From Home Furnishing Business
As a magazine dedicated to helping our readers succeed by providing strategy for the furniture industry, literally everything we present deals with providing data, analysis, ideas and advice about surviving and prospering in our highly competitive marketplaces. To that end, last April we updated the numbers about the shifting market shares of the major distribution channels to indicate who is taking business and who is losing it.
Since then, Coach’s Corner defined the impact of these market changes on furniture stores and why this might be happening. Over the last few months we talked about what furniture stores might consider doing to stop the share erosion by getting more from the opportunities that they already had, which is the low hanging fruit so to speak. We also discussed how to fight back against some of the tactics that the fastest growing channel has used to scare consumers away from our stores and how to choose the right words to use with our staff and guests, in order to deliver the message that each one wants to hear.
All of these efforts are indeed focused on helping us deal with the various aspects of the war going on in our individual and collective competitive battlefields. There are daily scrimmages, monthly battles and endless minefields to get through in order to survive, let alone win the campaign. We must understand that some of it is out of our control, but a good deal of it is within our grasp. We just need to have the right focus and develop strategies aimed at the day-to-day battles we can win and not waste time on those where we cannot triumph. What I am talking about is concentrating on the one thing we can control and impact daily in our stores, “share of customers”, instead of worrying so much about “share of traffic”. Let’s put that in perspective.
We have been talking a lot about market share over the last few months, which is a very important thing to know, not as a single number, but as a quarterly trend. Where were you two years ago and what has happened each quarter since? Are you winning or losing your competitive battle for share of the business done in your market? Every business needs to determine and understand this critical number because it is indeed the only true indicator of how you are performing in your market war. However, to a large degree, market share is heavily influenced by share of traffic. The number of people in your market that decide to visit your store is the main driver of total volume. In fact, to a great extent, it has been the shifts in traffic that have caused the distribution channel share changes we have been discussing. To survive, you still must do all you can to drive people in your doors, but in most markets, traffic is going to be static or slightly down for most furniture stores.
Obviously, this is due to many factors including the share shifts we have previously discussed. But a main cause we don’t often think of is the impact of the pre-shopping today’s customers do on the Internet. We all understand that roughly 20% end up buying online and never enter a store, so that reduces traffic. However, an even bigger impact is caused by the fact that the research they are doing on the Internet is helping the consumer narrow down the stores they want to visit. Our surveys indicate that almost 80 percent of people that recently purchased furniture visited fewer than three stores, with 50 percent of the total going to two or less locations before buying. Before the Internet the average number of stores visited was around five. Do the math: 100 consumers in a market visiting five stores each, generates 500 Ups in that market. If they only visit two each, then only 200 UPS are created – in less than twenty years we have seen as much as a 50 percent decline in potential traffic due to fewer stores being shopped and internet sales. That is not going to change in the future.
Therefore, let’s go back to the basics like we did in November and December, but from a slightly different point of view. What do we need to focus on to drive performance improvement in our stores that will deliver a higher share of the most important asset every retailer has – their customers. Senior management’s primary focus must be on what happens with the ones that do end up visiting the store. So let’s discuss ways to better understand and improve our share of customers.
In order to have any hope of improving a performance, we first must to find a way to measure it. We believe that the best sales metric we have to measure share of customers is revenue per UPS, also referred to as performance index. This number provides a clear and concise picture of how the store and each individual performs with the opportunities we give them. Since revenue per UPS can also be calculated by multiplying Close Rate X Average Sale, it is truly capturing the two most important elements of our interaction with potential customers on the sales floor. It actually reports the ultimate sales contribution that results from staff interactions with each person. Simply put, the higher the number, the more share of customers is being achieved.
As with all prime indicators, revenue per UPS only helps us track what is happening, it does not give us any answers. Similar to GMROI, it points out where we may have issues, so we can ask better questions and know where we need to dig deeper to find answers. For them we need to look closely at the two major factors that determine share of customers - How many of the people we saw did we actually sell and how much did we sell each one - close rate and average sale. So here is a brief update on where we think these numbers should be going for furniture retailers in general.
Close Rate - Remember when someone enters your store they are not yet a customer, only a guest or visitor. They must buy something from you in order to become a customer of your store. So, the first thing we should focus on is closing rate. The good news is that these people who narrow down their store visits to two or less are much more likely to buy in one of those locations than those who shop more places. The raw odds of closing someone visiting five places, is one in five or 20 percent. If they only go to two, then the odds go up to 50 percent for those visitors. Therefore, since about half of our traffic now shops less than two retailers, our chances of selling those people should have greatly increased. We can calculate that if your close rate potential on those visiting more stores is say 20 percent and it is 50 percent for those seeing less than two, then your overall potential for the store is between 30 percent and 35 percent. Based on what we have been seeing over the last decade, this scenario holds true. Those stores that were previously closing in the low twenties are now climbing up into the low thirties and those that were doing in the mid-twenties are now achieving results at or above the mid-thirties. Our advice is to look at this number. If you have not seen it increase dramatically in the last few years, you need to take a hard look at your hiring, training and sales management programs, because you have lost share of customers by not achieving the potential increases others have enjoyed.
Average Sale – Once you know you are creating customers at an acceptable rate, you need to focus on how much you sell each one. Let us note that historically many have looked at this number as a reflection of share of customer and we can understand that since it does directly indicate how you did with those customers you created. As such, it is possibly a more critical number to your success or failure than close rate, but we cannot forget that first you must sell someone, before you can sell that person more.
Average sale is also a statistic that is heavily influenced by your store’s advertising, merchandising and selling strategy. Obviously stores that sell higher end goods should have a higher average sale than those selling more promotional price points, However, I have often seen stores that heavily promote financing on lower priced goods build higher tickets, rivaling those carrying better goods. In addition, those stores that have a well-managed and successful in-home program will always have higher average sales than those that don’t, no matter what price level they carry.
With that in mind, we have seen a great deal of change in this statistic over the past two decades. It shrank a bit during the down turn, but ever since the consumer came out of the recession, we have seen steady and, in some cases, rather dramatic growth in average sale at all levels. The consumer today wants what they want and seem more willing to pay for it than a few years ago. Those lines that have custom order capability and particularly those that can deliver product quickly are doing quite well. Many promotional companies have successfully added better goods to their assortment. Others have added options such as upgraded cushions and power or functional features that have raised price points. The growth in premium mattress and adjustable base sales has also contributed to this trend in many stores.
Therefore, similar to close rate, but to an even greater extent, if you have not seen a fairly dramatic increase in your average sale over the past few years, you are missing the boat and need to take a hard look at your advertising, merchandising and selling efforts, because you are not getting your fair share of the business that is available to you.
In summary, if you have not been moving these last two numbers higher over the past few years, chances are that you are losing your war for share of customer and market. Driving improvement in these metrics and as a result the all-important revenue per UPS figure, is the only way to combat against decreasing share of traffic and increase your share of customers.
But survey the extra-large kitchens, great rooms and even family rooms of many of today’s homes, and you’re likely to find a dining table and chairs. Granted, it’s probably used for a lot of other activities besides eating, but at meal time, the homework papers and craft projects disappear – only to be replaced by plates, cups and utensils.
So dining room furniture is anything but dead. Producers say the category is still very vibrant, but it clearly has taken a sharp turn away from formal.
“The floor plans in newer homes certainly are more open, so you’re dealing with a space that is being used differently,” said Neil MacKenzie, director of marketing at Universal Furniture. “We’re trying to meet that demand by having something that looks tasteful and elegant, but more functional in terms of everyday use.”
And from the perspective of MacKenzie and other executives, functional usually equals casual.
“We’re still seeing a lot of activity with larger table sizes, but with more casual finishes and a more contemporary, modern look,” he said.
Erin Sullivan, vice president of product development at Fine Furniture Design, said the dining table has become “the central command center of the home,” particularly those with open floor plans that combine kitchen, dining, living and entertainment spaces.
“Casual dining tables serve as more than just a spot for meals,” Sullivan said. “And because of their connection to other rooms, consumers need more choices when it comes to size, finish and fabric options.”
And dining room furniture producers clearly are taking a cue from their upholstery brethren when it comes to customization. And just like upholstery, customization is a rapidly growing segment of the category.
Bassett Furniture, in fact, has an entire factory in Martinsville, Va., devoted to its custom dining program, and even with upgrades that were completed about a year ago, the facility is still running at or above capacity. And Fine Furniture Design has worked with its factories in China to develop a program that offers 14 table base options, 36 finishes, more than 65 chair styles, and more than 200 fabric and leather covers.
“Consumers today want the ability to ‘make it their own’ and express their uniqueness through the products they purchase,” said Sullivan.
Another upholstery trend that has made its way to the dining room is performance fabrics. MacKenzie said Universal is seeing significant demand for such fabrics on dining chairs – largely because they have become more affordable as a dining room option, and it’s simply a common-sense choice. “It’s something livable, as opposed to something that’s lived around,” he said. “After all, when you eat, you’re probably going to spill something once in a while.”
But the open-concept floor plans in today’s homes hasn’t meant weaker demand for smaller sizes of dining tables. If anything, MacKenzie and Sullivan say it has given that niche a jolt because of the predominance of casual styles there.
“Smaller-scale round dining tables are casual in style and versatile in how they are used, whether it’s a casual card game or dinner for four in the family room,” Sullivan said. And in some cases, these tables find their way into a larger, open-concept kitchen, enabling the consumer to “create the dining experience that is just right for you,” she pointed out.
A survey of recent dining room furniture purchasers by Impact Consulting, parent company of Home Furnishings Business, showed that, to no one’s surprise, tables and chairs were the most common formal dining items purchased.
Tables were purchased by 63.89% of those surveyed, while chairs were acquired by 75%.
A buffet or sideboard was purchased by 30.56%, while a china cabinet was brought home by only 11.11%.
Other pieces were cited by 8.33% of buyers, and for Universal, MacKenzie said the company is seeing increases in multi-functional pieces such as bar carts, and bar storage units – often taking the place of a sideboard because of their increased functionality.
When asked the style of furniture in their formal dining room, traditional and country/European tied for the most responses at 22.22% each. Contemporary was next at 19.44%, followed by transitional at 16.67% and country/rustic at 11.11%.
The only other style mentioned was cottage, which was cited by 8.33%.
According to the survey, cherry, mahogany and oak are the clear leaders among the respondents’ preferred wood or finish. Mahogany led the way with 34.75%, cherry was cited by 33.05%, and oak was named by 22.03%
The only others mentioned were maple (6.78%) and pine (3.39%).
When asked how much they would expect to pay for a formal dining room set (table and six side chairs) today, 25% said it should be below $1,500. However, 55.56% said the price should be $1,500 to $3,999, and another 16.67% said they would expect to pay $4,000 to $11,999.
Only 2.77% said they would expect to pay more than $12,000.
Many of those cities and towns don’t have an Art Van store currently, but if CEO Kim Yost’s growth plan is carried out after he retires later this year, that will soon change. And in larger cities, it won’t be just one store. He wants enough stores to become the largest furniture and mattress retailer in that market.
“Our goal is to become number one in all the markets within that 600-mile radius,” he said.
The growth plan has gotten off to a flying start, as the retailer has grown from being present in 28 markets three years ago to 51 markets today. Much of the growth has come from opening new stores, but the acquisitions of Levin Furniture and Wolf Furniture last fall added the key markets of Pittsburgh, Cleveland, Baltimore and Washington, D.C. overnight.
Yost recently spoke with Larry Thomas, senior business editor of Home Furnishings Business, about the challenges of such a rapid expansion, the decision to keep the Levin and Wolf names, and Art Van’s expansion into several new product categories.
Home Furnishings Business: What are the major challenges faced by such a rapid expansion?
Kim Yost: One big challenge is finding the right locations. We’re looking for anywhere from 45,000 to 75,000 square feet. Rents have to be at certain targets to achieve our financial thresholds. We look at each city with the view of having enough stores to get to number one in market share. We will buy existing buildings, lease existing buildings or build from the ground up. But going forward, leases (will be the priority.) We’re looking at these Toys R Us stores, as an example, to see what’s available.
Another big challenge is building the team for growth. Art Van has several leadership and sales courses for our team to help that development. As you build the stores, you have to staff them with great talent. We’ve had the opportunity to send in some of the talent from our Michigan headquarters, but that can only take you so far. You’ve got to have great education, sales and leadership courses to transfer your skills and your culture to these markets. And that’s not easy.
The difficulty is transferring your culture from your base to new markets. Culture eats strategy for lunch. You’ve got to realize that each market will have a degree of uniqueness.
HFB: Why did you decide to keep the Levin and Wolf names instead of converting them to Art Van stores.
Yost: Both our new brands have 100 years in business in their respective markets. We conducted an extensive survey in all four markets (Pittsburgh, Cleveland, Baltimore and Washington, D.C.) and came to realize that, unaided, these two brands had equal awareness to what we had in Michigan with Art Van. This is huge. When you’ve been in business for 100 years, like Levin’s, and over 100 years like Wolf’s, you’ve got two- and three-generation purchasers. You don’t want to take that great brand equity and just disregard it.
We’re going to maintain as much of the brand’s strengths as we can, whether it’s people, unique products, services and culture. Our goal is not to assume that one size fits all. In this particular case, we call it the power of three. We believe that by taking the best from Levin’s and the best from Wolf’s – combined with the best from Art Van – and bringing their synergistic secret sauce, we can create this power of three, and maximize the performance of all three brands.
HFB: Going forward, what will be the mix of product exclusively designed for Art Van vs. manufacturer’s brands?
Yost: The majority of our product mix is targeted to be exclusively designed and produced by our current domestic and import providers. We like to work with our current providers and then work from their lines so that the majority of our assortments are exclusive. We can’t differentiate ourselves unless we have a high propensity of exclusively designed and produced merchandise for Art Van.
Here are three examples of private label programs that have been incredibly successful. The new Detroit Sofa line that we’ve developed as a private label is made domestically. We also have a private-label leather line called Roma. And we have an upholstery line that’s one of our strongest, called The Style Collection. That’s also made domestically by one of our current suppliers.
We also have found great success by partnering with national brands like La-Z-Boy and Natuzzi to represent the quality perception from our consumers. There are not a lot of furniture brands that have that great perception like La-Z-Boy and Natuzzi.
You have to have lots of secret sauce in your merchandise. You have to have a strong position of uniqueness. It gives you a really good position in the marketplace. If you’re in the middle of the road with your merchandise, you’ll get run over.
HFB: Is your e-commerce effort focused nationally or in local markets?
Yost: Although we can deliver white-glove to all 48 contiguous states, the vast majority of our online sales are where we have existing stores. We believe that’s driven by brand awareness, by having physical stores in high profile trade zones, by the concentration of our advertising, and by our ability to offer in-store pickup.
What we’re finding is that more and more online transactions are being consummated after the store visit. It’s a new phenomenon.
Let me give you an example. They come in. They look at a sofa. They narrow it down to two colors. And when they go home, they make a definite decision on one of those two colors, and they complete the sale online – as opposed to coming back to the store a second or third time.
HFB: Will Art Van’s product offerings expand to include non-durable categories?
Yost: In April, we are going to move down the path of changing our name from Art Van Furniture to Art Van Home. We are going to concentrate a big portion of our product growth and merchandising and marketing growth in a new division called Home.
We will be expanding our flooring galleries in all Art Van stores. We are in the early stages of doing window treatments. And we’re going to expand greatly the traditional home categories – lighting, wall art, tabletop, top of bed and gift. In addition, in our new Home division, we will be launching dinnerware, stemware and glassware relating to six style categories. Online, we will be looking to expand in all rooms and product categories that relate to the home, including storage for the garage, exercise and fitness equipment.
If you need it for your home, Art Van is going to carry it. It’s going to drive traffic – both online and in our stores -- and it’s going to raise the average ticket.
HFB: What was the thought process behind your decision to retire later this year?
Yost: The timing is right. The company is well positioned for growth with our partners at T.H. Lee and the power of three with our brands. The heavy lifting for this next stage of growth is behind us, and it could never be a better time to bring on a new leader with a new vision and new excitement for the next phase of growth. Change is good.
We feel incredibly confident that we’ve got terrific partners, we’ve got an amazing financial foothold, and we certainly have a strong plan for the future with our 600-mile radius and our goal to be number one in all the markets within that 600 miles.
This month our focus is on those individuals who will ultimately lead each of their respective companies into the future. The importance of these individuals to their companies cannot be overstated. At a time when significant challenges are occurring not only in furniture retailing, but also in all retailing, the future is top of mind. Specifically, is brick and mortar retailing destined to disappear to be replaced by ecommerce?
Without a doubt, e-commerce, led by Wayfair to be followed by Amazon, has taken 15-20% of furniture/bedding sales. Will these juggernauts be stopped as the 1-800 distribution channel was stopped forty years ago? These are the discussions many multi-generational retailers are having as the next generation plans their careers.
The analysis is straightforward. Can a world-class web presence, supported by a national marketing campaign and a white-glove transportation/warehousing system, deliver a consumer experience more economically than the traditional brick and mortar stores? To date Wayfair has failed to do so as their losses mount even with increased revenue. However, this year Wayfair is implementing a national delivery system that will cover a substantial part of the nation’s households. Retailers who cope daily with executing the “last mile” are skeptical. Even third party delivery services that specialize in the furniture industry anticipate the challenge of execution on a national basis. What are the financial numbers? We will address this in the upcoming September issue on Internet Strategy.
What about our secret weapon? As important as our future leaders are, there is another group of individuals that cannot be replaced by a world class web presence. They are the retail sales associates. How important is the $1M writer to the retailer? How important are those long-tenured individuals who year after year consistently achieve that level of performance? They are expensive, but they are worth it. Industry statistics indicate that sales associates and their managers absorb 9.2% of every sales dollar. While this seems like a significant amount, the sales generated make the business run.
One of the key differences between average performance and top quartile performance is the percentage of repeat business. That is the percentage of sales in a quarter that is from consumers who purchased in the last eight quarters. For the retailers who exceed 25% for this statistic, total financial performance increases by 50-75%. These are the consumers who consider the retailer as their furniture store. The front line for creating that relationship is the retail sales associate.
While we recognize their importance to the long term future of brick and mortar furniture stores, the challenge today is attracting and keeping this talent. Minimum wage will not bring them through door, but a career that delivers $60-75K will. Moving them through the process is the challenge. Retailers, such as City Furniture, are making that initial investment by recruiting at some of the best colleges for entry level associates beginning with an internship and moving into a full-time position. An example of this importance is shown in the following. One retailer nominated one of his long term sales associates for the Forty Under 40. The only problem was that she was a bit over 40. From this retailer’s perspective he stated the following:
“We have a sales woman who is 71 years old, but is very young at heart. She’s spunky, acts like she’s under 40, and is an exceptional salesperson and an outstanding employee. She writes over $1 million in sales consistently year after year.”
We understand his perspective.
The overall point is that nothing can replace the knowledgeable, caring attention that only people can provide to a consumer when making a purchase that will impact their quality of daily life.
So I say to digital retailing – bring it on!!!
Although Healthcare spending still leads the way, durable goods, including Furniture and Home Furnishings products, have steadily increased their share of post-recession consumer dollars since 2009. This is despite the fact that last year for the first time Americans spent more money on health care than the total amount spent on living in and taking care of their homes -- $2.95 trillion versus $2.91 trillion. Housing expenditures grew 4 percent last year and include rents, mortgage payments, utilities, housing maintenance, all household and outdoor furnishings, tools and equipment but excludes cell phone, internet, cable, and telephone services. Meanwhile, spending for heathcare grew 5.6 percent and includes all out-of-pocket costs for health insurance, physicians, hospitals, outpatient facilities, nursing homes, etc. as well as prescription and non prescription drugs and medical equipment.
After a gradual post-recession recovery, consumer spending continues to grow an average of 3.8 percent a year since 2009. According to the Bureau of Labor Statistics’ Personal Expenditures Survey, Consumer Spending by U.S. Households totaled $12.76 trillion last year – increasing 3.9 percent from 2015. At a seasonally adjusted annual rate, the first quarter of this year slowed 2.7 percent to $13.11 trillion. This article picks up from Statistically Speaking’s August 2015 article Where are Consumer’s Spending Their Money.
Growth of Durable Goods
Between 2000 and 2009, consumer expenditures for services surged as durable goods lost ground during the Great Recession. However, since the recession’s end in 2009, spending for durable goods has seen the largest increase with nondurables declining as a percent of total consumption. Durable goods now comprise 67.8 percent of consumer expenditures (2017 Q1 Annualized) compared to 63.9 percent in 2009 (Table A).
As shown in Table B, both durable goods and nondurable goods lost tremendous ground from 2000 to 2009 as spending on services skyrocketed by 53.2 percent while consumer spending on housing and healthcare services steadily increased. On a positive note, in the years following the recession (2009 to 2017Q1), durable goods have surged growing 40.6 percent compared to 27.8 percent for nondurables and 33.7 percent for services.
Top Consumer Spending
With healthcare last year finally exceeding total housing expenditures, including furnishings and maintenance, the trend is on track to continue this year. Total combined housing and home furnishings expenditures lost 1 point share of all spending since 2009, mainly through declining utility expenses and slow to recover rents early in the recovery. Home furnishings products have generally held consumer spending share with the exception appliances and televisions. Meanwhile healthcare has increased its share 1.5 points in the same time period – up to 22.5 percent of total spending the first quarter of this year. Total consumer dollars spent on housing and furnishings trailed closely at 21.6 percent in 2017 Q1. Meanwhile Americans are eating out more, with corresponding spending on food consumed at home declining. Table C compares the share of consumer spending 2009 to 2017 Q1 by various goods and services. Itemized categories exceed three percent of spending.
Rents and mortgage payments make up 73 percent of consumer spending on housing, while the biggest chunk of healthcare was paid to hospitals (7.9%) and outpatient services (7.8%). Actual medical health insurance totaled 1.3 percent of consumer spending.
Housing and Household Expenditures
Since the end of the 2009 Recession, household insurance has surged as the fasted growing housing expense – up 67.8 percent but tapering off over last year (Table D). Both furniture and home Furnishings have maintained a steady upward trajectory – averaging 3.5 percent and 3.7 growth each year, but still lag slightly behind overall consumer spending growth of 3.8 percent. Televisions and appliances have been outpaced by other household spending. Household utilities have stabilized with little increase.
As Americans are staying put longer, household maintenance spending has grown 29.2 percent over the last five years. Last year, rents and mortgages saw a high growth of 4.7 percent as supply tightened in many areas. Consumer spending slowed during the first quarter of this year in all household spending categories, except televisions/video and audio. Figure 1 itemizes the growth of the housing and home furnishings expenditures five years, one year and 2017 Q1.
Furniture and Home Furnishings Products
In this first quarter of this year at a seasonally adjusted annual rate, Consumer spending on furniture alone totaled $109.7 billion dollars. Major appliances is the second largest home furnishings spending category at $41.4 billion. (Table E).
Although window coverings is the smallest of the home furnishings categories, it has experienced the largest post-recession surge in consumer spending increasing 42.1 percent. Table F visually depicts the indexed growth of spending on the major home furnishings categories post-recession. Carpets and other floor coverings have surged since 2015 with a total 32.2 percent growth since 2009. Both furniture and home furnishings accessories also experienced over 30 percent growth post-recession at 31.8 and 31.7 percent growth respectively.
Looking at the five year, one year and 2017 Q1 growth (Figure 2), all home furnishings categories except televisions and major appliances, exceeded 20 percent five-year growth. Spending on televisions has been depressed with only 2.4 percent five-year growth, although sales picked up the first quarter of this year. Major appliances has also underperformed growing 11.3 percent in five years. Growth last year was under 1 percent last year and continues to decline in the first quarter.
If curious about the spending categories with the largest increases, Table G shows the biggest winners and losers 2015 to 2016. Spectator sports are at the top of the winner’s list at 10.9 percent growth, followed closely by hairdressing salons and personal grooming Establishments at 9.4 percent. Gasoline and other energy goods are the biggest losers in consumer spending posting a 10.3 percent decline with second place going to securities commissions falling 5.2 percent.