From Home Furnishing Business
The industry is toying with us, with both recent growth and extreme declines – 13.5% December to January. We need to recognize that what fueled our growth was not increased consumer demand for furniture but the supply chain disruption. The pandemic forced an increase in prices that the industry passed on to the consumer. As can been seen from Graphic 2, the industry and/or the consumer had not, in the past, valued our product as compared to other consumer products. The graphic compares the consumer price index for furniture indexes to all other consumer durable products:
Yes, the industry has grown in the past 50 years, increasing 47% ($81B - $119B). Prior to the pandemic, generating on average net operating income of 3-4% during that period. There are many reasons for this lack of growth including quality reduction, alternatives for discretionary spending, etc. The industry had, for the most part, a “drive to the bottom” strategy. Yes, there were moments such as the bedding sector’s introduction of premium bedding with foam construction as a selling point, however, the pandemic’s increase in unit prices drove the industry post-pandemic to 57.6% ($118B to $186B) in three years doubling the net operating income.
Yes, it has been a great period of growth in revenue and profitability, but we must not be deluded. It was not an increase in demand as can be seen from the national sample of store traffic shown in Graphic 3:
The main takeaway is that the average unit price will now decline as transportation cost normalizes as it is already doing, and gross margin objectives are revised downward. It is time to begin MARKETING.
Marketing is a combination of functions beginning with ADVERTISING and transitioning to RETAIL EXPERIENCE (Facility/Visual display), then embraced by SALES and concluded by LOGISTICS (Warehousing/Delivery). The starting point is product that must be correct in terms of quality, value and style. The featured content in our January/ February 2023 issue of Home Furnishing Business detailed the demands of merchandising.
As we begin to discuss marketing in the furniture industry, we need to recognize that the dynamics are controlled by the consumer.
For the traditional furniture retailer, the challenge is the transition from the Baby Boomers to the generation that followed. Generation X is becoming their prime consumer target. Graphic 5 illustrates the concentration of age/income sold and compares the number of consumers purchasing to the number of consumers households in the market:
To begin the marketing discussion, we must understand one fact, “It takes a village to sell furniture.” That means all stakeholders must participate; the manufacturers, the retailers supported by markets, buying groups and associations.
Marketing For Manufacturers
Many manufacturers have adopted the strategy of “build it and they will come,” with ‘it’ being the PRODUCT and ‘THEY’ referring to the retailer and consumer.
ADVERTISING to its primary customer (B2B), the retailer has been reduced to a market presence – High Point and Las Vegas. While an argument can be made that this portion of advertising doubles with the addition of Las Vegas, the question must be asked, “did it double the expense?” For many retailers, Las Vegas is an important market for bedding and an opportunity for key executives to visit with top management and to scout new vendors. The pandemic exposed some of the weakness of the market concept. However, the industry responded to the challenge by opening more with “every Tuesday” and virtual showrooms. While the lack of new product reduced the need for market, the challenge of finding any product available was a real need.
Actual advertising as defined by product catalogs with the 11x17 sales sheets had diminished as product sampling followed production offshore. The logistics of photography became too much of a challenge, however it did not eliminate the need for this material. Interestingly, retailers are creating their own photography studios utilizing various new products or constructing their own. Did the retailer just give up? From a cost perspective it would be more efficient for one entity to execute for many.
And then, there is B2B advertising in print magazines such as Home Furnishings Business, which have faced the same decline, as manufacturers relied on free ink instigated by public relation firms placing products couched as editorial.
Of course, many marketers believe digital is as effective as print to communicate to both retailers and consumers. However, we question this approach when product is involved. A lo-res image viewed in seconds cannot communicate the value or create excitement.
What about the manufacturer’s commitment to advertising to the consumer? Except for furniture manufacturers such as STRESSLESS and bedding manufacturers such as TEMPURSEALY, all have disappeared from television. However, the verticals such as BASSETT, ASHLEY, LA-Z-BOY, and ETHAN ALLEN are communicating their unique product to consumers to the benefit of their company owned stores as well as their dealers. In a recent consumer survey by FurnitureCore about the importance of brand, manufacturer’s reputation increased postpandemic to the number two spot to 21.36% when asked the following:
The question is what brand? When pressed further, the consumer recited the direct-to-consumer bedding brands such as Casper and Purple, but not the emerging furniture brands such as Maiden Home, Floyd, and Joybird. This should be a warning to traditional furniture manufacturers based on what has happened with the direct-to-consumer bedding brands that are taking 15-20% of the floor space of traditional retailers. The other challenge is the once established brands such as Broyhill, Lane and others being purchased and merchandised again at a lower quality and price to a deceived consumer. Witness the success of Big Lots with the Broyhill name prior to the United meltdown.
No matter the strength of the advertising message, a proactive SALES EFFORT must be mounted. It is the exception for a retailer to pursue the new product. With only about 30% of the dealer base attending market on average depending on the percentage of dealer base in the top 200, the sales reps must complete the task.
And what is the task? The United States is divided into 404 distinct markets (MSA) in which 91.2% of all furniture is sold. Graphic 8 presents the statistics. A major question for manufacturers is in how many of these markets do they have a presence? Interestingly, most manufacturers do not know. According to FurnitureCore’s database on average, a manufacturer has coverage of 70-75%. To maximize performance, total coverage is required. Obviously, the smaller the market size, the less coverage. This is the opportunity for a tag team approach utilizing an in-house representation with a field sales rep.
How many sales reps does a manufacturer need? It depends on the service levels required to maximize performance. Traditionally, sales representatives have been left alone to produce the results —after all they are paid on commission. Additionally, they are independent contractors and cannot, by law, be directed. However, that hands-off approach may not be correct for today. The first question is often the hardest to answer by marketing management. The service level indicated in Graphic 9 illustrates what we mean.
There can be a difference in philosophy in determining the criteria. For example, the best performing retailer above average market share may receive the most frequent visits, or the below average market share may receive more or a combination of both.
Once the criteria are set, typically, the result is there is not enough time. The answer is to change the service criteria or the dreaded solution, cut territories. While painful to execute, the result is increased sales and commissions:
The only measure of sales performance must be market share. Did the manufacturer get an increasing or decreasing share of what was sold in the territory? It is a difficult thing to measure with variance in the market being ± 20-30%.
Graphic 11 illustrates the most recent performance (Q4/2022) between the 404 markets. It illustrates the ineffectiveness of the question, how is business? Unless you are speaking with your competition.
Once the retailer is excited about the product and the sale is made, all that is left is to move the product to the retailer’s warehouse on a timely basis at an expected price. The pandemic has disrupted that step not only increasing prices but destroying dependability and increasing inventory levels.
This level of failure will ultimately lead to an industry discussion that has lingered for years. Should furniture be sold delivered or FOB the manufacturer’s plant.? Historically, there was some justification when the plant was in North Carolina, but now, when it is in China, should it be another discussion? During the pandemic container costs and on shore delivery soared to never anticipated levels. Transportation contracts were ignored as container company’s position was, “If you want it at that price, you will need to wait on it.” Would the manufacturer have a better negotiating position?
Marketing For Retailers
The memory muscle is beginning to kick in with the retail sector. For several years, advertising was not required. Advertising as a percentage of revenue declined during the pandemic year (2020) to 3.92% and only now has it begun to increase to the 5% level. As with merchandising that was discussed in a previous issue, the retailer is confronted with communicating with five different generations as illustrated in Graphic 13.
The first challenge for the industry is to influence the consumers choices for disposable income purchases. The pandemic shutdown allowed the home furnishing purchase to move up in priority to number two behind a car purchase. The objective would be to maintain that performance.
However, price will not do it, but the dream of a beautiful home will. Graphic 14 below presents the statistics.
The challenge is how to communicate to each of these divergent generations. While the Internet has emerged from the pandemic as the medium of choice, television remains a solid number two. The results of our recent consumer survey on furniture purchases are shown in Graphic 15.
It is certain that the Internet/social networks emerged as the number one method of communication with more than 50% of consumers selecting this as number one motivators. Only Baby Boomers were less at 34% remaining with television at 32%. Understanding how the retailer is positioned within the market against their competition with their target customers is critical. Graphic 16 presents the findings of a consumer survey (a retailer effectiveness study).
These four statistics measure a retailer’s performance: DID NOT CONSIDER – Effectiveness of Advertising
CONSIDERED NOT SHOP – Effectiveness of Message
SHOP BUT NOT BOUGHT – Merchandise Line-up
SHOP AND BOUGHT – Sales Management
Obviously, there is some overlap between the statistics.
Another interesting performance statistic from the study is:
HOW THE CONSUMER PERCEIVES YOUR STORE AGAINST YOUR COMPETITION. Graphic 17 lists the major purchase motivators and how each retailer is perceived. The cost per UP in 2022 has fluctuated around $20 comparable to the same number in 2019.
Once the consumer is motivated to visit the store, the next objective is to CONSUMMATE THE SALE. The pandemic introduced another dimension in the selling process, which was beginning the sale in the home. Using live chat or text or just the phone, the sales associate can finalize the sale or schedule an appointment. However, when the restraint of the pandemic subsided, the consumer continued using the web presence as the pathway to the purchase but visited the stores next. Many retailers have abandoned the proactive selling. However, those that did not, continued to reap the benefits while ecommerce sales to retailers with a brick-and-mortar presence have increased. Graphic 18 presents the statistics.
The sales volume generated by the individual retail sales associate (RSA) has skyrocketed with the increase in average ticket. Graphic 19 provides the current (2022) level.
As you can see what the dream was – a million-dollar writer is now commonplace to be replaced by a two- million-dollar objective. The increase in average unit dollar obviously disrupted the compensation of the typical RSA. However, with the stress of the pandemic most retailers did not address the issue and the RSA received the same bump in comparison as did the owners in net operating income. Graphic 20 summarizes:
As can be seen from the comparison of the two tables, 2019 to 2022, the RSA received more of a bump. As the unit sales price returns to a more normal level, the RSA compensation will or must come down, another challenge that the industry must face. This issue may be the death blow for the commission structure. The close rate while experiencing an increase during the “shut down” period and the rebound thereafter has returned to the upper 30%. Graphic 21 presents the monthly statistics from the geographically dispersed sample of a balanced group of retailers by volume.
Sales per square foot of selling space has increased to an average of $240 per square foot annually increasing driven by average unit selling price. Interestingly, the performance of retailers over $100M did not outperform the smaller retailer as much as pre-pandemic.
With the increasing occupancy cost and the availability of space, the trend is to smaller spaces. Havertys in Atlanta is opening express stores of 12,000 square feet.
Compared to pre-pandemic, the consumer is somewhat pleased with their shopping experience, as illustrated by Graphic 22.
We wanted to better understand the consumer’s perspective of the retail sales associate by asking the following question:
As can be seen, most consumers were more satisfied in each element of the selling process.
With the sale complete, the final step is DELIVERING THE PRODUCT. This is where traditional furniture retailers can shine when compared to the ecommerce competition. The opportunity to deliver an undamaged product is important to personnel that share the same values as the retailers they represent.
The cost of the total handling process at 7.48% of revenue offset by 2.91% from delivery income according to FurnitureCore — financial best practices for top quartile retailers— the cost as a percent of revenue has increased (7.05% - 7.48%) and delivery income has also increased (2.26% - 2.91%).
As would be expected with the supply chain disruption, retailers scrambled to find product — any product. Retailers ended the pandemic period over inventory as indicated by their inventory turn as of Q3/2022, shown in Graphic 24. While overall inventory turns declined 18% for all retailers, larger retailers declined 29% reflecting their ability to purchase and warehouse the product.
The pandemic disrupted the consumer’s buying habits and the supply chain disrupted the process of both manufacturers and retailers.
Unfortunately, when the dust has settled, traditional furniture retailers have lost as of 2022 3-5% of the total industry market share. To whom did we lose? Value retailers such as Big Lots, home improvement chains such as Home Depot and mass merchants. It is time to get our game on.
While dining room furniture sales growth was down in the first quarter of 2022, it rebounded in the second quarter and climbed steadily throughout the year, finishing with 6.6% growth in Q4 over the same period in 2021.
Today’s top-selling dining rooms offer versatility and functionality. Expandable tables, including those with hidden table leaves, are trending as are customizable design options that allow consumers to choose their favorite finish, table size, and seating styles.
At Bellini Modern Living, the Lago table is popular for its variety of options, says Frederik Winther, vice president of sales. “In just 200 square feet, dealers are able to offer their customers a visually stunning dining table that expands three sizes, with a choice of four Italian ceramic tops and a choice of three sculptural bases.” Consumers love the durability and easycare of the ceramic tops featuring realistic stone patterns, and the self-adjusting/selfleveling system that automatically lifts the extra leaves hidden beneath the tabletop into place, Winther explains. Jofran’s Telluride Collection is all about scale as the dining table can be expanded to accommodate large groups with two breadboard extensions. “At 127 inches long with a relaxed Driftwood finish, it really makes a statement in any home,” says John Miranda, executive vice president of Jofran. Telluride’s coordinating bench seat option is another popular feature. Combining natural beauty and craftsmanship, Greenington’s Erikka dining collection is turning heads. Its solid Amber bamboo construction delivers a sustainability story that resonates with consumers while its streamlined designs complement an array of home décor styles. “We are very excited about the solid performance of Erikka as it has earned a place in our top sellers,” says Troy Lerew, vice president of sales.
Solid-wood construction is a key selling feature for many manufacturers. “Our Fall River Collection has been one of our best sellers because it’s hard to beat beautiful solid wood,” says Julie Grant, owner and creative director of Porter Designs. “All our wood designs are solid, and this set matches an entire collection that spans occasional, accent pieces and bedroom.
We find that buyers start with a few pieces and end up with the entire collection.” The Ziglar table from Fusion Designs is also revered for its solid wood craftsmanship. “Ziglar is a best-seller because customers immediately see the value in its solid wood, mortise-and-tenon construction, and love the fact they can choose from more than 30 hand-wiped finishes to suit their personal style and still have their dining furniture delivered quickly,” says Norm Schrock, sales manager at Fusion Designs.
Updated traditional continue to be well-received, as illustrated by Klaussner’s Trisha Yearwood Hometown collection. “We’ve seen very good traction on the Pennamon double pedestal table, it’s a classic look that’s been updated with a relaxed plank top and beautiful espresso finish,” says Ben Radoll, vice president of casegoods and import upholstery at Klaussner.
When it comes to personalization, the options are nearly limitless. At Wildwood, the Athena round table is consistently a best seller in its select line of customfinished furniture, says Meg Gilliland, director of marketing. “Its classic shape fits in a variety of settings, and the ability to choose any shade from Benjamin Moore’s array of over 3,500 paint colors gives designers more control over their colorways.”
The Phillips Collection is another supplier finding success with custom design options, says vice president Jason Phillips. “Our live edge dining table continues to thrive for several reasons: It speaks to our company’s ethos of sustainability and environmental stewardship which our customers connect with; it’s stunning in appearance, exceptionally constructed, and each one is unique. We sell each table as a one-of-akind SKU and it has taken years to master the procurement, drying, photography and technology required to support this sort of business, and ultimately packaging and freight to our customer.” The company is thrilled with the number of reorders and the positive reactions from clients on these unique models, says Phillips.
The strategy of traditional furniture stores to market to homeowners has been attractive because, after all, homeowner households outnumber rental households by about 1.8X, not quite double, and that ratio hasn’t moved much in the last few years. However, during the pandemic and since, some of the reasons this ratio has stayed stagnant have started to change (see Figure 1. Apartments Begin to Have Greater Appeal).
It is estimated, based on housing units already started, that over 450,000 new apartments will be completed in the first three quarters of this year, more than 100,000 units than last year. This represents an increase of 30%+ over the first three quarters of last year. Meanwhile single-family housing starts slowed over the last months, and new homes scheduled to be finished in the first three quarters of this year are estimated to be 20% less than the same period last year (Figure 2).
The demographics, psychographics and economics of apartment living may all be aligning at just the right time with the builders starting to address the pent-up demand for apartments. Traditional furniture stores and other furniture retailers may want to take another look at the special furniture needs and style preferences of apartment renters and how best to market to them. The last installment of Statistically Speaking began a two-part series on the housing industry – homeowners and renters. This issue addresses the growth in apartment construction and the opportunities for furniture retailers to target marketing efforts to these young, mobile, renters.
Age and Income Demographics
In 2021 there were over 128.5 million occupied housing units, according to the U.S. Census Bureau’s American Housing Survey (AHS). (Note: The AHS is sponsored by the Department of Housing and Urban Development (HUD) and conducted every other odd year by the U.S. Census Bureau. The survey is the most comprehensive national housing survey in the United States.) Homeowners represented 64.2% of the total in 2021 and renter households 35.8%. This ratio has been relatively stable in recent years with the race to own a home during the low interest rates of the pandemic increasing homeownership slightly. Table A compares the number of occupied housing units 2017 to 2021. In the last two years, 2019 to 2021, renter households grew 3.0% in the two years and homeowners 3.8%.
More than any other demographic, low income limits the ability of a household to make a significant furniture purchase. Table B segments total households 2017 to 2021 into three income ranges: Under $30,000 (24.6% of households in 2021), $30,000 to $99,999 (45% in 2021), and $100,000 and over (30.4% in 2021). Together, the renters and owners share the lower income households under $30,000 households -- 53% renters and 47% owners. On the other end of the economic spectrum, homeowners account for 82% of the 38.2 million households with annual incomes $100,000 and over. Between the low end and the more affluent end lies the broad range of $30,000 to $99,999 households totaling 45% of all units, where growth in apartment living is thriving (Tables B). It should be noted that the $100,000 and over group has benefited from post-pandemic growth in incomes, with the other broad categories declining since 2017.
A significant portion of each tenure type, renter or owner, is comprised of households with total income less than $30,000. Research has shown these households not to be significant purchasers of furniture. Table C gives a picture of more detailed income ranges shown in millions of homeowners. Zeroing in on key apartment furniture purchasers, Table D details percent of renter households compared to owners since 2015, excluding households with income less than $30,000. The data shows that the percent of households in the two upper income groups, over $80,000 to $99,900 and $100,000 and over, have been growing for both owner and renter housing units. Adding the perspective of age, the largest segment of households continues to be the 55 to 64 group as Baby Boomers age out of this group (Table E). They are 25.6 million strong and controlled by homeowners, 74.1% owners to 25.9% renters. As would be expected, renters dominate the 25-to-34-year-old age group 60.4% to 39.6% and control a significant portion of the 35-to-44 year olds, 41% renters to 59% homeowners. According to the National Association of Realtors, in 2021 the typical age of a first-time homebuyer was 33 and last year rose to 36.
Mapping the income of households to their householder ages brings the opportunities for furniture marketing to apartment dwellers into focus. Figure 4 shows the ratio of renter households to owners, with the highlighted areas indicating primary furniture purchasing segments where renter households outnumber homeowners. Profiles that reflect more renters than owners include ages 25 to 44 with incomes $30,000 to $99,999 and ages 45 to 54 years with incomes $30,000 to $79,999. (Note: Households with annual income under $30,000 as well as all ages under 25 years are not included in this analysis as they are not considered significant purchasers of home furniture.) Renters outpace homeowners in four key age/income ranges (Figure 3):
This profiled age/income segments where renters began to outnumber and grow faster than owners began between 2013 and 2015 (Table F). But since that time, even with tight apartment inventories and a pandemic, the number of renters in these middle-income ranges out surpassed the number of owners, increasing in 2021 to 12.1 million housing units (renters) compared to 8.2 million owners.
The remaining demographic comparison relates to composition of renter versus owner households (Figure 5). Renter households tend to be a combination of single individuals, either living alone, 38.3% of renters versus 22.9% of owners, or single and living with other adults or children, 36% renters versus 18.2% owners. Married couples with or without children tend to be homeowners, 25.7% of renters compared to 58.9% of owners. Interestingly, the percentage of households with children tends to be similar among renters and owners, 29.5% of renters versus 29.2% of owners.
Marketing to Renters
According to the U.S. Census Bureau, the typical U.S. renter is 39 years old, has never been married, with at least 4-years of college education, and a median annual income of $42,500 (the national median annual income is $67,500). Within our profiled furniture-targeted renters (see Figure 2 profile), median household incomes are higher between $60,000 and $69,999, with many single, one-person households. Owners within this same profile show median household incomes of $80,000 to $89,999.
With renters significantly younger than owners within the same income groups (Figure 6), marketing requires a totally different approach, especially looking at the size and style requirements for smaller apartments versus larger homes.
The typical rental is a 2-bedroom apartment with 1.5 baths and an area between 1,000 and 1,999 square feet (500- 999 square feet for most recent renters) (Zillow).
Historically, monthly mortgage payments are higher than rents, but as demand has exceeded supply for apartments, that gap has narrowed. According to Business Insider, in 2022 the average mortgage payment nationwide was $2,064 on a 30-year fixed mortgage while average rent for a 2-bedroom apartment had grown to $2,048, a difference of only $12 (Rent.com). Comparing that same apartment rent to a 15-year fixed mortgage of $3,059 on average, the difference is more significant at $1,011 a month.
Another key element of marketing to renters is location. Numbers of renters versus home owners as well as age and income can vary significantly, depending on the market. Bear in mind that while home values have skyrocketed, so have rents. Realtor.com reports that New York, California and Massachusetts are the most expensive states in which to rent, and yet home prices are also much higher, making renting more attractive in some metro areas. They report the top 10 U.S. cities where the gap between rent and mortgage is most attractive for renters (Figure 7) with San Francisco, San Jose and New York city heading the list.
The metro areas where buying is cheaper than renting are scattered in the South and Midwest and include Pittsburgh, Birmingham, St. Louis, Cleveland, Baltimore, Louisville, Indianapolis, and Kansas City. The costs of renting vs. buying in these areas are less significant, between $12-522 a month, in favor of buying.
Build It and They Will Come
Once construction has begun, it takes on average 17+ months to complete an apartment building and eight months to build a house. Table G shows estimated completions over the first three quarters of this year. The market for apartment furniture in these new, often billed as luxury units, will respond.
And finally, when you couple increased apartment supply with continued growth in the population of 25- to 39-year-olds and 40- to 54-year-olds over the next 10 to 15 years (Table H), then the table is set for retailers to step up to address the demand for apartment furniture.
Over twenty years ago, with the demise of the national chains (Sears/Montgomery Wards/JC Penny) to be followed by the national furniture chains (Levitz/ Wicks/ Helig-Myers), the warning of “alternative distribution channels” became the caution. While many alternative channels have fallen by the wayside and new ones such as Wayfair in the eCommerce channels have emerged, the warnings were correct.
Traditional retailers whether independents, regional chains or manufacturing direct face significant competition in these alternative ways to buy furniture. In the disruption of the pandemic in Q1/2020 our sister company, FurnitureCore, registered a decline in market share of traditional retailers (independent and regional chains) due to the lockdowns in 2020.
The challenge is to recognize these SILENT COMPETITORS and decide, do we want to compete with some of these giants for the “trash furniture” or more specifically the $399 sofa that is missing from the assortment? It is the beginning of a new year and a new strategy.
Now, before we go too far, there is a need for people to live in a stylish home at an affordable price point. That is the major challenge. In today’s world of $1000 phones where does the beautiful room fit.
In a recent national consumer survey FURNITURE is faring well in position number two only behind cars compared to 2019 prior to the pandemic. The table below present the rankings. Maintaining that position of intent to purchase is the challenge in MERCHANDISING.
MERCHANDISING is the sum total required to create a product from design to manufacturing to transportation to marketing to the retail floor or website. Then the retailer moves forward creating the presentation along with the message that will be used in the marketing and down to the retail sales associate that communicates to the consumers. In summary, a product that excites the consumer at the price point. What is important to the consumer? In a recent national survey conducted by FurnitureCore, a sister company of Home Furnishings Business, consisting of consumers that had purchased furniture and when asked to rank the importance of certain features, QUALITY by far was number one in their minds. The table below shows the consumers’ ranking. When you made your most recent furniture purchase, the following are some features that may have brought that product to your attention. Rank these features in order from 1 to 7 of the importance of each with 1 being the most important feature, 2 being the second most important, etc. If you do not think a feature is important to you, please do not rank it.
When you made your most recent furniture purchase, the following are some features that may have brought that product to your attention. Rank these features in order from 1 to 7 of the importance of each with 1 being the most important feature, 2 being the second most important, etc. If you do not think a feature is important to you, please do not rank it.
Merchandising is a process not a flash of brilliance, nor is it a cold calculation of another point of gross margin. It is a creative process. In today’s diverse consumer base and competing needs for disposable income, there is a requirement for a more data driven approach. However, the numbers will never replace the creative input provided by the merchant. The following presents the elements in the process:
Reflecting back, when you questioned the MERCHANT, how he – yes typically a male and for the most part the owner of the store – made the decision on the product he purchased. The answer was the people that were his customers, specifically, “Well, Mrs. Jones, they are well off and Mrs. Smith is as well, but sort of frugal, and Mrs. Brown has great taste, but they struggle” … and so forth. He really knew his customers not the specific purchase but the lifestyles of people.
Manufacturers that were considered to be PROJECT MAVENS, typically the owners, cultivated relationships with these merchants and got specific input on what would sell. This input continued as recently as 20 years ago, but more organized with dealer counsels at Broyhill, Booker and others.
Today the industry has moved away for the most part from this collaboration as retailers have gotten larger and more diverse and manufacturers have expanded their product offerings. The challenge to avoid the impact of “fast furniture” is to restore the “human hands” in the process. We can not return to the small factory in the foothills and the predominant local mom and pop community store. However, we can use a more analytical approach to determining the product promised and the product offered to the consumer. It may not be as good as “Mom’s apple pie, but, “not bad.”
Let’s start with a 35,000-foot perspective. There are 131.21 million households in the United States from single homes to condos/cluster home to apartments. Living in these shelters are approximately 100M furniture purchasers annually segmented by age/income as shown below:
These households are the targets for furniture manufacturers and retailers. Each year approximately 75% of these household make a significant furniture purchase. As of October of this year, based upon a national survey of furniture purchasers conducted for Home Furnishing Business by FurnitureCore, 17.8% were engaged in the shopping process significantly up from 13.4% in 2019.
This consumer target at a national level is interesting but not actionable to either the retailer or manufacturers. First, if we drill down to a market (MSA) level, we find the demographics vary 200% in age and 400% in income. In other words we have young markets (Manhattan, KS) and old markets (The Villages - Florida) as well as affluent markets (East Stroudsburg, PA) and less affluent (San Rafael, CA). The tables below present some examples.
The merchant must go beyond sheer demographics to identify those “Mrs. Smith’s that have the income but are frugal” and the “Mrs. Brown’s that have the taste level but lack the means.”
This introduces lifestyle into the equation or physiographic clusters. When a typical furniture retailers customer base is analyzed, we find that they sell to everybody, but specific clusters emerge. The graphic to the right presents:
The “chic society” and “doing well” are the descriptions that replace the mental image of “Mrs. Smith” and “Mrs. Brown.” The starting point for understanding the retailers customer base is who you are selling. Now, availability of data allows the determination of the age/income of the “Head of Household” simply by use of the home address. The processing of your sales each quarter allows the definition of your customer base, and when compared to the households in your market footprint a concentration factor can be produced. The concentration factor is simply the probability that a person in this age/ income segment would be a customer. The graphic below illustrates the concentration of a traditional furniture retailer:
Obviously, this must be drilled down to the product level and for some the store level which introduces the possibility for tailoring the merchandising line-up for those customers within a defined perimeter. Today, the concept of a “destination” store has disappeared because consumers will not drive the distances to shop.
As can be seen from the graphic, the retailer sells to everyone, but 73% are their primary consumer (shaded brown). A retailer or manufacturer obviously wants to sell everyone but too broad of a selection results in a confused customer. The goal is for the consumer to comment, “this is my store, it knows what I want.”
As the United States has become more diverse and the Internet has exposed the consumer to a global lifestyle, along with the increase in the more visual social media platforms of Pinterest and Tik-Tok has stimulated the home furnishing consumer. As the styles evolved from traditional, manufacturers and retailers coined the term “transitional” contributing to a lack of clarity. Home Furnishing Business has found one of the better ways to communicate style is the use of a room scene along with a descriptor. The scenes to the right are the current descriptions:
In the recent consumer survey, TRADITIONAL, while still the largest descriptor (38.4%) continues to decline. When the consumer was asked their current decorating style, Cottage casual continued to increase. The graphic to the left presents the findings: But even more interesting is the increasing decline of the traditional style when the consumer was asked about their “dream” style. The statistics are shown below:
The pandemic and the disruption of the supply chain has played havoc with the industry’s price structure. Unit prices have increased resulting in record sales in the furniture sector and specifically furniture stores as can be seen in the graphic: While revenue has increased as the average ticket increased, unit sales did not. The net results are the shifting of price increments.
While revenue has increased as the average ticket increased, unit sales did not. The net results are the shifting of price increments.
The graphics below present the unit sales by price point for a STATIONARY/FABRIC/SOFA comparing 2019 Q1 – Q3 to 2022 Q1 – Q3.
As can be seen from the graphic, the promotional price points < $399 declined 11.3 % with the opening price points of upper $999 – 1099 increasing by 9.0%. Will the price points shift back to the promotional price points? Will the value merchants (Big Lots/American Freight) and Mass Merchants (Home Depot/Costco) capture that price point? Should we care? The cost to buy/sell/deliver a $399 sofa is the same as a $599 sofa. What does your consumer want? What can your retail sales associate sell?
CREATING THE TOTAL ROOM
One of the most important elements that differentiate furniture stores from mass merchants and value merchants is the retail sales associate. The opportunity to inspire the consumer to not just purchase a sofa, but to create a beautiful room is the traditional furniture retailers unique difference.
But first it requires some cooperation between the upholstery buyer and the occasional buyer. The questions of “what goes with what” is often forgotten. There is technology that analyzes words in product descriptions to suggest purchase combinations. However, the talent of the visual merchandisers working with the buyers to create looks to include upholstery/occasional/ accessories has improved the consumer’s experience and increased the average ticket at the same time.
The pandemic mentality of “can we deliver what we sell” has cut short the effort to add to the ticket. The graphic on the next page presents the industry statistics for attachment rates.
With the pandemic and the supply chain disruption came a significant increase in gross margin (48.71 – 51.93%). The table below presents the comparison.
GROSS MARGIN MAJOR PRODUCT
As is evident from the table, all product categories experienced increases especially outdoor driven by supply and demand as consumers moved outdoors for entertainment due to COVID.
The downside to this increase in gross profit was the increase in inventory. The measure of GMROI (Gross Margin Return On Investment) as shown below:
While overall, the measure fell slightly ($2.94 - $2.70) from pre-pandemic, the top retailers decreased substantially ($5.30 - $3.27). As can be seen from the graphic to the right for ALL RETAILERS the gross margin per square foot of selling space continues to increase driven by the larger retailers (red line):
MEASURING THE RESULTS
The final step in a more analytical approach to merchandising is to understand how effective the product line-up is in attracting those consumer segments that are part of the overall strategy. Again, a furniture retailer does not necessarily need to sell everyone. The very focused retail verticals such as Arhaus, La-Z-Boy, and Love Sac know their customers, a very focused target. Understand your targets as presented to the right. The approach to measuring the effectiveness is simply a more comprehensive “WAR ROOM” that is digital instead of the difficult to maintain wall of pictures with post-it notes. The same information is needed. Sales in dollars and units; Gross profit and average unit sales all in rank order. The table presents an actual example with some redaction illustrating top 10 performers. That could be expanded: the comparison of top sellers overall to top sellers by demographic segment, there is significant deviation in top sellers. A critical merchandising analysis of price point and style will give guidance to how to expand sales to this demographic segment.
While the knowledge of what is selling to who on the retailer’s floor is important input to the consumer preference, but this is after the fact. In the ideal world, sharing of this information with the manufacturer would be invaluable. Another approach would be for the manufacturer to solicit input from the consumer. While in person focus groups are ideal, the costs and logistics can present a challenge. However, the use of Internet focus groups can provide a broad sample of consumers on a timely basis. The use of digital model early in the project development process can avoid costly mistakes. The graphic on the next page illustrates the output. Merchandising has evolved from the intuitive perspective of the merchant. The challenge is to integrate a more analytical approach to deciding WHAT WILL SELL.