Monthly Issue
From Home Furnishing Business
December 18,
2017 by Jane Chero in Economic News, Industry 
The top 20 percent of all households make over half (52.8 percent) of all income and pay 78.5 percent of all taxes. This still leaves these households who make over $105,600 per year with 48.6 percent of all disposable income. As would be expected, the lower income families spend a higher percentage of their income on food, shelter, utilities, gasoline, and healthcare, leaving less disposable income for non essentials. However, surprisingly, when it comes to home furnishings and equipment, the disparity in percent of income spent between the ranges does not vary significantly.
The annual mid-year Consumer Expenditure Survey report (mid 2015 to mid 2016) by the Bureau of Labor Statistics divides the 129 million households in the U.S. into 20 percent quintiles of around 25.8 million consumer units each from the lowest to highest earners. Not surprisingly, the majority of income earned before taxes along with the tax money generated and disposable income after taxes belong to households in the top quintile.
Income Groups
As shown in Table A, over three-fourths (75.4 percent) of total income comes from the top two quintiles. The average income for the highest 20 percent is $192,051 before taxes and the second 20 percent of average $82,561. The remaining three income segments make up 60 percent of U.S. households and earn less than $63,800. They account for under a quarter (24.5 percent) of all household income.
The majority of tax dollars, 78.5 percent, comes from the top income segment (Table B). And although the highest earning households pay on average 20.6 percent of their income to taxes, their share of total U.S. income after taxes is still at 48.6 percent, down from 52.8 percent before taxes. Paying roughly 10 percent of income to taxes, the fourth 20 percent quintile has an average of $73,827 of income after taxes – maintaining 23.5 percent share of all disposable income.
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After taxes, the bottom three earning households bumped up to 28 percent of total disposable income but much of it will be swallowed by the essentials like food, shelter and healthcare. (Table C)
Household Characteristics
There are distinct household characteristics that separate the income levels as depicted in Figure 1. Most notable is that the higher the income level, on average the more people in the household. The highest 20 percent have almost double the number of people (3.1 persons on average) compared to 1.6 persons on average in the lowest 20 percentile. This reflects the higher income concentration of married couple families. The top 20 percent also have on average 2.0 earners while the lowest earning households have 0.5 earners. It also shows the lower the household income, the higher concentration of individuals over 65 years and the fewer the number of children. The highest income households have on average three vehicles, compared to less than one for the lowest group. All of these characteristics contribute to the things consumers buy for their households in conjunction with their ability to pay.
Spending on Essentials
Essentials like food, shelter, utilities, gasoline, and healthcare eat up much of the income of lower income families, leaving less disposable income for non essentials. Yet, as stated earlier, when it comes to home furnishings and equipment, the disparity in percent of income spent between the ranges does not vary significantly. Table D shows how the percent of income being spent on most essential goods or services declines as the income brackets increase. As expected, shelter consumes the greatest portion of each income bracket – at 17.5 percent for the highest earners on up to 25.1 percent for the lowest.
While households with more money spend a smaller share of income on essentials, the amount of money spent is much greater. For those in the lowest 20 percent, an average expenditure of food is $3,651 at 15.1 percent of their earnings, while the highest 20 percent on average spends $12,646 – just 11.3 percent of income. For furniture and equipment, all levels of income still spend between 2.6 percent to 3.3 percent of their incomes.
Household Furnishings and Equipment
Among home furnishings and equipment, the percent of income spent on furniture and major appliances are the two largest segments. Aside from the lowest 20 percent quintile at 0.6 percent share, all income levels use between 0.8 and 0.9 percent of their income on furniture purchases (Table E). While the share is roughly the same, the dollars spent differ greatly. With an average annual expenditure of $1,054 on furniture, the highest income segment spends twice as much as the segment below it ($514) and almost four times the amount as the second 20 percent segment ($267). (Note: The Consumer Expenditure Survey conducted by the Bureau of Labor Statistics which is the basis of this article tends to reflect lower average annual expenditures compared to the Personal Consumption Expenditures tracked by the Bureau of Economic Analysis.)
Similar to furniture spending, the share of income spent on major appliances does not change much between income levels – ranging from 0.4 percent to 0.6 percent of income, regardless of earnings. Since a refrigerator or oven is more likely to be considered a necessity compared to a new sofa or table, average expenditures do not vary as much with highest earning households spending an average of $482 and the lowest spending $108 (Table F).
Despite the similarity in percent of expenditures spent on home furnishings and equipment among income segments, the vast differences in disposable income put much of the purchases within the top 20 percent of households. As shown in Table G, 65.6 percent of total furniture expenditures come from the top two income brackets with 44.1 percent from the highest 20 percent. Major appliances and home textiles are somewhat less concentrated in the highest 20 percent of households with the bottom three income levels accounting for 40 percent of their total expenditures. At 48.1 percent of total expenditures coming from the highest earning households, floor coverings are primarily being bought by households making more than $105,600.
Middle income families at one time were the bread and butter of the home furnishings industry. Median household income now stands at $55,775. This places the third quintile or 20 percent of consumer units earning between $38,000 and $63,800 purchasing only 17 percent of all furniture. Most of the home furnishings industry, 65.6 percent of furniture purchases belong to 40 percent of households earning over $63,800 annually.
In the next issue: Mapping age with the income.
November 16,
2017 by Jane Chero in Economic News, Industry
In last month’s Coach’s Corner column, we discussed the fact that almost half of the home furnishing customers in 2016, did business with distribution channels that do not have sales people in the traditional sense. We touched on some of the possible reasons for this, including the consumers’ increased confidence level, the historic lack of trust many have for sales people and the perception that many of these newer retail options offer a simpler, quicker and cheaper purchasing experience. All of these factors play a role I am sure, but my main point was that perhaps we are not doing as good a job of creating value in the customers mind for what our sales people do.
The following statement pretty much summed it up: “What I am saying is that if the customer felt they really needed a sales person, then that number would not be nearly as big.” That was followed by observation: “Of course, as we know, most customers actually DO need the assistance, either making the right product selection or putting the total room package together. The problem is they don’t believe that we can help them so they do not value the service we provide.”
My final recommendation was that we need to do a better job of communicating the benefits of visiting our stores and working with our sales staff, to make the customers dreams for their home come true. After all, the only reason we have sales people on our floors is so they can help our customers find what they are looking for and if the target consumers don’t know that or can’t buy into it, then a significant part of what we do has little or no value to them. But what if we are wrong and our staff is not helping customers find what they want? Now that is a really scary thought.
It is very possible that many of our sales team members are not being as successful as they should be at their basic task of helping customers find what they are looking for. Why do I say that? Recent research indicates that as many as 50% and an average of 40%, of those consumers who shopped a store and left without buying, stated that it was because the store “did not have what I was looking for.” Wow, that is an awfully big number. Let’s take a look at what could cause this to happen.
Myth: Does the store really not have what they are looking for? While this is certainly a possibility, it is not that probable. Research done even before the Internet came on the scene indicated that in roughly 85% - 90% of the studied responses of customers who left a store for this reason, the store indeed had or could have obtained what they wanted. Now with the Internet providing so much information about what a store has, the probability that a consumer would visit a store that does not have what they are looking for is very small.
Reality: A huge percentage of customers are rejecting our sales person’s assistance. The truth is that due to all their pre-shopping research, plus the aforementioned lack of positive expectations for the experience, many of these more confident shoppers are just not letting our sales people help them. They come in with the “I’m just looking” attitude and reject any initial contact from our staff members. In many stores this is indeed the number one reason that potential customers leave without buying.
They enter the store, are greeted by a sales person and tell them they just want to look. Not wanting to be “pushy”, the sales person releases them to browse, without even trying to determine what they are looking for or give them further assistance. Many customers assume a furniture store is just like Target or the grocery store so they browse through the store, thinking they will see everything you can provide to them. When they don’t see what they want they leave, unless the sales person or someone else reconnects with them. Yes, this is the customers fault to begin with, but in the end, it is the sales person’s main responsibility to break through the initial resistance and find a way to help every customer find what they are looking for. This is one of the toughest training and coaching challenges that every retail sales manager has, but it is also one of the most important.
Recommendation: Because of this situation, the most important element in the selling process today, has become the opening or greeting. The first words a sales person says and how they say them have the power to make or break their potential connection to each customer. Here is a brief glimpse into some of the points we make when training about the greeting.
First we need to understand that the greeting has four critical purposes:
· To make the customer feel welcome and at ease
· To get the salesperson and the customer connected and talking
· To begin to establish a trusting relationship
· To eliminate the “I’m just looking” response
We have found that the best greetings include the words “welcome” and “thank you”. Something like “Welcome to our store, thank you for coming in today”. These words are similar to how you would greet someone visiting your home and begin the process of helping the greeter become a person instead of a sales person in the customer’s eyes. The greeting needs to be rehearsed so that it becomes second nature so it is said sincerely and comfortably, to every store visitor, without hesitation.
If on the other hand your staff members adopt the role of salesperson with all the affectations attached to it -- such as lurking around the front door or by using phrases such as “How may I help you?” -- The customer will quickly take on her accustomed role. She will issue the words that go along with that role, which are “I’m just looking.” The key to greeting is to have the customer see them as a person first and a sales person second. Train them to stay out of the classic role. Say and do the things that customers will view as people things. In reality, the purpose of their opening greeting process should be to say things that most salespeople don’t say.
What you do and say after “welcome” and “thank you” is one of the most crucial aspects of establishing a trusting, person-to-person relationship with your customer. Now you must connect with the customer to learn what he/she is seeking as the result of this visit and how he/she wants to be assisted during the process. To do this while establishing trust, there are some basic points to remember:
· Stay away from the selling role
· Ask NO qualifying questions
· Make an acquaintance
· Ask questions about the customer
This is traditionally referred to as “small talk”, but in reality, it is actually “BIG talk”. The goal should be to have a casual conversation, just like at a party or gathering of friends. It should not be formal or forced. The more natural this is done, the better. It should relax the customer and allow them to get to know the sales person a bit and vice versa.
This last point is the hardest thing to train because it is a “people skill” and is often what separates the truly gifted sales person from the ones that struggle. How we deal with strangers is for the most part ingrained in our personality long before we show up for sales training. It is based on our life experience and what we learned growing up. How we handle our fear of the unknown and our own confidence in dealing with new situations are key factors. The only way to improve here is through roll play and reinforcement of positive body language, a sincere smile and caring mannerisms. Practice does indeed make perfect, well at least almost perfect in this case.
The greeting is not completed until the customer is ready, willing and able to talk with the sales person about why they came into the store. The best transition questions we have found are something like: “So what brings you into our store on a beautiful day like today?” or “Which room can I help you make perfect today?” Of course, even with a great greeting that is properly delivered, many consumers still will not be won over and easily surrender that information.
There are many ways to deal with these untrusting customers and which direction to take the conversation depends a lot on what the sales person reads as the main reason for the rejection at that point. Based on what we have discussed here, many customers already think they know what they want and say this so they can just walk through on their own to see if you have it. As stated earlier, we know that usually does not work well for them or the store. Our recommendation for these “browsers” is to just be honest and tell them you are there to help make their search easier, quicker and more successful. Something like the following often works:
“That is wonderful, we have a huge selection for you to see. However, even as large as our showroom is, it is impossible for us to show everything we have available, particularly items we can have made specifically for you. If you can just tell me what you are looking for and perhaps a little about the room it is going into, I am sure I can save you some time and effort finding it.”
These are just some basic first steps of the greeting process. Using a solid training program including role play and mentoring, your sales team must be developed into exceptional greeters who can and will make every customer they meet feel welcome in your store and willing to talk about what they want for their home. Not easy, but it is doable with enough effort, dedication and discipline.
October 26,
2017 by Jane Chero in Business Strategy, Economic News, Industry
As an industry, we should be pleased that the home furnishings category, at retail, is out performing other retail sectors, as can be seen in the accompanying table.
TABLE C (REPEAT FROM FORECAST SECTION)
The furniture/bedding sector has steadily increased since the great recession and we estimate an industry volume of $103 billion for 2017, up 3.4% from the previous year. The graphic below illustrates our performance through the most recent quarter.
INDUSTRY SALES GRAPHIC
Unfortunately, this growth has not been shared with the traditional furniture stores, but instead has gone to home furnishings stores such as Bed, Bath & Beyond and Restoration Hardware or other alternative channels. The graphic below illustrates.
The fact is all retailing is facing challenges in the first half of 2017. A Credit Suisse report indicated 8,640 retailers will close doors, up 40% from 2008. The ripple effect of this will be, according to Credit Suisse, 275 malls will close within the next five years. All “brick and mortar” retailing is going through a transformation.
Contrary to popular belief, e-commerce alone is not causing this Armageddon. It is the changing consumers, not just the emerging millennials, but the downscaling baby boomers. The fact is the U.S. is over retailed. This so-called commercial real estate bubble goes back three decades. The major question is will the bubble cause another great recession like the housing bubble?
The furniture store share can be broken down by; regional chains, large independents (multi-markets within a state) and what we refer to as “mom and pops” (independents). The following table breaks down the growth by channel.
For the furniture industry, this abundance of commercial real estate has fueled the expansion of the regional chains. Attracted by low occupancy costs, stores such as HH Gregg have been retrofitted to furniture stores. Unlike other retail sectors, furniture retailers are not over-stored.
The major question is why all the interest in home furnishings? Simply put, it is our gross margin. Currently, gross margin is running at 48-49% for retailers over $10 million. This performance is accomplished in stores within a 50K – 60K footprint. This translates into an attractive gross margin per square foot of selling space at least to other retailers. The graphic below provides the monthly statistics.
The other major sea change is the collapse of the total channel, blurring the distinction between manufacturer and retailer. The objective is to capture more margin, while tailoring the purchasing experience for the consumer.
The graphic illustrates the transformation. Remember the gross margin percent for a retailer who produces or contracts the product itself captures an additional 20-30% million dollars.
For example, the varying gross margins by publicly held entities involved in the channel:
Obviously, what occurs below the gross margin line on the profit and loss statement involves the consumer experience. Matching what the consumer demands against the price the manufacturer or retailer is willing to charge is what is driving the proliferation of different ways to supply furniture to the consumer. The table below illustrates the give and take.
The only given is, a business entity must make a profit to survive long-term. The rocks are littered with bankruptcies which had a new idea. Several companies are getting closer to the shoals.
Moving forward to our forecast. Remembering other retailers or manufacturers strategies - good or bad - will impact you in the short term. It must always be a long-term strategy.
October 26,
2017 by Jane Chero in Economic News, Industry
Table A shows the steady increase of both existing and new homes sales since the Great Recession. At a 98.5 index growth (2007 = 100), existing home sales continue to edge closer to pre-recession levels. Although still 21.8 percent shy of 2007 sales levels, new home sales have increased an average of 13 percent each year since 2011.
The National Association of Realtors projects the number of existing home sales will increase 2.6 percent this year and inventory tighten further in 2018 at 1.8 percent growth. (Figure 1)
Median Home Prices
The rapid rise of home prices shows no sign of slowing down (Table B). For existing home sales, prices have increased an annual average of 6.7 percent since 2011. The median price of existing homes at press time totaled $242,150 – up 11.8 percent from pre-recession prices. At year end, the National Association of Realtors (NAR) projected existing home prices will grow 5.2 percent this year compared to last then moderate slightly into the 3 to 4 percent growth range over the next two years (Figure 2).
New home prices have jumped by 28.7 percent since 2007 and have maintained an upward track post-recession (2011) – growing a yearly average of 5.8 percent and finishing the second quarter of 2017 with a median home price of $313,767 (Table B). Growth in the median price of new homes is expected to moderate in the last half of this year and the National Association of Realtors forecasts new home costs increasing over 3 percent next year (Figure 2).
As would be expected, regional variation in home prices are significant. As shown in Table C, at a median home price of $357,443 the West has the highest existing home sale prices. A lack of existing home inventory in the West is most likely causing prices to increase at such a high rate – up 22.5 percent from 2014 to 2017 Q2. The Northeast increased by 7.4 percent during the same time period, while existing home prices in the Midwest and South also showed great gains – growing 17.2 and 20.8 percent.
For new homes, the median price in the Northeast has skyrocketed up to $497,350 – a jump of 23.5 percent in 3.5 years. New home prices in the West actually declined by (-2.6) percent since 2014, while the Midwest increased 5.5 percent and the South by 8.6 percent.
Metropolitan cities, especially in California, are showing jaw-dropping price increases. Table D shows the top 10 most expensive cities to buy a home in 2017 Q2. The top 3 are California cities with San Jose-Sunnyvale-Santa Clara, CA topping out at $1,183,400.
The 10 metro cities increased an average of 7.7 percent in existing home sale prices over last year. Seattle-Tacoma-Bellevue, WA led the way in price hikes – jumping 13 percent from 2016 Q2.
On the flip side are the 10 metropolitan cities with the lowest median prices of existing homes this year (Table E). Youngstown-Warren-Boardman, OH-PA tops the list at a median price $87,000. A couple of these least expensive cities actually made big increases over last year – Decatur, IL is up 12.3 percent while Rockford, IL is up 12.4 percent.
When the home building industry picked up after the Great Recession, so did the price of new homes. Before the recession in 2007, 64 percent of new homes sold for under $300,000. In 2009 at the bottom of the Recession, that number grew as high as 74 percent. Today only 45.7 percent of homes sell $300,000 and under. Since 2011, houses selling above $300,000 have steadily become the majority – up to 54.3 percent in 2017 YTD.
Median Income
Since the recession, median income has been unable to keep up with the escalation of home prices. Overall, median home prices have risen 28.1 percent from 2007 to 2016 – up to $313,700 (Table G). The growth of median income stalled with the recession and has slowly improved to $59,900 in 2016. According to ONS affordability data, median price paid for a home leapt 259 percent between 1997 and 2016, while earnings rose only 68 percent.
Housing Inventory
Along with rising home prices, low inventory has posed a problem for many home buyers wanting to upgrade housing or buy for the first time. Forecasters see little change on the horizon for existing home sales. Although in a much higher price bracket, new home inventory has steadily increased over the last year – rising 16.5 percent from July 2016 to 276,000 homes in July 2017. In comparison, at a year-to-date inventory of 1.9 million homes, existing home inventory had a typical dip in the fall and winter but is still 9 percent lower from July 2016 to July 2017 (Table H).
Rental Prices and Vacancy Rates
For many, home buying continues to be out of reach and with slower to grow rent prices, it is often the best option.
At a median monthly rental price of $1,414 in July 2017, rent has only increased by 2.1% since 2011 (Table J).
As shown in Table I, rental vacancy rates have dipped dramatically by 35 percent from 2009 to 2016. With an increase of 4.3 percent over the past year, the vacancy rate is at 7.2 year-to-date.
Housing Starts – Single and Family Units
The growth in new Single-Family unit housing starts will not let up anytime soon. Starts are projected to have double digit growth over the next two years. However, Multi-Family unit housing starts (apartments) has fallen dramatically since the boom of 2014-2015 brought on by pent up demand and also the Millennials pouring into the rental market. Developers complain of long permitting and construction time spans also a lack of skilled workers. However, even though Multi-Family starts are projected to fall slightly next year, this reflects the apartment industry returning to a more realistic growth cycle (Figure 3). The challenge to growth in new home starts will be the affordability for first-time Millennial buyers, and current homeowners seeking to upgrade.
October 24,
2017 by Jane Chero in Business Strategy, Industry
Sam Moore’s Nadia
Customizable in any of the company’s 25 wood finishes and more than 450 fabrics, this exposed wood chair is a top seller due to its comfort, moderate scale and versatility. In addition to customizing the wood finish and inside fabric, the outside fabric can be contrasted for an additional fashion statement. Approximate retail price is $999.
No, it hasn’t seen a growth curve comparable to motion furniture in recent years, but the rapid development of customization programs by manufacturers large and small, coupled with significant improvements in styling and fabric selection, have enabled the stationary segment to keep a wide lead over its sister category.
A decade ago, performance fabrics had a microscopic market share, and waits of three to six months for a custom-order sofa were commonplace.
Today, it’s not unusual for an upholstery manufacturer to keep 1,000 fabrics in stock – including dozens of performance fabric options – and a custom-order sofa is out the door no more than 30 days after the factory gets the order.
And even for upholstery sources that don’t offer custom orders, they still have to ship product to their dealers faster than ever before because retailers often carry little or no inventory, and consumers follow the mantra of Queen’s 1989 hit, “I Want It All and I Want It Now.”
“Speed to market will always be a key factor,” said Michael Campbell, CEO of leather upholstery importer Leather Italia USA. “It also solidifies healthy relationships with retail sales professionals and staff, as they are comfortable in selling and promoting your line with the confidence they’ll receive (the product) in a timely fashion.”
Research by Impact Consulting Services, parent company of Home Furnishings Business, illustrates the consumer’s impatience. In a survey of recent fabric upholstery purchasers, only 2.6% said they were willing to wait three to six months for a custom order sofa, while 28.5% said they would wait one to three months.
A plurality (46.6%) said they were willing to wait two weeks to one month, and another 18.1% said they wouldn’t wait longer than one to two weeks.
Leather Italia, like many vendors who import upholstery from Asia, stocks best-sellers in U.S. warehouses. But even those who don’t have domestic warehousing are becoming more focused on getting product to their dealers quickly.
Jeff Katz, vice president of upholstery at Magnusson Home, said his company stocks about a dozen best-sellers in China, but can get still get the product to a retailer’s warehouse in 45 days or less.
“I try to put neutral fabrics on the frame, and then spice it up with pillows,” Katz said. “Then it’s very easy and inexpensive to change the décor of your room by changing pillows.”
From a styling standpoint, Katz said smaller scaled models – particularly 82- to 86-inch sofas – are among his hottest sellers, as is just about any frame with a curved or bowed front rail.
“People are living in smaller apartments, smaller houses and using them (sofas) in smaller rooms,” he said. “So the smaller scale, more contemporary styles are selling best.”
And while the Magnussen line doesn’t include any leather upholstery covers, textured fabrics are rapidly gaining in popularity, he explained.
“Performance fabrics are not real big for me, but anything that has texture in it is selling very well,” said Katz.
In the Impact Consulting survey, some 31% of recent fabric upholstery purchasers said contemporary was their preferred upholstery style, which was second only to traditional at 50.9%. No other style category was preferred by more than 7.8% of respondents.
And while 67.9% of respondents said they were either “satisfied” or “very satisfied” with their purchase, the survey made it clear that the vast majority of consumers don’t know the meaning of one of the most common marketing terms used in the upholstery business – 8-way hand tied.
When asked what the terms meant as it related to upholstered furniture, 65.5% admitted they didn’t know, and another 6.9% incorrectly said it was related to frame construction or cushion fill. Only 27.6% correctly said it was related to springs and support construction.
In a separate survey of recent purchasers of leather upholstery, 8-way hand tied didn’t fare much better. Some 60% said they didn’t know and only 31.1% gave the correct answer.
And the leather upholstery category’s most bandied term – bonded leather – also took a beating. Some 56.7% admitted they didn’t know the meaning of the term “bonded leather,” and another 16.7% incorrectly said the product is real leather that has been processed to improve its performance. Just 26.7% correctly said “bonded leather” means the product is not real leather.
“There remains confusion and misinterpretation in today’s market relative to bonded leather, leather-like articles and performance covers emulating a leather look,” said Leather Italia’s Campbell. “Many retailers are working very hard to transition back to an all-leather article and building that back into their culture.”
Campbell said he would like to see leather upholstery vendors and retailers put more emphasis on all-leather covers, which would help retail sales associates and consumers better understand the category.
“Understanding the benefits of an all-leather article is a must,” he said. “Marketing the all-leather category with an attractive presentation within a store is also necessary to add validity to the message.
In the survey of recent leather upholstery purchasers, 23.3% said they would be willing to pay an additional $200 for furniture that is 100% leather, and the same percentage said they would be willing to pay more than $200 extra.
Another 16.7% said they were willing to pay $150 more, while 13.3% said they would pay an additional $100.
A related question asked how much they would expect to pay “for a good quality leather sofa.” Fully 27.3% said more than $2,000, and 45.5% said $1,000 to $1,999. Only 18.2% said they expect to pay $600 to $999, while just 9.1% said less than $300.
