Monthly Issue
From Home Furnishing Business
June 15,
2023 by HFBusiness Staff in Business Strategy, Industry 
As can be seen from the graphic, the forward-looking statistic (compared to the previous quarter) indicates a definite slowdown while the back focused statistic (compared to the previous year) provides a more positive perspective.
But what about the balance of the year? Given no extreme external factors, FurnitureCore, LLC, sister company to Home Furnishings Business still has confidence in its 2023 forecast of 2.6%. Then why are retailers feeling so unsettled? One reason is the variance across the nation with one retailer reporting sales are up 13.4% (year-over-year) and another 17% down (year-over-year). Table C presents the range of variance.
Let’s now get down to the specific performance factors for the industry and your specific operation (for subscribers).
RETAIL METRICS
Despite inflation, supply chain disruptions, and a slowing in the frenzied demand seen in 2021, the furniture industry grew a respectable 6.47% in 2022 following 2021’s growth of 21.9% coming out of the COVID-19 pandemic. Furniture stores, however, did not fare as well. Table A shows that furniture store sales for the total U.S. grew only 1.1% last year compared to the traditional furniture stores.(See Figure 1 for the Methodology.)
For years the furniture industry experienced slow growth coming out of the Great Recession. Sales picked up a little steam around 2015 to 2018. Then when the pandemic hit, industry sales skyrocketed before slowing in 2022. Meanwhile, furniture store sales growth continued at a crawl until 2021, then fell to very slow growth last year. Table B shows the dollar growth.
Last year, quarterly growth over the prior quarter for all U.S. furniture stores went negative for three out of the four quarters, with only the second quarter showing positive growth at 8.66%. Quarter four was down 0.56%. Notably the first quarter of this year showed no improvement with flat growth over the last quarter of 2022. Traditional retailers participating in the retail metrics for this article also experienced significant slowing in the last half of 2022 (Table C).
The financials of the traditional furniture retailers participating in the retail metrics in 2021 told a story of high gross profit driven by increased volumes from higher prices. Segue to 2022 and those sky-high profits subsided, especially in the third quarter. Table D illustrates the percent dollar growth in key indicators for gross profit, sales expense, general and administrative expense and net operating income.
Table E shows the total quarterly performance as a percent of revenues, not dollars.
Key Performance Indicators 2022
(Table F)
KPIs at their broadest levels, showed a decline in profits in 2022 compared to 2021 and an increase in expenses. (Table F) Gross profit as a percent of revenue fell to 50.13% last year compared to 51.17% in 2021. The fourth quarter showed the strongest performance at 51.67%.
Sales Expense was up over a percentage point, 23.25% in 2022 versus 22.2% the year before.
General and Administrative Expense (G&A) was up the most of the broad expense items at 16.54% of revenue compared to 14.72% in 2021.
Net Operating Income, as a result of increased expenses, fell from 14.25% of revenue in 2021 to 10.33% in 2022.
Above the Line Performance
(Table G)
Merchandise Returns in 2022 were slightly more than in 2021 at 0.59% of revenue versus the prior year of 0.35%. Merchandise Protection Sales were off slightly last year at 3.11% of revenue versus 3.42% in 2021.
Delivery Income was half a percentage point higher as a percent of revenue in 2022 (3.61%) than 2021 (3.17%) driven by additional revenue in the fourth quarter.
Cost of Goods Sold (Table H)
Of significance is that the total cost of goods sold was up over one percentage point in 2022 at 49.87% of revenue compared to 48.83% the year before. CGS eased somewhat in the fourth quarter.
Gross Profit on Sales (Table I)
Increased cost of goods sold impacted gross profit a full percentage point, down to 50.13% of revenue in 2022 compared to 51.17% in 2021.
Selling Expense (Table J)
All facets of selling expense increased as a percent of revenue in 2022, except for store sales expense. Total selling expense as a percent of revenue grew from 22.2% in 2021 to 23.25% last year. The following details the individual selling expense categories. Advertising/Public Relations took the highest jump in percent of revenue from 3.56% in 2021 to 4.36% in 2022. In 2021 consumer demand was so strong that retailers didn’t feel the need to increase advertising. However, in 2022 across the board – broadcast/air, Internet advertising, print and direct mail increased. Broadcast/ air advertising is still king among retailers at 58% of advertising expenditures in 2022. Internet advertising is still less than 1% of revenue annually.
Sales Expense for 2022 was also up slightly as a percent of revenue – 9.81% in 2022 compared to 9.61% in 2021. Increases in sales commissions and draws account for most of this increase.
Warehouse/Delivery/Services Expense as a percent of sales was mostly the same in 2022 compared to 2021, 8.0% versus 7.88%. Store Sales Expense was comparable to 2021 at 1.04%.
General & Administrative Expenses (Table K)
G & A expenses is the largest group of fixed expenses. These accounts are those that keep the doors open, the lights on and the place running. Each component of this broad category, except human resources, saw an increase in 2022 as a percent of revenue. G&A increased from 14.72% of revenue in 2021 to 16.54% in 2022. Information Systems expense was up over half a percentage point in 2022 to 1.13%. Occupancy Expense, a significant expenditure, increased to 6.27% of revenue in 2022 compared to 5.67% in 2021. Rent and lease payments represent 62% of this category and increased to 3.9%. Utilities, building maintenance and taxes also grew. Administration Expense, is the largest segment of G&A growing to 8.7% of revenue in 2022 compared to 7.97% in 2021, with growth in salaries as a percent of revenue being the main contributor.
Human Resources expenditures remained at less than half a percent of revenue. Net Credit Expense (Table L)
Net credit expense at 2.63% of revenue in 2022 was similar to 2021. Net Income (Table M)
While net income before interest and taxes in 2022 at 7.92% could not compare to the high 2021 number of 13.72% in 2021, it was still higher than the industry has seen in many years before 2021.
Key Performance Indicators
(Table 0)
Gross profit as a percent of revenue in 2022 was a full percentage point lower than 2021; however, it was consistent last year at just over 50% across all sales volume ranges. Retailers $25M to $75M in sales posted significantly lower sales expenses, which in turn impacted the higher 11.57% net operating income compared to smaller retailers at 8.63% and large retailers at 9.71%.
Above the Line (% of Revenue)
(Table P)
Merchandise returns were highest among the $25 to $75 million retailers at 1.86% of revenue. Merchandise protection sales and delivery income were highest among larger retailers $75M and over in sales.
Cost of Goods Sold (Table Q)
Cost of goods sold was consistently just below 50% of revenue for all sales ranges. Gross Profit on Sales (Table R)
Gross profit was consistent across all sales ranges at just under 50%, a full percentage point higher than 2021. However, that increased performance was more than offset by higher fixed and variable expenses.
Selling Expenses (Table S)
Selling expenses were highest for small retailers (25.9% of revenue) and larger ones (24.3%), but somewhat lower for mid-sized retailers $25M to $75M at 21.23%. Smaller retailers spent more as a percent of revenue on advertising and sales expense than the medium and larger counterparts.
General & Administrative Expenses (% of Revenue)
(Table T)
G&A expenses were highest among mid-sized retailers $25M to $75M in sales at 17.24% of revenue compared to 15.8% for smaller retailers with less than $25M in sales and 16.16% for larger $75M and over. Occupancy costs were higher for the midsize group.
Net Credit Expense
(Net of Credit Income)
(Table U)
Credit expense was much higher for larger retailers with sales over $75M at 3.07% of revenue compared to the midsized group at 2.08% and smaller retailers at 2.15%.
Net Income Before Interest and Taxes (Table V)
Lower selling expenses contributed to the mid-sized retail group $25M to $75M having significantly higher net income before interest and taxes at 10.36% compared to 6.62% for small retailers under $25M and larger retailers $75M and over at 6.42%.
March 27,
2023 by HFBusiness Staff in Business Strategy, Industry
The industry is toying with us, with both recent growth and extreme declines – 13.5% December to January. We need to recognize that what fueled our growth was not increased consumer demand for furniture but the supply chain disruption. The pandemic forced an increase in prices that the industry passed on to the consumer. As can been seen from Graphic 2, the industry and/or the consumer had not, in the past, valued our product as compared to other consumer products. The graphic compares the consumer price index for furniture indexes to all other consumer durable products:
Yes, the industry has grown in the past 50 years, increasing 47% ($81B - $119B). Prior to the pandemic, generating on average net operating income of 3-4% during that period. There are many reasons for this lack of growth including quality reduction, alternatives for discretionary spending, etc. The industry had, for the most part, a “drive to the bottom” strategy. Yes, there were moments such as the bedding sector’s introduction of premium bedding with foam construction as a selling point, however, the pandemic’s increase in unit prices drove the industry post-pandemic to 57.6% ($118B to $186B) in three years doubling the net operating income.
Yes, it has been a great period of growth in revenue and profitability, but we must not be deluded. It was not an increase in demand as can be seen from the national sample of store traffic shown in Graphic 3:
The main takeaway is that the average unit price will now decline as transportation cost normalizes as it is already doing, and gross margin objectives are revised downward. It is time to begin MARKETING.
Marketing is a combination of functions beginning with ADVERTISING and transitioning to RETAIL EXPERIENCE (Facility/Visual display), then embraced by SALES and concluded by LOGISTICS (Warehousing/Delivery). The starting point is product that must be correct in terms of quality, value and style. The featured content in our January/ February 2023 issue of Home Furnishing Business detailed the demands of merchandising.
As we begin to discuss marketing in the furniture industry, we need to recognize that the dynamics are controlled by the consumer.
For the traditional furniture retailer, the challenge is the transition from the Baby Boomers to the generation that followed. Generation X is becoming their prime consumer target. Graphic 5 illustrates the concentration of age/income sold and compares the number of consumers purchasing to the number of consumers households in the market:
To begin the marketing discussion, we must understand one fact, “It takes a village to sell furniture.” That means all stakeholders must participate; the manufacturers, the retailers supported by markets, buying groups and associations.
Marketing For Manufacturers
Many manufacturers have adopted the strategy of “build it and they will come,” with ‘it’ being the PRODUCT and ‘THEY’ referring to the retailer and consumer.
ADVERTISING to its primary customer (B2B), the retailer has been reduced to a market presence – High Point and Las Vegas. While an argument can be made that this portion of advertising doubles with the addition of Las Vegas, the question must be asked, “did it double the expense?” For many retailers, Las Vegas is an important market for bedding and an opportunity for key executives to visit with top management and to scout new vendors. The pandemic exposed some of the weakness of the market concept. However, the industry responded to the challenge by opening more with “every Tuesday” and virtual showrooms. While the lack of new product reduced the need for market, the challenge of finding any product available was a real need.
Actual advertising as defined by product catalogs with the 11x17 sales sheets had diminished as product sampling followed production offshore. The logistics of photography became too much of a challenge, however it did not eliminate the need for this material. Interestingly, retailers are creating their own photography studios utilizing various new products or constructing their own. Did the retailer just give up? From a cost perspective it would be more efficient for one entity to execute for many.
And then, there is B2B advertising in print magazines such as Home Furnishings Business, which have faced the same decline, as manufacturers relied on free ink instigated by public relation firms placing products couched as editorial.
Of course, many marketers believe digital is as effective as print to communicate to both retailers and consumers. However, we question this approach when product is involved. A lo-res image viewed in seconds cannot communicate the value or create excitement.
What about the manufacturer’s commitment to advertising to the consumer? Except for furniture manufacturers such as STRESSLESS and bedding manufacturers such as TEMPURSEALY, all have disappeared from television. However, the verticals such as BASSETT, ASHLEY, LA-Z-BOY, and ETHAN ALLEN are communicating their unique product to consumers to the benefit of their company owned stores as well as their dealers. In a recent consumer survey by FurnitureCore about the importance of brand, manufacturer’s reputation increased postpandemic to the number two spot to 21.36% when asked the following:
The question is what brand? When pressed further, the consumer recited the direct-to-consumer bedding brands such as Casper and Purple, but not the emerging furniture brands such as Maiden Home, Floyd, and Joybird. This should be a warning to traditional furniture manufacturers based on what has happened with the direct-to-consumer bedding brands that are taking 15-20% of the floor space of traditional retailers. The other challenge is the once established brands such as Broyhill, Lane and others being purchased and merchandised again at a lower quality and price to a deceived consumer. Witness the success of Big Lots with the Broyhill name prior to the United meltdown.
No matter the strength of the advertising message, a proactive SALES EFFORT must be mounted. It is the exception for a retailer to pursue the new product. With only about 30% of the dealer base attending market on average depending on the percentage of dealer base in the top 200, the sales reps must complete the task.
And what is the task? The United States is divided into 404 distinct markets (MSA) in which 91.2% of all furniture is sold. Graphic 8 presents the statistics. A major question for manufacturers is in how many of these markets do they have a presence? Interestingly, most manufacturers do not know. According to FurnitureCore’s database on average, a manufacturer has coverage of 70-75%. To maximize performance, total coverage is required. Obviously, the smaller the market size, the less coverage. This is the opportunity for a tag team approach utilizing an in-house representation with a field sales rep.
How many sales reps does a manufacturer need? It depends on the service levels required to maximize performance. Traditionally, sales representatives have been left alone to produce the results —after all they are paid on commission. Additionally, they are independent contractors and cannot, by law, be directed. However, that hands-off approach may not be correct for today. The first question is often the hardest to answer by marketing management. The service level indicated in Graphic 9 illustrates what we mean.
There can be a difference in philosophy in determining the criteria. For example, the best performing retailer above average market share may receive the most frequent visits, or the below average market share may receive more or a combination of both.
Once the criteria are set, typically, the result is there is not enough time. The answer is to change the service criteria or the dreaded solution, cut territories. While painful to execute, the result is increased sales and commissions:
The only measure of sales performance must be market share. Did the manufacturer get an increasing or decreasing share of what was sold in the territory? It is a difficult thing to measure with variance in the market being ± 20-30%.
Graphic 11 illustrates the most recent performance (Q4/2022) between the 404 markets. It illustrates the ineffectiveness of the question, how is business? Unless you are speaking with your competition.
Once the retailer is excited about the product and the sale is made, all that is left is to move the product to the retailer’s warehouse on a timely basis at an expected price. The pandemic has disrupted that step not only increasing prices but destroying dependability and increasing inventory levels.
This level of failure will ultimately lead to an industry discussion that has lingered for years. Should furniture be sold delivered or FOB the manufacturer’s plant.? Historically, there was some justification when the plant was in North Carolina, but now, when it is in China, should it be another discussion? During the pandemic container costs and on shore delivery soared to never anticipated levels. Transportation contracts were ignored as container company’s position was, “If you want it at that price, you will need to wait on it.” Would the manufacturer have a better negotiating position?
Marketing For Retailers
The memory muscle is beginning to kick in with the retail sector. For several years, advertising was not required. Advertising as a percentage of revenue declined during the pandemic year (2020) to 3.92% and only now has it begun to increase to the 5% level. As with merchandising that was discussed in a previous issue, the retailer is confronted with communicating with five different generations as illustrated in Graphic 13.
The first challenge for the industry is to influence the consumers choices for disposable income purchases. The pandemic shutdown allowed the home furnishing purchase to move up in priority to number two behind a car purchase. The objective would be to maintain that performance.
However, price will not do it, but the dream of a beautiful home will. Graphic 14 below presents the statistics.
The challenge is how to communicate to each of these divergent generations. While the Internet has emerged from the pandemic as the medium of choice, television remains a solid number two. The results of our recent consumer survey on furniture purchases are shown in Graphic 15.
It is certain that the Internet/social networks emerged as the number one method of communication with more than 50% of consumers selecting this as number one motivators. Only Baby Boomers were less at 34% remaining with television at 32%. Understanding how the retailer is positioned within the market against their competition with their target customers is critical. Graphic 16 presents the findings of a consumer survey (a retailer effectiveness study).
These four statistics measure a retailer’s performance: DID NOT CONSIDER – Effectiveness of Advertising
CONSIDERED NOT SHOP – Effectiveness of Message
SHOP BUT NOT BOUGHT – Merchandise Line-up
SHOP AND BOUGHT – Sales Management
Obviously, there is some overlap between the statistics.
Another interesting performance statistic from the study is:
HOW THE CONSUMER PERCEIVES YOUR STORE AGAINST YOUR COMPETITION. Graphic 17 lists the major purchase motivators and how each retailer is perceived. The cost per UP in 2022 has fluctuated around $20 comparable to the same number in 2019.
Once the consumer is motivated to visit the store, the next objective is to CONSUMMATE THE SALE. The pandemic introduced another dimension in the selling process, which was beginning the sale in the home. Using live chat or text or just the phone, the sales associate can finalize the sale or schedule an appointment. However, when the restraint of the pandemic subsided, the consumer continued using the web presence as the pathway to the purchase but visited the stores next. Many retailers have abandoned the proactive selling. However, those that did not, continued to reap the benefits while ecommerce sales to retailers with a brick-and-mortar presence have increased. Graphic 18 presents the statistics.
The sales volume generated by the individual retail sales associate (RSA) has skyrocketed with the increase in average ticket. Graphic 19 provides the current (2022) level.
As you can see what the dream was – a million-dollar writer is now commonplace to be replaced by a two- million-dollar objective. The increase in average unit dollar obviously disrupted the compensation of the typical RSA. However, with the stress of the pandemic most retailers did not address the issue and the RSA received the same bump in comparison as did the owners in net operating income. Graphic 20 summarizes:
As can be seen from the comparison of the two tables, 2019 to 2022, the RSA received more of a bump. As the unit sales price returns to a more normal level, the RSA compensation will or must come down, another challenge that the industry must face. This issue may be the death blow for the commission structure. The close rate while experiencing an increase during the “shut down” period and the rebound thereafter has returned to the upper 30%. Graphic 21 presents the monthly statistics from the geographically dispersed sample of a balanced group of retailers by volume.
Sales per square foot of selling space has increased to an average of $240 per square foot annually increasing driven by average unit selling price. Interestingly, the performance of retailers over $100M did not outperform the smaller retailer as much as pre-pandemic.
With the increasing occupancy cost and the availability of space, the trend is to smaller spaces. Havertys in Atlanta is opening express stores of 12,000 square feet.
Compared to pre-pandemic, the consumer is somewhat pleased with their shopping experience, as illustrated by Graphic 22.
We wanted to better understand the consumer’s perspective of the retail sales associate by asking the following question:
As can be seen, most consumers were more satisfied in each element of the selling process.
With the sale complete, the final step is DELIVERING THE PRODUCT. This is where traditional furniture retailers can shine when compared to the ecommerce competition. The opportunity to deliver an undamaged product is important to personnel that share the same values as the retailers they represent.
The cost of the total handling process at 7.48% of revenue offset by 2.91% from delivery income according to FurnitureCore — financial best practices for top quartile retailers— the cost as a percent of revenue has increased (7.05% - 7.48%) and delivery income has also increased (2.26% - 2.91%).
As would be expected with the supply chain disruption, retailers scrambled to find product — any product. Retailers ended the pandemic period over inventory as indicated by their inventory turn as of Q3/2022, shown in Graphic 24. While overall inventory turns declined 18% for all retailers, larger retailers declined 29% reflecting their ability to purchase and warehouse the product.
The pandemic disrupted the consumer’s buying habits and the supply chain disrupted the process of both manufacturers and retailers.
Unfortunately, when the dust has settled, traditional furniture retailers have lost as of 2022 3-5% of the total industry market share. To whom did we lose? Value retailers such as Big Lots, home improvement chains such as Home Depot and mass merchants. It is time to get our game on.
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.
November 30,
2022 by HFBusiness Staff in Business Strategy, Industry
While consumer spending on furniture grew 33% between 2019 and the end of 2021, sales began to slow by mid-2022 as the housing market cooled, furniture demand leveled and inventories swelled. Yet this fall’s mood is buoyed by supply chain improvements, dramatic reductions in transportation costs and the assurance that – for the first time in a couple of years – new products ordered are expected to arrive within a few months.
As retailers express an appetite for fresh new products and producers introduce expansive collections, the burning questions that remain revolve around the furniture consumer. Will the consumer’s new-found love for their homes be enduring? Have they changed their preferences about where they are buying furniture and why? How will the volatile housing market impact furniture purchases? Will the consumer continue to be willing to pay more for furniture? And will furniture continue to enjoy a larger share of consumers’ discretionary spending?
Survey of 1,000 Furniture-Purchasing Households Compares 2019 and 2022 These questions and more were the focus of a comprehensive Home Furnishings Business survey of 1,000 households who have purchased furniture in the last 18 months. As we compare today’s furniture consumer with the pre-pandemic benchmark of the 2019 consumer, some compelling and distinct changes are apparent. Many of the most interesting are highlighted here.
1. TODAY’S FURNITURE CONSUMER IS MORE ASPIRATIONAL. When asked, “What best describes your attitude towards decorating/ home furnishing?” the response, ‘My home furnishings must communicate who I am and reflect a sense of current style’ jumped over 11 points from 34.8% of responses in October 2019 to 46% in September 2022. (Table A)
While style and personal expression soared as a motivator, more practical attitudes toward furniture decreased. For example, those who said home furnishings should be “functional” and that furniture is mainly for “now” decreased from 13% to 11.8%, and those motivated mainly by comfort decreased from 21% in 2019 to 18% in 2022.
INTERNET PROVIDES STYLE INSPIRATION
Today’s more aspirational furniture consumer is getting her inspiration from the Internet. When asked where they find style inspiration, “Internet” is the top source, named by 38%. That’s nearly 20 points higher than the next source of inspiration, HGTV. As a source of inspiration, retail stores are next at 18%, followed by Magazines at 13% and Antiquing at 11%. (Table B)
“The stay-at-home dynamic in the early stages of the pandemic opened peoples’ eyes to what was possible for their homes as they used the web to do research,” observed Peter Keith, a senior research analyst for the furniture and mattress retail sector for investment firm Piper Sandler. “Consumers were able to see a much broader array of styles and items, rather than being limited by in-store assortments. While the initial market share shift toward online buying has now shifted back to the in-store experience, what has remained is that online research is a more integral part of the shopping process,” he said. “Consumers are coming into stores more informed with a vision of what they want for their home, which is helping to drive a higherticket sales and higher conversion rates.” What does a more expressive, aspirational and informed consumer mean to retailers and producers? No doubt, these shoppers have higher expectations for fashion, design and an elevated in-store presentation.
And, since the consumers are operating from a higher level on the hierarchy of needs, furniture merchants should be able to maintain pricing and margins, especially in the upper medium to high-end price points. 2. TODAY’S MALE FURNITURE SHOPPER IS DRAMATICALLY MORE ENGAGED THAN 3 YEARS AGO.
For years, the female consumer has been by far the dominant player when it comes to furniture shopping and home decorating. That dynamic has flipped on its head in the last 3 years. In October of 2019, 58% of respondents reported that the female in their household was the one who most frequently made the decision to purchase furnishings, while 26% said the male did and 16% reported a joint decision. (Table C)
This year, the percentage of households reporting the male as the one making the decision to purchase furniture rose over 20 points to 47%.
That’s a full 10 points higher than those reporting that the female makes the furniture-purchasing decision. Again, 16% report a joint decision. In a related question, respondents were asked who in their household was the first to mention a need to buy furniture. Females dominated in 2019, with 59%, while males were the first to mention buying furniture in 29% of households. This year, males and females pulled even at approximately 43% each. (Table D)
3. FURNITURE IS STANDING TALL AMONG CONSUMER DURABLES AND NON-DURABLES.
In both 2019 and 2020, households were given a list of five possible areas in which they might make a major purchase. These included leisure travel, home computer/laptop, communications/smart phone, furniture and a car. (Table E)
This year, furniture ranked overall as the highest priority for a major purchase. Furniture’s ranking improved from 2019, when cars were at the top of the list. As the number one spending priority, leisure dropped as a first choice for household spending by more than 10 points from 31% to 21% in . Furniture as the first choice for spending went up from 16% in 2019 to over 22% this year. Meanwhile, communications spending as the top priority almost doubled as 16% of respondents cited it as their number one choice for spending.
Leading industry analyst Jerry Epperson, managing director at Mann, Armistead & Epperson Ltd., believes furniture will maintain and even strengthen its clout as a contender for the consumer’s discretionary dollar.
“Over the last two-plus years, consumers have increasingly realized the value of their homes, become more willing to invest in them, and they have learned a lot about all the functionality and styles available in furnishings,” Epperson said. “As we head into the new year, many of the retail inventory imbalances will improve, and retailers are going to be bringing in a lot of fresh new product that will draw consumers back into stores.” While perishable and nondurables will continue to experience some inflation and product availability problems in 2023, furniture pricing in comparison will be stable, and our product availability will be the best in a few years. This dynamic, enhanced by exciting new products and promotions from retailers will put furniture in an advantaged position relative to other goods,” he believes.
4. CATALOG MERCHANTS, HOME IMPROVEMENT STORES AND MASS MERCHANTS GAINED AS DESTINATIONS FOR FURNITURE BUYING COMPARED TO 2019, WHILE REGIONAL FURNITURE CHAINS AND MANUFACTURER-OWNED STORES DECLINED AS DESTINATIONS. When asked, “What type of retailer did you make your most recent purchase,” the biggest gainers were:
• Catalogs of a retailer or manufacturer, up 4 points to nearly 9% of total responses.
• Home improvement stores (Lowes, Home Depot), up 5 points to around 5% of the total responses.
• Mass merchants, up 3 points to over 6% of the total responses. (Table F)
Remaining largely flat compared to 2019 were:
• Independent furniture stores at about 21% of the total.
• National chains also remained flat at 6% of the total.
• Internet/online outlets as a source for furniture stayed about the same over the period at 13%.
• Both interior designers and warehouse clubs stayed even at around 1% of the total. • Department stores made a slight gain to 9%.
Retailers who had the most decline compared to 2019 included:
• Regional furniture chains were down 6 points to 16% of the total.
• Manufacturer-owned stores like Ethan Allen and Ashley Furniture Home Store were down 3 points to 11%.
• “Manufactured by the retailer” stores like Pottery Barn or Crate & Barrell went down a point to 1.5%.
5. CONSUMERS BECAME FAR MORE COMFORTABLE PURCHASING FURNITURE ONLINE, ESPECIALLY AT OMNICHANNEL RETAILERS WITH BOTH BRICK AND MORTAR AND INTERNET SALES VENUES.
When asked “Have you ever purchased furniture online?” affirmative answers grew significantly from 59% in 2019 to 72% in , a 13-point jump. (Table G)
The growth area for online purchases of furniture is clearly omnichannel retailers, or brick & mortar retailers who have both a store and an online selling site – the best of both worlds.
Forty-six percent of consumers reported in that they purchased furniture online from an omnichannel retailer, growing nearly 6 points from 40.5% in 2019. Those buying from manufacturer websites also grew from 22.6% in 2019 to 27% in 2022. (Table H)
The decline in Internet furniture purchases during the period came for online-only retailers. While 37% reported buying from pure ecommerce players in 2019, that number dropped 10 points to 27% reporting that they purchased from a pureplay ecomm dealer in 2022. 6. SECOND HOMES GREW AS A PRIMARY REASON FOR BUYING FURNITURE.
When asked what the main reason for buying furniture was, “second homes” stood out by rising 4 points to 5% of the total. As the trend to remote work “from anywhere” took off during the pandemic, many consumers moved to their vacation/ second home and ended up staying there some or most of the time. While companies have returned to the office full-time, many others have adopted a hybrid model of having their employees work both in the office and at home. (Table I)
The number one reason for purchase in both 2019 and is furniture replacement, although it was down slightly to 26% in . “Desire new furniture” and “Redecorating” were tied at 18% each. Remodeling and recent move were next at 14% and 13%, respectively. Marriage was up 3 points to 5% of the total.
7. COASTAL COTTAGE AND GLOBAL ECLECTIC ARE GROWING AS “DREAM DÉCOR” STYLES.
The rise of second homes as a motivator for purchase could partially explain why “Cottage/Coastal” rose 3 points from 2019 to as the look consumers describe as their “dream style,” to 16.5% citing it as their ideal décor. The other look that grew in popularity as a dream look is “Global/Eclectic,” which was up 4 points to 15.4% of the total calling it dreamy.
Meanwhile, both contemporary/modern and traditional/classic decreased as a dream look. Contemporary fell in the dream category from 24% of the total to 21%, while traditional/ classic fell from 33% to 28%.
8. FURNITURE SHOPPERS’ RATINGS OF AND ENGAGEMENT WITH RETAIL SALESPEOPLE IMPROVED FROM 2019 TO TODAY.
Consumers were given a list of attributes on which to rate the professionalism, knowledge and helpfulness of retail salespeople. In every category, the overall ratings of salespeople improved from 2019 to, including:
• Appreciation for the helpfulness of the salespeople
• Salesperson’s greeting
• Remembering the names of salespeople
• Professionalism of the salespeople
• Their knowledge of furniture design and production
• Their decorating advice
• The salesperson made them feel special and more inclined to return to the store for future purchases.
9. AMONG FURNITURE CATEGORIES, BEDROOM AND DINING HAD THE MOST GROWTH IN PURCHASES FOR RESPONDENTS, WHILE UPHOLSTERED SOFAS AND CHAIRS BOTH DECLINED.
When asked about their most recent furniture purchase, bedroom furniture made the most gains from 2019 to , with about 31% citing bedroom this year compared to 26% in 2019. Youth bedroom and infant bedroom also grew. Youth bedroom grew 3 points to 9.3% of responses, and infant bedroom great about 1.5 points to 3.1%.
Another growth area was home office, increasing 1.5 points to 3% of respondents citing it as their most recent purchase. Compared to 2019, those citing their most recent purchase as an upholstered sofa fell 7 points to 17%, and those citing an entertainment center/armoire fell about 2 points to 1%. (Table J)
10. PURCHASERS REPORTED MAKING FASTER DECISIONS TO BUY FURNITURE COMPARED TO 2019. IN BOTH YEARS, VISITING 3 RETAILERS BEFORE MAKING THEIR DECISION WAS THE MOST POPULAR PRACTICE.
Compared to 2019, furniture shoppers are making faster decisions to buy. The biggest increase over the period was for those saying they made their decision in 1 to 2 weeks, which gained 5 points at over 32% of respondents.
At the same time, those reporting that it took them two weeks to a month to decide went down 2 points to 28%. (Table K) As for how many retailers purchasers shopped before making their most recent home furnishings purchase, that remained largely unchanged over the period. In both 2019 and , the greatest number – about 38% -- reported shopping in 3 stores before buying. (Table L)
Furniture Consumers Keep Looking Homeward Red-hot Housing Market Cools; Poised to Grow Again in 2023
Beginning with the safer-at-home practices early in the 2020 pandemic, consumers have rediscovered their homes and home furnishings, causing the housing industry and residential furniture to be among the stars of the U.S. economy.
In August of 2020, over one million new homes were sold at an annualized rate, the largest number in 18 years. Housing activity continued strong through around spring of 2022, when the ongoing shortage of homes, double-digit housing inflation and rising interest rates sent existing home sales down an estimated 13% in the second half. New single-family homes were down even more at 17% in the same period.
As most forecasters expect a recovery in housing in 2023 (Housing starts are forecast to grow nearly 8% for single-family units and 3.5% for multi-family units), we asked 1,000 furniture-purchasing households if they had recently purchased a home, what kind of home they purchased, how large it was and what furniture they bought to furnish it. If they had been sidelined from buying a home, we asked them why.
Here’s a look at the housing landscape among furniture purchasers: Nearly 60% of Furniture Purchasers Have Recently Bought or are Buying a Home When asked, “During the last 6 months to one year, have you purchased or are you in the process of purchasing a home,” 38% of respondents reported buying a home, and 18% reported they were in the process of buying a home, for a combined total of 56.6%.
On the other side of the coin, 43% said they have not purchased and are not in the process of purchasing a home. What type of homes are being purchased? Sixty-eight percent report buying a house. A combined 24% report buying multi-family housing such as an apartment, townhome or condo. According to the {U.S. Department of Commerce}, multi-family housing starts have been on fire, up significantly in Q1 and Q2 of this year, at 20% and 18% respectively.
During the last 6 months to a year, have you purchased or were you in the process of purchasing a home?
Housing square footage has stayed stable from 2019 to 2022 in most categories. The area of largest growth is in larger houses from 2,500 to 2,999 square feet.
In both 2019 and 2022, 27% of respondents reported their homes are 1,000 to 1,499 square feet, and approximately 20% reported their homes are 2,000 to 2,499 square feet both years. Those reporting their homes are 2,500 to 2,999 square feet went up 5 points during the period, from 6% then to 11% today.
The other area of change during the three years was a negative one. Homes of 3,000-plus square feet went down from 8% of respondents in 2019 to 5% in 2022 . Rising Prices + Interest Rates, Housing Shortage Sideline Home Buyers Especially in the second half of 2022, a number of consumers have left the active market for a home due to a myriad of reasons including the ongoing housing shortage and rising mortgage rates. We asked furniture purchasers, “In recent months, if you have delayed the purchase of a home or made offers on a home but have not had offers accepted, what was the reason you were unable to buy a home as desired?” The top four reasons in order are: 36% The rising prices of homes make them cost prohibitive for my budget 33% Lack of available homes in my area/price range 16% Rising interest/mortgage rates… 12% Unable to compete or have offer accepted during bidding wars over properties…
To those who had been sidelined, when do they anticipate re-entering the market for a home or being about to buy a home?
The greatest number of respondents – 42% -- anticipate re-entering the market for a home in 2023. Another 26% anticipate continuing their home search later in , while 19% expect to re-enter the market in 2024. About 4% say they don’t see the possibility of buying a home in the foreseeable future. Living Room Upholstery, Tables, Motion on Top of Buying Lists for New Movers For those who recently moved into a new home, we asked what kind of furniture they had purchased just before or just after moving.
Here, in order, are the top choices: 30% Sofa, sectional chair
15.5% Living room tables, consoles, shelves
11% Reclining chair/furniture
8.3% Entertainment center
5% Dining/kitchen table/chairs
3.3% Office furniture
As natural disasters, severe temperatures and shrinking waterways become alarmingly more frequent, climate change and environmental issues have become a top concern for corporations, state and federal lawmakers and voters.
But what about furniture shoppers? Do furniture shoppers have environmental and sustainability concerns top of mind, and are they willing to pay somewhat more for products sold by brands and retailers who tell a sustainability story? In the Home Furnishings Business survey of 1,000 households who have purchased furniture in the last 18 months, we asked purchasers what they are concerned about in the environment and their attitudes toward “buying green.”
Areas of concern that rated lower but still of some concern to purchasers include overloading of landfills, hazardous indoor air quality and unfair labor and trade practices.
Are shoppers willing to invest in their concerns? Nearly 86% of all shoppers said they would be willing to pay “moderately more” for a furnishings product made with sustainable, ecologically friendly materials, or materials contributing to healthy indoor air quality.
The willingness to pay moderately more for sustainable furniture items broke down significantly by age. Those 44 and younger were almost unanimous in saying they would be willing to pay more for an ecologically friendly furnishings product: 95% of those aged 25 to 34 were affirmative in paying more, and 94% of those aged 35-44 report they are willing to pay more. Among those aged 45 to 54, 78% said they are willing to pay more, and among those aged 55 to 64, 72% report a willingness to pay more.
In all income ranges, at least 70% report a willingness to pay more. Beginning in the 50K to 75K annual income range, 84% report a willingness to pay more, and beginning at income ranges of at least 100K annual income, 94% to 96% report a willingness to pay more.
The survey asked recent purchasers to rate their concerns about the environment on a scale of 1 to 10, with 1 being the most concerned. These are the top areas of concern, in order:
1. Global warming
2. Deforestation/loss of rainforests
3. Using up natural resources
4. Extinction of species
5. Increases in natural disasters
Overwhelmingly, consumers prefer to buy sustainable furnishings, all things being equal.
All other things being equal, with comparable style, quality and price, a dramatic 88% of shoppers said they would prefer to buy a furniture brand that uses sustainable materials and environmentally friendly business practices. How can brands and merchants best communicate a message of environmental stewardship in their products and business practices?
One key is to use the right terminology. The Home Furnishings Business survey asked furniture shoppers what their preference is for terms used to describe products that are good for the environment.
Their preference for terms in order is:
1. Eco-Friendly
2. Sustainable
3. Environmentally Safe
4. Green
When shopping for furniture, how interested are shoppers if a brand or product has an environmentally friendly story or materials? When we asked purchasers about their level of interest, the answers were all over the board. While the 20% who indicated a high level of interest represented the largest portion, other levels of interest were just under that percentage. Notably, those rating the importance of an environmental story when shopping for furniture as a 1, 2 or 3 in importance represented a combined 43%.
“Apparel and footwear are ahead in offering a lot of messaging around sustainability,” said Peter Keith, a senior research analyst for the furniture and mattress retail sector for investment firm Piper Sandler. “They talk about products made with recycled materials, and products having more durability, so they last longer and create less waste,” he said. “In fact, in recent years the idea of ‘fast fashion’ has really gone away. People don’t want to buy shirts that last only three to six months and create waste. By the same token, consumers are paying up for premium quality, not disposable furniture that wears out in a few years.”
Keith believes furniture is “starting to catch up” in the area of environmental practices, products and messaging. “There’s a ripe environment toward environmental and sustainability storytelling in the furniture and mattress industry,” he said.
Much Ado About Millennials Generation is Massive, but Home Ownership Rate & Wealth Lag Previous Generations
I t’s no wonder that furniture marketers spend lots of time and energy trying to figure out how to reach the Millennial Generation.
Today aged 26 to 41, they are the largest generation in America at over 72 million strong. As trend setters in everything from fashion to culture and from shopping to entertainment, many consider Millennials the most influential generation. That’s not only because of their size. They also have enormous impact on the next-largest generation: their 70-million-plus Baby Boomer parents.
All that said, as furniture retailers consider how to connect with generations in their sales, marketing, merchandising and customer service, two major principles should be considered.
1. Millennials command a lower portion of those who are purchasing from traditional furniture retailers today, compared to the other two major generations.
According to FurnitureCore, LLC., sister company of Home Furnishings Business, Millennials are currently overshadowed in buying furniture from traditional furniture stores by two other generations. As shown on the pie chart, while Millennials accounted for about 30% of all purchases from furniture stores in 2021, Generation X and the Boomers combined for over 70% of purchases. (Gen Z, meanwhile, or those aged 25 and under, did not quite account for 1% of purchases) Generation X, currently aged 42 to 57, are truly the “prime” generation. They’re in their prime earnings years and the life stage for buying furniture and homes. They accounted for over 30% of all furniture store purchases last year. The Baby Boomers, aged 58 to 76, represent a 40% share of furniture-store buying all by themselves, as they command the most wealth and buying power – both for homes and furniture. 2. Millennials’ path to wealth and homeownership has been fraught with pitfalls and false starts.
First it was the Great Recession of 2007- 2010. That’s when a large percentage of Millennials were graduating high school or college, entering a dismal job market that languished for years. When many were finally getting on their feet, the COVID Pandemic struck, throwing the economy – and then the housing market – into chaos and turbulence. Members of the Millennial generation – the oldest of whom are 41 – have less wealth than previous generations, have delayed life milestones like getting married and starting a family and have lived with their parents longer on average. While their dream of home ownership is intense, their outlook is still clouded because of a massive housing shortage, rising home costs over the last couple of years and now rising mortgage rates. In the related article Furniture Consumers Keep Looking Homeward, {see page 20}, we reported findings of a survey of 1,000 households who have purchased furniture in the last 18 months. Many of them reported leaving the active market for a home in recent months.
Thirty-six percent said the rising prices of home made them cost prohibitive, 33% said there are a lack of available homes in their price range or area, 16% cited rising interest/mortgage rates, and 12% said they were unable to compete or have an offer accepted during bidding wars over properties.
The good news is that around 60% anticipate re-entering the market for a home late this year or in 2023. Yes, Millennials are the largest and arguably most influential generation, and should continue to be a focus of furniture marketers. But right now, two other generations are equally important and are more in the “sweet spot” of furniture purchasing.
But we’re not betting against Millennials – the most educated and diverse generation in history. They will land on their feet professionally, economically and as homeowners.
October 4,
2022 by HFBusiness Staff in Business Strategy, Industry
Along with this surge in consumers returning to the stores came a surge in product cost initially driven by the increase in the cost of containers followed by an increase in production driven by growing raw material costs. This surge in costs resulted in a well-deserved consumer price increase as illustrated in Table B. The growth period coming out of the pandemic was unlike the industry growth in 2008/2009 coming out of the Great Recession where consumer prices did not increase. The pandemic increase was driven by other factors. Retailers quickly realized this relationship between units/revenue and reacted to the pricing shift with gross margins increasing accordingly to protect against future price increases. In 2021, gross margins increased industry wide 1.5 percentage points (48.9% - 50.4%) adding to the increase in the Consumer Price Index. (See Home Furnishings Business May/June 2022 issue Retail Metrics.)
Manufacturers’ prices increased and inbound freight added to the total causing a 21.7% growth in prices in 2021. Table C illustrates the impact on a traditional fabric sofa comparing 2019 to 2021. The result is a 10%+ increase in average unit selling price.
The residential furniture industry enjoyed an unprecedented lift in demand (and prices) during the bulk of the COVID years of 2020 through early 2022, as homeowners invested in their indoor furnishings and outdoor/patio environments. However, by Q2 of 2022 demand began to soften due to a variety of factors including rising interest rates, lower new-home formations and rising costs and inflationary pressures. Also, the consumer saw a shift in mentality from “I need this” purchases to “I want this” discretionary spending. And with the COVID-19 pandemic mostly over, the world has re-opened as consumers have become more comfortable traveling and getting on airplanes, going out to restaurants and generally resuming a normal life. That said consumer demand in 2022 should still exceed pre-COVID volumes – despite soaring inflation, recession talk, and wobbly public stock markets.
Looking forward to 2023, we are optimistic that the U.S. economy will settle into a “new normal” and that home furnishings will resume a nice steady growth over the pre-COVID years. Container rates are coming down, gas prices are finally decreasing, raw material price increases have slowed, and the stock market is showing some strength. All these elements should boost consumer confidence and drive solid growth in furnishings’ purchases. Some key points to watch:
E-Commerce:
Adoption to buying furniture online continues and we are increasingly seeing companies take an omni-channel approach via marketplaces like Wayfair, One Kings Lane, and Overstock.com, while the big box stores offer their massive web-portals (WalMart, Costco, Target, etc.), and the lifestyle stores like RH, PB/West Elm, Arhaus and Crate & Barrel offer tremendous in-person and on-line shopping experiences. And increasingly we see consumers bypassing these more legacy retail brands and buying direct from brands like Joybird, Albany Park, and Burrow. We expect to see significant M&A activity in this space as legacy furniture companies seek this higher growth e-commerce channel.
Whole Home and broader furnishings: Increasingly we are hearing about the “whole home” as consumers want to make purchases that can create a holistic environment, the focus not just on one sofa or table but the entire room and a house that flows onto the patio as an extension of the interior of the home. Lighting, rugs, accessories and wall art will play a leading role in how CEO’s guide product development road maps and revenue growth. We also believe patio and casual furniture will remain a high-growth sector and prime acquisition target for legacy furniture companies.
Global Sourcing Rebalanced:
After a tumultuous several years of supply chain strife, our industry is scrambling to find the right combination of U.S.-made, vs. China, Vietnam, India, Mexico and the rest of the world. Tariffs, container rates and factory shutdowns have wreaked havoc with the global supply chain over the last 18 months, and our leaders are trying to assess what the new balance for supply will be. Labor pressures and geo-political strife continue to make this a complicated issue around the world. We anticipate continued exploration of increased reliance on India and Mexico and smaller outfits in Eastern Europe and Portugal, as well as the continued desire to re-shore manufacturing to the U.S. to the extent possible. Blurring lines of Resi-mercial Furniture: Home and non-home furniture continues to look more alike, as historically segmented players increasingly compete in each other’s spaces. MillerKnoll (the merger of Herman Miller and Knoll) has a huge home furnishings presence with its various brands including DWR, Muuto and HermanMilleronline.com. Steelcase has an alliance with several home furnishings companies. Haworth has huge residential product offerings. HNI has several online portals for home and home office furniture. Competition is growing around every corner, and we expect this to continue, and we expect these players to be major contenders for residential market share and digitally native direct-to-enterprise plays.
Shows/Showrooms:
There is increasing pressure on the markets to become modern and relevant in this new economy. The casual market is leaving Chicago and moving to Atlanta. The Neocon show for commercial furniture now has two competing properties. The Las Vegas and High Point shows continue their relentless cadence of four “can’t miss” residential shows per year, amidst various challenges such as the 100+ degree weather of the Vegas market in July and staggering vacancies in the main buildings in High Point as more exhibitors are building their own destination venues, no doubt drawn by the allure of year-round showcases to key customers. More and more vendors are no longer showing at all and are using alternative marketing tools to reach their customers. There is no clear answer to this complex issue. We see a mixed bag of headwinds and tailwinds going into 2023. But overall, we are bullish on the furniture industry and the U.S. economy. 2023 should be a good year. Bring it on.
The bottom line is that the industry increase was significantly, but then not significantly, driven by consumer demand. Figure 1 summarizes from a historical perspective. Traffic is declining into the stores and has now become an accepted fact at the retail level by at least 30% or more of retailers as indicated in Table D.
The next performance indicator will likely be a decrease in selling price driven by retailers discounting due to excessive inventory. Therefore, without the other normal factors that impact the industry performance is the market conditions of product cost and gross margin.
Figure 2 presents the external factors that impact the furniture industry and whether the forecast for 2023 is for these factors to improve over 2022 or decline.
Looking at the factors that drive our industry, the forecast is obvious with all INDICATORS pointing downward. That part is over for now, but not forever.
The Furniture Industry Braces for a Downturn as Recession Fears Remain at the Forefront
The furniture industry will look back on much of 2022 as a profitable, if not chaotic, year, especially through the first half. But the U.S. is now inching towards a recession, more likely in 2023, with most forecasting it to be brief.
The coming forecasted downturn is difficult because it is unfolding in ways we haven’t seen before in any recession. Inflation is still high and consumer confidence has slowed. But job growth remains strong, unemployment low, and in most consumer products, consumption has slowed but remains healthy. Vacation and airline travel demand, usually one of the first industries to feel the effects of a downturn, is higher than airlines have been able to handle. Supply chain disruptions, both labor and material, are easing.
These opposing forces and other key trends are the basis for Home Furnishings Business’ furniture industry economic outlook and forecast presented below. The Furniture Industry The furniture industry averaged 3.2% growth over the first half of this year compared to the first half of 2021. Consumer spending in July shows furniture sales slowed 0.3% over the preceding June and were down another 1.1% in August over July. Most economists at press time placed a 50-50 chance of the U.S. entering a significant economic correction and downturn, if not in the fourth quarter of 2022, then the first half of next year. Furniture industry sales are projected to finish this year 3% higher than 2021 and primarily grow 2.5% in 2023 (Table A).
Bedding sales have slightly outperformed all other furniture products the first half of this year, 3.61% versus 3.09%. In the second quarter, however, growth slowed slightly for both segments in Q2 vs. Q2 last year to 3.07% (furniture products) and 3.2% (bedding). Spending is forecast to slow further during the second half of this year to 2.5% increase year-overyear for furniture products and 2.4% for bedding (Figure 2).
Distribution Channels.
The 3.2% industry growth in the first half of this year was stretched out over many types of retail outlets; however, furniture store sales grew at only 0.1% through the second quarter as consumers trended toward other retail channels. Home furnishings stores (outlets selling less than 50% furniture) have struggled to keep pace in recent years with pressures from e-commerce. But, surprisingly, these retailers of furnishings, accessories, floor coverings and tableware, have made a small comeback this year, outperforming furniture stores by growing sales 5.2% in the second half of this year compared to last. Electronic shopping again led the pack of all retail channels growing 9.9% in 2022 Q2 YTD for all products, not just furniture. Electronics and appliance store sales were down the most falling 6.9% (Figure 3). A notable slowdown occurred in the last month of the second quarter where sales in June compared to May declined in all of the retail outlets shown in Figure 3, most notably e-commerce shopping (-4.5%), home furnishings stores (-5.3%), warehouse price clubs (-1.7%) and furniture stores (-1%). Going forward through the rest of this year, with retail inventories already at high levels, heavy discounting may be coming this holiday season.
E-commerce shopping is on pace to capture over 20% of all retail sales this year for durable and nondurable goods (excluding motor vehicles and parts) and surpass $1 trillion in revenue for the first time. And although the pace of e-commerce slowed to under 10% growth the first half of this year and shake-outs are expected in the future, it remains the major force of retailing (Figure 4).
Furniture Buying Population Shifts.
The prime furniture buying population has been identified as consumers ages 25 to 74. The 65 to 74 age group has been included as this group remains a powerful purchasing presence in the industry. The youngest prime purchasers, ages 25 to 34, continue to decline in population as the Millennials completely age out of this segment. Worrisome for the furniture industry is that the 55 to 64 group, a smaller cohort but one that has the highest incomes, is flooding into the older ages 65 to 74. Will this high dollar group slow its furniture purchasing patterns in retirement? The good news is that the Millennials are currently between the ages of 26 and 41 and will continue to advance into the 35 to 44 age group, the prime purchasers of furniture. And as baby boomers begin their assent into the 75 and over population, the furniture industry will feel their loss for years to come.
The Economy
GDP. Gross Domestic Product took a roller coaster ride through the heart of the pandemic in 2020 before settling into solid growth the second half of the year as consumer spending went a bit crazy. This year brought fiscal reality with GDP sliding 1.6% in Q1 and down 0.6% in Q2. Many economists are predicting third -quarter GDP will be up over 1.5%. Another downturn has not been forecast until maybe late this year, but most likely in early 2023. Year-overyear forecasts for 2022 are ranging from 0% to 1.7% growth for the year.
Most economic forecast projects the 2023 downturn to be mild, ranging from -0.4% go 1.1% growth (Table C). Unemployment. The unemployment rate continued to fall from 5.4% last year to 3.6% in the second quarter of this year. Rates have fallen to just below December 2019 levels. August saw an uptick to 3.7% unemployment; however, the rates are expected to remain low through the rest of the year around 3.6% to 3.7% and rise a full percentage point in 2023 as the economy weakens.
Consumer Prices (Inflation).
The elephant in the room for the U.S. economy continues to be inflation and the price gains made by furniture products in 2021 and the first half of 2022. Prices stayed relatively stable throughout the last half of 2020 after the worst of the Covid pandemic. But in May of last year, price increases exploded with July of this year 21.7% higher than January 2021, a period of 18 months. Meanwhile consumer spending on furniture grew at less than half that rate (9%) during the same 1-1/2 years. Much of the price impact came during the supply chain disruptions of last year. This year both consumer spending on furniture and price increases tracked on parallel lines over the six months February to July. Consumer spending in July was 5.3% higher than February, and price increases were 4.0% more (Table F1).
These increases have helped make up for the years of stagnant price growth. In the second quarter of this year, furniture prices increased at an annual rate of 13.6% well ahead of all consumer products, which grew 8.6%. Higher transportation costs throughout the second half of last year and the first half of this year is a big contributing factor. As inventories increase and the competition adds pressure, prices are cooling in the second half of this year which should take the overall average price increase for the year to 7.2%. Falling gasoline prices should also impact price declines as transportation costs lessen for most consumer products. Next year as the economy continues to struggle, prices could fall even more (Table F2). Consumer price increases for furniture products grew more slowly in the second quarter of this year at 2.2% versus the preceding Q1. In the first quarter, prices grew 4.2% over Q4 of 2021 (Table G).
Stock Market.
The Dow Jones has been volatile since before the Covid pandemic began as if unsure which domestic or global event to react to next. Inflation and interest rate increases have spurred negative market reactions. Meanwhile, consumer spending growth and low unemployment have evoked positive reactions. In the second quarter, more negative than positive news sent the Dow Jones down 11.3% at the end of the quarter compared to 2022 Q1. And hawkish talk from Federal Reserve Chairman Jerome Powell at the end of August sent the Dow down further hovering around 32,000, which is 14% less than January levels of 36,600. Historical data suggests there is more pain to come. Numerous long-range forecasters suggest 2022 will end at around 31,500 and 2023 could possibly go a bit lower (Table H).
Gasoline Prices. One of the biggest economic indicators driving consumer at $4.07 a gallon for regular gas and 2023 at $3.59 (Table I). Consumer Confidence. In June of this year, the Consumer Confidence Index dropped below 100 for the first time in over a year signaling consumers are less optimistic about the economy and worried about persistent inflation and stayed at 95.3 in July. Many economists were surprised by the August jump to 103.2 when the initial forecast was 98.2. Lynn Franco, senior director of economic indicators at The Conference Board, explained the difference in the initial forecast as consumer “purchasing intentions increased after a July pullback, and vacation intentions reached an 8-month high. Looking ahead, August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term” (Table J).
Looking at the forecast for the rest of the year, the third and fourth quarters of this year should show a slow deterioration in confidence and 2023 could see it drop consistently below 100.
Prime Interest Rate. Mid-March of this year the Federal Reserve began to increase the prime interest rate that had been at 3.25% for over two years. In a stair-step approach, at press time rates had increased four times to 5.5% in August, with continuing hawkish talk by the Fed to continue to increase them more to further gain control of inflation. Additional smaller increases may also occur in November and December (Table L).
panic over rising inflation is gasoline, the life blood of U.S. commerce and consumer transportation. A gallon of regular averaged $3.05 last year and $4.64 in second quarter of this year, an increase of 23.1%. At press time, prices had fallen to around $4.00. The U.S. Energy Information Administration forecasts 2022 average gasoline prices Mortgage Interest Rates.Rates for mortgages have responded in kind to the moves by the Fed to bring inflation under control. At press time, 30-year fixed rates were around 5.7%, up from an average of 3% at the end of last year. Meanwhile 5/1- year hybrid adjustable rates were 4.4%. Rates are projected to continue to increase in the second half of the year to an average rate of 5.2% for the year for a 30-year fixed mortgage and 4.0% for a 5/1-year hybrid adjustable mortgage. In 2023 rates should move even higher at an average rate of 6% for 30-year mortgages and 4.8% for 5/1-year hybrid adjustable (Table M).
The Housing Market
Housing Sales. The housing industry has been the star of the U.S. economy pre-pandemic as well as post-pandemic. Coming out of the worst of the COVID-19 shutdown, in August of 2020, 1.036 million new homes (annualized rate) were sold, the largest number in 18 years. In July of this year, that number was more than cut in half to 511,000 homes (annualized rate). After the third quarter 2020 peak, new homes have continued to trend downward. Forecasters believe the industry will fall further in the second half ending 2022 with existing home sales down 13.2% and new single-family homes down more at 17% decline. The forecast for 2023 should be brighter for new home sales, but existing home sales will show little growth (Table N).
Housing Starts. With new single-family housing starts lagging for 10 years coming out of the Great Recession, starts finally picked up in earnest during the Covid pandemic in 2020 and continued growth into 2021. This year, new single family starts slowed and went negative monthover-month beginning in February, dropping each month through July (-2.13% July over June). Meanwhile, multi-family starts have been on fire, up significantly in Q1 and Q2 of this year, at 20.3% and 17.5%. Housing starts are forecast in 2023 to grow 7.9% for single-family units and 3.5% for multi-family units (Table O).
Housing Prices. The much-publicized increase in housing prices this year has stirred fears of another housing crash. However, according to a report issued by the Conference Board, US Housing: Boom- Bust Redux?, “Supply and demand factors—not speculation, predatory lending and/or bad underwriting practices—are at the root of the latest home price upswing.” This year existing home prices are forecast to be up 14.1% and new home prices 10.2%. Prices should level off to more normal growth in 2022.
When business is trending downward, it is easiest for economists to say that weakness will continue. And today, more economists are saying the recession will hit its worst in the fourth quarter of this year or in early 2023.
I disagree. I think our recession began early this year and the furniture and mattress industries hit their trough during the summer. Why? First, we already have two quarters of negative GDP, a key indicator of a recession, and the summer did not feel any better. Second, our economy is disjointed. From May of 2020 through 2021, durables prospered thanks to governmental generosity driven by the COVID-19 Pandemic, low interest rates that helped housing sales along with great demographics and a broad shortage of places to live and government restrictions that discouraged Americans from leaving their homes or being around others. Since early 2022, with high inflation, rising interest rates, shortages among many durables and a decline in COVIDrelated restrictions, American consumers have been catching up with services and consumer non-durables. Travel, dining out, event attendance and much more has rebounded, shifting spending away from durables— at least on a temporary basis. Third, the furniture industry has been hurt by one of the most unusual combination of circumstances most of us can remember. As consumer spending slowed this year, logistical difficulties (ports, trucks and rail) have begun to improve, and delayed shipments from Asia began to catch up, while many retailers, importers and manufacturers have been able to deliver long delayed furnishings. A dramatic shift from shortages early in the year, we now have excessive inventories, but these will be normalized as the year progresses.
Fourth, home furnishings have historically sold 55% of annual revenues in the second half of our calendar year caused, I believe, by Americans finding new homes in the first half of the year and moving in the summer and fall.
Finally, we believe there is unmet demand for many home products created by the great housing sales in 2019 through 2021. Also, remember that, for many reasons, we could not meet the strong demand we experienced in 2020 and 2021. Consumers are enjoying their travel, restaurants, sporting events and shopping no doubt, but as colder weather returns and we go indoors, we believe home related spending will recover slowly but this should set great prospects for a much improved 2023.
Let’s hope I am right. I am overdue!
JERRY EPPERSON
Managing Director Mann,
Armistead & Epperson, Ltd.
If I thought I could forecast the residential furniture industry for 2023 with any accuracy, I would not be worried about deciding what investments my retirement plan should be making. I think we are all just trying to forecast —with the hope of being close to right—when this slowdown we are in will phase out, and when business will get back to normal. As one executive and I were discussing recently, we are hoping that something that resembles normal will return by maybe November, just a few months away. Then we reminded ourselves that we believed those words three or four months ago. There is good news for some, however, in that quite a few companies still have good backlogs. Those companies will have some time to see what the next few months bring. Others may not be as lucky.
Of course, the real question is what is normal? We all thought 2019 was the last “normal” year. But that was before the craziness of new orders in late 2020 and 2021. Then, most added some 30% to the selling prices at wholesale, hoping that would cover the increased cost of raw materials, labor and overhead as well as imported finished products and freight— whether ocean or domestic. Now many costs have leveled out, but the price increases continue through a lot of the supply chain and inflation in general.
The Federal Reserve is committed to lowering inflation and their theory is that raising interest rates will lower people’s ability to buy therefore forcing prices down due to lack of demand. To some, this brake pumping seems to feel more like brake slamming. When this will end is not clear to most of us at this time. However, a good deal of the inflation relates to energy, especially gas prices, and with the Federal policies we wonder if that can happen.
What impact the elections will have is another big question. At one point, folks thought the Democrats were going to lose in a big way. But that does not seem as clear as it did a month or so ago as the politicians are doing all they can to make things sound and feel better. So, with all that said, what will 2023 look like for residential furniture? We think, as has been the case in the past, the general economy will need to pick up to be able to drag furniture along. We would expect that to happen in a small way sometime in the first quarter of 2023 with meaningful improvement not happening until maybe the second quarter. This should allow the furniture business to get back to a more normal 3% - 4% growth rate by the second half of the year. That growth will be impacted by what we are comparing to as if the ocean freight costs decline even more, then the surcharges that many have added will decline, causing more difficult comparisons the other way.
Many have started comparing unit sales to take all the clutter out of comparisons. For many, this is difficult due to the variety of products offered, but it is not a bad idea if you can do it, even for given product lines.
The residential furniture industry enjoyed an unprecedented lift in demand (and prices) during the bulk of the COVID years of 2020 through early 2022, as homeowners invested in their indoor furnishings and outdoor/patio environments. However, by Q2 of 2022 demand began to soften due to a variety of factors including rising interest rates, lower new-home formations and rising costs and inflationary pressures. Also, the consumer saw a shift in mentality from “I need this” purchases to “I want this” discretionary spending. And with the COVID-19 pandemic mostly over, the world has re-opened as consumers have become more comfortable traveling and getting on airplanes, going out to restaurants and generally resuming a normal life. That said consumer demand in 2022 should still exceed pre-COVID volumes – despite soaring inflation, recession talk, and wobbly public stock markets.
Looking forward to 2023, we are optimistic that the U.S. economy will settle into a “new normal” and that home furnishings will resume a nice steady growth over the pre-COVID years. Container rates are coming down, gas prices are finally decreasing, raw material price increases have slowed, and the stock market is showing some strength. All these elements should boost consumer confidence and drive solid growth in furnishings’ purchases. Some key points to watch:
E-Commerce:
Adoption to buying furniture online continues and we are increasingly seeing companies take an omni-channel approach via marketplaces like Wayfair, One Kings Lane, and Overstock.com, while the big box stores offer their massive web-portals (WalMart, Costco, Target, etc.), and the lifestyle stores like RH, PB/West Elm, Arhaus and Crate & Barrel offer tremendous in-person and on-line shopping experiences. And increasingly we see consumers bypassing these more legacy retail brands and buying direct from brands like Joybird, Albany Park, and Burrow. We expect to see significant M&A activity in this space as legacy furniture companies seek this higher growth e-commerce channel.
Whole Home and broader furnishings: Increasingly we are hearing about the “whole home” as consumers want to make purchases that can create a holistic environment, the focus not just on one sofa or table but the entire room and a house that flows onto the patio as an extension of the interior of the home. Lighting, rugs, accessories and wall art will play a leading role in how CEO’s guide product development road maps and revenue growth. We also believe patio and casual furniture will remain a high-growth sector and prime acquisition target for legacy furniture companies.
Global Sourcing Rebalanced:
After a tumultuous several years of supply chain strife, our industry is scrambling to find the right combination of U.S.-made, vs. China, Vietnam, India, Mexico and the rest of the world. Tariffs, container rates and factory shutdowns have wreaked havoc with the global supply chain over the last 18 months, and our leaders are trying to assess what the new balance for supply will be. Labor pressures and geo-political strife continue to make this a complicated issue around the world. We anticipate continued exploration of increased reliance on India and Mexico and smaller outfits in Eastern Europe and Portugal, as well as the continued desire to re-shore manufacturing to the U.S. to the extent possible. Blurring lines of Resi-mercial Furniture: Home and non-home furniture continues to look more alike, as historically segmented players increasingly compete in each other’s spaces. MillerKnoll (the merger of Herman Miller and Knoll) has a huge home furnishings presence with its various brands including DWR, Muuto and HermanMilleronline.com. Steelcase has an alliance with several home furnishings companies. Haworth has huge residential product offerings. HNI has several online portals for home and home office furniture. Competition is growing around every corner, and we expect this to continue, and we expect these players to be major contenders for residential market share and digitally native direct-to-enterprise plays.
Shows/Showrooms:
There is increasing pressure on the markets to become modern and relevant in this new economy. The casual market is leaving Chicago and moving to Atlanta. The Neocon show for commercial furniture now has two competing properties. The Las Vegas and High Point shows continue their relentless cadence of four “can’t miss” residential shows per year, amidst various challenges such as the 100+ degree weather of the Vegas market in July and staggering vacancies in the main buildings in High Point as more exhibitors are building their own destination venues, no doubt drawn by the allure of year-round showcases to key customers. More and more vendors are no longer showing at all and are using alternative marketing tools to reach their customers. There is no clear answer to this complex issue. We see a mixed bag of headwinds and tailwinds going into 2023. But overall, we are bullish on the furniture industry and the U.S. economy. 2023 should be a good year. Bring it on.