From Home Furnishing Business
Cover Story: Merchandising THE EFFORT that CREATES THE MAGIC
As a management consultant, many years ago, I urged retailers to “nail it to the floor.” “It” being their best sellers. I also questioned why choose that yellow sofa when the most frequently purchased color was beige. The answer is that the consumer becomes excited about creating a new look within the realm of beige. But there is always that one customer who ventures beyond the beige spectrum and opts for a bold choice like yellow. The emerging generation wants something different. Why is the grocery chain Trader Joe’s successful when the competition has better selections? Simply put, you will always find something different when you shop. Bringing excitement to the mundane chore of grocery shopping is a challenge.
Let’s explore the four “P’s” of merchandising with the first being PERSISTANCE. That is what it will take as the merchandising team balances short term profitability with long term BRAND that is the percentage of consumers in your market that will consider you when they started the shopping process. The table below present 2023 results by distribution channel.
Over half (53.9%) of consumers did not consider independent retailers while shopping but 46.1% did. 16.2% of consumers considered shopping at independents but didn’t follow through. and 16% shopped but did not purchase. Thankfully 13.9% did. Compare the many competing distribution channels – more on this in the next issue of Home Furnishing Business. What does this mean to the merchandising team? EVERYTHING. Merchandising influences all the factors that drive success – driving the consumer to consider to shop and to purchase.
This article is focused on the traditional furniture sector including both manufacturers and retailers. However, we realize that some traditional manufacturers and retailers are exploring other strategies as as illustrated in Figure 1.
Industries are always in a state of transition. With furniture manufacturing centers shifting from Jamestown, New York to Grand Rapids, Michigan to Western North Carolina. Likewise, distribution channels move from department stores and national chains to independents and regional chains to retail verticals and e-tailers. (Table B) But returning to the traditional channels, what can reverse the downward trend?
In the last 30 years we have seen the second generation expand the family’s single store/single market business to multi-markets, with many stores becoming corporations. Unfortunately, several have moved on to venture capital or public ownership with mixed results.
While the Commerce Department still recognizes over 20,000 furniture stores and home furnishing stores as shown in Tables C and D, the majority of the TRADITIONAL RETAILERS revenue is generated by the top 300 retailers (20.9%) of the TOTAL industry.
After the significant increase in revenue enjoyed by independent retailers, which created a financial windfall during the pandemic, many independent retailers are closing. The main reason for exiting is the lack of a family transition plan. PRODUCT – “THE FOUNDATION OF RETAIL“ There is much confusion about the definition of furniture store and home furnishing store. Here is the official definition from the Commerce Department:
Well, that didn’t help much. However, it does give some guidance to the revenue statistics shown in Table E. For traditional furniture retailers currently, the products would be defined as shown in Table F. It is interesting to note the merchandise line-up difference between the total industry and the larger stores as well as the change from 2017 to 2023.
If we went further back, we would see that other product categories have disappeared from the traditional furniture stores – small appliances, linen, dinnerware and so forth. Why? The most common response is competition from discounters. It is true that the “category killers” become part of the retail scene and drove many products from furniture retail stores. Recently these same “category killers” have met their demise, Babies R Us and Bed Bath and Beyond, to name a few. Today, the category killer is the INTERNET with the focus on the rug, accessory and bedding category, and yes furniture in 2023 with 18% of furniture sold on the Internet according to FurnitureCore, sister company to Home Furnishings Business and its research arm.
Today, there is much discussion about store traffic or lack of such. If we are limiting the reasons for shopping to items that are only purchased every two or three years, what is the impact? Even with a loyal customer base the time between purchases is significant. Consider Table G with 25%± of purchases beyond seven quarters. We should consider the RETAIL VERTICAL distribution channel that now provides 28.2% of all furniture sold. New entities such as Arhaus have 16,000 sq. ft. stores selling on average $10M per store by merchandising the total home. Difficult to execute, but so is a GOB. Harsh? But true. The industry’s emerging customers, the millennials and Gen Z, want more than just a sofa. Shop a Home Goods store and see the “lookers.” Wouldn’t you like that traffic in your store? Maybe they would discover that sofa that they couldn’t live without.
It may be time to take our product categories back. Should we reconsider infant furniture? PRICE POINTS – WHAT WE CAN AFFORD OR WHAT WE WANT? It took a pandemic to allow the furniture industry to attain a price increase. For decades the industry has bemoaned the fact that in 1964 a new Mustang cost $3500 and a sofa was $300 and now a Mustang is 15x that and the industry is still selling $399 sofas. The Consumer Indexes graphic (Graphic 1) illustrates.
Yes, the industry got a bounce, but so did the automotive industry. The price increase obviously accelerated industry growth after the initial shock of the pandemic store closures as can be seen from Graphic 2.
Where this situation resulted in a price increase driven by increased transportation cost, material cost and yes, an increase in gross margin at retail. Gross margin per square foot of selling space accelerated from the $6/sq ft level to the $10/sq ft level in 2021 peaking in 2022 at $12/sq ft before beginning to stabilize at $10/sq ft in 2023 as seen in Graphic 3.
Obviously, this was an increase in revenue but not units sold. However, the pandemic did cause a shift in traditional retailers’ merchandising price points measured by units sold by price point. Using upholstery/ stationary/sofa-love/fabric as a datum, the % of units sold in promotional drop from 24.2% in 2019 to 8% in 2023. This shift caused a 45% increase in average unit selling price of stationary-fabric sofas ($704 --$1027). Graphic 4 presents the comparison.
There is a reason that the furniture industry has been able to continue in existence without any significant price increases – the most frequent answer is the transition to offshore manufacturing. Yes, there was a cost savings after factoring in transportation cost. Now imports represent 26.9% of all furniture sold in the United States. The pandemic disruption caused a reconsideration of the offshore model. However, the many barriers of reshoring are significant. However, the major reason is the gradual reduction in quality. We say gradual because the consumer has a general perception of quality decline but not specific. How or why did the industry pursue this strategy? Gradually the marketing of furniture moved away from quality statements such as “EIGHT WAY HAND TIED” and discussion of wood species – “pecan/cherry/solid oak” to mixed hardwood or construction of “dovetailed drawers.” To illustrate the 2018 consumer awareness of eight way handtied at “did not know” at 41% in 2013 declining to 64% in 2017 and probably nil now. The results are the consumer not being educated about quality differences to justify the price differential. There is a difference between a $399 sofa and a $999 sofa, but does the consumer know or for that matter, does the retail sales associate know? The results are consumer’s purchase without a quality differential. The influence of the consumers income has little impact on the purchase. In fact, currently, in 2023 if the consumer’s household income is $100K - $150K, the probability of purchasing a $400 - $999 sofa is 1.7x compared to 2.1x for purchasing a $1000 - $2000. Graphic 5 presents the percentages.
The retailer’s communication of price/value is critical in the selling process. How important, on a scale of 1-5 of importance? PRICE/VALUE as would be expected ranks 4.55 no matter the age or income. As can be seen from Table H. The distribution channel that delivers the best price/value by far is regional chains as can be seen in Graphic 6.
But concern should be noted about the consumer’s perspective of mass merchants, Internet compared to the independents.
SELECTION - FOUND WHAT I WAS LOOKING FOR
The concept of selection has emerged as a focus. The question is HOW MUCH IS ENOUGH? No matter the breadth of selection it is important with all ages and incomes. From consumer surveys in 2023 it was the number two behind price/value. (See Table I) While many retailers still have 100,000+ square foot stores, using a destination store strategy, in the last decade others have reduced their store footprint and moved the stores closer to the time starved consumer. The results have been an increase in occupancy cost offset by a reduction in advertising expense reflecting the retailer’s presence in a retail shopping area. Currently (2023) for traditional retailers, the performance is averaging $204/square foot (annual). Graphic 7 presents the monthly statistics.
This performance measure has increased since 2019 due to the average unit selling price the performing values between smaller independents ($145/sq ft) the larger regional chains ($275/sq ft).
The question is —store size versus consumer’s drive distance. The retail/ manufacturing verticals have more stores per household in the market but smaller stores (15M – 35M). However, the stores perform. Consider Arhaus store at 16,000 sq ft on average producing $625 per square foot, a statistic that makes traditional retailer’s question – how can they provide enough selection in that small footprint? The answer is simple. Arhaus focuses on a smaller segment of consumers (29%) than the typical regional chain serving 77% of the households in the market.
The major challenge in merchandising is the generation shift as the Baby Boomer exits and the next two generations become our prime customers. In fact, it has already occurred in 2020 when Generation X surpassed the Baby Boomers. (Graphic 8). With each generation comes a demand for a new style. In a recent survey, we compared from the consumer’s PERSPECTIVE their current style to their dream style. The results are shown in Table J.
While this is a significant challenge for the merchandise team, the extent of the challenge is to compare the dream styles of the Millennials to the Baby Boomers as shown in Graphic 10. Obviously, from the graphics above, retailers must get MODERN and INDUSTRIAL ready for the Millennials. The challenging merchandising question is, what is the definition of style from the consumer’s perception? Remember, it is in the eye of the beholder. Style quizzes have been overused and abused as website interceptors. However, those that are based upon research can help refine YOUR definition of style. Using your buyers’ perception of style as the product is placed in the merchandise lineup, survey your target consumer. When you present your style interpretation and they concur, the process of style refinement begins. (Graphic 11).
The ultimate measure is what sells. In most retailers, a “war room” exists displaying best sellers. A digital version of best sellers for upholstery/ stationary/sofa-line/fabric. (Graphic 12). Note that only one of the SKUs that are best sellers for Millennials are in the Top 5.
PARTNERSHIP - A REAL SHARING OF OBJECTIVES
What is required to reverse this downward trend? -- Simply put, PARTNERSHIP. A return to sharing between manufacturer and retailers, specifically.
The industry is undergoing a generational shift. This shift from the Baby Boomers that fueled the transition from department store and national chains to independent furniture stores has been unstable for the past decade with Generation X now generating 36.7% of the industry revenue and their children, the Millennials, following close behind. (Table K)
The feature article in the Nov/Dec 2023 issue of Home Furnishing Business addressed the consumer. Now we will address the most critical component, the product, and how retailers and manufacturers can address the merchandising task.
It has been a long time since the term “product maven” and “merchant” have been used to refer to furniture leaders. The truth is, it was never the individual that produces the magic, but a team that includes the manufacturer, retailers and the sales representative. For traditional manufacturers and retailers to reverse this trend requires getting the team back together. So, now let’s begin the process of sharing to create improved performance for both manufacturer and retailer. Just follow the red arrows below.