From Home Furnishing Business
Well, it’s over. The store is still standing, and the consumer is ready to buy. Close rates are up more than 20% with less traffic, but an increased average ticket. However, there is not time to enjoy the rebound due to multiple hurdles in the way. First is product shortage, as manufacturers cope with their own unique challenges caused by the pandemic. Retailers are forced to commit to orders through the end of the year, introducing additional risk.
Personnel shortages are occurring with tenured, critical employees deciding it is time to retire. Many retail sales associates, already frustrated with product deliveries, are handling equally frustrated consumers and are leaving with the stress of added workloads. While there appears to be some reasons for hope in eliminating COVID-19, the remnants remain: “mask vs. no mask”, required vaccinations, and an endless series of new employee relations decisions. What lingers is the feeling that it could all happen again. Maybe PTSD does exist from the disruption caused by the pandemic.
While many checking accounts are bulging with customer deposits, the recently released stimulus checks can continue the demand for furniture. The positive forecast shown in Table A affirms the possible growth. Still there is trepidation and not wanting to return to the “cellar”.
However, traditional retailers soon realized it was not a level playing field. First, being designated as “non-essential retailers” forced many to resort to selling by appointment, essentially entering the store via the side door. At the same time, other furniture retailers that had appliances in their merchandise assortment continued with business as usual. Many retailers reacted by adding a few appliances to their mix to game the system and remain open.
Already carrying some furniture, mass merchants and home improvement stores expanded their assortment to meet significant demand from customers. After experiencing the gross margin potential, these retailers are now committed to the furniture category. A major question for traditional furniture retailers is, how were mass merchants and home furniture stores able to source products so easily?
Even before the pandemic, general merchandise stores such as Big Lots were venturing into furniture. Armed with the Broyhill brand, sales exploded up to a reported $400 million in the first year and forecasted to be a billion dollar contributor in the next few years. Based on the financials, Big Lots’ commitment to furniture will continue with other “value retailers” to follow.
And then there was e-commerce. While confined to the home, traditional retailers watched as delivery trucks went to neighbors to deliver that must-have new recliner. Without a doubt, the traditional furniture segment did not get their share of the home furnishings boom. In fact, many were lucky to reach 2019 levels. While written sales exploded, the lack of product resulted in significant backlogs. Graph B shows the comparison.
By year-end equilibrium appeared to be restored, but continued supply chain issues still plague the industry. The thought is whether all channels will be impacted the same.
Over the last several years, industry focus has been on the competition within the traditional furniture retail sector. While the threat of e-commerce has been recognized, the prevailing thought was the level of penetration would level off as did with the 1-800 retailers of the 1980s. Ultimately, the threat of retailers such as Blackwelders, Roses and others finally disappeared. Only Furnitureland South remains with a substantial regional presence, but it still has remnants of the 1-800 model.
The enforcement of sales tax laws and physical purchase presence dampened the growth. However, just as important in the decline was that local retailers recognized the retail experience delivered by the new model was what consumers wanted. Definitely there was a price differential, but to paraphrase one of those local retailers:
The imposition of sales taxes for e-tailers has slowed the growth of e-commerce. However, the consumer still wants the convenience of anytime shopping, the range of selection, and the availability to get knowledgeable assistance through chat features.
We cannot dismiss the digital challenges furniture and other consumer products must accept and join. Twenty years ago, e-commerce retailers were still in their infancy. In 1999, only one major consumer product, clothing (including footwear) posted over $1 billion dollars. By contrast, only $350 million was sold for furniture and home furnishings.
As with the death of the Great Recession, we can only surmise that the pandemic will cause a similar growth. The largest furniture e-tailer Wayfair posted revenue of $14.1 billion in 2020, up 55% from the previous year. More troubling is the jump of 34% in Wayfair’s customer base to 20.3 million. No longer can the industry say Wayfair is not profitable, as they now have a net income of $185 million.
However, it is not only the e-commerce distribution channel that is eroding the traditional furniture retail sector. In the 1970s, brick and mortar furniture stores controlled more than 70% of sales, sharing with department stores and mass merchants like Sears, JCPenney, and Montgomery Ward. These mass merchants have disappeared from furniture and department stores and are struggling to find their place in the product category. Furniture stores, those that derive at least 70% of their revenue from furniture and bedding now attract 42% of the consumer expenditures. Graph D presents the historical data.
We have estimated that e-commerce represents $84 billion, so where does the other $127 billion reside? The lifestyle stores with both Retail Verticals such as Restoration Hardware (RH) and Manufacturer Verticals such as Bassett are a significant presence, primarily in the upper/premium price points. This retail sector represents $8.7 billion in sales (Figure 1).
However, this sector has embraced the omnichannel experience with a balance between online and brick and mortar. Due to the pandemic many retailers in this sector were forced to close stores. The projection is that many of these stores will never reopen, accelerating the move to e-commerce. The vertical manufacturers are an important part of this retail sector with the largest participant being Ashley Furniture. The company just passed the 1,000 store marker and has estimated sales of $5.5 billion (Figure 2).
Emerging in this sector, are small startup manufacturers that are bypassing both brick and mortar and e-tailers by selling direct to the consumers. Attracting the attention of venture capitalists, these new industry participants could become the disruptors of the next decade. The traditional furniture stores represent over $110 billion in sales and are segmented into Regional Chains, retailers that have a presence in multiple states; Large Independents, retailers serving multiple markets in the same state; and finally, the Independents, retailers serving one or more markets but earning less than $50 million in sales. While these retailers still represent a significant portion of the traditional furniture stores, they are declining.
The regional chains have been in a growth mode for the last decade. For early regional chains: Havertys in the South, Raymour and Flanigan in the Northeast and Rooms To Go on the East Coast, expansion has slowed while others have picked up the pace. Fueled by real estate made available from the demise of some big box retailers, large independents have expanded. Regional chains control $ 17.1 billion of the total market and 43.2% of the furniture store sector. While significant, the regional coverage is short of national retailers. Out of all 404 markets (MSAs), only the promotional/middle retailers approach a third of the total markets (Figure 3).
There are some regional retailers content to remain within state boundaries. However, through expansion or acquisition many of these retailers will become regional chains in the near future. These retailers represent $3.7 billion of the total market (Figure 4). It should be noted a number of these large independents are in Florida. While a large state, many of the markets are getting very competitive.
While the pandemic put a halt on expansion plans, projects already underway continued and many traditional retailers expanded their footprint in 2019/2020 as Figure 5 quantifies. As expected, many of these expansions did not increase market share. How will 2021 translate into expansion among an abundance of retail space? Caution should be encouraged as all retail is exploring omnichannel distribution as a dominant expansion strategy. Furniture industry beware.
According to John Miranda, executive vice president at Jofran Inc., “As people are making the change to work from home and distance learning the demand for casual dining has increased. Families are looking for solutions to their newfound working and learning environment. By replacing their old tables with a larger one or something with built-in storage, it is allowing them to be more productive and efficient.” Other manufacturers agree. Cindy Shockey, Simply Amish furniture designer and sales representative says, “The demand for a more casual, yet highly practical, living space is on the rise as consumers want to truly live in and experience all parts of their home. Gone are the days of creating rooms that are too formal to be used or that are only used on special occasions. And yet, we want our spaces to feel unique and timeless. Practical and timeless do not have to mean that design or style take a back seat, quite the opposite.”
During the twentieth century, dining rooms became a part of the home where many Americans invested most of the decorating dollars - furnishing the room with chandeliers, large tables, and sideboards filled with expensive crystal, china, and silver. With the influx of open floor plans across the country, the defined dining room had all but disappeared. Now in the midst of COVID 19, the dining room’s appeal has reemerged as a place to both share meals and conduct daily life. And proof is the uptick in sales.
Versatility and variety is driving current bestsellers’ success. Don Montgomery, vice president of sales for Emerald Home Furnishings says, “Our best-selling table options in both size and application answer the basic questions for every consumer looking to update their dining area….will it fit where I want to use it? Soft finishes complimented by rich, dark tones addresses the second question…is it the right color? And finally, once in the home, our product establishes the buyer as a discerning shopper who appreciates a quality product.”
According to a FurnitureCore, Inc. industry model developed by Impact Consulting Services, parent company to Home Furnishings Business, dining room industry sales have jumped from $11.5 million in 2019 to $12.5 Million in 2020 — an increase of 9.2% and $46.2 million above the total 8.8% furniture growth for the entire industry. While dining room furniture sales growth was stagnant in the second quarter of 2020, due to stay-at-home orders and buyer uncertainty, sales rebounded by 16.6% in the third quarter and 12.8% in the final quarter of last year. Expect this category to continue to evolve as consumers look to create more functional space within every room.
However, it was not until around 2005 when online shopping kicked into high gear only to get stymied by the Great Recession. It was five more years in 2010 when e-commerce retailers, identified as those whose primary business activity is in furniture and home furnishings, really took off. But even then, it took until 2014 for brick-and-mortar furniture stores to fully realize how rapidly they were losing ground. At that same time, Wayfair, with its subsidiaries, went public and other furniture and home furnishings e-tailers began to flood the marketplace. E-commerce sales grew swiftly until last year when the pandemic accelerated growth even faster with online furniture and home furnishings sales reaching an estimated $97 billion in 2020 (Table A).
In this feature, we explore how e-commerce retailers with furniture and home furnishings as their primary business activity have impacted brick and mortar stores and how these traditional retailers are attempting to slowly catch up. Furniture and home furnishings retailers are now divided by the Census Bureau into three categories –
(1) Traditional brick and mortar stores, where e-commerce sales, if any, are fulfilled from within the store or a common distribution center,
(2) Omnichannel stores which are larger retail chains with separate brick and mortar and e-commerce operations, and
(3) Pure Play stores that are online retailers with no brick-and-mortar presence and who only operate online.
Note, that some Pure Play retailers are opening brick and mortar stores, primarily as clearance stores. Also note that the old mail-order category is becoming a grey area and is generally incorporated into e-commerce sales as most transactions are online.
As shown in Table B, e-commerce sales from omnichannel brick and mortar stores reached $14 billion in e-commerce furniture and home furnishings sales in 2020 – gaining a share of 7% of total furniture and home furnishings sales. However, the competition of Pure Play e-commerce now makes up 40% of the total industry with $84 billion in sales. While still the majority share at 52%, store front sales are quickly losing ground to online retailers. Store front sales (non e-commerce) had small but positive growth from 2017 through the first two months of 2020 before the pandemic resulted in a drop of 5.6% for the year (Table C).
After e-commerce sales increases above 20% in 2017 and 2018, traditional smaller brick and mortar retailers experienced a large downturn in sales in 2019 of 17.5% most likely the result of either retailers crossing over from traditional brick and mortar stores into the omnichannel or smaller traditional retailers unable to grow their online businesses. Omnichannel brick and mortar store sales catapulted 47.7% in 2020 after annual steady growth between 11% and 13% from 2017 to 2019. A few pure play retailers are sticking their toes in the omnichannel category, opening mostly brick and mortar clearance centers for now. Sales growth among pure play retailers has remained consistently high since 2017 with 2020 growth at 29.2%.
Over the last four years the gap has widened between pure play e-commerce sales and omnichannel brick and mortar sales among furniture and home furnishings stores (Table D). While store front sales are down from $111.4 billion in 2017 to $109.6 billion in 2020, pure play e-commerce sales have almost doubled – increasing by $40 billion.
Brick and mortar omnichannel retail sales have also almost doubled 2017 to 2020 to $13.9 billion. Pure play e-commerce retailers have grown from contributing 27.3% of total furniture and home furnishings sales in 2017 to 40.1% in 2020. While omnichannel retailers keep increasing their share of total sales – finishing 2020 at 6.6%, the growth from 2019 to 2020 was 1.7 percentage points compared to the pure play e-commerce category’s increase of 6.6% (Table E).
Looking only at e-commerce sales, when it is all said and done, omnichannel retailers have made little headway in cutting into the market share of the pure play furniture and home furnishings retailers. In 2017, omnichannel businesses controlled 13.7% of e-commerce sales and in 2020, 13.9% (Table F).
The internet’s impact on brick and mortar furniture and home furnishing store sales last year cannot be overstated. Wayfair alone acquired five million new customers in just three months, something that normally takes a year to achieve. Despite the pandemic and all its restrictions, Wayfair fulfilled nearly 19 million orders in the second quarter – a 106% increase from the same quarter a year ago. Brick and mortar companies that have successfully transitioned into omnichannel retailers with dedicated e-commerce business models have made progress in keeping up with pure play growth but have gained little market share away from them.
What is unclear in the data is how store front sales have grown within the omnichannel compared to their e-commerce activity. Many smaller traditional retailers are without resources to enter the e-commerce marketplace with any conviction and, in many cases, are facing dire circumstances just trying to keep the doors open.
Compounding these external factors is the recent performance of pollster’s success in forecasting what the consumer is thinking and what the consumer will do. That is enough to make one question the analytical approach.
However, both manufacturers and retailers must make decisions to move forward. Today, retailers must place orders for product delivery out 12+ weeks. Manufacturer's in turn are planning production often expanding capacity to meet this demand. While we are forecasting, we are like the chicken contributing eggs for the breakfast. Unlike the pig that contributes the bacon, it is not the same degree of commitment when no one shows up for the meal.
WHAT IS DRIVING THIS FORECAST?
THE DOMINANT FACTORS ARE: Personal Consumption Expenditures Furniture and Bedding. Despite the plunge in retail sales during retail shutdowns of many brick-andmortar stores in April/May, consumer spending on furniture and bedding flourished June through November. With additional stimulus money arriving in consumer bank accounts this winter, it is expected that the consumer will save a portion, but also spend. November 2020 year-to-date spending is up 8.1% over 2019.
Retail Sales (Online Shopping).
Non-store retailing and its subset, electronic shopping, were not subject to the government restrictions and gained tremendous market share throughout the pandemic. Even consumers not accustomed to online shipping embraced the experience, perhaps never to turn back. By November, non-store retailing grew 22.6% compared to 2019.
Retail Sales (Brick-and-Mortar Stores).
Furniture and home furnishings stores were hard hit during the pandemic but showed consistent and increased growth June to October. Based on preliminary retail sales data for the broad Furniture/Home Furnishings stores category, November slowed as consumer confidence fell. For the year, it is expected that furniture stores and also home furnishings store sales will be down 5% to 7% over 2019, quite an accomplishment given the obstacles.
Warehouse clubs and supercenters were allowed to remain open throughout the pandemic and were still showing good growth through the end of the year. The housing market suffered tremendously during March, April, and May, but perked up in June and has been going strong since. Housing starts, a predictor for 2021 are up 7.9%. November 2020 YTD and new home sales increased 19.1%. Existing home sales have driven home prices higher since July, with inventories low toward year's end.
Consumer Price Index. Prices for all consumer products nationwide were stable with 2020 November YTD growth up 1.2%. For furniture and bedding, prices fell through July, but have been working their way back. November YTD furniture and bedding prices were down only 0.1% Employment Situation. Perhaps the biggest unknown is if and how fast businesses will rebound from 2020. By November, there were over nine million fewer jobs than November 2019 and almost five million people considered unemployed. This does not count the discouraged workers who are no longer counted as part of the workforce looking for a job.
Consumer confidence was on the upswing in September and October (index over 101 each month) before falling to 92.9 in November. For the 11 months of 2020, the average confidence level was down over 30 index points, reflecting the strain of COVID-19.
Source: Impact Consulting Services' FruntiureCore.com industry model Note: Previous 2020 Q2 estiamte has been revised. *2020 Q4 throught 2021 Q4 is forecast Industry Growth Quarter Year Over Year Growth Over Same Quarter of Previous Year 2019 Q1 to 2020 Q3 with forecast 2020 Q4 to 2021 Q4 Furniture and Bedding The graphic above presents both historical and projected industry growth.