Drops in imports and exports began in 2019 partly as a result of “tariff wars” with China and declined further during the first half of 2020 due to pandemic shutdowns. Once factories reopened, a surge in demand overwhelmed an already stressed supply chain causing price hikes of imported goods, increased duties/tariffs and soaring freight costs. Pre-pandemic, many companies turned to manufacturing in Vietnam to combat China’s tariffs and that has only increased, despite Vietnam’s problems keeping factories open with employees fleeing to home villages. In 2021, high container costs and shipping delays have furniture companies looking closer at Mexico as a viable option in these uncertain times. This article updates article Statistically Speaking’s Sept/Oct 2020 Pandemic Slows Flow of International Goods.
After a rocky year, U.S. furniture imports finished 2020 at $30.7 billion wholesale – 3.1% up from 2019 (Tables A and B). At $26.8 billion in August 2021 and four months of data to go in the year, import dollars will far exceed 2020 and likely be much higher than peak imports of 2018. Both imports and exports plummeted in 2019, 6.1% and 3.9% respectively, with tariff wars raging. During 2020, exports tanked even further, dropping 10.9%. Although not up to pre-pandemic levels, U.S export dollars were $2.4 billion as of August—up 25.1% from $1.9 billion in August of 2020.
Cost to Import Goods
The customs value is the price of the imported goods and does not include additional duties and tariffs, nor insurance & freight. Historically the add-ons have been small compared to the customs value. In recent years, tariff wars have ushered in high duties from China and more recently the exorbitant freight costs. As shown in Table C, duties and tariffs shot up 124.7% in 2018 and 183.1% in 2019. Initially, customs value and insurance and freight dropped in 2019 and 2020. Now with such high demand and supply chain difficulties, freight charges are up 85.5% (2021 Aug YTD) and the total cost of imported goods has increased 38.3% from 2020.
In 2017, add-ons of duties and tariffs, as well as insurance and freight charges, totaled only 7.7% of the cost of importing. This year August year-to-date, the add-ons reached 16.1% (Table D).
Duties and tariffs are part of the total cost of goods, but levied based on the total general customs value and exclusive of freight and insurance. Duties and tariffs stayed steady at 1.1% of customs value from 2015 to 2017 before beginning the climb of 2.2% in 2018 and ultimately to 8.0% by August year-to-date (Table E).
Over 97% of the duties and tariffs the U.S. pays to other countries to import products is to China. This year, August year-to-date, China represents 36.1% of all U.S. imports, but 97.1% of all duties and tariffs the U.S. pays. China receives an additional 21.5% of its customs value in additional duties and tariffs (Figure 1).
In addition to high duties from China, freight costs have skyrocketed globally in 2021. As of October 7, 2021, inbound spot freight rates from Shanghai to Los Angeles were up 175% over last year and up 210% from Shanghai to New York. Outbound was not much better – up 155% from Los Angeles to Shanghai and 103% from New York to Rotterdam (Figure 2). While the pandemic has been the catalyst to the supply chain explosion, most economists agree the shipping industry has been running at full capacity with no margin for error for a long time. The well-publicized chaos in international shipping, a major contributor to higher prices and rising inflation, is predicted to last well into 2022.
Household Furniture Growth Exceeds Office and Institutional
All furniture industry imports – household, office and institutional – dropped in 2019. Then due to the post-COVIDshutdown surge in demand in the second half of 2020, imports began to increase again before exploding in 2021. U.S. imports of household furniture (excluding mattresses) was up 54.4% as of August year-to-date, followed by institutional furniture at 34.9% and office furniture at an 18.6% increase over 2020 (Table F). Among household furniture categories, the demand and value of upholstery skyrocketed in 2021 – up 77.2% in August year-todate. Nonupholstered wood furniture increased by 48.9%, followed by metal furniture at 41.9% and all other household furniture categories at 40.7% (Table G).
As shown in Table H, the product mix for imported household furniture has changed very little over the last five years. Upholstery stumbled during the pandemic but made up for it in 2021, accounting for 32.4% of imported household furniture by August. With the exception of mattresses, imports of all furniture categories increased from 2020 August YTD to 2021 Aug YTD (Figure 3).
Imports by Country
Of the 161 countries shipping household and institutional furniture to the U.S. this year, four countries control 76.9% of imports with China leading the pack at 38.7% in 2021 August yearto-date (Table I). As recently as 2018, China controlled 57.9% and the percentage has fallen each year. Noted previously, tariff wars beginning in 2019 spurred U.S. companies to move operations to Vietnam, which has grown from 13.6% of imports in 2018 to 28.6% this year despite the factory shutdowns that plagued the country during the summer and into the fall of this year.
As shown in Figures 4 and 5, Vietnam is seeing the highest growth from U.S. furniture imports at $7.7 billion this year through August — up 76.3% from the same period of 2020. In reaction to the exorbitant freight costs, more companies are turning to Mexico for their manufacturing needs. Proximity has become a huge appeal and being able to develop product from Mexico is an advantage during supply chain uncertainty. At $1.5 billion in U.S. furniture imports, Mexico is on track to exceed pre-pandemic levels and is up 46.4% over the first eight months of 2020.
Among major furniture categories, upholstery is the biggest contributor to Mexico’s jump in U.S. furniture imports, increasing by 114.7% over the past year. However, Vietnam still accounts for 43.8% of product category sales and is also up over 110%. Vietnam also accounts for the vast majority (50.2%) of nonupholstered wood household furniture. China still leads the way in metal, household furniture (except wood and metal), institutional furniture and office furniture (Figure 6).
While the shipping crisis is ongoing, product keeps flowing in. But many believe there is a reckoning coming, especially in the U.S. John Porcari, the port envoy to the Biden-Harris Administration Supply Chain Disruptions Task Force, is quoted as saying, “We’re living on our grandparents’ investments. As global commerce increased, as the e-commerce economy increased, we haven’t made infrastructure investments keep up.”
Merchandisers did not realize how much of their activities were a product of memory muscle. Markets in January, April, August and October preceded a review of product sales rate for the best sellers that were slow to change.
Now welcome to dynamic merchandising, where best sellers change monthly based upon supply and the concept of “nailing down the floor” is an objective not a cardinal rule. Now more than ever, there is a need for constantly updated analytics, given the increase in price of product and transportation. For the traditional retailers, the promotional price points have been all but eliminated. For the upholstery/stationary/sofa-love/ fabric category the percentage of units sold has declined 50% (21.6% - 10.49%). The graphic below presents Q1/Q2 2021.
Unfortunately, the value retailers (Home Depot, Target) have maintained this price point with ready-to-assembly. The current fluctuation in supply has caused a continuing change in top sellers. What was number 31 in the second quarter is now number one. Monitoring this fluctuation is critical. Trying not to let merchandising become “what you can get” from a well curated merchandise lineup is the challenge. Once you train yourself to this more dynamic process, there are benefits. But now the challenge.
From a quarterly perspective, the pandemic shutdown was just a “shutter” that impacted the end of March and April with a significant rebound in May and June.
Now this year, as we write, the industry has just completed quarter two with a mind blowing 35.6% in sales over the same quarter last year – scoring a 25.02% increase for the past 12 months (July 20 – June 21). Should we be optimistic or pessimistic?
While the industry will continue to grow, there will be the haves and have nots in the distribution channels. The first challenge that furniture retailers face is e-commerce. During the initial quarter of the pandemic and forced with mandatory shutdowns in many areas, brick and mortar sales declined. The focal point of this shift in market share is Wayfair increasing sales by 56% from $9 billion to $14 billion with repeat, continued orders, representing 76% of total volume. However, this volume is focused in the total home furnishings category, not just furniture and bedding.
While growth may continue, the consumer is being attracted to other distribution channels that offer different retail experiences and product value. The recipient of the growth is obviously e-commerce, but value retailers such as Big Lots and manufacturer verticals such as La-ZBoy, Ashley HomeStores, and Bassett can also control their supply channels. Graphic B presents the current estimate of distribution channels.
From a financial perspective, traditional furniture stores are in a significantly improved position. Traditional stores moved from a prepandemic breakeven point at 90% of current sales to 76% of current sales twelve months after the pandemic quarter. The specifics are presented in Figure 1. This cushion provides some assurances from a downturn.
However, while sales were up 24% for this composite group, sales for their market footprint were up 35.6%, resulting in a market share loss of 11.3 points. Therefore, a positive financial position could become significantly negative with a return to more historical consumer demand levels. Also, the contribution margin levels have increased significantly, driven by increased gross profits and a decrease in certain expenses such as advertising.
The industry has survived many downturns in the past 40 years. Whether it is inflation, a consumer confidence crisis, stock market crash or financial meltdown, we have persevered. However, with this crisis there has not been a downturn. Graphics C and D compare consumer price index (CPI) and consumer expenditure ($/Households).
But what if the consumer recognized the value of furniture and appreciated what a beautiful home added to their life? Graphic E presents the forecast.
Welcome to a $2 billion dollar industry. We can dream. And now to the forecast.
U.S. Economy Forecast to Proceed Cautiously with A Bit of Optimism
Much of Home Furnishings Business’ Economic Forecast hangs on containing the COVID-19 variants not just in the U.S., but internationally, where supply chain disruptions impact everything from consumer products to the construction industry. Figure 1 summarizes the forecast.
The Furniture Industry
This year’s growth in the furniture industry appears misleading on paper as it is compared to 2020 with partial shutdowns during the pandemic and a subsequent consumer spending spree on furniture, home furnishings and housing. When the dust settles, 2021 should finish 18.8% up and 2022 forecast at 5.9%.
By the end of 2022 the furniture and bedding industry should total over $160 billion.
Distribution Channels. The pandemic threw retail distribution channels into a tailspin with much of sales performance based on which retailers faced mandatory shutdowns. Figure 3 shows growth yearover-year 2019 through 2022 forecast, sorted by second quarter growth this year. Department stores suffered the most during the pandemic and subsequently in Q2 this year posted the highest gains. Furniture and home furnishing stores also performed well, with furniture stores gaining 67.7% compared to Q2 of 2020. Electronic shopping, one of several distribution channels that had to play by the fewest government rules, experienced growth early in the pandemic, with second quarter sales posting only 9.4% increases when compared against the same quarter of 2021. The dollar volume gained by electronic shopping internet companies is reflected in Figure 4 and shows that while growth has slowed in the second quarter, it will still well exceed 2020 numbers of $836.7 billion. Prime Furniture Buying Population.
Important to the furniture industry is the further decline in the 45 to 55 population, which historically spends the highest dollars per household. Despite their spending, in recent years these GenZs are one of the lowest cohorts in the furniture buying population. Recently released Census Bureau total population estimates show that from July 1, 2019 to July 1, 2020, the nation grew by just 0.35%. This is the lowest annual growth rate since at least 1900. The Census Bureau will revise its projections in the future (last projections by age in 2017) to reflect the effects of the pandemic. U.S. COVID-related deaths among people over 65 coupled with a low pregnancy rate and stymied immigration during the pandemic, put an asterisk next to population projections. According to the CDC, 40,000 fewer babies were born in the second half of 2020 than would normally occur.
For the furniture industry, the continued economic pressures on Millennials pouring into the 35 to 44 age group, further exacerbated by the pandemic, is of concern. Federal studentloan debt payments are set to resume this fall, coupled with possible higher interest rates. It matters less that a segment of the prime furniture buying population is increasing in numbers if financial woes constantly override the growth.
Meanwhile Baby Boomers continue to age out of the prime furniture buying population.
Gross Domestic Product (GDP). During the second quarter of 2020 GDP fell 31.2%, but quickly rebounded with 33.8% growth in the third quarter. Growth this year through the second quarter ranges from 6.3% to 6.5%.
This year GDP is expected to average around 6.5%, but slow significantly in 2022 to 3.3% according to the Federal Open Market Committee (FOMC). Payroll Employment. According to the Bureau of Labor Statistics (BLS), the substantial shock to the U.S. labor market caused by the pandemic has resulted in the BLS projections program designing two alternate scenarios to estimate some of the long-term structural labor market changes that could result from the pandemic. For now, payroll employment is expected to grow 3% in 2021 and slow to 2.2% growth in 2022.
Unemployment Rate. Economists differ significantly on the forecast for the unemployment rate, especially next year. Most see this year ending around 5.6% unemployment with 2022 falling to 4.5%.
Consumer Prices (Inflation).
Furniture prices began to increase starting in August 2020 after falling during the worst of the pandemic. In the second quarter prices took off increasing 8.3% but are expected to slow compared to the third and fourth quarters of last year. For the first half of this year, prices have increased 5.1% over 2020 and should finish the year at about a 7% growth. Given the continued supply chain disruptions for the furniture industry, 2022 furniture prices are forecast to grow another 5.5%.
Dow Jones Industrial Average.
The stock market ignored pandemic bad news in 2020 and ended the year at record highs. In the second quarter this year, the Dow Jones Industrial Average ended at 34,503 and most economists expect the trend to continue through the second half of this year and take off again in 2022. However, a Morgan Stanley report issued in August reiterated that, “amid hope and excitement that the pandemic might soon be behind, investors may actually find it tougher to generate the kind of stock market returns we saw last year in the midst of COVID-19.”
Gasoline Prices. While gasoline prices have increased to an average of $2.97 for a gallon of regular in the second quarter of this year. Prices are expected to moderate slightly in the second half of this year and again in 2022. For this year, a gallon of regular is forecast to average $2.82, or 37% above 2020.
America’s confidence level exceeded an index of 100 (1985=100) last March, the first time in a year, when the index grew to 109 (Source: Conference Board). Confidence steadily increased until this August, when it fell for the first time from 125.1 in July to 113.8 as the Delta variant became more widespread. Increased confidence depends in large part on how quickly the Delta variant is brought under control as well as how employment confidence grows as unemployment benefits and federal stimulus packages come to an end.
For the second quarter of this year, consumer confidence averaged 121.2, before declining in August. Prime Interest Rate. Despite economic uncertainty, most economists believe the prime rate will hold throughout 2021 at 3.25% before rising later in 2022 to 3.5%. Mortgage Interest Rates. Interest rates are expected to remain low for the remainder of the year before rising next year. The 30-Year rate is forecast to end 2021 at 3.1% and grow to 3.7% in 2022. The 5/1-Year Hybrid Adjustable rate should stay under 3% until next year.
The Housing Market Housing Sales.
Existing home sales took off in the first quarter of this year and increased 33% in Q2 compared to COVID-depressed sales in 2020. Meanwhile new home sales were strong during the 2020 pandemic and continued through the first quarter of this year. However, inventories were depleted in Q2 as new homes that would typically have started construction during the pandemic, slowed to a sales crawl of 2.8% growth. Home sales are expected to moderate the second half of this year. In 2022 existing home sales are forecast to be flat, and new construction should boost new home sales by 15.6%. Housing Starts. New construction jumped over 40% for both single and multi-family units in the second quarter of this year compared to 2020 when COVID disrupted the construction industry. Housing starts should remain level in number through the second half 2021 and increase in 2022 for single family units by 8.7% and decline for multi-family units by 3.6%. Housing Prices. The much-publicized increase in housing prices this year has stirred fears of another housing crash. However, according to a report issued by the Conference Board, US Housing: Boom- Bust Redux?, “Supply and demand factors—not speculation, predatory lending and/or bad underwriting practices—are at the root of the latest home price upswing.” This year existing home prices are forecast to be up 14.1% and new home prices 10.2%. Prices should level off to more normal growth in 2022.
Growth has continued in 2021 with upholstery sales up 8.5% from $13.09 billion in the first quarter to $14.20 billion in the second quarter. In a COVID 19 world, consumers are embracing the comforts of home like never before, leading manufacturers and retailers to find success incorporating style with comfort. “Comfort drives our business,” says Anthony Teague, senior vice president of sales and merchandising at Jackson Catnapper. “One of the most exciting new products to hit the streets for Catnapper in 2021 is the Angelo Power Headrest motion sofa. The features of the power recline and power headrest offer infinite positions for personalized comfort. The seating experience is highlighted by soft top grain Italian leather that envelopes the body everywhere it touches.”
Four Hands has also found success with comfortable, cozy pieces geared toward creating a space the whole family can enjoy. Regarding the company’s best-selling Chloe Media lounger, Director of Upholstery Jessica Green says, “This piece was made for connection and creating memories. It’s an intentional, purposeful shape with ample seating, layered toss pillows and exaggerated depth to support the full body, it’s ideal for cozy movie watching.” When consumers were polled during a FurnitureCore survey and asked which look they selected for their most recent upholstery furniture purchase, 56.79% selected plump, overstuffed sofas with deep seating compared to 43.21% who selected a sleek, tight body cover following the line of the furniture.
Now more than ever, consumers are seeking comfort in a variety of styles. Sleeker, more contemporary pieces are gaining in popularity while traditional styles still hold the majority of appeal. In a survey from FurnitureCore, shoppers were polled on their preferred style of upholstery and found that 44.17% preferred traditional. Second was contemporary at 32.74%, followed by country/rustic at 9.87%, transitional at 4.82%, cottage at 4.48%, and mission/shaker at 3.92%.
Upholstery demand partnered with ongoing delivery delays has caused frustration for everyone: consumers, manufacturers and retailers. A prepandemic survey asked how long customers were willing to wait for a custom order sofa. In what might seem laughable now, the survey found that a majority (40.13%) were willing to wait two weeks to a month, 38.23% were willing to wait one-to-three months, 9.64% were willing to wait three-to-six months, and 0.67% were able to wait more than six months. The remaining 11.32% were only willing to wait less than two weeks. With average wait times now over six months, customers have had to adjust their expectations. The good news for upholstery is that demand is not subsiding and many consumers are deciding that desired sofa, sectional, or chair is worth the wait.
When a large percent of a local population has similar high-risk factors, it puts an entire community unable to effectively or timely recover from a disaster. This information is extremely helpful to local, state, and national governments, in developing strategies to assist communities with recovery. It also brings into focus local retail businesses operating in higher risk communities and how they would react and survive after a tornado, flood, hurricane, or wildfire. Some businesses might struggle to keep the doors open, for example, a local dry cleaner, while other retail entities, like furniture stores and building material dealers, might tend to thrive. (See “Natural Disasters Often Stimulate Furniture Industry Sales”, page 53.)
If natural disasters are to become more frequent and more destructive, it should be time for retail businesses, like furniture stores, to develop business strategies to address the needs of a community following a disaster. In order words, figure out how to be one of the retailers that thrives. One thing is certain, both governments and businesses were caught off guard in the pandemic.
The Census Bureau Community Resilience Estimates (CRE) program has quantified individual and household risk factors as shown in Figure 1. This installment of Statistically Speaking dives into the CRE and looks at the range of resilience in communities throughout the United States based on the number of risk factors.