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From Home Furnishing Business

What Sells: TAKING SLEEP Seriously

A popular choice for consumers looking to combine technological advances in foam with innerspring is a hybrid option, offering the best of both worlds. Finding luck with their best-selling hybrid model, Mlily USA’s President Stephen Chen says, “A good night sleep is a pathway to a healthier life but it’s what’s inside the mattress that really counts. Consumers love the Fusion Luxe because it’s backed by science and includes seven layers of quality materials that combine the strength and support of individually pocketed innerspring coils with the cool plush comfort of our adaptable foam technology for comfort and support.”

When discussing Southerland’s success with the Signature Hybrid Collection, President and CEO Bryan Smith “continues to see an increased number of consumers looking for a hybrid sleep experience, which is one of the reasons this collection is such a big hit. It’s the Goldilocks tale – three of the models are copper-infused latex hybrids, and the other three feature the gel memory foam- but there is one just right for every consumer.”

Along with a growing number of consumers willing to spend money on premium and luxury bedding products, the vast array of choices leads many to spend more time researching online. Over the past decade, the mattress market has grown exponentially. The direct-toconsumer model has produced an explosion of online companies and a variety of options for potential buyers. According to a FurnitureCore Inc. survey developed by Impact Consulting Services, parent company to Home Furnishings Business, of consumers that recently bought a mattress, 27.78% spent one-to-two hours online before making a purchase, 31.95% spent threeto-four hours, 14.58% spent five-to-sevenhours and 12.50% spent seven hours or more.

Increasingly, manufacturers and retailers are looking for ways to improve their sustainability efforts. Consumers are paying closer attention to fabrics and materials, whether that is looking for products that are sustainable and environmentally friendly or hypoallergenic. According to Nick Bates, president of Spring Air International, the best-selling Nature’s Rest line “provides Spring Air’s retail partners with a product offering that attracts consumers who believe natural is better and who have an appetite for a more sustainable natural sleep experience.” In addition to the growing list of mattress options paired with specific personal requirements, the consumer’s awareness that a mattress needs to be replaced periodically keeps this industry thriving. However, the timeline does vary among consumers. Based on the same consumer survey, the majority of consumers, 50%, believe a mattress should be replaced every six-to-10 years. 6.94% of consumers believe that it should be replaced within 5 years, while 34.73% replace their mattress every 11-15 years and 6.94% every 16-20 years. The remaining 1.39% replace every 20 years or later.

Based on the FurnitureCore Industry model developed by Impact Consulting Services, research shows that the bedding category took off in the second half of 2020, finishing the year at $16.74 billion. In 2021, sales skyrocketed 52% from the first quarter to the second quarter. At $15.58 billion in the third quarter of 2021 year-to-date, sales were 25% higher than 2020 Q3 YTD. In this highly competitive category, manufacturers are taking sleep seriously and working hard to provide each consumer with the perfect mattress.

 

Statistically Speaking: The Furniture Industry Eyes Growing Favorable Demographics While Housing Struggles to Meet Demand

Housing Industry’s Struggle to Meet Demand The housing market had four distinct growth phases over the tenyear period that has brought it to today’s dilemma—namely, how to catch up with demand (Table A). Phase 1. 2011-2013: Post Great Recession. Coming out of the Great Recession the housing industry accelerated. Builders geared up, prices climbed, interest rates were low. The annual spending for new and existing homes grew over 20% each year in both 2012 and 2013. Prices climbed over 10% a year. Meanwhile the furniture industry struggled post-recession growing at an annual rate of 3% over the two years.

Phase 2. 2013-2017: Economic Growth. Things settled down for four years as the economy grew. The housing market averaged 7.1% growth over the four-year period and the furniture industry a similar 7.4% annual increase.

Phase 3. 2017-2019: Housing Industry Slumps. The housing industry got in a big hole between 2017 and 2019 when demographics dictated it should be growing. Over a two-year period, the housing market fell 1%. In 2018, sales were down 2.4% and up only 0.4% in 2019 as prices fell 0.7%. According to the Federal Reserve, declining affordability, higher mortgage rates, higher construction costs and declines in equity prices slowed the U.S. housing markets.

Phase 4. 2019-2021: Pandemic and Recovery. The pandemic brought a wave of low inventories and high demand and even higher prices. Builders powered through labor problems and new and existing home sales dollars grew annually just over 10% in 2020 and 2021. Meanwhile, couped-up pandemic consumers went wild buying furniture, with sales up 9.2% in 2020 and 21.5% in 2021 (preliminary) to an average of 15.2% for the two-year period.

This issue of Statistically Speaking looks at the housing industry’s recent struggles to address pent-up demand as household growth is set to further explode. Housing demand at its basic level is about building enough units to satisfy the annual increase in household formations plus replace older homes no longer habitable or units in geographic areas no longer desired. For the first time since the 1970s, when the Baby Boomers hit the home buying scene, home and apartment builders have scrambled to catch up in the last decade (2010 – 2020) as more households were formed than units built. In the last two years, the construction industry has tried to close the gap all while in the midst of a pandemic and its recovery. As shown in Table B and Figure 1, a historic housing crunch occurred between 1971 and 1980 as Baby Boomers began entering the housing market. After 1980, new housing completions were able to stay ahead of household formations until 2010, a 30-year stretch. Our current housing crisis has been a decade long one with 1.1 million fewer homes and apartments built since 2011 than households formed.

The housing industry is pushed forward by various drivers and stumbles when faced with industry barriers (Figure 2). Demographics are poised to be the primary industry driver as Millennials are currently entering their prime home buying ages. Alongside this driver is a barrier as older home owners are choosing to stay put as rising prices deter them from moving up. While household formations have stalled in recent years, there are indications that they are now on the rise. Low mortgage rates are also a key driver, but rapidly rising inflation will likely make those rates go higher. The two major barriers are low inventories and rising housing and apartment prices. And Fannie Mae predicts inventories will stay low for the next 10 years. Affordable prices for homes and rentals may have leveled off at the end of 2021, but no sign yet that they are falling. Rising apartment rates are a major economic concern going forward.

Alongside these housing industry’s consumer drivers and barriers is the construction industry with its own set. Unwavering demand is the main construction driver. However, labor and material shortages and supply chain bottlenecks and may further hinder the industry going forward (Figure 3). Lumber prices peaked in May of 2021 and fell 70% before year-end, but in December they began climbing again and the supply chain was still unstable at press time. Labor shortages appear to be easing. Adding fuel to the fire, the National Association of Home Builders (NAHB) reports 76% of builders in Fall of 2021 cited the low supply of buildable lots as critical.

Demographics
The housing industry not only has a lot of catching up to do, but is facing a tsunami of new households in the next 15 years that should bode well for the furniture and housing industries. In 2014, the age group 25 to 39 surpassed the older 40 to 54 segment in size as Millennials began to pour into ages 25 to 39. These post-college Millennials, though initially slow to get out on their own, are key drivers to household formations and the leading edge of primary furniture buyers. The smaller Generation X which now solidly sits in the 40 to 54 age group are in their prime income years and have driven the furniture industry in recent times. These higher earning 40-to-54-year-old consumers will grow as leading-edge Millennials transition into this older age segment. As shown in Table C, the important thing about 2022, is that this year both age groups key to the housing industry and especially the furniture industry will be increasing at the same time until around 2030. In 15 years, the Millennials will have aged into the 40 to 54 age group and the 25 to 39 age groups will start to decline as the smaller Generation Z emerges.

Housing
Over the last year housing starts geared up and began to dig out of the pandemic setbacks and address the pent-up demand. Recent November data from the Census Bureau signals a positive step forward. Table D details the monthly path for housing starts and housing completions beginning just before the pandemic in December 2019 through November 2021. During the two-month period at the end of February 2020 through April 2020, Covid-19 brought housing starts to trickle, falling 41%. But starts came roaring back last year and peaked at an annual rate of 1.725 million in March 2021 then struggled until November, when they jumped 11.8% over October to 1.68 million annual units, a significant indicator for the housing recovery (Table E). With supply chain disruptions, housing completions have become longer drawn-out affairs. Since the peak in March of last year of 1.5 million annualized completions, the number of finished houses, condos, and apartments in November is still 14.4% below that peak compared to March.

Both single-family and multi-family starts posted double digit one-month growth last November compared to the previous month. Single family starts of 1.17 million were 11.3% higher than October and multi-family starts in November were at an annualized rate of 506,000 units, up 12.9%. Year-to-date November 2020 to November 2021, starts increased 15.4% for the one-year period to an annualized rate of 1.58 million units with multi-family unit starts growing slightly faster (Table F). Single-family starts grew 14.7% over the one-year period to 1.12 million units (annual) and multi-family units increased 17.3% to 466,000 annualized units. Regionally, starts in the Northeast grew the fastest, up 24.2% overall (single-family and multi-family), followed by the West with 18.0%, the South at 14.4% and Midwest the lowest at 9.0%. The Northeast and West had the highest oneyear growth in multi-family unit starts, 32.3% and 33.2% increases respectively. The other three regions are a majority of single-family housing starts with the South showing the lowest growth in multifamily units at 7.3%.

While multi-family starts are growing quickly, for the total U.S. last year (November 2021 YTD), 70.6% of housing starts were single family (Table G). Leading the way was the South at 76.2% single family. Meanwhile, for the Northeast, multi-family units totaled over 50% of starts.

Housing Permits
Housing units permitted (seasonally adjusted at an annual rate) provides a window into the near future a few months ahead. And while not all permits materialize as housing starts, they are a key indicator of what lies ahead. Permits peaked last January 2021 at 1.88 million units and transformed approximately three months later in March as peak starts of 1.72 million (annual rate). Last January was the single highest month for permits since May of 2006, just prior to the Great Recession. Since January 2021, permits have followed a general up and down trend until September growing steadily through November to 1.71 million units (Table H). This three-month growth in permits will translate into starting in the first part of this year.

Housing Inventory
During the pandemic, housing inventories fell to 3.5 months in September, October and November of 2020, the lowest levels on record (since 1963). The month’s supply is the ratio of houses for sale to houses sold. The months’ supply indicates how long the current for-sale inventory would last given the current sales rate if no additional new houses were built (Table J). Inventories began to ease in March of last year with over 6-months of housing supply by the end of last year.

Housing Prices
Home prices exploded throughout the pandemic and through last year. The National Association of Realtors projects that prices softened a bit toward the end of last year 2021 and will continue to moderate and grow more slowly in 2022. In 2021, the median existing home price was estimated to be $340,200 and $385,200 for a new home. This is a 14.7% increase for existing home prices and 14.3% for new homes over one year. The National Association of Realtors forecasts prices to climb in 2022 - 2.8% for existing homes to a median price of $349,800 and 4.4% to $402,000 for new homes (Table K). Unfortunately, the rising prices will continue to keep new home buyers out of the market and stuck in a cycle of paying high rent without the ability to save for a down payment on a home.

The challenge for the furniture industry since the Great Recession has been an unrelenting loss of consumer share of dollars spent on paying for homes and apartments. The Consumer Price Index quantifies price increases not just for furniture and bedding, but also the CPI for rent for primary residences and another category called “owners’ equivalent rent of primary residence” which is defined as the amount of rent that would have to be paid in order to substitute a currently owned house as a rental property. Table I shows historically that as the furniture industry struggled to get prices up after the Great Recession, rents and owners’ equivalent rents grew steadily. The CPI for furniture and bedding fell 7.3% between 2010 and 2018. In 2019 the furniture industry finally saw an increase of 2.3% before the pandemic shoved prices down again. Then by November 2021 furniture prices had exceeded the 6.8% growth in overall inflation increasing 7.5% year-to-date. For rents and owners’ equivalent rents, since 2015 prices increased between 3.3% and 3.8% annually for both. In 2021 (November YTD) that growth slowed to 2.1% for rent increases and 2.4% for owners’ equivalent rent. Note that rent and home price growth are slower to show up in inflation figures. Rents usually don’t impact inflation until a lease turns over. So even though rent prices fell in 2021 in the CPI, recent month-to-month increases are some of the fastest in 20 years. Apartment List estimates that new lease price increases for apartment rents will be up 16.2% in 2021.

Mortgage Rates
Low interest rates have been a key driving force in home sales. In the second quarter of last year, 30-year fixed rates moved higher than 5/1-year hybrid adjustable mortgages and the gap has widened since (Table J). In the first quarter of 2019, a 30-year fixed rate was at 4.37%. 30-year rates hit their lowest point in 2020 Q4 at 2.76%. As of November 2021, a 30-year fixed rate was at 3.07% and a 5/1-year hybrid adjustable rate was at 2.51. Inflation is expected to take the rates higher in this year.

The end of 2021 was shaping up to be a good start to returning the housing and furniture industries to a steady pattern of demand and growth. That is, if the many economic and social challenges, as well as other unforeseen Covid obstacles, don’t derail the process.

Editor's Note: We are getting what we prayed for, BUT…

The major concern is how long will the demand continue. In our last issue we forecasted an increase of 5.9% over 2021 which we forecast to be a 18.8% increase over the previous year. However, furniture retailers don’t have the luxury to reflect because they must react to external factors that are challenging their ability to manage:
• Increasing prices at retail to offset the increased freight transportation cost with containers moving from $3,500/ container to north of $15,000 (read this month’s Statistically Speaking), not to mention inbound freight.
• Increased product cost from vendors because of their increase in imported raw material and labor.
• Personnel shortages. Even with increased wages of 15-20%, stores remain understaffed and some have had to close stores temporarily
• With furniture prices up 12%, will consumer demand continue even without increasing advertising back to normal? • While struggling to find merchandising and coping with unexpected inventory build impacting both warehouse space as well as cash flow
Believe me retailers are not complaining about the significant increase in net operating income. But watch the financial key performance to make sure your vital signs are in line with the industry.

Cover Story: 2020 Power Distribution Channels

Based upon research from Colliers research team and COSTAR real estate database for furniture stores (NAICS Code 442110) nationwide in 2019, the 378 transactions for 5.06 million square feet declined 46% in 2020 to 203 transactions, totaling 3.1 million square feet. For 2021, the decline continued to 124 transactions (38%) and 1.68 million square feet. What does the future hold? Ben Haverty, a seasoned industry veteran and vice president of Colliers Retail Service Group, summed up what has happened best: 2020 Shrink and Survive “In 2020, as the pandemic exploded, retail furniture focused on surviving by shrinking unproductive stores, renegotiating overpriced leases and working to expand their digital sales.”

2021 Stabilize and Plan “In 2021, retailers that survived 2020 are focused on product supply chain and logistic issues to capture the robust bounce back in sales, but at the same time started the long planning process of opening new store(s) in their existing and new markets.”

2022 Expand and Strive “2022 will see the fruit of the 2021 planning. We will see a surge in new furniture store openings from national chains, regional players ready to expand into new markets and native digital brands that have discovered they need physical showrooms to complement their digital business.”

Adding a different perspective for the houseware/home furnishing retail segments, there were approximately 2,900 closures and 1,200 openings between January 1, 2018 – November 1, 2021. Eliminating Mattress Firm and Pier 1, the gap narrows to approximately 1,800 closures and 1,150 openings. Another industry powerhouse, Julius M Feinblum (JMF), believes 2021 has been better than most believe with the more entrepreneurial independent retailers taking advantage of opportunities. From Julius’ perspective, 2022 and beyond will see a continued expansion, not only with the established retailers but new entrepreneurs, especially the second generation of new immigrants that see retailing as a low cost of entry business. While the growth of brick and mortar stores will continue, the major question is in what distribution channel. Figure 1 and Figure 2 present the historical growth and decline of retail stores compared to the retail sales by distribution channel.

The pandemic, while interrupting growth in the second quarter of 2020, returned in the balance of the year and has continued in 2021. However, the retail stores growth was in home furnishings stores but not furniture stores.

HISTORICAL PERSPECTIVES

The industry discusses distribution channels often but not what causes the need for new distribution channels — the consumer need for a different retail experience. The initial graphic places the distribution channels in perspective of time and the furniture purchasers that dominated the purchases. Prior to the 1960’s, the furniture market was dominated by National Chains (JCP/Sears/ Wards) that provided value to the growing middle class demanding quality at a good price and satisfied the move to the suburb. Fashion was defined by Homes and Garden magazine and supported by television shows such as Price is Right. Local Department Stores, before the mergers, defined the upper-end consumer expectations. The Warehouse Store format (Levitts), with inventory in racks overhead, addressed the consumer need for instant gratification and has continued to this day with “next day delivery.” The warehouse clubs such as Costco emerged to satisfy the search for a better deal along with the 1-800 Number Retailers Independents took the mantel from department stores for better goods as the product/services of the merged local department stores failed to satisfy regional states and traditions.

Some independents continued to grow, becoming Regional Chains still run by second and third generations of furniture retailers, a tradition that continues today. Designers expanded but have expanded their services to more than the “manor born” to now the two income households that do not have time to shop for furniture – in essence personal shoppers executing the consumer’s personal style not that of the designer.

And then came e-tailers that provided the selection/price at 10 o’clock with a click of the mouse. If not a purchase, at least the shopping research. With the pandemic, more consumers completed the research with a purchase.

From a false start in the 1980’s, the major manufacturers brands such as Broyhill, Lane, Ashley, Bassett, Thomasville and many more expanded their gallery concepts into free-standing Manufacturer Verticals stores mimicking the successful Ethan Allen in partnership with retail partners. This concept has significant potential but failed with outside corporate financial ownership and lack of management depth. Entrepreneurial retailers expanded their consumer-targeted stores such as Crate and Barrel into Lifestyle Stores, delivering to a very focused consumer target the look and price they wanted.

There are survivors in each of these distribution channels still servicing a consumer base. However, their rise and fall will be determined by an ability to deliver the retail experience that their consumers seek. As each of these channels emerged, existing retailers anticipated their channel would be decimated. However, those that accepted the challenge of change survived. Look at the graphic. Some are in the dustbins of industry history and others have prospered. For example, Furnitureland South is now at the top of our Power 50 Retailers – Independents. Graphic A tracks the performance of each distribution channel over the past five years.

But the pandemic has created significant growth for many distribution channels and many retailers have seen a financial bonanza. The question is whether a return to historical levels of demand will result in a reversal of their marketshare.

A major question is, what will the furniture store look like in the future? There is a move to smaller footprints with a more curated selection.

What will emerge from 2021 and into the future will be different but for sure it will address the needs of the emerging generation of consumers.

HOME FURNISHINGS BUSINESS’ RETAILERS 10TH ANNUAL POWER 50

T he pandemic in the first quarter of 2020 could have dealt a death blow to the foundation of the furniture industry. The smaller independents, already dealing with the expansion of the regional chains, now faced with this new external factor could have decided enough was enough. Regional chains with their more entrepreneurial management teams innovated and managed to continue selling in spite of shutdown orders.

What was an obstacle to the traditional retail sectors became a boom for others as the status of “essential retailer” allowed mass merchants, value retailers, appliance stores and home improvement stores to expand their selection of furniture and gain marketshare. Leading this marketshare STEAL was the direct-to-consumer distribution channel, gaining 5%+/- in 2020. Topping the list was Wayfair, surpassing Amazon in the furniture segment.

After a tumultuous second quarter, it became obvious that consumer expenditures for furniture and bedding was going beyond pent-up demand and reflected the change in consumer perception about their home and living environment. After a slow start due to restrictions, Furniture Stores regained their competitiveness. Graphic A presents a comparison of monthly sales.

The traditional furniture retailers, lead by the regional chains, surged back. However, the next challenge emerged – the lack of product to sell. The old strategic advantage was important again as long term relationships with manufacturers became the difference between “product” to sell and “promises” to sell. While quarter to quarter comparisons were historic, the challenge was and continues to be product to sell.

What matters is after the turmoil how does the consumer choice of distribution channel emerge. In October, a survey of consumers indicated where the dust settled. Not surprisingly, the iIternet gained ground but independent retailers did as well. Note from Graphic C the winners and losers.

The next important finding will be as we return to normal in 2021 and beyond, where will the consumer preference emerge? But at the end of 2020, this is where the individual retailers stand according to our methodology.

POWER 50–METHODOLOGY

Market share is the most heavily weighted factor determining who makes the list, accounting for 46% of the total score. It is determined by dividing the retailer’s estimated sales by the estimated retail sales of furniture and bedding in each of the markets in which the company participates, whether it is a metropolitan statistical area, micro statistical area, or a rural area. Sales of electronics, appliances, and housewares are not included.

To arrive at a list of home furnishings retailers with the strongest online engagement, we measure by 14 separate metrics. Sources include Alexa, Facebook, MOZ, OpenSEO, Twitter, and Pinterest. On Facebook, for example, the number of “check-ins” and “likes” were among the metrics, as were the number of Twitter followers, Pinterest “pins” and GooglePageRank, just to name a few.

From that data, we used a basic ranking methodology, assigning a numerical value to the ranked list of each metric. (For example, the retailer with the highest number of Twitter followers received a “1,” and so on.)

Then, we arrived at 14 individual scores calculated for each metric. After dropping the two highest scores to eliminate any outliers, the statistical average of the 12 remaining scores was used to calculate the final engagement score.

The final factor in the Power 50 ranking is retail expansion, which accounts for 15% of the total score. Using public records, it measured store expansion and expansion into new markets. In addition to the Power 50, HFB compiled separate lists that ranked regional chains, large independents, vertically integrated retailers, and independents with sales of less than $50 million in a single state.

What Sells: The Home Office is Here to Stay

Many consumers are still managing combined spaces, especially with some households having multiple people working from home. When consumers were polled during a FurnitureCore survey and asked the location of their home office, 55.79% said in a room specifically for a home office and 44.21% said their office is in an area of a shared room. As the popularity of standing desks has grown in recent years, Twin Star Home has targeted consumers desiring a more functional home workspace. “As the number of people working from home surged during the pandemic, so did the popularity of standing desks. For consumers who don’t have dedicated offices at home, standing desks are a great solution for providing workspace, especially in blended living spaces. We have been leaning into this category with the launch of many new designs and consumers have been raving about them,” said Lisa Cody, SVP marketing at Twin Star Home.

Offering consumers variety in their home office furniture is the key to success. More than ever, no home office is created the same. Consumer research conducted by FurnitureCore asked consumers what style of desk they preferred for the home office. 27.37% prefer a writing desk, followed by an L shaped desk at 22.1%, an executive desk at 21.75%, a desk with a hutch at 12.28%, a corner desk at 10.88%, and a roll-top and secretary both at 2.81%. After long hours sitting at any type of desk, consumers know the importance of the right chair. When asked what home office furniture have you purchased in the last two years, 50.53% of consumers surveyed said a desk chair.

Based on the FurnitureCore Industry Model developed by Impact Consulting Services, parent company to Home Furnishings Business, research shows that the home office category has increased steadily since 2019, finishing 2020 with $4.74 billion in sales and up from $4.31 billion in 2019. The momentum continues to strengthen with 2021 sales of home office up 33.6% yearto-date over 2020 Q2 YTD. At $2.85 billion in 2021 Q2 YTD, sales are on track to exceed $5 billion this year. Incorporating sustainability into the home office demand, Greenington has found success with its organic line of office furniture. “Home office continues to be a strong category with sustainability increasingly important to consumers,” said Troy Lerew, Greenington VP of sales.

Growing at roughly the same pace as home office, the home entertainment category was up 33.2% by the second quarter of 2021 at $3.44 billion in sales, compared to $2.58 billion in 2020 during the same period. Both furniture categories increased by 6.5% from 2021 Q1 to 2021 Q2. Just as important as carving out the perfect home office, is creating a place to unwind after that day at work with the latest in home entertainment.

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