Casting A Long Shadow

November 30, 2007  by in UnCategorized   

By Home Furnishings Business in on December 2007 Sixteen years ago, political adviser James Carville helped then-candidate Bill Clinton capture the White House by focusing him on the year’s most important issue by constantly repeating the phrase, “It’s the economy, stupid.”

Today, with another Clinton on the campaign trail, it took little prompting for furniture retailers to repeat the same economic message when Home Furnishings Business asked about top concerns heading into an election year.

For our annual State of the Industry report, we asked store owners about rising prices in Asia. We asked about added fire regulations on upholstery. We asked about high-profile bankruptcies during 2007. We asked about growth in mattress-only stores, expansion of factory stores and even “reconstituted leather” sofas.

In response to almost every question, furniture retailers all offered essentially the same answer: “Lack of sales has got to be your No. 1 issue,” said Wogie Badcock, president of the National Home Furnishings Association. “I think everybody is in a hunker-down mode, watching expenses and trying to pull through,” said Badcock, a senior vice president with Badcock Home Furnishings, Mulberry, Fla., which has a network of more than 300 stores.

Survival Instinct

While other issues remain important, Badcock and other retailers said sales declines will almost always be what store operators remain focused on until negative trends turn upward.

Eliot Tatelman, president of Jordan’s Furniture, Avon, Mass., sounded pretty much the same theme, saying the main questions on the minds of most retailers entering 2008 are “What manufacturers are going to (still) be here?” and “What retailers are going to be here?”

With all that uncertainty, he said furniture retailers as a group have become almost solely focused on undercutting the prices of their closest competitors.

“As retailers, we carry wonderful products and we enhance people’s lives, but the only things we talk about and promote right now are price, price, price, price and how cheap you can be,” said Tatelman. “It’s no longer about service, style and all of those thing things, which is a real shame,” he said. “That’s not how I built my business or how I’d like to see the industry go, but, right now, I think the economy and competition is forcing that.”

Tatelman expects that retailers will return to promoting attributes other than price as the economy improves, but said the industry will lose some retailers before the housing market improves. Fears about the impact of the depressed real estate market were realized in November when New York-based Levitz Furniture filed Chapter 11 bankruptcy, saying its continuing losses left it unable to make timely and complete payments to some vendors. It was the third time Levitz had filed for bankruptcy over the past 10 years. In 2005, it emerged from bankruptcy after shutting 35 stores and received an infusion of cash from investors who included Prentice Capital Management and Great American Group. According to Levitz’s filing, investors have placed nearly $200 million with the 76-store chain that is now concentrated in the Northeast and the West Coast.

In its court filings, the company has indicated that options for Levitz include a possible sale.

Separating the Men from the Boys

In Denver, American Furniture Warehouse CEO Jake Jabs said flat sales will eventually benefit furniture stores that have weathered previous downturns. Colorado, which has seen more foreclosures than all but four states, is in a “recession,” Jabs said.

“What recessions do is separate the men from the boys,” particularly in furniture, he said. “The guys who have the values and can run a tight ship and do business in a slow period are the ones who are going to be here when the recession’s over.”

Jabs said he’s weathered at least five recessions, including a much worse one when an oil industry downturn during the early 80s prompted many homeowners to flee the state.

“If you don’t have any debt, you don’t have a problem,” said Jabs, who operates 11 stores in Colorado. “If you pay cash for everything, which we do, you’ll survive.”

The real estate situation appears to be having a particularly harsh affect on states in the West. George Nader, president of the Western Home Furnishings Association, said 69 of the group’s more than 1,100 members went out of business during 2007. “That’s a little bit scary, since the people in our association tend to be pretty well-established,” he said.

At a recent board meeting, members put a lot of focus on the state of the economy, and Nader said the consensus was that it could take a year for things to turn around.

“Everybody just needs to hang on in the meantime,” he said.

Steve DeHaan, executive vice president of the National Home Furnishings Association, said it’s not unusual for the organization or affiliates like the WHFA see up to 8 percent of its membership retire or go out of business in a given year. While the economy has been tough, he said both the NHFA and WHFA have been holding steady when it comes to membership.

Pulling Back

For Tres Amigos in Tuscon, Ariz., the housing market decline—and a resulting dip in sales—forced a decision for the eight-year-old chain to shutter all five of its stores in Phoenix in November in order to focus on its home market, where it operates four stores. Keith Kramer, a co-owner, said the sinking real estate market has also sharply reduced the number of people renovating their homes. The result is a “double-whammy” that prompted Tres Amigos to focus on its healthiest stores in Tucson and on the company’s thriving Internet site.

“Ad rates in Phoenix are three times higher than in Tucson, and the rental market for locations in Phoenix are about double,” he said. “It costs us less money to stay alive in Tucson. That market is also seeing significant decreases in same-store sales, but we’re better able to adjust to that here.”

He said Tres Amigos was fortunate that its Phoenix landlords were flexible in its negations about closing locations. Kramer said it’s too early to tell whether Tres Amigos will one day return to Phoenix.

“It’s not a gloom-and-doom situation for us,” he said, adding that, “These things happen” in a down economy. “I’m going to work a little harder, roll up our sleeves a little bit higher. We’re going to ride this out, and we’ll be better when it’s over.”

Jabs predicts “there will be a lot of furniture stores going out of business,” especially if the current slump lasts through much of next year.

Against that depressing backdrop, Nader said WHFA members are focusing on ways to help one another. One method is an e-mail exchange that allows WHFA members to post questions or business challenges and receive replies from other retailers who have experienced the same situations. Nader said member services that include credit and insurance programs with group rates can help non-members lower costs.

“I think it really helps to be a member of an association. There is definitely strength in numbers,” he said.

Added Regulations?

Of course, there are other issues retailers are facing, no matter how preoccupied they may be with the economy.

Badcock said new mattress fire resistance standards imposed by the U.S. Consumer Products Safety Commission have him concerned about the possibility of additional requirements for upholstery, which the federal agency has been considering for several years. He said mattress requirements have led to price increases, and he wants to ensure that government regulators fully consider the sales impact that additional upholstery requirements could have.

Furniture industry analyst Jerry Epperson said an even bigger issue concerning mattresses has been the growth of specialty sleep chains that have been eating into the sales of traditional furniture stores.

“Bedding specialty shops are eating the lunch of furniture stores. They’re getting bigger and better and more professional all the time, and bedding manufacturers love them,” said Epperson, managing director of Mann, Armistead & Epperson, Richmond, Va. “Bedding is the most profitable (product) in most furniture stores, and we don’t want to lose mattresses the same way (furniture stores) lost appliances, electronics and rugs. A lot of time, the biggest assortment in bedding in most towns is at the traditional furniture store, and we’ve been encouraging furniture stores to tell people that.”

Finding Furniture Bargains

Epperson also expects that private equity firms that bought a number of furniture retailers (and manufacturers) in 2007 will continue to focus on furniture in the year ahead. “If you look at the publicly held companies, their stock is on sale. You can buy (furniture manufacturers and retailers) at lows we haven’t seen for seven years or more. Would you rather buy (Furniture Brands) when it’s at $10 or $11 or at $35,” a high it neared in early 2004. “Private equity firms, by definition, are trying to find lots of assets for very little money.”

Private equity firms, of course, aren’t the only financial players in furniture. It was disclosed in October that Samson Holdings, which controls Lacquer Craft and Universal, made an unsuccessful bid in July to acquire Furniture Brands. Then, in October, Samson paid $73 million to acquire a 14.9 percent stake in St. Louis-based FBI.

Private equity firms did plenty of deals in furniture during 2007, and Sun Capital was among the most active. It acquired both Rowe and Powell in January and then acquired a controlling interest in Berkline/Benchcraft in May. Later that month, Sun Capital also purchased International Bedding Corp.

Sun Capital also sold Mattress Firm to Boston-based equity firm J.W. Childs and company management in January. Since then, Mattress Firm has acquired several regional mattress chains and grown to more than 440 locations after adding nearly 100 stores. If it continues growing quickly, Houston-based Mattress Firm could quickly unseat the 470-store Select Comfort chain as the industry’s biggest mattress retailer.

Retailers are also concerned about what’s being called bonded leather or “reconstituted” leather that consists of ground-up leather remnants combined with man-made materials.

Epperson warns that the product, which contains only 17 percent actual cowhide in some cases, could further deflate the market for leather sofas and chairs, especially when retailers don’t clearly inform shoppers about what they’re buying.

“I don’t know if we’re doing ourselves a favor as an industry by selling (reconstituted) leather,” Epperson said. “Traditionally, leather has been a step-up product. We put more value on a car with leather seats versus fabric, or shoes made of leather, instead of fabric. If leather becomes as cheap as fabric, I think that would be a real shame.”

A Handbag Or A Sofa?

Tatelman isn’t alone in worrying about the message furniture retailers—as a group—are sending in their zeal to under-cut the prices of their closest competitors. Doug Kays, president of Premiere Home Furnishings in Los Angeles, said the retailers who emerge from the current home furnishing slump will be those who find ways to compete against other categories, not just one another.

“We have to find ways to show the customer that they could buy five brand new dress shirts or one sofa. With what some people pay for a purse or a pair of shoes, they could be buying a piece of new furniture that would make a lasting difference in their home,” said Kays, who will become NHFA’s president in 2008. “We’ve made a mistake as furniture retailers in only trying to compete against one another.”

He said retailers who find ways to balance furniture against other categories—including everything from Jet-Skis and motorcycles to cruises and other vacations—will not only survive the current sales slowdown, but will become much stronger competitors when the real estate market is revived.