From Home Furnishing Business
Without a doubt, when consumers escaped the shelter-in-place orders and the furniture industry escaped the “nonessential” classification, business boomed, with written sales surging and backlogs increasing. While experiencing the typical backlog buildup in the first months of 2020, retailers’ shipments increased as written sales decreased, and by the end of March and during April written sales plummeted. Beginning in May, traditional retailers began to cope with the shutdown environment alongside manufacturers coping with the pandemic impact on the supply channels.
According to Smith Leonard’s Furniture Insights, shipments declined 6% in 2020 with backlogs up 168% from year-end 2019. Obviously, furniture demand went somewhere during this time and the answer was other distribution channels. We estimate that e-commerce gained 3% to 5% market share followed by the home improvement channels (Home Depot/Lowes) and value retailers (Big Lots/ Target). Will traditional retailers regain this share?
That is a topic for future articles. So, if the substantial net income was not driven by volume, what was the contributor? In summary, the industry’s performance was driven by increased gross margin and reduction in expenses. But most important was the sheer determination of this entrepreneurial sector of the furniture industry. Owners returned to the daily details of the business. Discovering what was important took center stage while driving business in this unusual environment. The financial performance for the 2020 pandemic year is shown in Figure 1.
It was necessary to present the results by quarter to reflect the tumultuous year — a year that began normally and appeared to be on the road to a good year, only to fall into a chasm in the second quarter. The upturn was just as dramatic as the decline, as consumers rushed to satisfy pent-up demand and traditional retailers adjusted by incorporating sales by appointments generated from website leads. Retailers used their reserves along with government stimulus to maintain staff until the critical decision to allow the return of business in May and June. Soon, inventory was depleted and the next challenge facing the industry was a lack of product and transportation cost. While these significant shifts were challenging, the results to the bottom line has been rewarding, as seen from the key performance indicators shown in Figure 2.
Controlling prices while absorbing rising price/transportation costs became a daily challenge of repricing the floor. Gross profit increased by 0.8% for the year and almost 2% by the fourth quarter. We believe, and most would agree, that the strategy to increase gross profit was the result of attempting to stay ahead of the very necessary price increases from vendors and the unbelievable container prices, moving from $3,500 per container to north of $10,000 per container.
However, the price increases instilled confidence that the competition was not looking to discount as a strategy. Compared to other consumer products, the consumer price index in 2020 increased only slightly (from 113.2 to 114.5), while all products and housing continued to soar, as seen in Graphic D.
A major question moving into 2021 is, “Will these price increases and the resulting margin increases hold?” In comparison to other consumer products, furniture can endure a price increase. The gross profit increase contributed only 30% to the increase in 2020 net income. Depicted in Graphic E, one obvious contributor was the reduction in sales expense.
Sales expense reduction was reduced by more than a point (1.70%) by the end of the year. However, during the volatile third quarter, sales expense dropped two points from the disastrous second quarter. Sales expense began to trend up in the fourth quarter, primarily driven by handling expense. Advertising decreased 1.63% in 2020 from 2019, but was down substantially in Q3/Q4 by almost two points. While traffic fell considerably with the onslaught of the pandemic, it returned to normal levels by the second and third quarter without significant advertising. Traditional retailers began experimenting with digital advertising, as consumers have embraced the internet to begin their shopping process. Unfortunately, this change resulted in a loss of market share to the e-commerce channel, which did not have to comply with non-essential retail directives.
Handling expense (warehouse/ delivery/service) declined slightly (from 7.09% to 6.88%), primarily driven by the lack of product for handling. However, the lack of personnel at the current salary levels may dictate an increase in this cost element moving forward.
Selling expense for retail sales associates declined in the latter part of the year, partially driven by the loss of staff from commissions left unpaid because of backlogs. This delay in commission is forcing retailers to consider paying on written sales instead of the more common delivered sales. We would anticipate that this cost element will increase in the coming year.
The next area of cost is general and administrative. Stable for the year after experiencing a significant increase in the first part of 2020, this cost area fell in Q3 with rent concessions and staff reductions, but Q4 brought a leveling off. We expect general and administrative to return to historic levels. The table/graphic illustrates the breakdown. The other impact of these cost ratios is the fluctuation in volumes by quarter reflecting a volume variance in that the majority of these cost elements are fixed. No government subsidies (PPP loans) were included in these expense elements, but were shown as other income until forgiven.
Credit expense has remained the same during the pandemic year, as seen in the table/ graphic, and, interestingly, the stimulus funds did not impact the credit-driven consumer. As important as expense elements are the above the line revenue elements. Other than merchandise sales, as seen in the table/graphic, protection sales and delivery income remained constant from 2019 to 2020. The results were historical net income levels, as seen in Graphic K.
The major concern is if this level of performance be maintained. As backlogs are diminished, will the demand continue? Without a doubt, the consumer has become more focused on the home. However, as the nation puts the pandemic in the rearview mirror, other discretionary expenditures will take center stage. Additionally, forced expenditure reductions, such as dining out and kids’ sports, will reclaim its share of the family budget. Expenditures for advertising will increase to reclaim consumer interest fueled by promotions resulting in the decline of gross margin.
With all these expected trends, there is a hidden issue of market share loss to other distribution channels. While most retailers’ sales increased significantly in the third and fourth quarter of 2020, they lost three to five points of market share. Answer this question: Could your store have sustained a sales decline of 3% to 5% before the pandemic? That is the hidden crack in our future.
Know When to Hold Them, Know When to Fold Them
For the last three quarters business has been great, increasing 13.9% in Q4 over the same quarter in 2019. While the pace declined in subsequent quarters, it was still a very profitable time for traditional furniture retailers.
However, prior to the pandemic, many single-market retailers were concerned about the future of the independent furniture retailer based upon the expansion of the large regional chains and the erosion of market share to the retailers such as Wayfair.
While the aftermath of the pandemic shutdown did create a tsunami of purchasing, concern was still present, with the Bureau of Labor Statistics projecting a loss of 16% of furniture stores in the next five years — a pace exceeded only by clothing stores and electronic stores. Many asked the question: Is it time to fold them?
One retailer that made that decision was Wilcox Furniture, a fixture in the Corpus Christi, Texas, market for 68 years. The company, led by George Moore for the past 30 years, decided, along with other stockholders, it was time to take advantage of the consumer demand and liquidate. With the assistance of Wahlquist Management, the liquidation sale began and two months of sales was generated in eight days.
The icing on the cake was when the sale of the real estate (four stores) was accomplished with a targeted email and buyers were secured. What was good for the stockholders was also good for the employees, in that the purchaser was another established retailer, Beale Furniture, out of Houston. The transition will occur by Memorial Day.
While George Moore will miss the furniture industry, it was the right time for everyone. The independent furniture retail channel will continue in Corpus Christi — a positive for the citizens.
As manufacturers keep finding new ways to balance these desires, the motion/recliner category continues to increase its share of upholstery. Whether it’s a recliner with all the bells and whistles — massage and heating, wifi connectivity, food trays, and even a six-pack cooler in the armrest — or a motion sofa that looks stationary, there is something for everyone.
When creating a motion piece that is both relaxed and refined, manufacturers must be careful not to sacrifice the comfort of traditional recliners. As Anthony Teague, SVP of merchandising for Jackson/Catnapper, points out when describing the company’s best-selling Calvin sofa, “We often talk about the ascension of the motion sofa from the basement to the living room, and the Calvin epitomizes the meaning of that statement. The secret to the more ‘stationary-looking’ motion Catnapper has successfully launched across the country is the fact that the category is still anchored around comfort. So many attempts at making reclining sofas that don’t look like ‘motion’ have failed because they are not giving the consumer the one thing they expect from motion — a great seating experience.”
Balancing comfort with the style of stationary has also led to success for Nice Link Home Furnishings. According to President Jay Carlson, “Our leather power motion and recliner are top sellers because they both provide comfort and convenience in a fashionable, high-leg stationary design.”
According to a FurnitureCore, Inc., survey developed by Impact Consulting Services, parent company to Home Furnishings Business, 57.7% of consumers surveyed felt that the style of reclining furniture was an inhibitor to their purchase in the category. In the same study, consumers were asked to pick the top four items they have now or would want to have in their next reclining product.
The results were heat/massage at 58.41%, followed by automated adjustable headrest and lumbar supports at 58.10%, storage drawer at 49.21%, hidden tabletop at 45.08%, docking station for telephone at 31.75%, built-in remote at 28.25%, built-in beverage cooler at 27.62%, and surround sound system at 26.98%.
While upholstery, as a percent of total furniture sales, has dropped slightly from 2019 to 2020, the motion category continues to increase its share of upholstery sales — up to 13.7% when combined with leather motion, according to a FurnitureCore Industry model.
Recliners as a sub-category have dipped down to 8.35% in 2020 from 9.09% in 2019, but the motion/recliner category finished out 2020 with 22.09% of furniture sales compared to 21.22% in 2018. The model also shows the growth of motion within the upholstery category – jumping to 23.56% in 2020 from 21.66% in 2019 and 21.39% in 2018.
With more manufacturers and retailers evolving with consumers to find that perfect balance of comfort and style, the sky is the limit for the motion/ retailer category.
This decade began in the thick of what many refer to as the “Retail Apocalypse,” with a sharp decline of stores happening each year. While the pandemic has produced a surge in furniture purchases, many analysts predict online penetration will increase with no indications that retail store closures will slow. The number of brick-and-mortar retail stores (establishments) for all consumer products peaked for most entities between 1988 and 1991. As bigger corporations evolved, translating to fewer owners and bigger stores — coupled with rapid internet technology advancements — retail began to change and hasn’t looked back. Furniture and home furnishings stores are among the big casualties.
This article picks up from Statistically Speaking’s September 2019 article “Charting the Progress of Survival: Furniture and Home Furnishings Stores.” The heaviest decline in both furniture and home furnishings retail locations occurred between 2005 and 2010, which coincided with the Great Recession. The number of furniture store establishments dropped 12.1% in those five years, alongside a huge 21.7% drop in the number of firms (Graphic A) as smaller independent retailers were hard hit.
Following 2010, the number of furniture store establishments decreased an additional 18.0% over the next 10 years, finishing 2020 with 21,703 stores. The most recent data on firms (ownership) from 2018 show the number of firms recorded a 17.8% decline, down to 12,365, since 2010. While the number of furniture stores has continued to fall for the last 30+ years, home furnishings stores grew steadily until 2005. Economic pressure during the Great Recession, coupled with the rapid rise of electronic shopping, has taken its toll on brick-and-mortar home furnishings stores even more than furniture stores. Between 1990 and 2005, the number of establishments grew 15.1% but dropped by 18.5% down to 28,056 from 2005 to 2010. Over the last decade, the number of home furnishings stores fell another 13.2% to 24,348 (Graphic B).
The decline in the number of home furnishings store firms also began in 2005, decreasing by 19.6% in 2010, followed by an additional loss of 3,170 firms by 2018. The primary signal for the decline of independent furniture stores, with ownership of generally one or more local stores, is when data show the loss of furniture store firms (ownership) falls faster than net growth in store counts. Over less than 20 years, the number of furniture companies with primary operating ownership of one or more stores fell 37.6% and the number of brick-and-mortar stores declined by 21.3%. In 2014 and 2015, furniture store firms were hitting negative growth between 1.1% and 1.4%, respectively, while establishments showed slight increases. However, in 2016, stores started to decline alongside ownership by 1.7%.
Not surprisingly, employee growth began to decline by 2017 – decreasing 0.5% in 2017 and 1.1% in 2019 before the dramatic drop of 12.8% brought on by the pandemic in 2020 (Graphic C).
The pandemic has had a mixed impact among furniture stores, with federal stimulus propping up much of the brickand-mortar industry in the third quarter of last year and beyond. For 2019 through 2020 Q2, the industry had a net decline in stores five out of the six quarters (Graphic D).
The largest decline hit from 2019 Q2 to Q3, marking a net decrease of 255 stores. But with the consumer’s renewed interest in furniture and home furnishings during the pandemic, the third quarter of last year saw a net increase of 538 furniture establishments over the second quarter of 2020 and an increase of 380 stores over the third quarter of 2019. As shown in Graphic E, the pandemic was especially hard for home furnishings stores. Already faced with a steady net decline of store closings each year, last year resulted in a net decrease of 579 home furnishings establishments, preceded by 454 in 2019.
Furniture establishments fared slightly better after overcoming the hit in 2018 of a net decline of 387 stores. In comparison, 2020 only produced a net decrease of 86 furniture establishments. The furniture and home furnishing stores picture comes into focus when compared to other types of retail brick-andmortar stores also selling furniture. While furniture and home furnishings stores have continued to lose establishments, warehouse price clubs/supercenters and pure electronic shopping retailers have maintained positive growth rates. These average annual growth rates in five-year segments since 2000 is shown for select furniture retailers in Graphic F-1.
Other key brick-and-mortar retail stores have also been in decline for decades, feeling the pressure from warehouse price clubs and supercenters, but especially from electronic shopping retailers. Table F-2 shows a select group, with office supplies/ stationary/gift stores and department stores experiencing the largest net declines. Smaller independent furniture stores have felt a majority of the brunt from retail consolidation, but larger chains have also gone by the wayside. The rapid growth of electronic shopping and online retailers throughout the last 20 years has added significantly to the brick-andmortar crisis.
And it seems the pandemic may have further strengthened the relationship between the consumer and the internet. Brick-and-mortar furniture stores celebrated record sales in the third and fourth quarters of last year. And for the first two months of 2021 sales are up 13.1% over 2020 (Graphic G).
The rain cloud that persists is that while consumer spending for furniture has catapulted to 23.8% in January/February over the same two months last year, furniture stores have increased sales but lost market share. The gap between furniture store sales and total consumer spending on furniture has continued to widened. In 2014, furniture store sales of $53 billion represented about 57.5% of total consumer spending on furniture. Last year, that ratio had fallen to 42.5% (Graphic H). The Census Bureau and Department of Commerce reported $60 billion in furniture store sales last year compared to $141 billion total consumer spending on furniture and bedding.
As shown in Graphic I, the annual growth of furniture store sales began to decline in 2019 (-0.2%), followed by a 2.4% decrease in 2020. Meanwhile, consumer spending on furniture has continually shown positive growth every year since the end of the Great Recession and finished 2020 with an annual growth of 7.9%. What remains to be seen for the future of brick-and-mortar furniture stores is whether the momentum of the consumer’s interest in their homes can help furniture stores counteract the internet’s pull and last long enough to keep these stores and other furniture and home furnishings establishments in business.
Well, it’s over. The store is still standing, and the consumer is ready to buy. Close rates are up more than 20% with less traffic, but an increased average ticket. However, there is not time to enjoy the rebound due to multiple hurdles in the way. First is product shortage, as manufacturers cope with their own unique challenges caused by the pandemic. Retailers are forced to commit to orders through the end of the year, introducing additional risk.
Personnel shortages are occurring with tenured, critical employees deciding it is time to retire. Many retail sales associates, already frustrated with product deliveries, are handling equally frustrated consumers and are leaving with the stress of added workloads. While there appears to be some reasons for hope in eliminating COVID-19, the remnants remain: “mask vs. no mask”, required vaccinations, and an endless series of new employee relations decisions. What lingers is the feeling that it could all happen again. Maybe PTSD does exist from the disruption caused by the pandemic.
While many checking accounts are bulging with customer deposits, the recently released stimulus checks can continue the demand for furniture. The positive forecast shown in Table A affirms the possible growth. Still there is trepidation and not wanting to return to the “cellar”.
However, traditional retailers soon realized it was not a level playing field. First, being designated as “non-essential retailers” forced many to resort to selling by appointment, essentially entering the store via the side door. At the same time, other furniture retailers that had appliances in their merchandise assortment continued with business as usual. Many retailers reacted by adding a few appliances to their mix to game the system and remain open.
Already carrying some furniture, mass merchants and home improvement stores expanded their assortment to meet significant demand from customers. After experiencing the gross margin potential, these retailers are now committed to the furniture category. A major question for traditional furniture retailers is, how were mass merchants and home furniture stores able to source products so easily?
Even before the pandemic, general merchandise stores such as Big Lots were venturing into furniture. Armed with the Broyhill brand, sales exploded up to a reported $400 million in the first year and forecasted to be a billion dollar contributor in the next few years. Based on the financials, Big Lots’ commitment to furniture will continue with other “value retailers” to follow.
And then there was e-commerce. While confined to the home, traditional retailers watched as delivery trucks went to neighbors to deliver that must-have new recliner. Without a doubt, the traditional furniture segment did not get their share of the home furnishings boom. In fact, many were lucky to reach 2019 levels. While written sales exploded, the lack of product resulted in significant backlogs. Graph B shows the comparison.
By year-end equilibrium appeared to be restored, but continued supply chain issues still plague the industry. The thought is whether all channels will be impacted the same.
Over the last several years, industry focus has been on the competition within the traditional furniture retail sector. While the threat of e-commerce has been recognized, the prevailing thought was the level of penetration would level off as did with the 1-800 retailers of the 1980s. Ultimately, the threat of retailers such as Blackwelders, Roses and others finally disappeared. Only Furnitureland South remains with a substantial regional presence, but it still has remnants of the 1-800 model.
The enforcement of sales tax laws and physical purchase presence dampened the growth. However, just as important in the decline was that local retailers recognized the retail experience delivered by the new model was what consumers wanted. Definitely there was a price differential, but to paraphrase one of those local retailers:
The imposition of sales taxes for e-tailers has slowed the growth of e-commerce. However, the consumer still wants the convenience of anytime shopping, the range of selection, and the availability to get knowledgeable assistance through chat features.
We cannot dismiss the digital challenges furniture and other consumer products must accept and join. Twenty years ago, e-commerce retailers were still in their infancy. In 1999, only one major consumer product, clothing (including footwear) posted over $1 billion dollars. By contrast, only $350 million was sold for furniture and home furnishings.
As with the death of the Great Recession, we can only surmise that the pandemic will cause a similar growth. The largest furniture e-tailer Wayfair posted revenue of $14.1 billion in 2020, up 55% from the previous year. More troubling is the jump of 34% in Wayfair’s customer base to 20.3 million. No longer can the industry say Wayfair is not profitable, as they now have a net income of $185 million.
However, it is not only the e-commerce distribution channel that is eroding the traditional furniture retail sector. In the 1970s, brick and mortar furniture stores controlled more than 70% of sales, sharing with department stores and mass merchants like Sears, JCPenney, and Montgomery Ward. These mass merchants have disappeared from furniture and department stores and are struggling to find their place in the product category. Furniture stores, those that derive at least 70% of their revenue from furniture and bedding now attract 42% of the consumer expenditures. Graph D presents the historical data.
We have estimated that e-commerce represents $84 billion, so where does the other $127 billion reside? The lifestyle stores with both Retail Verticals such as Restoration Hardware (RH) and Manufacturer Verticals such as Bassett are a significant presence, primarily in the upper/premium price points. This retail sector represents $8.7 billion in sales (Figure 1).
However, this sector has embraced the omnichannel experience with a balance between online and brick and mortar. Due to the pandemic many retailers in this sector were forced to close stores. The projection is that many of these stores will never reopen, accelerating the move to e-commerce. The vertical manufacturers are an important part of this retail sector with the largest participant being Ashley Furniture. The company just passed the 1,000 store marker and has estimated sales of $5.5 billion (Figure 2).
Emerging in this sector, are small startup manufacturers that are bypassing both brick and mortar and e-tailers by selling direct to the consumers. Attracting the attention of venture capitalists, these new industry participants could become the disruptors of the next decade. The traditional furniture stores represent over $110 billion in sales and are segmented into Regional Chains, retailers that have a presence in multiple states; Large Independents, retailers serving multiple markets in the same state; and finally, the Independents, retailers serving one or more markets but earning less than $50 million in sales. While these retailers still represent a significant portion of the traditional furniture stores, they are declining.
The regional chains have been in a growth mode for the last decade. For early regional chains: Havertys in the South, Raymour and Flanigan in the Northeast and Rooms To Go on the East Coast, expansion has slowed while others have picked up the pace. Fueled by real estate made available from the demise of some big box retailers, large independents have expanded. Regional chains control $ 17.1 billion of the total market and 43.2% of the furniture store sector. While significant, the regional coverage is short of national retailers. Out of all 404 markets (MSAs), only the promotional/middle retailers approach a third of the total markets (Figure 3).
There are some regional retailers content to remain within state boundaries. However, through expansion or acquisition many of these retailers will become regional chains in the near future. These retailers represent $3.7 billion of the total market (Figure 4). It should be noted a number of these large independents are in Florida. While a large state, many of the markets are getting very competitive.
While the pandemic put a halt on expansion plans, projects already underway continued and many traditional retailers expanded their footprint in 2019/2020 as Figure 5 quantifies. As expected, many of these expansions did not increase market share. How will 2021 translate into expansion among an abundance of retail space? Caution should be encouraged as all retail is exploring omnichannel distribution as a dominant expansion strategy. Furniture industry beware.