear in the data is how store front sales have grown within the omnichannel compared to their e-commerce activity. Many smaller traditional retailers are without resources to enter the e-commerce marketplace with any conviction and, in many cases, are facing dire circumstances just trying to keep the doors open.
Compounding these external factors is the recent performance of pollster’s success in forecasting what the consumer is thinking and what the consumer will do. That is enough to make one question the analytical approach.
However, both manufacturers and retailers must make decisions to move forward. Today, retailers must place orders for product delivery out 12+ weeks. Manufacturer's in turn are planning production often expanding capacity to meet this demand. While we are forecasting, we are like the chicken contributing eggs for the breakfast. Unlike the pig that contributes the bacon, it is not the same degree of commitment when no one shows up for the meal.
WHAT IS DRIVING THIS FORECAST?
THE DOMINANT FACTORS ARE: Personal Consumption Expenditures Furniture and Bedding. Despite the plunge in retail sales during retail shutdowns of many brick-andmortar stores in April/May, consumer spending on furniture and bedding flourished June through November. With additional stimulus money arriving in consumer bank accounts this winter, it is expected that the consumer will save a portion, but also spend. November 2020 year-to-date spending is up 8.1% over 2019.
Retail Sales (Online Shopping).
Non-store retailing and its subset, electronic shopping, were not subject to the government restrictions and gained tremendous market share throughout the pandemic. Even consumers not accustomed to online shipping embraced the experience, perhaps never to turn back. By November, non-store retailing grew 22.6% compared to 2019.
Retail Sales (Brick-and-Mortar Stores).
Furniture and home furnishings stores were hard hit during the pandemic but showed consistent and increased growth June to October. Based on preliminary retail sales data for the broad Furniture/Home Furnishings stores category, November slowed as consumer confidence fell. For the year, it is expected that furniture stores and also home furnishings store sales will be down 5% to 7% over 2019, quite an accomplishment given the obstacles.
Warehouse clubs and supercenters were allowed to remain open throughout the pandemic and were still showing good growth through the end of the year. The housing market suffered tremendously during March, April, and May, but perked up in June and has been going strong since. Housing starts, a predictor for 2021 are up 7.9%. November 2020 YTD and new home sales increased 19.1%. Existing home sales have driven home prices higher since July, with inventories low toward year's end.
Consumer Price Index. Prices for all consumer products nationwide were stable with 2020 November YTD growth up 1.2%. For furniture and bedding, prices fell through July, but have been working their way back. November YTD furniture and bedding prices were down only 0.1% Employment Situation. Perhaps the biggest unknown is if and how fast businesses will rebound from 2020. By November, there were over nine million fewer jobs than November 2019 and almost five million people considered unemployed. This does not count the discouraged workers who are no longer counted as part of the workforce looking for a job.
Consumer confidence was on the upswing in September and October (index over 101 each month) before falling to 92.9 in November. For the 11 months of 2020, the average confidence level was down over 30 index points, reflecting the strain of COVID-19.
Source: Impact Consulting Services' FruntiureCore.com industry model Note: Previous 2020 Q2 estiamte has been revised. *2020 Q4 throught 2021 Q4 is forecast Industry Growth Quarter Year Over Year Growth Over Same Quarter of Previous Year 2019 Q1 to 2020 Q3 with forecast 2020 Q4 to 2021 Q4 Furniture and Bedding The graphic above presents both historical and projected industry growth.
The most obvious explanation is increased disposable income as was discussed in last month’s installment of Statistically Speaking in the November/December 2020 issue of Home Furnishings Business and supported in the table to the right. Free from expenditures for outside entertainment, vacations, and sports activities, the consumer directed their attention to their homes. The first step in discussing this new consumer demand is to understand their change in attitude about home furnishings. History has shown that society uses possessions as a way to communicate. Whether success, security or values, the individuals’ surroundings are an important part of their “status”. It was interesting to measure the shift in the consumers attitude toward redecorating and home furnishings as can be seen in Graphic C.
As can be seen from the graphic the importance of home furnishings surged in how important the consumer perceived themselves.
This is where merchandising begins, tapping into the very intangible consumer attitude of communicating the individual’s sense of style and success. Drilling down to the next level of understanding, the consumer was asked of the product purchased what brought the product to their attention. After COVID, the importance of quality, comfort, and functionality came to the forefront.
Moving forward in the buying process from being attracted to what finally motivated the consumer to purchase, we compared purchase motivations after COVID to preCOVID. Interestingly, the reputation of the manufacturer has become more important. In the furniture industry manufacturer' brand has declined over the past 40 years. The remaining brands such as La-Z-Boy and Bassett have survived but have been enhanced by their own retail presence. Brands such as Ekornes and Abbyson have invested in creating a consumer awareness.
During the mandated shut down of “non-essential” retail traditional furniture stores, those that derive 70% of their revenue from furniture and bedding lost market share to e-commerce. We estimate e-commerce gained 5-8% market share points during the pandemic. Graphic F illustrates the rebound of furniture stores but not to the level of consumer expenditures.
As disastrous as the forced loss of revenue was, the retailer’s long-term loss of customers during this shutdown period, Wayfair gained 40,000 new first-time customers and this was only one of the online retailers. Additionally, general merchandisers such as Big Lots, with its just acquired Broyhill Brand, captured significant revenue.
For e-commerce retailers that tout “endless aisles” with unlimited selection as a significant advantage, this is where the impact of MERCHANDISING by the traditional furniture retailer emerges as a potential advantage. Does the consumer want to navigate those endless aisles, or do they want to shop a merchandise line-up curated just for them? How often have you heard “This store has just what I want” on the floor? From our research we believe that is what the consumer is looking for and that is the traditional brick and mortar retailer’s strategic advantage. Consumers have specific ideas of what they want their homes to look like. Those ideas driven by the new generation of current buyers Generation X are moving away from the traditional style of their parents. Graphic G illustrates.
As can be seen from the comparison compared to 2019 consumers moved to embrace the comfort food of decorating indicating cottage casual (20.4%) (can’t read words) (6.42%) as their dream styles, moving away from traditional and contemporary. The opportunity for furniture stores is to compare how the same consumers view their current style.
What influences the consumer as they pursue redecorating? While the actual retail store influences 17% ± of consumers who are redecorating, the Internet remains 2x more influential increasing during the pandemic. Shelter magazines continue to decline in importance.
The consumer wants their furnishings to have a certain look to reflect “how they want their rooms to be”. Most important was comfort. The graphic presents the comparison before and after COVID.
Though the category has become much broader than the basic inner spring model, this familiar means to an end is still the most popular selection among consumers based on a FurnitureCore, Inc. survey developed by Impact Consulting Services, parent company to Home Furnishings Business. Of consumers that recently bought a mattress, 52.27% reported buying an innerspring model. This number is followed by memory foam at 40.91%, air (like Sleep Number) at 4.55%, and the most expensive, but durable solution, latex, at 2.27%.
With the circulation of the many ads on social media regarding new and exciting mattress products, familiarity and excitement surrounding sleep innovations will allow the consumer to increasingly branch out from the most basic models. In this pandemic economy, word of mouth has been more important than ever as many consumers are weary of leaving their homes to try out mattresses in person. One of the leading innovators in the field, not only in innovation, but also recommendation by word of mouth, is Intellibed, who has earned the coveted 2021 Women’s Choice Award for their excellent customer recommendation rating. Colin House, CEO at Intellibed, gives the insight behind the award winning technology, saying, “Intellibed’s Gel Matrix is the most innovative and technological breakthrough in beds since the invention of memory foam in the early 1990s. Gel Matrix technology, originally used (and still used today) in professional medical environments to bring comfort to burn and long-term patients, is scientifically-engineered to provide both a firm and soft sleep surface at the same time, reducing pressure points. The Intellibed Gel Matrix mattress provides retailers with a unique selling proposition to help them increase per-square-foot profits and elevates the shopping experience for every critical store visit.”
The fact that consumers are aware that mattresses should be replaced every few years keeps the category at the top of mind. Depending on several factors involving sleep patterns and the type of mattress purchased, the life span of a mattress may vary. But most important is the consumer perception of how often their mattress should be replaced. Based on the same consumer survey, the majority of consumers, 54.55%, believe a mattress should be replaced every 6-10 years. 11.36% of consumers believe that a mattress should be replaced every 5 years and will continue to invest in new mattresses until they find a solution to suit their needs. Of the remainder of the group, 27.27% replace their mattress every 11-15 years and 6.82% replace them between 16-20 years.
The year 2020 certainly brought about many disruptions in the industry with the mattress category significantly affected, but experienced a recovery late in the year. Margins placed on product can significantly boost retailer average ticket to help them over the slump. Manufacturers, such as Malouf, have product proven to do just that. Says Eric Holmstead, director of North American sales, “Our best-selling Wellsville Gel Memory Foam Hybrid provides a high-end feel and price point without the National brand cost, allowing retail partners to capture significant margin with placement on their floor.”
Though sales have been boosted through Q3 of 2020, product delivery is still being impacted at the retail level. Many retailers have expressed their challenge to receive product, but few manufacturers are situated perfectly to meet the demand. Shaun Pennington, president of Diamond Mattress, explains his company’s unique ability to satisfy demand, saying, “As a vertically integrated U.S. manufacturer, Diamond Mattress is delivering products on time nationwide while avoiding many of the supply chain issues the industry is facing. The ability of U.S. producers like us to innovate and create more value for retail programs continue to make bedding a strong and growing category for furniture and mattress retailers.” Cheers to 2021 and the hope the year brings as we inch closer to our new normal with product innovations, supply chain solutions, and with the help of a good mattress, some deep sleep!
Many also reported, not just that they liked working remotely, but also getting away from the frantic lifestyle of a big city. There has been a lot of discussion in the media about the pandemic causing an exodus of people from big cities as more companies are looking at “working from home” as a viable, long-term solution. Early evidence suggests many families are already exploring alternatives. A late summer 2020 survey by Redfin, the home listing company, shows that before the pandemic, 37% of its online searches were in urban areas, but only 19% during the pandemic. Suburban area searches grew from 43% before to 50% during the pandemic. And perhaps, most shocking, 9% of the online searches prepandemic were rural areas compared to 19% during COVID-19 (Figure 1).
Redfin also reported that 29% of people looking for homes on its sites in the third quarter of 2020 were looking to move to a different city.
It is still too early to tell if the shift out of the urban areas will occur or how it will affect small markets. For decades smaller markets have seen steady decline across the country with population shifts to bigger markets. Despite the losses, many small markets are continuing to produce steady furniture industry sales. This month Statistically Speaking dives into the segmentation of markets by furniture industry sales looking at population shifts and employment and income growth with focus on the trajectory of small cities.
Small markets include small MSAs (under $50 million in furniture industry sales), micro statistical areas, and rural areas. These markets represent 18.4% of the U.S. population (2019), and include 68.6% of total counties. Small MSAs equal 29.5% of the total 404 metro areas. Of importance to the furniture industry is that small markets account for 14.2% of personal income as of 2020 Q3, but only 11.6% of furniture industry sales (Figure 2). Furniture Industry Sales As shown in Table A, the top 28 markets, contributing over $1 Billion each in furniture industry sales, make up 40% of the total industry. Mid-to-large MSAs, between $50 Million and $999 Million, contribute almost half (47.7%) of furniture industry sales, and smaller markets under $50 million make up the other 11.6%. All markets size segments increased in furniture industry sales each year since 2017 (Figure 3). However, growth varies significantly by individual MSA. The combined growth diminished slightly between 2018 and 2019 with many retail size segments – large and small – falling below a 5% increase. Despite the pandemic, 2020Q3 YTD combined sales in all retail sales ranges are above 5% growth with the exception of rural areas at 4.9%. The impact of Federal stimulus on this growth is unknown at this time.
Figure 4 shows a sample of key performing markets within these market size segments. Excluded are markets where positive industry growth may have been impacted by one of the many natural disasters seen in the past two years. Small Market Population Shifts While the population of the United States grew swiftly over the last 60 years, not quite doubling, the actual share of the population living in small markets did not change as much as one might think. Table B shows small markets lost only seven points in population share. However, because of population growth, these same small markets gained almost 15 million people 1960 to 2019.
Since 2010, population growth in general slowed. Over the last five years, large markets saw the most growth (over 4%) (Table C). Small markets struggled to maintain the current population levels. Rural areas began losing population gradually each year, and since 2014 lost 0.7% of its residents.
Over a third of the U.S. population lives in only 183 counties out of a total 3,142 (Figure 3). These 28 markets (MSAs) combined are the fastest growing in population – up 4.2% from 2014 to 2019. Meanwhile, the slowest metropolitan population growth occurred in MSAs under $50 Million in furniture industry sales. Markets with $25 Million to $49 Million in sales increased population by only 0.7% and those under $25 million just 1.3%. And over the last 10 years, rural areas gradually lost population for the first time in history. Table C and Figure 5 show for the five-years 2014 to 2019, rural areas lost almost 1% of its residents.
One of the biggest problems facing the furniture industry is the slow and often negative population growth of future prime furniture purchasers. Millennials are expected to take up some of the slack over the next 10 years as Baby Boomers continue to age out of prime furniture buying years. Table D shows the Millennial population now fully into adulthood with ages 25 to 34 years growing 5.7% over the last five years. On the flip side, the heart of the Baby Boomers (ages 65 to 74 years) grew by 19.5% 2014 to 2019 which in turn reduced the 45 to 54 age group populated by the smaller size of Generation X. This affluent cohort remains strong furniture buyers.
Figure 6 may cause many industry retailers to panic seeing the dramatic shift from 2014 to 2019 in the population age groups in the different sized markets. Some examples:
• Low U.S. birth rates reflect the negative growth in all markets for the 0 to 9 age group.
• Smaller markets show negative growth in almost all age groups up to 25 years old, further reflecting on the long-range future of these communities.
• Millennials are firmly entrenched in the larger markets over $50 million in industry sales.
Coming out of the Great Recession, employment grew rapidly through last year – up 7.3% for the total U.S. from 2014 to 2019. However, this year the pandemic lowered U.S. employment to 2015 levels as of October 2020. From 2014 to 2019, employment grew rapidly in the big markets - jumping over 9% in markets with furniture industry sales above $500 Million. As with population growth, increases in employment grew at a slower rate (roughly 3%) among smaller markets. Conversely employment growth in smaller markets did not fall as far as bigger markets from December 2019 to October 2020 (Table E).
Alongside employment, personal income grew rapidly for all market ranges between 2014 and 2019. Not surprisingly, the two biggest market segments showed the highest growth at 26.8% and 28.5% respectively. Markets ranging from $50 Million to $499 Million had income growth between 20% and 23%. Rural areas and markets with industry sales from $25 Million to $49 Million ranged in income growth from 13.8% to 17.6% over the previous five years (Table F). If furniture industry sales in smaller markets had kept up with these cities’ income levels, they would have gained an additional $2.4 billion dollars in industry share.
Questions remain: Can the bleeding be stopped in smaller markets? Will younger people and families be enticed to flee the big cities for a different lifestyle? Is the “work from home” or “work from anywhere” really a revolution or just a pandemic blip in our economic history? Small markets need a hook – either vacation spots, rural scenic areas, or cities where the drive into urban workplaces one or two days a week would be doable.