From Home Furnishing Business
Our very existence is based on the process of attracting shoppers and turning them into buyers. We often refer to these people looking for our products as traffic. On our websites that might be defined as clicks, whereas in our stores they would be called UPS. They are the most critical ingredient in our business because without enough of this raw material, we can not produce the sales we need to survive and prosper. Therefore, it is the consumers that we get to shop with us, or shoppers, that we really need to focus on. We like to talk about how to get more of them to visit, however, since most furniture stores (particularly smaller ones) are getting fewer then the year before, a very pertinent question might be where have all the shoppers gone?
Since I have been a musician and played guitar almost all my life, when this question popped into my head, it was quite natural for the title of a very popular folk song from my youth to come to mind. Where Have All the Flowers Gone? was written by Pete Seeger and made a hit by many others, including Peter, Paul and Mary, and The Kingston Trio in the early sixties. Seeger’s inspiration for the song came on the way to a concert at Oberlin College, which was one of the few venues that would hire him due to his politics during the McCarthy era. He read these lines from a traditional Cossack folk song: “Where are the flowers, the girls have picked them. Where are the girls, they have taken husbands. Where are the men, they are in the army”. He used these lines as the basis for his original three-verse ballad. In 1960, Joe Hickerson added the final two about graveyards and the return of the flowers, making it what’s called a “circular song”. Its anti-war message during the unpopular Vietnam War was widely embraced, and in 2010 it was listed as one of the top 20 political songs of all time.
While I am not trying to get too political here, I think it is fair to say that we as furniture retailers are currently at war, because each distribution channel is fighting for its share of the those that are shopping for home furnishings. Over the past few decades, we have seen the battle intensify as the consumer has been given more and more ways to buy the goods we sell. This huge increase in selection for both product and shopping experience has caused the demise of thousands of retailers. As people choose to shop elsewhere, revenue dries up and businesses must either change or go away.
This process has mostly impacted what used to be a once dominant main player of retail furniture distribution, the independent general furniture store. In the last ten years, we have lost roughly 21% of furniture storefronts, mostly from this segment. These entrepreneurial entities, many still family-owned, had as much as half of the business nationally in the latter part of the 1900’s, sank to 35% share in 2005 and now have roughly a third of that. Will they go extinct or will the lost shoppers return? Follow my rewrite of this great song to find out my opinion about it.
Where Have All the Shoppers Gone?
Where have all the shoppers gone? Long time passing
Where have all the shoppers gone? lLng time ago
Where have all the shoppers gone?
Small stores took them, everyone,
When will they ever learn, oh when will they ever learn?
Back when my parents first shopped for furniture, after World War II, the main destination for most people to get ideas and purchase furniture was usually a small store in their community. There were a few larger chain stores and the traditional department stores which catered mainly to the “carriage trade” or higher-end customers. Selection was limited, and this was a good solid business to be in for a long time.
Where have all the small stores gone? Long time passing
Where have all the small stores gone? Long time ago
Where have all the small stores gone?
Gone to big stores, everyone,
When will they ever learn, oh when will they ever learn?
As we moved through the latter half of the 1900s, the Big Box, category-killing stores became the place to go. Good selection, quick delivery of many in-stock items and promised savings based on their big volume attracted many who would have been smaller store customers. Regional and national chains grew their share substantially, as did Sears, Penney’s and Wards, mainly at the expense of the smaller stores. In addition, we saw the emergence of specialty vertical and branded stores like Ethan Allen and La-Z-Boy that drew even more good shoppers away from the local general furniture store.
Where have all the big stores gone? Short time passing
Where have all the big stores gone? Not so long ago
Where have all the big stores gone?
Gone to websites, everyone,
When will they ever learn, oh when will they ever learn?
With the turn of the last century and the rapid growth of the internet as a retail channel for virtually everything, an entirely new dynamic hit the furniture industry. Whereas in the past nearly everyone ended up purchasing their furniture locally, now they had the opportunity to shop outside their physical market and have it delivered. Previously there were several highly successful retailers that used mail-order catalogs and 800 numbers to do this, but while they did well, it was never a huge percentage of the overall business. More recently with the growth of dedicated home furnishings sites and the advent of Amazon throwing its substantial marketing/selling power at the industry, we have seen this channel grow from nothing to roughly 15% in a very short time. Big stores have jumped on board and found some success selling online. The last segment to get onboard with it for various reasons, has been the smaller retailers. How big will it get? Will shoppers buy a “pig in a poke” as far as color, size, finish and comfort goes?
Where are all the websites going? In no time passing
Where are all the websites going? Here’s where they’ll go
Where are all the websites going?
Going to small local stores, everyone,
When will they ever learn, oh when will they ever learn?
As good as it has been over the last few years for online only sellers, we have recently seen the huge year-over-year growth slow a bit, falling from 26% in 2015 to 12.9% last year. This channel is still far and away the fastest growing one, but have they begun to tap out their available market share? Are most of those willing to purchase big ticket items for their home on the internet already doing so? While it is a given that online sales will continue to dominate in accessories, flatpack furniture and other easy to ship items, will they gain a similar piece of the action for “real furniture” and particularly better goods? I think that the jury is still out on this, but there are some indications that the party may be winding down a bit. If the Amazon’s and Wayfair’s of the world think that all of their future growth will come from people buying online, why then are they building small brick and mortar stores? Why are successful online and traditional retailers like Target and Nordstrom’s reportedly investigating building boutique size stores in smaller markets?
Where will all the shoppers go? In the future
Where will all the shoppers go? Not too far away
Where will all the shoppers go?
Going back to small stores, everyone
When will they ever learn, oh when will they ever learn?
Because the best place to be in order to build long lasting relationships based on trust and value is still person-to-person and face-to-face, I believe that the local small stores will rise again! So don’t give up. Take advantage of who you are and where you are to sell the services you provide to the people you can reach out and touch. When will we ever learn that there is no place like home!
Oh wait, isn’t that another song?
According to FurnitureCore (the research arm of Home Furnishings Business) data, accents have held their place with furniture sales (excluding bedding) at 5.56%. With all the emphasis of online marketing from manufacturers and online retail sites like Wayfair, it is likely that the percentage will continue to grow.
Why all the excitement around the accent furniture category? There are many perceivable factors that may contribute to this. Accent pieces are items that emphasize or complement a room’s décor. They are produced in a seemingly endless variety and are often a segue into emphasizing consumers’ personal style. Consumer tastes have become more inclined to steer away from matching groups of furniture, opting instead for eclectic pieces that create a bit of fun or personality in a room. Often these pieces do not necessarily have a utilitarian requirement, but simply serve as an addition to an existing space.
Accent pieces tend to be extremely versatile in terms of functionality and come in a range of affordable options, colors, and designs. According to ZUO’s CEO, Luis Ruesga, “Furnishings are fashion for every style and passion. Working with global trends we manufacture innovative, fashionable and affordable styles that can be enjoyed in any application.”
What does this mean to brick and mortar stores? It means opportunity. An opportunity to tack on the item that has caught their customer’s eye as they are making their purchase for a sofa, dining, or bedroom set. An opportunity to increase the average ticket of each sale. And, perhaps most importantly due the category’s versatility in both functionality and price, it means an opportunity to make a sale even when total sales are slow.
The U.S. economy is expected to have grown at its best pace in four years in the second quarter, and a part of the boost may have been from inventory building and exports ahead of the implementation of tariffs. Economists say it’s difficult to determine how much tariff-related activity added to the expected 4.1 percent growth. Some economists say it could be just a few tenths of a point, but NatWest Markets economists say it could total a full point.
However, the news is filled with the closing of stores that have been in business 75 years plus. In 2007 at the furniture industry peak, the U.S. had 27,630 furniture stores (store fronts). By the end of last year, that number had fallen 21 percent to 21,765 stores. Over 50 percent of the 5,865 stores that closed between 2007 and 2017 did so in 2008 and 2009, unable to survive the recession. Preliminary data from first quarter of this year shows the first possible increase since 2007 with the addition of 287 stores compared to the fourth quarter of 2017. The graphic below presents the facts.
The political environment which is driving much of these external factors shows no signs of abatement. Even with a change in the midyear elections, the resulting turmoil for the next two years would intensify this change.
All of this disruption has added to the concern of the impact of ecommerce on the traditional brick and mortar stores. While we believe the increase in growth to the ecommerce channel has peaked, we see Amazon’s latest move to create a better online experience in furniture shopping, along with Wayfair’s expansion into the higher end segment with its private label products, promising showroom /gallery quality furniture at a price the consumer can “comfortably” afford, offering an “unparalleled” way to shop online for their homes.
What is the solution? There is no magic answer. However, a trusted map to guide your decisions—or should I say a reliable GPS—that is updated consistently for changing industry conditions, is helpful.
Today, the industry needs more than a sextant or compass to avoid the shoals.
Stay tuned to the next issues.
The overall U.S. economy is experiencing the second largest period of economic growth since World War II. And if the growth continues through 2019, it will be bigger than the dot.com boom. Economic growth in the U.S. is expected to remain above average through the end of 2019 but could fall back from growth levels seen in 2018. Most economists believe a recession is out to at least the end of 2020, perhaps 2021 or even 2022.
The Furniture Industry
Forecast. New data from a comprehensive revision of Personal Consumption Expenditures by the Department of Commerce, U.S. Bureau of Economic Analysis (BEA), confirms what industry experts have suspected for years. The furniture industry grew more slowly immediate post recession years than the prior PCE numbers indicated, cumulatively almost 10 percent less. This data detailing personal consumption of furniture is tied to the U.S. National Accounts including GDP.
The newly revised PCE numbers also readjusted furniture industry growth upward to a 4.9 percent increase 2016 to 2017. And through August of this year, PCE furniture consumption increased 7.4 percent compared to the same 8 months last year.
Industry sales, all channels, are forecast to slow slightly the remainder of the year, but should finish at least in the 6 percent increase range by year end. Growth should moderate in 2019 to between 4.8 percent and 5 percent continuing to 4.7 percent in 2020. (Table A)
The Bedding industry has been the fastest growing segment of the industry since the recession until last year when the industry was disrupted by consolidation as well as increased internet presence from online companies marketing primarily bed-in-a-box product. Growth in 2017 was 1.5 percent compared to 5.3 percent for all other furniture products. This year the Bedding industry has begun to recover and should expect growth of 4.4 percent while all other furniture is on track to increase 6.3 percent. Both furniture and bedding sales should approach 5 percent growth in 2019 and slightly lower in 2020. (Table B)
Distribution Channels. For Furniture Stores, one would have to go back to 2004 to see a higher growth year. Furniture Store estimates through August show a 7.8 percent increase in sales compared to the same period last year. This increase exceeds the performance of all other home furnishings channels, except electronic shopping (internet)/mail order retailers that grew 9.7 percent August year-to-date. These two channels, along with General Merchandise Stores, are the only furniture and home furnishings channels that are outperforming the 5.4 percent growth among U.S. retail sales for all products. Electronics and Appliances stores continue to decline in number. Home Furnishings stores sales have slowed. (Tables C and D)
Prime Furniture Buying Population. The good news is that Millennials are finally working their way through their prime furniture purchasing years. The age group 35 to 44 is now the fastest growing category under 65 and is expected to increase 1.3 percent 2018 and 2019. As the largest generation since the Baby Boomers, they have delayed marriage and household formations. Jobs coming out of the last recession were hard to find, didn’t meet their salary expectations, or were not the jobs they wanted. Whether this generation will place the same importance on their homes and home furnishings as their Boomer parents is not entirely clear at this time. Nevertheless, they are the prime consumer force in the United States. Unfortunately, GenXers in their mid 40s and 50s with their high salaries and big homes are still impacting the industry but are the fastest declining age group of prime purchasers falling 3.1 percent this year in numbers and another 3.6 percent next year. Baby Boomers are still impacting the industry as the older age groups continue to grow. (Table E)
The U.S. Economy
Despite a politically charged climate with concerns over international trade alliances and tariffs, upcoming mid-term elections, and polarized political parties, the U.S. economy continues to barrel forward at a record pace. The Home Furnishings Business (HFB) forecasts that follow are a result of a compilation of predictions by leading U.S. economists. Figure 1 provides the complete sources.
Real Gross Domestic Product. GDP of 4.2 percent in the second quarter, up from 2.2 percent in Q1, reflects the economy’s robust growth. Most economists agree the second half of the year won’t be able to keep up that pace and the year will finish around 3 percent growth. GDP is expected to slow in 2019 to 2.7 percent and further to 2.0 percent in 2020. A large number of experts feel this historical expansion will continue to cool with a recession looming toward the end of 2020 or 2021. (Table F)
Payroll Employment and Unemployment Rate. The U.S. worker shortage still looms large, especially in retail stores, as businesses struggle to find the right workers to match the job. (See the May, 2018 issue of HFB Magazine, “Statistically Speaking: Companies Look to Technology to Help Solve Nationwide Worker Shortage.”) Furniture store executives, in particular, have expressed frustration at turnover rates while trying to implement new strategies to attract and maintain quality employees. Non farm workers are forecast to grow 1.7 percent in 2018, slightly higher than the 1.6 percent growth in 2017. And although growth will slow over the next two years, companies will still add employees at a forecasted rate of 1.5 percent in 2019 and 1.3 percent in 2020. (Table G)
As the economy adds jobs, unemployment is forecast to continue to be low at 3.8 percent this year and into 2019 with only a slight uptick in 2020. (Table H)
Stock Market. The Dow Jones continues to express little interest in the political climate, instead focusing on increase business performance. The Dow Jones is forecast to end this year at 28,000 plus and grow above 30,000 in 2019. The market is expected to remain strong for most of 2020, but performance will depend on when an often predicted recession might arrive at the end of 2020 or wait until 2021 or even2022. (Table I)
Consumer Prices. The furniture industry continues to struggle to get prices up. This year growth in prices is expected to be negative again, down 0.5 percent from 2017, primarily in bedding. Hopefully, furniture and bedding prices will go positive in 2019 and continue to grow slowly into 2020. Meanwhile all consumer goods prices are forecasted to grow 2.6 percent this year and 2.3 percent in 2019. (Table J)
Gasoline Prices. The International Energy Administration predicts that the United States will become the world's largest oil producer by 2023 growing enough to meet domestic demand. While OPEC walks the tight rope between increasing and lowering production to insure profits and continued exploration, in a free U.S. economy that may prove to be more difficult. Oil companies must find the right balance between increasing supply slowly enough to keep prices high enough to pay for increasing exploration. Perceived shortages caused by hurricanes, the threat of war in oil-exporting areas, or refinery shutdowns can cause panic and prices to spike. Gasoline prices are expected to remain below $2.50 for a gallon of regular gasoline 2019 and 2020, with this year forecasted to average $2.70. (Table K)
Consumer Confidence. The current high level of confidence at press time reflects a sturdy economic expansion in the U.S. that’s about to turn nine years old with no end in sight, according to Market Watch/Barclays. Job openings are at a record high and unemployment is at a 17-year low. Confidence grows despite trade rhetoric, stock market volatility, and political unrest.
Lynn Franco, Director of Economic Indicators at The Conference Board says that, “Overall, these historically high confidence levels should continue to support healthy consumer spending in the near-term.” (Table L)
Prime Interest Rate. This short-term interest rate is the most commonly used in the banking system. The average rate for the year should be at 4.9 percent, according to leading economists. The 5 percent rate at press time, however, is forecasted to be raised to 5.25 percent by the Federal Open Market Committee (FOMC) before year end and continue through 2019. Another increase to 5.5 percent is forecast for 2020. The Prime Rate is generally increased if the FOMC determines that the pace of inflation within the U.S. economy is too high so as to bring inflation under control. (Table M)
The Housing Market
30-Year Mortgage Interest Rate. As the Prime Rate has edged up, so has 30-Year Mortgage Interest Rate to a forecasted average of 4.6 percent this year. While still low, rates should edge up again in 2019 to 5.1 percent and 2020 to 6 percent. (Table N)
New and Existing Home Sales.
With low inventories and slow residential construction, existing home sales are forecast to decline this year 1 percent and pick up slightly in 2019 at 2.1 percent growth, according to the National Association of Realtors (NAR). These low inventories are contributing to higher home prices. With existing home low inventories, new single-family homes are being cobbled up, many pre-construction. Sales of new homes are forecast to grow 8.6 this year following a 9.3 percent increase in 2017. As new residential construction ramps, up 2019 single-family sales should hit double digits. (Table O)
Housing Starts. Despite a recent slowdown, residential construction shows a positive trend. According to Kiplinger, “Increases in the cost of building materials and shortages of land and labor have left builders unable to ramp up construction faster, despite optimism in the industry about the direction of the market. Prices for building materials, however, have recently begun to ease somewhat.” (See HFB Magazine, July 2018, “Statistically Speaking: Housing Industry Struggles to Keep up with Consumer Work/Lifestyle Demands.”) The National Association of Realtors (NAR) forecasts Housing Starts for single-family units to grow 7.7 percent this year and is optimistic about double digit growth in 2019. No economists on HFB’s list ventured a forecast past 2019 but the trend should be positive. Likewise, after a negative growth year in 2017, multi-family units have rebounded and should increase 7.6 percent this year. The NAR predicts Housing Starts growth should then be flat in 2019. (Table P)
Home Prices. In July this year, the Census Bureau reported the median price of a new home sold in the U.S. was $328,700. Existing homes sold, tracked by the National Association of Realtors (NAR), reflect a July median price of $269,500. Low inventories of existing homes should help increase the price by 5 percent this year, with prices continuing to increase in 2019 at 3.6 percent. New home prices should be down slightly this year less than 1 percent, but grow 2.6 percent in 2019. (Table Q)
Conclusion. The U.S. economy appears very healthy. This growth should continue throughout next year, but at a slightly slower pace. In 2020 the economy should moderate further with increased anxiety among businesses as to how long the expansion can last.
Directly impacting the furniture industry is a Canadian imposed 10 percent tariff on U.S. upholstery and mattresses coming into its country. The Trump Administration insists that imposing tariffs on steel and aluminum, not just to Canada, but Mexico and Euro-Asia as well, is designed to level the playing field and return manufacturing and jobs to America. At press time, the U.S. and Mexico had come to a preliminary agreement to rewrite the old NAFTA pact and Canada was still at the table. (See box insert below).
The Canadian retail indoor furniture industry is about 10 percent the size of the U.S., $9.8 billion CAD compared to $99.8 billion USD(Table A). In addition, the Canadian industry grew more slowly as it recovered from the last recession, 2.9 percent annual growth (CAGR) versus U.S. 4.7 percent for the U.S (Table B).
Given the vast difference in the populations of the two countries it should be noted that Canada relies much more on the furniture industry of the U.S. than vice versa. In 2017 the U.S. exported only slightly more indoor furniture and bedding products to Canada than it imported, finishing the year with $1.77 billion in exports to Canada compared to $1.71 billion in imports from our sister country. However, imports from the U.S. into Canada represent about 23 percent (plus or minus) of the total Canadian indoor furniture industry compared to Canadian imports into the U.S. at about 1.7 percent (Table C).
The furniture and bedding trade gap between the two countries has been narrowing, especially since the recovery began from the last recession. Although U.S. imports of indoor furniture and bedding from Canada have increased by 40 percent in the past seven years, exports are still 4 percent higher and have grown 13 percent from 2010 to 2017 (Table D).
Without a totally renegotiated new deal, about 30 percent of the $1.77 billion USD in indoor furniture and bedding exported by the U.S. to Canada last year would now be subjected to a 10 percent tariff. The two furniture areas targeted by the Canadians are upholstery and mattresses, as shown in Table E. Upholstery accounts for 22.3 percent of U.S. furniture exports, while mattresses account for 6.6 percent.
Last year, Canadian furniture retailers imported $396.3 USD million worth of upholstery from the U.S., which was up from $378.7 million in 2016. Since 2010 U.S. upholstery coming to Canada grew only 4.6 percent. The U.S. is the second largest importer of upholstery into Canada behind China, whose imports were valued at $692.0 million in 2017. Despite the smaller size of mattress exports to Canada, the amount has jumped 84 percent over seven years, increasing from $64.3 million in 2010 to $118.2 million in 2017 (Table F).
Many observers believe the big ticket categories chosen by Canada – upholstery, mattresses, refrigerators, dishwashers and washing machines – were strategically picked to pressure leading members of the U.S. Congress to negotiate what Canada thinks would fairly benefit both countries.
According to an article by Michael J. Knell, Home Goods Online, a Canadian market intelligence firm, “Upholstery is probably on the list because Ashley Furniture Industries is in Wisconsin, the state represented by Paul Ryan, the outgoing Speaker of the House of Representatives. While there is no specific data available, Ashley is believed to be one of the largest single exporters of upholstery in Canada, followed by La-Z-Boy, the publicly-held furniture maker with factories in five states including Missouri, Mississippi and N.C. It closed its only Canadian factory in 2005.”
Knell further indicates that “Mattresses are probably on the list because every TempurPedic mattress sold in North America is manufactured by Tempur Sealy International at their factory in Kentucky, the home state of Mitch McConnell, the majority leader of the U.S. Senate.”
As shown in Figure 1, of all upholstery and mattresses imported into Canada from all countries, the U.S. controls about 31.7 percent of upholstery imports and 51.5 percent of mattresses in Canadian dollars (2017). This data is from the Retail Council of Canada’s International Merchandise Trade Database.
Besides upholstery and mattresses, other home furnishings products are also facing 10 percent tariffs imposed by Canada, most notably major appliances. The U.S. controls about 41 percent of total household appliances imported into Canada, roughly $490.8 million Canadian dollars (Figure 2).
The Canadian tariffs on U.S. products are designed to counter the Trump Administration’s 25 percent steel and aluminum tariffs. While the 10 percent tariff response may seem positive for Canadian manufacturers, according to a report by the Retail Council of Canada (RCC), Canadian consumers are facing two negative impact areas – one direct and the other indirect. The RCC’s report states that “the most immediate direct effect of a tariff is an increase in price to the consumer. But the indirect cost of a tariff increase is often reduced consumer spending.”
The report further states that Canadian consumers will face a crisis of “substitutability” of some consumer goods. With upholstery and mattresses, the problem is that both China and Vietnam face a MFN (Most Favored Nation) tariff of 9.5 percent on furniture, so there is no relief found in shifting product orders away from a 10 percent tariff on U.S. imports to the 9.5 percent on Chinese or Vietnamese imports. The RCC said that while the Canadian furniture industry might be able to meet some of the need, increased demand and the lack of competing tariff-free alternatives is apt to lead to price increases from Canadian sources.
For big ticket items frequently purchased together, like major appliances, the 10 percent tariff could potentially deter purchases altogether. Also, there are no domestic sources of supply for appliances, so unlike most of the other goods, retailers would be wholly dependent on sources in Mexico and Asia. The RCC report goes on to point out that “with Mexico being the only plausible source of a tariff-free supply of major appliances, prices from that source will most likely increase”.
The Trump Administration is determined to “level the playing field” for U.S. manufacturer’s claiming the NAFTA agreement has been a bad deal for the U.S. But history has shown that trade wars tend to hurt consumers on both sides of the border. As the final renegotiation of the NAFTA agreement makes its way through Congress, trade between Canada and the U.S. will either be healthier for the two countries or will further sour relations.