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From Home Furnishing Business

TAKE 5: BOB MARICICH

Having just steered International Market Centers through its second private equity transaction in six years, one could forgive CEO Bob Maricich if he wanted to kick back and spend more time at his vacation home in Montana.

But that’s not likely to happen. The 67-year-old Maricich says he isn’t planning to retire anytime soon, and said IMC’s recent sale to a pair of funds controlled by the private equity firm Blackstone presents significant growth opportunities that he and his management team are excited to pursue.

IMC, which was formed in 2011 when the World Market Center in Las Vegas and several major High Point showroom properties were placed under common ownership, now controls about two-thirds of High Point’s showroom space, including the sparkling new Christopher Guy showroom on South Hamilton Street.

And the World Market Center has been adding gift and home décor exhibitors at a furious pace after designating a large chunk of Building C for those vendors.

Maricich recently spoke with Larry Thomas, senior business editor of Home Furnishings Business, about IMC’s sale to Blackstone, the growth opportunities the deal presents, and its possible effect on the High Point and Las Vegas markets.

Home Furnishings Business: What changes can buyers and exhibitors expect to see under the new ownership?

Bob Maricich: It’s an extraordinarily positive development for the company and the industry. There’s no question that Blackstone is in the business to grow, and that growth could be in the form of buying something. It could be in the form of building new buildings. It could be in the form of broadening the furnishings and home categories that are in our markets. The total focus is really on improving and making more effective and efficient the buyers experiences. `

At the end of the day, the buyers really determine where market is and how long it is. Even though they don’t pay us anything, we need to treat them as a customer. And that customer focus is how do we improve that experience? Particularly in High Point, we’re looking at some of the things we can do in terms of physical improvements, beautification, and efficiency, so that buyers can be more productive. We’d love to figure out a way to have them stay longer and shop more, but they’re clearly telling us that their time and their money is valuable, and the effort needs to be on the efficiency of shopping.

On our executive team, everyone is a personal owner of the new company. And the quality of management was a significant reason for Blackstone buying the company. So everyone is staying on, and everyone is excited and motivated about the growth opportunities going forward.

HFB: Blackstone has said acquisitions are a possibility. Could these opportunities take the company outside the home furnishings and gift industries, or is there still room to grow in these core businesses?

Maricich: I think there’s a lot of room to grow in those core categories. The definition of home furnishings is broadening. Channels of distribution are broadening. That’s a great opportunity. Then there are the verticals, particularly in Las Vegas, related to gift. We’ve got a great start, but there’s great growth opportunity there. I hope that (the World Market Center) will be fully occupied by the end of next year or early 2019, and that will afford us an opportunity to build another building there.

Our main task is to put buyers and sellers together in the most cost-efficient way. So without a doubt, there are real opportunities to expand the experience with technology. We invested a lot of money researching that, and we’re looking for ways to create value in that regard.

And finally, even though our name is International Market Centers, we’re not a property owner outside the United States. That certainly creates an opportunity as well.

HFB: Unlike the furniture industry, there are several competing U.S. trade shows for gifts and home décor. What special challenges does that present?

Maricich: We’ve done extensive research that clearly shows that buyers and manufacturers want a major show in the eastern United States and a major show in the west. It’s economical. Two shows that are drawing international audiences are better than six or seven regional shows. We’ve got the only truly growing whole home market in North America. The buyers want it because, at a regional show, there’s not enough suppliers to do their shopping. We think we’re the natural home in the west for the gift and home décor industry. Atlanta clearly has carved out that space (in the east), but buyers west of the Mississippi clearly want to come to a western location.

HFB: How did Las Vegas become the premiere market for the bedding industry?

Maricich: I’d love to take credit for growing that (laughs), but that started long before IMC. The bedding people generally are far greater promoters than the furniture people, and part of that promotion is entertainment. They just embraced Las Vegas and everything Vegas has to offer.

Four or five companies now have significant market share, and when they moved there (to Vegas), all of a sudden all of the smaller companies and the e-tailers went there. Once you get a core of leaders, it solidifies the category. They’re able to spend a lot of promotional money to draw a national audience.

But the same dynamic applies to that industry as it does to the furniture industry and the gift industry. We need to take care of the buyers. We need to keep the buyers energized and make sure they’re productive.

HFB: It’s clear that fewer furniture buyers are coming to all markets today. How to you address that?

Maricich: This notion of being a whole home market is really valuable to buyers. There’s a real need for that effective, efficient shopping experience. When we ask buyers what categories they’ve purchased, it’s heavily weighted to those who are buying for multiple categories.

I think you’re seeing a lot of challenges for traditional furniture manufacturers with not only the generational change, but with the change in channels of distribution. What we’re seeing is an industry that’s growing at two or three percent, but that’s highly deceptive because you’ve got a part of the industry that’s growing rapidly, at 10 or 15 percent, and you’ve got part of the industry that’s flailing and going backwards. Just watch and see who’s expanding their showroom. There’s somebody who’s playing to win -- somebody who is spending money to make their showroom compelling and a destination. The day that people that can come to a High Point market, and open their door and expect customers to walk in, that’s well behind us.

HFB: In the wake of mass shooting in Las Vegas, have you made any changes to your security plan?

Maricich:  We’ve always been security conscious. But we’re going to do a better job of making them more visible, so people will see that there is a really significant security presence.

High Point is a very different challenge than Las Vegas because there are so many buildings and multiple points of entry. In Las Vegas, the last two markets, we have started registering people outside the courtyard and having a single point of entry. Now that we have that in place … we can beef up security to almost an airport level if we have to. We don’t think that’s necessary, but we have that flexibility.

HFB: In High Point, there’s a proposal to build a minor league baseball stadium, apartments, a hotel and other development just north of the downtown market district. Are you supportive of this effort?

Maricich: We are unequivocally supporting it. It’s a fantastic idea. I’m frankly troubled that there’s some hesitancy that seems to be coming from the county government. The wrong answer is to do nothing. Now, you have a ring of almost urban blight. It creates kind of a vacuum in downtown High Point, where there are no restaurants, no after-hours places, no dynamic of excitement, even during market. The stadium idea and the vision that (High Point University President) Nido Qubein has articulated is phenomenal. It will be a catalyst for more and more of the kind of growth that the downtown area needs…and that will be good for the market.

Editors Letter: DON’T THROW THAT AWAY!

Watching the news on the aftermath of the storms, with the mountains of household items, building materials, and worldly possessions, my frugal side kicked in. I don’t know, but if I was in the same situation, I would be concerned with salvaging furniture. However, some of the casegoods appeared to be of better quality. I mentioned this to a non-furniture industry person and this statement brings me back to reality, “Everything is made of particleboard and when it is wet, it is ruined.” I guess my vision of carefully constructed pieces is a part of history until I remember Stickley, Harden, and others.

With that thought, I went into the research to better understand why consumers made their last furniture purchase.  The graphic below presents the statistics from Impact Consulting Services, parent company of Home Furnishings Business, most recent consumer survey:

WHAT WAS THE PRIMARY REASON YOU DECIDED TO MAKE YOUR MOST RECENT FURNITURE PURCHASE?

Furniture Replacement has more than doubled, as the reason to purchase, in the past 15 years. Along with other consumer durables, the furniture industry has executed a product strategy, which assumes the consumer does not have an expectation of durability. Along with washers/dryers at 2-4 years and refrigerators at less than 10 years, we joined the disposable economy.

Without a doubt, the prices for furniture are stagnant, as can be seen from the Consumer Price Index (minus 2.3%), covered in the preceding forecasting articles.

The major question is, “Is that what a consumer wants?” Yes, the major appliance brands pursued the strategy using offshore contractor plants to produce their products at the lowest price.  The results, the premier brands – Viking, Wolf, Subzero – captured the quality position with higher prices.

Will our industry segment into two quality standards, one for the “curb” in two years and the other for a lifetime of enjoyment?  Let’s give the consumer a choice and not just believe they want cheap.

Cover Story: State Of The 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.

Statistically Speaking: Home Prices Outpacing Consumer’s Ability to Purchase

Table A shows the steady increase of both existing and new homes sales since the Great Recession. At a 98.5 index growth (2007 = 100), existing home sales continue to edge closer to pre-recession levels. Although still 21.8 percent shy of 2007 sales levels, new home sales have increased an average of 13 percent each year since 2011.

The National Association of Realtors projects the number of existing home sales will increase 2.6 percent this year and inventory tighten further in 2018 at 1.8 percent growth. (Figure 1)

Median Home Prices

The rapid rise of home prices shows no sign of slowing down (Table B). For existing home sales, prices have increased an annual average of 6.7 percent since 2011. The median price of existing homes at press time totaled $242,150 – up 11.8 percent from pre-recession prices. At year end, the National Association of Realtors (NAR) projected existing home prices will grow 5.2 percent this year compared to last then moderate slightly into the 3 to 4 percent growth range over the next two years (Figure 2).

New home prices have jumped by 28.7 percent since 2007 and have maintained an upward track post-recession (2011) – growing a yearly average of 5.8 percent and finishing the second quarter of 2017 with a median home price of $313,767 (Table B). Growth in the median price of new homes is expected to moderate in the last half of this year and the National Association of Realtors forecasts new home costs increasing over 3 percent next year (Figure 2).

As would be expected, regional variation in home prices are significant. As shown in Table C, at a median home price of $357,443 the West has the highest existing home sale prices. A lack of existing home inventory in the West is most likely causing prices to increase at such a high rate – up 22.5 percent from 2014 to 2017 Q2. The Northeast increased by 7.4 percent during the same time period, while existing home prices in the Midwest and South also showed great gains – growing 17.2 and 20.8 percent.

For new homes, the median price in the Northeast has skyrocketed up to $497,350 – a jump of 23.5 percent in 3.5 years. New home prices in the West actually declined by (-2.6) percent since 2014, while the Midwest increased 5.5 percent and the South by 8.6 percent.

Metropolitan cities, especially in California, are showing jaw-dropping price increases. Table D shows the top 10 most expensive cities to buy a home in 2017 Q2. The top 3 are California cities with San Jose-Sunnyvale-Santa Clara, CA topping out at $1,183,400.

The 10 metro cities increased an average of 7.7 percent in existing home sale prices over last year. Seattle-Tacoma-Bellevue, WA led the way in price hikes – jumping 13 percent from 2016 Q2.

On the flip side are the 10 metropolitan cities with the lowest median prices of existing homes this year (Table E). Youngstown-Warren-Boardman, OH-PA tops the list at a median price $87,000. A couple of these least expensive cities actually made big increases over last year – Decatur, IL is up 12.3 percent while Rockford, IL is up 12.4 percent.  

When the home building industry picked up after the Great Recession, so did the price of new homes. Before the recession in 2007, 64 percent of new homes sold for under $300,000. In 2009 at the bottom of the Recession, that number grew as high as 74 percent. Today only 45.7 percent of homes sell $300,000 and under. Since 2011, houses selling above $300,000 have steadily become the majority – up to 54.3 percent in 2017 YTD.

Median Income

Since the recession, median income has been unable to keep up with the escalation of home prices. Overall, median home prices have risen 28.1 percent from 2007 to 2016 – up to $313,700  (Table G). The growth of median income stalled with the recession and has slowly improved to $59,900 in 2016. According to ONS affordability data, median price paid for a home leapt 259 percent between 1997 and 2016, while earnings rose only 68 percent.

Housing Inventory

Along with rising home prices, low inventory has posed a problem for many home buyers wanting to upgrade housing or buy for the first time. Forecasters see little change on the horizon for existing home sales.  Although in a much higher price bracket, new home inventory has steadily increased over the last year – rising 16.5 percent from July 2016 to 276,000 homes in July 2017. In comparison, at a year-to-date inventory of 1.9 million homes, existing home inventory had a typical dip in the fall and winter but is still 9 percent lower from July 2016 to July 2017 (Table H).

Rental Prices and Vacancy Rates

 For many, home buying continues to be out of reach and with slower to grow rent prices, it is often the best option.

At a median monthly rental price of $1,414 in July 2017, rent has only increased by 2.1% since 2011 (Table J).

As shown in Table I, rental vacancy rates have dipped dramatically by 35 percent from 2009 to 2016. With an increase of 4.3 percent over the past year, the vacancy rate is at 7.2 year-to-date.

Housing Starts – Single and Family Units

The growth in new Single-Family unit housing starts will not let up anytime soon. Starts are projected to have double digit growth over the next two years.  However, Multi-Family unit housing starts (apartments) has fallen dramatically since the boom of 2014-2015 brought on by pent up demand and also the Millennials pouring into the rental market. Developers complain of long permitting and construction time spans also a lack of skilled workers. However, even though Multi-Family starts are projected to fall slightly next year, this reflects the apartment industry returning to a more realistic growth cycle (Figure 3). The challenge to growth in new home starts will be the affordability for first-time Millennial buyers, and current homeowners seeking to upgrade.

WHAT SELLS: UPHOLSTERY

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.

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