Aces Of Clubs

March 14, 2007  by in UnCategorized   

By Home Furnishings Business in Advertising on March 2007 For furniture stores right now, one of great unanswered questions is just how much consumer spending is being lost to new rivals such as Costco, Target and TJ Maxx, all of which are dramatically expanding their home offerings.

Among analysts who track the sales figures, estimates on how much of the $83.1 billion industry furniture stores still control ranges widely from nearly 75 percent to 52 percent. What virtually all observers agree on is that furniture stores are steadily losing ground as Costco, Sam’s Club, Wal-Mart and Staples each have seen revenues in the category approach or exceed $1 billion annually.

Those trends are worrying, especially for smaller furniture stores, as the warehouse clubs and other multi-category retailers continue to add stores and increase space devoted to furniture. Even Kroger grocery stores are getting into the game by adding furniture departments to the chain’s new, large-format Kroger Marketplace stores.

“More Concerned About Direct Competitors”

With all those trends in mind, it’s surprising that many of the veteran furniture retailers interviewed for this story say they spend little time worrying about the $399 leather recliners and $469 name-brand mattresses on sale at warehouse clubs. “Companies like Costco and Wal-Mart are tremendous retailers, so you have to be aware of what they do, but (warehouse clubs) have not really had much an affect on us,” said Rooms To Go President and CEO Jeff Seaman. “We’re more concerned about the direct competitors we face in every one of the markets we’re in.”

Issaquah, Wash.-based Costco located one of its first stores near Lewiston, Idaho, more than 15 years ago. At Folletts Furniture, less than a half-mile from the warehouse club, General Manager Greg Follett judges Costco as his biggest rival in the small market. “There’s not a major furniture brand that is not represented in (Costco) anymore. It has affected (sales). It just flat-out has,” he said. “The only way to compete against those kind of (discounters) is to continually highlight what you do that they don’t. You have to be more specialized, focus more on special orders, have a larger selection and provide honest-to-God service.”

He said Folletts also tries to avoid brands or products that Costco carries. Folletts long ago dropped Sealy—which has a major presence in Costco stores. At the time, he said shoppers would stop in to ask Follett’s bedding sales associates questions about mattresses they’d been eying at Costco. A Sealy spokesman did not respond to questions from Home Furnishings Business.

Impulse Furniture Purchases

Britt Beemer, chairman of America’s Research Group, a market research firm specializing in furniture, said, “Furniture retailers don’t see that customer, because there’s no cross-shopping. Our research shows that only about 12 percent of consumers who bought furniture in a warehouse store also shopped at a traditional furniture store... It’s all impulse shopping. They’re spur-of-the-moment purchases, just like any of us who go into a warehouse club and end up buying lots of things we hadn’t planned on.”

An analysis by Retail Forward, Columbus, Ohio, last year found that warehouse clubs like Costco and Sam’s Club accounted for more than 8 percent of U.S. furniture sales in 2005—up from near zero in 1999. Meanwhile, furniture stores accounted for 52 percent total industry sales, a steep decline from just five years earlier when furniture store market share totaled 62 percent, according to the research and consulting firm. “I would not attribute all of the decline to warehouse clubs,” said Retail Forward Senior Consultant Nick McCoy. “What’s happening, in my opinion, is that large furniture (chains), discount stores and warehouse clubs are really hurting the small furniture stores. They’re the ones who are really struggling to compete.”

Retail Forward’s analysis of market share shows far greater gains by warehouse clubs and other non-traditional rivals than other industry researchers. For example, Mann, Armistead & Epperson cites U.S. Commerce Department figures in stating that furniture stores account for about 75 percent of all furniture sales, with warehouse clubs taking about 2.8 percent of the market.

More Billion-Dollar Players

McCoy said Retail Forward’s figures put a heavy emphasis on published estimates that furniture sales at Costco and Sam’s Club total nearly $1 billion each. In addition, Wal-Mart’s furniture departments are a $2 billion-a-year business, and office specialists like Office Depot and Staples are both nearing $1 billion in furniture. Added together, McCoy said, those mass merchants—plus department stores, catalogers and others—are taking a substantial share of the $83.1 billion consumers spend on furniture each year.

That impact is growing, especially in the warehouse club sector. Costco, with 48.5 million members in the U.S., expects to add 33 stores in 2007, and the 49-million-member Sam’s Club expects to add up to 30 locations in the coming year.

Analyst Jerry Epperson, Mann, Armistead & Epperson’s managing director, said the warehouse clubs often feature lower prices on some furniture products. “The last time we looked at it, they had add-on margins of about 18 percent to 20 percent, and the average furniture store (has) add-on margins of 41 percent. But, for the warehouse clubs, those (18 percent) margins are among the best of any category they sell.”

Still, he said traditional retailers have plenty of weapons against warehouse clubs that offer extremely limited selections, delivery options and little service.

At Breuners Arizona in Scottsdale, General Manager Tom Daley said warehouse clubs can be strong in select categories like leather upholstery, but added, “Overall, I don’t think (they are) a major factor against our business where we’re positioned... They’ll bring an item in and it will be there for six weeks or until they run out. There are not a lot of things they carry on a year-round basis.”

He said the Phoenix area is filled with discount-oriented furniture sellers, including Razzmatazz, which specializes in higher-end closeouts. “You always have to watch it. If there are products being offered at stores that don’t offer the service we do, we’ll avoid those lines and those products. With most of them, it’s all sales final, no service, but you have to justify to the customer why your price is higher. You can justify it, but I don’t know if the customer really cares at that point.”

Taking “Half A Loaf”

At Glendale, Calif.-based mattress specialist Sit ‘N Sleep, which has 16 locations, President Larry Miller said he has essentially blunted the impact of warehouse clubs with ads that promise to beat any competitor’s price. “We meet or beat their prices. So, we take a few short deals and we take that customer out of the market, but it’s better than losing a customer for life,” he said. “It’s better to have half a loaf than none.”

He said some customers will always gravitate to the discounters. “It’s really not an issue for us. We have 150 beds, and they have four. Some people are going to go to Sam’s or Costco, but that’s the commodotized part of the market. I don’t see it as a threat for the upper-end bedding at all.”

Beemer said warehouse clubs are being filled with more and more brand-name merchandise. In some cases, manufacturers need to find new outlets to replace retail accounts that have shifted to private-label goods. In addition, he said, “the manufacturers that sell to the warehouse clubs are not getting as much flak from furniture retailers as they did five years ago. They’ve just quit fighting it.”

Retail Forward’s McCoy said changing fashion tastes may also be boosting mass market stores. “Consumer preferences seem to be shifting more to stylish, less expensive furniture that can be replaced more often as tastes change and away from so-called heirloom furniture... I think some of the smaller furniture stores are kind of locked into a particular type of (traditional) product.” HFB