Monthly Issue
From Home Furnishing Business
October 26,
2017 by Jane Chero in Business Strategy, Economic News, Industry 
As an industry, we should be pleased that the home furnishings category, at retail, is out performing other retail sectors, as can be seen in the accompanying table.
TABLE C (REPEAT FROM FORECAST SECTION)
The furniture/bedding sector has steadily increased since the great recession and we estimate an industry volume of $103 billion for 2017, up 3.4% from the previous year. The graphic below illustrates our performance through the most recent quarter.
INDUSTRY SALES GRAPHIC
Unfortunately, this growth has not been shared with the traditional furniture stores, but instead has gone to home furnishings stores such as Bed, Bath & Beyond and Restoration Hardware or other alternative channels. The graphic below illustrates.
The fact is all retailing is facing challenges in the first half of 2017. A Credit Suisse report indicated 8,640 retailers will close doors, up 40% from 2008. The ripple effect of this will be, according to Credit Suisse, 275 malls will close within the next five years. All “brick and mortar” retailing is going through a transformation.
Contrary to popular belief, e-commerce alone is not causing this Armageddon. It is the changing consumers, not just the emerging millennials, but the downscaling baby boomers. The fact is the U.S. is over retailed. This so-called commercial real estate bubble goes back three decades. The major question is will the bubble cause another great recession like the housing bubble?
The furniture store share can be broken down by; regional chains, large independents (multi-markets within a state) and what we refer to as “mom and pops” (independents). The following table breaks down the growth by channel.
For the furniture industry, this abundance of commercial real estate has fueled the expansion of the regional chains. Attracted by low occupancy costs, stores such as HH Gregg have been retrofitted to furniture stores. Unlike other retail sectors, furniture retailers are not over-stored.
The major question is why all the interest in home furnishings? Simply put, it is our gross margin. Currently, gross margin is running at 48-49% for retailers over $10 million. This performance is accomplished in stores within a 50K – 60K footprint. This translates into an attractive gross margin per square foot of selling space at least to other retailers. The graphic below provides the monthly statistics.
The other major sea change is the collapse of the total channel, blurring the distinction between manufacturer and retailer. The objective is to capture more margin, while tailoring the purchasing experience for the consumer.
The graphic illustrates the transformation. Remember the gross margin percent for a retailer who produces or contracts the product itself captures an additional 20-30% million dollars.
For example, the varying gross margins by publicly held entities involved in the channel:
Obviously, what occurs below the gross margin line on the profit and loss statement involves the consumer experience. Matching what the consumer demands against the price the manufacturer or retailer is willing to charge is what is driving the proliferation of different ways to supply furniture to the consumer. The table below illustrates the give and take.
The only given is, a business entity must make a profit to survive long-term. The rocks are littered with bankruptcies which had a new idea. Several companies are getting closer to the shoals.
Moving forward to our forecast. Remembering other retailers or manufacturers strategies - good or bad - will impact you in the short term. It must always be a long-term strategy.
October 24,
2017 by Jane Chero in Business Strategy, Industry
Sam Moore’s Nadia
Customizable in any of the company’s 25 wood finishes and more than 450 fabrics, this exposed wood chair is a top seller due to its comfort, moderate scale and versatility. In addition to customizing the wood finish and inside fabric, the outside fabric can be contrasted for an additional fashion statement. Approximate retail price is $999.
No, it hasn’t seen a growth curve comparable to motion furniture in recent years, but the rapid development of customization programs by manufacturers large and small, coupled with significant improvements in styling and fabric selection, have enabled the stationary segment to keep a wide lead over its sister category.
A decade ago, performance fabrics had a microscopic market share, and waits of three to six months for a custom-order sofa were commonplace.
Today, it’s not unusual for an upholstery manufacturer to keep 1,000 fabrics in stock – including dozens of performance fabric options – and a custom-order sofa is out the door no more than 30 days after the factory gets the order.
And even for upholstery sources that don’t offer custom orders, they still have to ship product to their dealers faster than ever before because retailers often carry little or no inventory, and consumers follow the mantra of Queen’s 1989 hit, “I Want It All and I Want It Now.”
“Speed to market will always be a key factor,” said Michael Campbell, CEO of leather upholstery importer Leather Italia USA. “It also solidifies healthy relationships with retail sales professionals and staff, as they are comfortable in selling and promoting your line with the confidence they’ll receive (the product) in a timely fashion.”
Research by Impact Consulting Services, parent company of Home Furnishings Business, illustrates the consumer’s impatience. In a survey of recent fabric upholstery purchasers, only 2.6% said they were willing to wait three to six months for a custom order sofa, while 28.5% said they would wait one to three months.
A plurality (46.6%) said they were willing to wait two weeks to one month, and another 18.1% said they wouldn’t wait longer than one to two weeks.
Leather Italia, like many vendors who import upholstery from Asia, stocks best-sellers in U.S. warehouses. But even those who don’t have domestic warehousing are becoming more focused on getting product to their dealers quickly.
Jeff Katz, vice president of upholstery at Magnusson Home, said his company stocks about a dozen best-sellers in China, but can get still get the product to a retailer’s warehouse in 45 days or less.
“I try to put neutral fabrics on the frame, and then spice it up with pillows,” Katz said. “Then it’s very easy and inexpensive to change the décor of your room by changing pillows.”
From a styling standpoint, Katz said smaller scaled models – particularly 82- to 86-inch sofas – are among his hottest sellers, as is just about any frame with a curved or bowed front rail.
“People are living in smaller apartments, smaller houses and using them (sofas) in smaller rooms,” he said. “So the smaller scale, more contemporary styles are selling best.”
And while the Magnussen line doesn’t include any leather upholstery covers, textured fabrics are rapidly gaining in popularity, he explained.
“Performance fabrics are not real big for me, but anything that has texture in it is selling very well,” said Katz.
In the Impact Consulting survey, some 31% of recent fabric upholstery purchasers said contemporary was their preferred upholstery style, which was second only to traditional at 50.9%. No other style category was preferred by more than 7.8% of respondents.
And while 67.9% of respondents said they were either “satisfied” or “very satisfied” with their purchase, the survey made it clear that the vast majority of consumers don’t know the meaning of one of the most common marketing terms used in the upholstery business – 8-way hand tied.
When asked what the terms meant as it related to upholstered furniture, 65.5% admitted they didn’t know, and another 6.9% incorrectly said it was related to frame construction or cushion fill. Only 27.6% correctly said it was related to springs and support construction.
In a separate survey of recent purchasers of leather upholstery, 8-way hand tied didn’t fare much better. Some 60% said they didn’t know and only 31.1% gave the correct answer.
And the leather upholstery category’s most bandied term – bonded leather – also took a beating. Some 56.7% admitted they didn’t know the meaning of the term “bonded leather,” and another 16.7% incorrectly said the product is real leather that has been processed to improve its performance. Just 26.7% correctly said “bonded leather” means the product is not real leather.
“There remains confusion and misinterpretation in today’s market relative to bonded leather, leather-like articles and performance covers emulating a leather look,” said Leather Italia’s Campbell. “Many retailers are working very hard to transition back to an all-leather article and building that back into their culture.”
Campbell said he would like to see leather upholstery vendors and retailers put more emphasis on all-leather covers, which would help retail sales associates and consumers better understand the category.
“Understanding the benefits of an all-leather article is a must,” he said. “Marketing the all-leather category with an attractive presentation within a store is also necessary to add validity to the message.
In the survey of recent leather upholstery purchasers, 23.3% said they would be willing to pay an additional $200 for furniture that is 100% leather, and the same percentage said they would be willing to pay more than $200 extra.
Another 16.7% said they were willing to pay $150 more, while 13.3% said they would pay an additional $100.
A related question asked how much they would expect to pay “for a good quality leather sofa.” Fully 27.3% said more than $2,000, and 45.5% said $1,000 to $1,999. Only 18.2% said they expect to pay $600 to $999, while just 9.1% said less than $300.
October 24,
2017 by Jane Chero in Business Strategy, Industry
Since most markets are not growing much in size, the only way to increase business without expanding to another market, is to sell more within the existing market. We can accomplish this by selling more people in our current market, selling more to the people we already sell in the market or preferably doing both - thus gaining share. While most retailers think about this mainly in relation to the other furniture stores they see in their area, the reality is that much of their battle for market share is against distribution channels they don’t always consider in their analysis. In addition, the very nature of who we are and what distribution channel we belong to, also can make our job either easier or harder!
To put this in perspective, in 2015 there were 6,774 fewer furniture and home furnishings establishments in the U.S. than there were in 2009, roughly a 12.3% reduction. During the same period of time, the total (all channels) furniture and bedding industry sales grew from $74.17 to $93.39 billion, an increase of $18.83 billion or 25.4%. Given the reduction in retail locations and the healthy increase in volume, it would certainly indicate that the remaining furniture and home furnishings stores must have flourished, particularly since the industry grew another $3 billion in 2016.
Of course, we all know that it wasn’t quite that simple and while there was great growth for some, many others struggled just to maintain what they had. Let’s take a look at the share data from a sales performance trend standpoint so we have a better understanding of who the players really are and how we got here.
At their peak in the 60s, 70s and 80s these “traditional distribution channels” were so dominant that they accounted for as much as 95% of the furniture business in the USA. As the consumer revolution began to take hold in the 90s, the customer began to seek out other ways to buy our products and we saw the birth and eventually the dramatic growth of multiple new channels for them to choose from.
As the graph below shows, these new “alternative” distribution channels began to eat away at the market share of the original ones, to the point where they now account for just under 37% of the home furnishings sales. In other words, the traditional channels have lost over 60% of their share to the new comers. So, let’s take a look at them now. (Graphic 4)
Many of these “newcomers” were not actually new at all, having been around for many years. Their growth in the last couple of decades came for many different reasons. In some cases, existing alternative format retailers just began to put more emphasis on furniture. In other cases, more companies decided to jump onboard and do business in a retail format they had not done before. In addition, consumers changed how they wanted to buy and what they wanted to get from the relationship with their retailer of choice. This helped grow some existing retail formats and also drove the development of new ones.
Of the traditional channels, only the regional chains enjoyed growth over the last five years, while the independent channel gave up over 50% of its already shrinking share. Some of this loss was actually the result of some large independents becoming regional chains through expansion and others converting to manufacturing verticals. Department stores continued to struggle, losing about 10% of their piece of the pie. In fact, if you looked at the top 10 furniture and bedding retailers list from the 90s, most if not all of the companies on it would have been from the traditional channels. Today there are only two from those channels on the Top 10 list. That is a huge change.
As I have said before, data does not give you answers. It only helps you ask better questions. The main questions this data raises are centered on determining why the customer is choosing to take their business from one channel to another and what can you do to keep those customers and attract others?
As a sales coach, one of the things I find most interesting is how the consumer interacts with the retailer during their shopping/buying experience. If you think about it, the three channels that have gained the most share in the past two decades, Lifestyle Stores, Mass Merchants and the Internet, all have a significant difference from the other five channels – they don’t have sales people in a role like the others. Yes, recently Pottery Barn has added designers to most of their stores, but during their growth period they mainly provided clerks that had some product knowledge, but whose role was to help customers find things, not necessarily to sell them things. If you can find anyone to talk to at most Mass Merchants they have a similar clerk role, but normally with much less specific product knowledge. Of course, with the Internet the customer is for the most part on their own most of the time unless they request help.
The next fastest growing segment has been the Bedding Specialty stores. While they do have sales staff performing basically the same role as the traditional channels, they have been very successful in changing the consumer’s perception of that role. The very nature of being at a single category specialty store indicates that the staff are specialists in that area. Since getting a good night’s sleep is the main goal of a mattress purchase, having someone who they believe can help them do that is very important and these stores have done a good job of getting their customers to buy into that.
So what is the main take-away from this observation? As said in many previous articles, we are dealing with a much more educated and style-aware consumer now than we did before HGTV and the Internet. Because they are more aware and have taken the time to research their purchase, they are more confident in their ability to make a major decision for their home. Therefore, many do not feel that they need a sales person and perhaps they carry the same fears as previous generations about the quality of the help a traditional sales person will provide to them. So they shop at places that don’t make them deal with someone they don’t want involved in their shopping process, at least until they are ready.
This is certainly not the only reason that almost 50% share is going to these newer alternate channels. Price, convenience, selection and simplicity also play a major role. What I am saying is that if the customer felt they really needed a sales person, then that number would not be nearly as big. Of course, as we know, most customers actually DO need the assistance, either making the right product selection or putting the total room package together. The problem is they don’t believe that we can help them so they do not value the service we provide!
Therefore, the key thing we must do to be more successful with these potential customers is to help them understand all we can do for them to make the result of their efforts so much better. We are in an age of DIY and unless we can convince our audience that they will enjoy both the process and the result more if they let us partner with them, we will lose them to the newer, faster, simpler, cheaper, slicker and more “in” channels.
Product, selection and price are not the way to separate yourself from these “new competitors”. They can beat you with all of those. Make sure you use your website and marketing programs to drive the message of what you can do that they can’t. Sell your total package of benefits and the fact that you will be there after the sale to continue the relationship. Be part of your community and participate in as many local events and projects as you can. Be the answer to your market’s needs, not just someone that sells product within the market.
It is not going to be easy, but the enemies are at your gate. You need to know who they are and how to fight them or they will continue to steal market share from you!
October 23,
2017 by Jane Chero in Business Strategy, Industry
In 1965, recent college graduate Alex Sarratt and two fraternity brothers from the University of North Carolina set sail -- literally -- for Spain. They weren't quite sure what they would be doing when they got there, but they had a hunch that it would be a good place to start a business since the country had been opened to outside investment only six years earlier.
One of the three decided this Spanish adventure wasn't for him and returned to the U.S. about six weeks later. But by 1967, Sarratt and Walter Reid had formed a company called Sarreid and were exporting accessories and accent furniture to North America.
After a couple of lean years, the business took off. And the rest, as they say, is history.
Fifty years later, Sarratt is still a partner in Sarreid. He and Reid sold the company in 1985, but Sarratt teamed up with Charles Hoffman and Charles Mauze to buy it back in 1990. And the company's business remains healthy -- buoyed by a product line that includes a lot more than accent furniture.
Sarratt recently spoke with Larry Thomas, senior business editor of Home Furnishings Business, about the company's history and its future.
Home Furnishings Business: What made you decide to go to Spain to start your business?
Alex Sarratt: Rather than go to law school, which maybe all three of us would have done, we just had an inkling to go to Spain. And we had a friend whose father was in the freight leasing business. He said he would let us go to Spain on one of his freighters at no cost. So all three of us left from Richmond, Va. We had a car and a dog that we took with us.
When we went there, it was a second-world country. Spain hadn't been open to outside investment until 1959, so we were early arrivals to try to do business there. If we had gone to Italy, France or Germany, it would have been totally different.
HFB: What led you and Walter Reid to get into the furniture business?
Sarratt: I guess you could say it was fate that led us into the sourcing hand-crafted accessories and accent furniture. The giftware business was big then, but there really wasn't a commercial category for these types of larger items. We were young and wore sport coats and ties, and everybody thought we were Americans who had a lot of money.
HFB: What were the reasons for its early success?
Sarratt: We were doing things offshore with people who were artisans, which was a category you couldn't find in America. We were working with wood carvers, sculptors and painters. We were able to create a product that was not available in America. We went offshore not to save money, but to create a certain type of product.
An example of that would be in Spain or Italy, the craftsmen did a lot of carved religious figures and things like that. We were able to take those skills and have them make early American folk art. We started making objects like beautiful horses, and other animals that were all hand-carved and finished. I'm pretty sure we were the first to do that.
We went to Italy in 1970 and opened an office there. Italy and Spain were our resource countries until the early 80s. Then Italy and Spain applied for membership in the European Union in 1985. And one of the criteria was that wages had to rise until they equaled French and German wages. So that killed the export industry in about four or five years.
At that point, we went to Mexico, and we went to the Philippines. And then in 1990, we went to India and Hong Kong, where we could source product from (mainland) China.
HFB: So Sarried was one of the first furniture companies to source product from China?
Sarratt: Yes. Back in those days, we didn't have any competition from domestic companies. But when they all went offshore, we were basically just like them, even though we had more experience. But also, when the major manufacturers went to India, China and Vietnam, they brought expertise with them. And they brought suppliers of chemicals and wood finishes and kiln dried wood, and all the machinery that's needed to make fine furniture.
So by 2000, we were gearing up to be a furniture manufacturer. And now, we sell everything but bedroom. It's still hand crafted, still hand-made, still hand-finished. We're at the high end.
HFB: What are Sarried's strongest furniture categories today?
Sarratt: In furniture, it's coffee tables and dining tables. There's a lot of value in each, and they don't take up much freight. We make everything with KD legs in a very sophisticated assembly process, so they're strong.
I'd also say our leather upholstery is strong.
HFB: In 50 years, Sarried has weathered at least four recessions. What's your secret to success during these times?
Sarratt: There are times during recessions when you have to go into a survival mode. We have put money back into the company during those periods. The 1980 recession was pretty tough. The 1987 recession was really tough. The 2000 recession wasn't so bad, but certainly the 2008 -2009 Great Recession was the worst thing anybody had been through. Most people's business fell off by 50% overnight. In September 2008, people just stopped buying, and they didn't buy anything in 2009. And of course, a lot of stores went out of business -- big and little.
Since that time, stores have not chosen to stock. Resources like Sarried have to have the inventory. Somebody will buy one dining room set and put it on their floor, and they want us to ship when they sell one. It's almost like people who lived through the Great Depression in the 1930s. They can't forget what happened, and they're afraid it's going to happen again.
HFB: What's the biggest technological advance you've seen in recent years?
Sarratt: The advent of e-commerce was enhanced dramatically by the iPad, which is only five or six years old. Prior to that, the only way our industry could sell was through photographs that a sales rep had to carry. And we probably had 2,000 photos, and they weighed 120 pounds. (laughs). So a rep would have all these photos in his car, and he would have to select what he wanted to show a certain retailer.
Now on the iPad, it's all there and (the categories) are all divided electronically.
Plus, reps can now see the inventory, so they tend to sell things that are available. (The rep) wants to get paid a commission and a buyer doesn't want to purchase something he can't have right away. That has made things very, very efficient, and we can update things constantly.
HFB: Does Sarried do a lot of business through e-commerce today?
Sarratt: The majority of our sales are still from brick-and-mortar stores. The category that has grown more than any other is interior designers, because they become our best sales people. Our better dealers have interior design departments, too. But when you do business with an interior designer, you're placing furniture rather than waiting for somebody to come pick it out and take it home.
The population under 40 isn't used to shopping at a mall or in a store. If they want something, they look on their phone ... and they feel comfortable buying it that way.
The challenge for our dealers, of course, is to have an extremely good website. And whatever you did last month, you want to make sure it's improved a little bit this month.
But on the other hand, having customer service people in our office that can receive a phone call or an email or text, and take care of that customer is critical. That's no matter who is it. It can be the store that’s our customer or it can be the consumer. We have to take care of them, too. We can't say 'call your dealer.'
That has changed the whole dynamics of how you become a manufacturer and distributor of home furnishings.
September 4,
2017 by Jane Chero in Advertising, Business Strategy, Industry
It is accepted by all that 70-75% of all consumers visit the web before making the purchase with over half making the decision of who to shop on the web. Now is the time to accept the opportunity to impress the consumer is on your website.
The buzz in the market created by the social media vendors is to create traffic to your website. However, many retailers need to consider what the consumer will find when they get there. Remember, you never get a second chance to make a first impression.
Without a doubt, the challenges to keep product content current is there. Many vendors are attempting to solve this issue. Today, however, a simple smart phone picture uploaded is better than no image at all.
Your homepage is your front door. Are the product images new? Is the homepage cluttered by messages from all your vendors, as well as every department of your company?
While it is exciting to discuss virtual reality creating tools to allow consumers to visualize your furniture in their home, let’s get the basics done first.
The internet can be a great tool to communicate home furnishings to the consumer, but we must first make it work for us. Remember your first competitor is all of the other areas a consumers’ disposable income could go. As you can see, only 9.22% of consumer said furniture was the number 1: