From Home Furnishing Business
As can be seen from Graphic 1, with all the turmoil, the result was a dismal 1.8% down in the second quarter. However, with the conversion of the substantial backlog at the end of June, for some more than 30%, the industry soared in the third quarter to what we believe will be a growth of 10.1%. Unfortunately, this irrational exuberance will not continue and the industry will decline, we believe, to a 2.0% growth for the fourth quarter for the end of the year. After all the angst, a meager 3.7% growth year over year for 2021 and a slight rebound to 4.0% in 2020. What caused this irrational exuberance? Simply put, the consumers were encouraged to stay at home and not spend. And the nation sent significant stimulus in the form of checks and enhanced unemployment.
This created a major increase in DISPOSABLE INCOME never before experienced. Graphic 2 illustrates. But the party may be over. At this point, no more stimulus is forthcoming from the federal government. The job losses thought to be temporary now appear to be permanent with small business support (PPP Loans) seemingly exhausted. As with other downturns, now the best predictors will be CONSUMER CONFIDENCE and UNEMPLOYMENT.
Consumer confidence fell 40% from its near-term peak in 2018 with the corresponding decrease in furniture consumer spending. At this point, consumer confidence has not reached the level of the Great Recession; however, the consumer has not fully absorbed the impact of the job loss. Graphic 3 presents the trends.
What is real is the unemployment. In one short period of time, 30 million jobs were gone. While many believed it would be short term, it has seen a third of the loss return to work. However, each month another million jobs lost is added to the rolls. Graphic 4 illustrates. This time, furniture spending held back— there are many theories as to why, such as people being forced to “shelter in place” or work at home becoming a permanent condition. The future trends are not clear. The following sections present the analytics behind our forecasts. This forecast will be modified and adjusted as we move through the year. This is followed by the insight of three of the recognized experts in the industry.
With all of our perspective, we may find our way through the fog of the new normal.
Based on a FurnitureCore, Inc. Industry Model developed by Impact Consulting Services, parent company to Home Furnishings Business, the broad upholstery category has maintained its 34% of total furniture and bedding sales compared to the same quarter last year (Q2/2019). Manufacturers have certainly noted the sustained demand bolstered by the current reality of increased time at home and have weighed in on what consumers are searching for.
“Our collections are rooted in uncomplicated luxury, designed for spaces that are real, relaxed, and refined,” said Jay Peters, vice president of merchandising at Standard Furniture. “And, now more than ever, we find consumers are asking for easy, comfortable pieces that provide a sense of home, creating a space that the whole family can enjoy.” Suzanne Henson, vice president of merchandising and marketing at Craftmaster Furniture, expands on how home life has been impacted and how product demand has been reshaped, saying, “The COVID situation is definitely bringing a greater focus to life at home.
Along with a huge increase in overall demand, we’re seeing a few distinct trends emerging. First, the demand for fast delivery is so important. Because of the rising tide in business, retailers are having issues keeping stock on their floor, and manufacturers are scrambling to keep their delivery times from going out too far. So any product we can deliver quickly to a retailer is a hot commodity and means the retailer can keep their floors refreshed. Second, we see even more demand for customizable sectional groups. Consumers have fewer distractions right now and are able to spend some time creating custom pieces that work specifically for their room.” Again, a keystone to the success of this category— the sectional— is magnified.
“Nothing seems to be more compelling at retail right now than sectionals,” says Anthony A. Teague, senior vice president of sales and merchandising at Jackson Catnapper. “In stationary seating, sectionals represent four of our top six selling items and we wanted to translate that success to the motion category. We believe by using fabric combinations that are more commonly associated with stationary, we are bringing a new customer to the motion category and the proof has been evident in the numbers.”
Whether the consumer is looking for a stationary or motion solution for their new reality, a survey conducted by FurnitureCore helps define additional factors related to consumer purchases in the category. Shoppers were polled on their preferred style of upholstered furniture and found that a vast majority (56.25%) preferred traditional stylings. Second was contemporary at 28.13%, followed by rustic at 6.25%. Mission/shaker, cottage, and transitional tied with each at 3.13%. Additionally, the survey analyzed which look the consumer finds preferable in upholstered furniture. 59.38% favors plump, overstuffed deep seating while the remaining 40.63% prefer a sleek, tight body cover following the lines of furniture.
Most importantly as we face delays in today’s COVID-world, the survey polled consumers on how long they would be willing to wait for a custom order sofa. This survey pre-dates the pandemic, but may lend some insight into wait times for more standard SKUs as the industry gains momentum following mandatory shutdowns across the country and abroad. The survey found that most consumers (40.63%) are willing to wait two weeks to a month for a custom sofa, 15.63% are willing to wait 1-3 months, 6.25% are willing to wait 3-6 months, and 3.13% are able to wait more than 6 months. The remaining 34.38% are only willing to wait less than 2 weeks. The demand is there. The following products are sure to help uplift the consumer’s spirits and satisfy their need for a comfy family area.
U.S. furniture imports peaked at $31.8 billion wholesale in 2018 before dropping 6.1% to $29.9 billion in 2019. (Table A and B). Furniture imports have continued to fall from 2019 Q2 to 2020 Q2 – decreasing 13.6% from $14.9 billion to $12.9 billion and an additional 12.4% from the first quarter of 2020 to the second quarter.
Furniture exports have wavered over the past 6 years and were on the rise before declining 3.9% 2018 to 2019 from $3.6 billion $3.5 billion. Over the past year (2019Q2 to 2020Q2), U.S. furniture exports have plummeted 21.4%. And during the pandemic between Q1 and Q2 they fell 17.2%.
It wasn’t until the end of 2018 when the U.S. and China entered into the famous “Tariff Wars” that duties on imported furniture, bedding and other home furnishings goods to the U.S. totaled more than 1.1% of the import value. Since that time, duties have risen to 8.4% of the total import value with 90% of the revenue coming from China (Table C).
Traditional household and institutional furniture imports totaled $29.9 billion wholesale in 2019, down from $31.5 billion in 2018. Most imports of furniture products peaked in 2018 before the decline began in 2019, including upholstery, nonupholstered wood furniture, metal furniture, and mattresses (Table D).
As shown in Figure 1 and Table E, most furniture categories increased during 2017 and 2018 and once the tariffs hit, those numbers began to decline. With the introduction of bed in a box, Mattresses imports jumped dramatically in 2017, and this year 2019 Q2 to 2020 Q2 – increased 39% alongside decreases for all other categories. Once the pandemic arrived at the end of March, imports continued a downward trend from the first quarter this year to the second quarter with the exception of imports coded to all other “Household Furniture (except Wood and Metal)”.
The U.S. imported goods from 132 countries in the first half of 2020, totaling $12.9 billion dollars wholesale. This number is 13.6% less than 2019 Q2 YTD. In 2014 China exported over 5X the goods to the U.S. as Vietnam. That ratio has slowly closed over the last seven years to 1.9X the amount this year (2020 Q2 YTD). Shown in Figure 2 Chinese furniture imports dropped from $18.4 billion in 2018 to $14.2 billion in 2019. And this year from 2019 Q2 to 2020 Q2, the number decreased from $7.7 billion to $5.5 billion. On the flip side, imports from Vietnam increased from $4.3 billion in 2018 to $5.9 billion in 2019.
Vietnam was also the only country in the top 5% of U.S. importers to have positive growth between 2019 Q2 and 2020 Q2 – increasing from $2.6 billion to $3.0 billion. Although Chinese imports are down this year 2019 Q2 to 2020 Q2 YTD by 28.2%, as the pandemic took hold in the U.S., China’s growth jumped 11.2% between the first and second quarters (Figure 3). Meanwhile, imports from Vietnam, which had jumped 35.5% in 2019 and another 16.5% from 2019 Q2 to 2020 Q2, decreased 23.2% from 2020 Q1 to 2020 Q2. Furniture imports from Mexico have also increased steadily through 2019 before falling in 2020.
As a percent of total imports, China still leads the way at 47.6% in 2019 but that percentage has declined from 58% in 2014. In 2020 Q2 YTD, China accounted for 43% of total imports compared to Vietnam at 23.1%. Vietnam has also increased from 11.2% of total U.S. furniture imports in 2014 to 19.6% in 2019, while Mexico and Canada have both hovered around 5% (Figure 4).
As shown in Figure 5, Canada is the only major country importing significant amounts of U.S. furniture goods, with consistent annual imports around $1.7 billion. Over the past year (2019 Q2 to 2020 Q2), all the countries contributing over 1% to U.S. exports decreased, including Canada – down from $885 million to $736 million.
Canadian exports increased by 0.5% from 2018 to 2019, but then decreased by 16.8% from 2019 Q2 to 2020 Q2 and 10.7% from the first quarter of 2020 to the second quarter (Figure 6). This year Canada still represents over half of the U.S. export dollars (53.3%) – up from 50.6% in 2019. Mexico is the next highest contributor at 8% this year, followed by United Kingdom at 2% (Figure 7).
The U.S. has not had a positive foreign trade balance since the 1970s. In furniture, 2019 was the first year to show some improvement in foreign trade balance since 2009. The deficit fell from (-$28.2) billion to (-$26.4) billion in 2019 and has improved again this year (2020 Q2 YTD) despite falling exports. (Table F).
Of the 195 countries in which the U.S. conducted foreign trade, either exports or imports, the U.S. had a positive trade balance in 127 countries and a negative trade balance in 68. However, the major trading partners, China, Vietnam, and Mexico are still significantly upside down, with U.S. imports considerably larger than exports (Figure 8). The COVID-19 pandemic has definitely been disruptive to foreign trade, but if the virus can stabilize further worldwide in the months to come, the flow of international goods should improve slowly over time. Until then, supply chains to furniture stores and online retailers will continue to experience disruptions and the consumer will become more frustrated with wait times and smaller selections.
For most home furnishings retailers, the biggest issue during these last three months has not been getting people to purchase, but rather having product to deliver. Manufacturers and distributors are playing catch up to refill the pipelines and depleted store inventories. This will take time to rectify, creating a situation of “have and have nots” in most markets. The obvious winners appear to be those that have product. However, it seems to me that a high percentage of post lockdown customers are not interested in the commodity type items we normally stock, preferring instead to custom order what they really want, possibly mitigating the situation and closing the gap. This could be because they have had so much time at home to think about it, and with the help of the Internet and home renovation TV shows have already narrowed down what they want before going out to find it. This is just a guess, but it may have some merit.
One thing we do know for sure is that the customers we are seeing now are somewhat different than the ones we have seen in the past. They are highly motivated to solve their issues in the home and have had plenty of time to contemplate their purchase. Therefore, they arrive at our doorstep more ready, willing and able to buy than we have been used to. The bad—these hungry buyers will not be around forever We need to enjoy these motivated customers while we can and hopefully please them enough to make them lifelong clients, because at some point they will be gone. No one can tell when that will be, but we are going into our traditionally strong fall selling period and should do very well during the next couple of months.
Keep in mind that we could see a second wave of COVID-19 in the fall, which could cause a lockdown in some areas that will interrupt our recovery. If that happens, it may cause a recurrence of this phenomenon when it abates, but it seems unlikely that the impact on our traffic and business will be as dramatic as it was this time. The fear is that these post-lockdown customers will dry up at some point and our high close rates, bigger average sales, and in some cases, good traffic numbers will sink! We will then be back where we were before COVID-19 hit and that will be the new normal again. Not to be a doomsayer, but an even bigger fear is that it is quite possible that much of the good business we have enjoyed recently is actually future sales that we would have had a good chance of making in the first quarter of next year anyway. Obviously, that would make 2021 a struggle and further set back stores still trying to replace the business they lost during the second quarter of 2020.
Although not confirmed, I offer this thought as something we may need to be prepared to face when and if the time comes. The ugly—many of these new customers may not choose to buy from you As I am sure you have read in this publication and others, while most distribution channels have enjoyed some growth over the past few months, the share of sales each has received has been very uneven. Online retailers had tremendous increases from last year. Obviously, they had a big advantage over many brick and mortar stores since they did not have to close for several weeks and do not need face-to-face contact to make sales.
Given the captive audience the stay-at-home orders gave online retailers, that segments sales as a whole grew 78% in May, 76% in June, and then 55% in July over last year. Therefore, I would guess that their market share grew in most major categories. The biggest beneficiary of the uneven playing field in our industry appears to have been Wayfair which increased its second quarter sales 87% from $2.3 billion to $4.3 billion and actually made a profit. They also added almost five million new customers, which is more than they added the prior 12 months! Their challenge now is to keep them. In addition, many big box stores and larger multicategory retailers like Target, Big Lots and others, had two distinct advantages that helped them increase their normal share of volume even during the lockdowns.
They were open for those that wanted to shop, and they all have strong online businesses. Led by the furniture category, Big Lots had its largest year-over-year second quarter increase ever of 31.3%. The light at the end of the tunnel— small retailers fighting back As smaller stores opened, they began to claw back share and captured a high percentage of those customers that preferred to shop in-person, despite the pandemic. Indeed, the biggest advantage traditional furniture stores probably have is with the still large segment of the consuming public that wants to see, feel and touch home products before buying them. In addition, the ability to assist or even lead the search process by providing design and product guidance, could be their strongest selling point.
The need for face-toface interaction obviously worked against these retailers during the lockdown months, but the importance of their services is now overcoming many potential client’s fear of the coronavirus. While some have had strong traffic, many are seeing less people come in the door, but are doing so well with them on both close rate and average sale, that the result is record sales. Where do we go from here—things to consider doing as we move forward We are indeed moving into uncharted territory this fall and winter.
Normally we know what to expect based on our own history and experience. Obviously, we have not been through anything like the last six months before, nor have our customers, so we are all wondering what will happen next. With virus infections rising again in some areas we may see lockdowns return. The possibility of a reliable vaccine being available by the end of this year could be a game changer, if it actually happens. Throw in the volatility of this year’s presidential election plus the associated political tug of war, and predicting the future is more impossible than ever.
However, there are a few things we can do that would have a fairly solid chance of helping us get through it all, no matter what happens. Here are some ideas to consider: n If you don’t have a strong online selling effort in place, build one. You need it like your next breath! This should be the biggest take away from the pandemic. There is no excuse for not doing this and it could be the difference between survival and failure in the future. Also make sure that your website is equipped with features that can help you bridge the online-offline gap, such as product customization, 360-views, high quality zoom, alternate angles, room scenes, etc. n Re-double your online advertising and email efforts – reach out to your existing and potential new customers like never before.
We know your future clients are searching for you online more than ever – help them find you. n Maintain “cautious optimism” meaning prepare for the best but be ready for the worst. Be excited, be enthusiastic, but also beware.
- Try not to be overconfident because you are currently setting sales records. Once we get through this disaster, we will not necessarily be back to the pre-pandemic normal you remember. Furniture stores have lost a big piece of their market share in most markets and getting it back will require a huge effort. Be ready.
- Watch your financials and do not be fooled by great numbers in critical areas they may be temporary. Remember that customer deposits are not the same as cash, even though they may look like it on your books.
- Watch your staffing levels in the areas that touch the consumer – sales, customer service and delivery. Now is the time for you to capture new customers. We believe that most stores are operating with roughly 75% of their previous staff. It is not possible to spend the needed time with each customer if your floor is on overflow constantly. The biggest cause of lost revenue both now and in the future is not providing the experience your customer desires because salespeople are too busy. Do not allow your overworked staff to take customers for granted or back off of their follow-up and client development tasks.
- Build back your inventory but do not go overboard. Reloading your warehouse and rightsizing your stock will be a balancing act, but you must stay on top of it. n If you have not readdressed your home office effort, do it now. With so many working from home and deciding to make it permanent, this could be an area of opportunity for you. In addition, many children will be remote learning and home schooled, which will certainly create a need for many of your customers. Create a display with signage in your store and promote your store as the place to go for both home office and homeschool furniture.
- Take the virus with all its mandated and recommended precautionary recommendations seriously, because your potential customers will. Name or personalize your virus safety program and promote it in all your marketing. Think outside the box and go beyond what is normal by adding things like professional offices do such as, “call us from your car and we will come out to take your temperature and escort you to our clean, safe showroom for a personal tour and consultation.”
- Be ready for the bottom to fall out again for any number of reasons. You made it through this catastrophe, but you know there could be more to come. You should know how to prepare for it better now than you did before, so create a plan, just in case you need it.
Some retailers were not able to react to these extremes of having to embrace VIRTUAL SELLING with appointments to sidestep unclear orders to close non-essential retailing. Others faced specifi c orders to remain closed, while “big box” retailers remained open with essentials status, continuing to sell furniture. And of course, e-commerce continued to increase their sales by over 25% during this period of time. While furniture retailers enjoyed a sugar high in May and into June, the fact is that the retailers who seized the opportunity are back and close to even for the year. In other words, the rollercoaster car has returned to the top.
Now, as of this writing, the industry is waiting at the top of the rollercoaster. With the increased coronavirus infection rate, will we repeat the cycle and drop again? It is for certain that only the nimble will survive this unknown.
And what about the business model for furniture retailing? With the exception of limited digital, there has been litt le advertising dollars spent. Also, much of these sales have been accomplished with reduced staff . What are the new ratios to sell? This will be explored in our upcoming September/ October issue featuring Performance Metrics.
For more detail in consumer expenditure, see the Statistically Speaking article on page 46 in this issue.