2023 by HFBusiness Staff in Business Strategy, Industry
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.
2023 by HFBusiness Staff in Business Strategy, Industry
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.
2023 by HFBusiness Staff in Business Strategy, Industry
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.