From Home Furnishing Business
Based on the FurnitureCore Industry Model developed by Impact Consulting Services, parent company to Home Furnishings Business, research shows the category has increased steadily over the past three years, finishing 2020 with $19.63 billion in sales and up from $18.04 billion in 2019. Not surprisingly, bedroom sales for the first quarter of 2021 jumped 31.3% above the same quarter in 2020, as the quarantine period of the pandemic began that March. Although behind the total industry growth of 9.3% from 2020 Q4 to 2021 Q1, the bedroom category did increase by 3.8%.
As you may guess, when polled on which bedroom furniture piece attracted the consumer most during their shopping experience, the bed topped out at 63.79%, followed by the dresser at 16.21%, the nightstand at 3.79%, the chest at 3.44%, and the armoire at 2.38%; 10.4% reported ‘other.’ The surge in furniture buying has not diminished the consumer’s need for value and functionality. Value combined with customization has led to success for Marge Carson. Offering choices in fabrics and leather for the headboard, with nightstands available to coordinate, has made their Palo Alto Contemporary Bed a top seller. “The bed combines a value price point with design details like wood trim and a plinth base that a local [dressmaker upholstery shop] wouldn’t be able to offer, making it unique in the marketplace,” said Jim LaBarge, CEO of Marge Carson. Many retailers and manufacturers are finding success with modern, scaleddown pieces, incorporating sleeker designs while also providing maximum storage. According to Jeff Schwall, national sales manager for Porter Design, their best-selling Urban Bedroom Collection “was created to address the increasing trend for small space living. The storage case pieces are intentionally reduced in scale to provide maximum storage while being able to easily fit into a smaller room. Our select mixture of solid sheesham hardwood allows us to deliver a modern, clean finish. And finished interior, solid wood drawers gracefully slide on side-guided roller ball bearing glides for ease of operation. Our bestselling Urban Collection features timeless styling for today’s modern home.”
Sam Moore’s Cardinal Bed Part of the Nest Theory Collection, the Cardinal Bed features a shelter-style headboard with vertical channeled details and is customizable with hundreds of fabrics. Suggested retail price is $2,499.
Combining modern style with sustainability has also proven successful for Greenington and their city-scaled Park Avenue bedroom crafted with solid bamboo. “Park Avenue’s sophisticated look has quickly become a top performer for our dealers. The consumer wants beautiful modern designs that have origins rooted solidly in sustainability,” said Troy Lerew, vice president of sales for Greenington.
Although contemporary furniture has grown in popularity, traditional bedroom furniture is still the most popular style, according to data from Impact Consulting, parent company of Home Furnishings Business. When asked the primary style of furniture in their bedroom, 39.23% of consumers surveyed said traditional, followed by contemporary at 25.87%, country/ rustic at 6.97%, country/European at 5.55%, transitional at 5.16%, Mission/Shaker at 4.26%, and cottage at 2.97%. Now more than ever, consumers value options when creating their perfect bedroom retreat.
Furniture Prices Play Catch Up Most furniture and home furnishings industry products have been in a price slump since the mid-2000s as imports exploded into the United States. During the pandemic, furniture and bedding prices started to climb noticeably in the second half of last year as the economy began to partially reopen and really took off during the first and second quarters of this year. Table A shows the quarterly price index averages 2020 Q1 to 2021 Q2 (April/May). The price shifts discussed here refer to two overlapping periods, not directly tied to quarters. The first compares the CPI at the end of December 2019 vs. the CPI in May of this year, which measures where we were a couple of months before the pandemic to where we are now with the recovery. The second data point focus is on the first five months of 2021 comparing the CPI at the end of December last year to May of this year.
Since the start of 2020 through May of this year, furniture and bedding prices are up 7.7%, weathering the pandemic downturn in 2020. Most of that growth has occurred during the first five months through May, where prices have jumped 5.4% compared to December last year (Table A).
As many consumers upgraded their outdoor spaces during the quarantine, prices of outdoor furniture began to climb right away (Table A). As of May, the “other furniture category,” of which outdoor is a large part, has grown 14.7% since the beginning of 2020 prior to the pandemic, with most of that growth coming throughout 2020. For the first five months of this year compared to last December, the category is up 4.9%.
Living room, kitchen, and dining room furniture prices have also shown major growth this year, up 7.8% since the start of the year through May. Since the start of 2020 pre-pandemic to May, prices are up 10%. Prices for bedroom furniture, however, have lagged other categories, increasing only 1.7% since the start of last year through May (Table A).
Meanwhile, prices for major appliances, in short supply with consumers on hot home buying and renovation spending sprees, have skyrocketed above all furniture categories, growing 21.8% since the start of last year, with most of that growth occurring last year. Since the start of the year, major appliance prices are up 4.4% through May (Table A).
Consumer prices in other home furnishings products fluctuated during the pandemic, with many declining substantially before increasing (Table B). Rising slightly in 2020 Q3 to an index of 100.2, floor covering prices have only recently exceeded prices from January of last year. Prices are up 3.2% for floor coverings since the beginning of this year through May. Since the start of last year (just prior to the pandemic) to May 2021, clocks, lamps, and decorator item prices have grown 2.8% and nonelectric cookware and tableware have grown 5%. Television prices are up 2.1% in total since the start of last year after falling rapidly during all of 2020. After declining significantly, the first five months of 2021 have seen television prices increase 7.4%. Prices are yet to fully recover for dishes and flatware, up 0.6%, and window coverings, down 1.4%, since the start of 2020 through May of this year (Table B).
Not surprisingly, the price of outdoor equipment and supplies rose sharply during the second half of 2020, increasing 4.5% since the start of the pandemic through May of this year. Prices of tools, hardware, and supplies have grown steadily since late last year — up overall 5.8% since the start of January 2020 (Table C). Rising prices in the furniture industry can’t be attributed to wholesale import prices. Prices for most furniture categories and major appliance imports fell during the first half of 2020 and are slow to recover. Only two categories, nonupholstered furniture and institutional furniture/ kitchen cabinets, have just reached prepandemic prices in May. Upholstered furniture, office furniture, and appliance prices are still slightly below the beginning of 2020.
Historical Growth in Consumer Prices The early to mid-2000s were considered steady and stable growth years for the furniture and home furnishing industries and provide a healthy benchmark for analyzing price growth. Since that time, the industry has weathered a recession and now a pandemic. Overall, the CAGR (compound annual growth rate) has steadily increased each year for most consumer items since 2005 (Tables E, F and Figure 1). Since 2005, price increases over time have been staggering in some of the key areas, such as healthcare, with household furnishings and operations noticeably different with only a 2.2% increase since 2005 (Table E).
In the broad furniture and home furnishings product categories and other miscellaneous items, such as apparel, sporting goods, and computers, prices have historically decreased since 2005, many significantly (Table F). Furniture and bedding prices overall have declined 6.4%. Major appliances are up slightly at 2.1%. Other home furnishings items such as window coverings, decorative accessories, dishes and cookware have seen price declines since 2005, between -27.6% and -57.1%. Televisions prices have fallen 94.8% and computers prices are down 73.3% (Table F).
Looking at the historical indexed growth in prices of the key consumer products and services featured in Table G, only household furnishings and operations remained flat throughout time. Prices of new cars and trucks have also increased very slowly. As shown in Table H, the consumer price indexes for food at home (groceries) as well as food away from home (take-out and restaurant dining) have historically continued to climb. Annual growth rates approach 2% for food at home and 3% for food away from home (Figure 1). Both saw prices increase more than 3% during the pandemic. Consumer prices for furniture generally declined from about 2006 to 2015 and have yet to catch up to those levels (Table I) despite the recent surge during the pandemic. Since 2017, all categories have increased prices, with major appliances growing 4.6% from 2019 to 2020 and another 8.2% monthly average this year to May 2021 (Figure 1). As shown in Table J, the home furnishings category has not seen the same surge in prices as furniture and major appliances since the pandemic began. With the exception of floor coverings, at a CPI of 111.6 in May of 2021, all the other home furnishings categories are still well below 2005 prices.
The graphical contrast in the growth in the prices of televisions compared to cable and satellite television services is shown in Table K. As technology has made televisions better and more affordable, prices fell almost 100% since 2005 (down 94.8%) compared to the cost of cable services increase of 50.7%. The trajectory of annual price increases since 2005 for key consumer items and services is shown in Figure 1. This table shows the compound annual growth rate for selected time periods. Although furniture and appliances have lagged behind historically, they have shown some of the best growth of all product areas this year through May. As the world continues to adapt to the ongoing economic results of the pandemic, price increases in the furniture industry are starting to become the new reality.
However, compared to the same quarter last year, the growth is even higher at 35.3%. Alongside the tsunami of sales was a significant increase in net operating income (13.19%) in quarter four and it appears that the first quarter of 2021 will be even higher. This month’s feature article discusses the factors that are driving the windfall. In my biweekly performance group calls (anticipating a return to in-person meetings by the end of the year) there are two camps.
The first camp’s belief is to enjoy the sunshine. The consumer demand may continue: driven by housing, interest rates, and consumer confidence. If not, we can address it then. The second camp is significantly less confident. The takeaway is to maximize performance now, but be aware.
The most important statistic is understanding your breakeven point. The table below calculates that statistic for top-quarter performers — more than $100 million in revenue. Enjoy the sunshine, move forward with confidence, and, to quote a performance group member:
Without a doubt, when consumers escaped the shelter-in-place orders and the furniture industry escaped the “nonessential” classification, business boomed, with written sales surging and backlogs increasing. While experiencing the typical backlog buildup in the first months of 2020, retailers’ shipments increased as written sales decreased, and by the end of March and during April written sales plummeted. Beginning in May, traditional retailers began to cope with the shutdown environment alongside manufacturers coping with the pandemic impact on the supply channels.
According to Smith Leonard’s Furniture Insights, shipments declined 6% in 2020 with backlogs up 168% from year-end 2019. Obviously, furniture demand went somewhere during this time and the answer was other distribution channels. We estimate that e-commerce gained 3% to 5% market share followed by the home improvement channels (Home Depot/Lowes) and value retailers (Big Lots/ Target). Will traditional retailers regain this share?
That is a topic for future articles. So, if the substantial net income was not driven by volume, what was the contributor? In summary, the industry’s performance was driven by increased gross margin and reduction in expenses. But most important was the sheer determination of this entrepreneurial sector of the furniture industry. Owners returned to the daily details of the business. Discovering what was important took center stage while driving business in this unusual environment. The financial performance for the 2020 pandemic year is shown in Figure 1.
It was necessary to present the results by quarter to reflect the tumultuous year — a year that began normally and appeared to be on the road to a good year, only to fall into a chasm in the second quarter. The upturn was just as dramatic as the decline, as consumers rushed to satisfy pent-up demand and traditional retailers adjusted by incorporating sales by appointments generated from website leads. Retailers used their reserves along with government stimulus to maintain staff until the critical decision to allow the return of business in May and June. Soon, inventory was depleted and the next challenge facing the industry was a lack of product and transportation cost. While these significant shifts were challenging, the results to the bottom line has been rewarding, as seen from the key performance indicators shown in Figure 2.
Controlling prices while absorbing rising price/transportation costs became a daily challenge of repricing the floor. Gross profit increased by 0.8% for the year and almost 2% by the fourth quarter. We believe, and most would agree, that the strategy to increase gross profit was the result of attempting to stay ahead of the very necessary price increases from vendors and the unbelievable container prices, moving from $3,500 per container to north of $10,000 per container.
However, the price increases instilled confidence that the competition was not looking to discount as a strategy. Compared to other consumer products, the consumer price index in 2020 increased only slightly (from 113.2 to 114.5), while all products and housing continued to soar, as seen in Graphic D.
A major question moving into 2021 is, “Will these price increases and the resulting margin increases hold?” In comparison to other consumer products, furniture can endure a price increase. The gross profit increase contributed only 30% to the increase in 2020 net income. Depicted in Graphic E, one obvious contributor was the reduction in sales expense.
Sales expense reduction was reduced by more than a point (1.70%) by the end of the year. However, during the volatile third quarter, sales expense dropped two points from the disastrous second quarter. Sales expense began to trend up in the fourth quarter, primarily driven by handling expense. Advertising decreased 1.63% in 2020 from 2019, but was down substantially in Q3/Q4 by almost two points. While traffic fell considerably with the onslaught of the pandemic, it returned to normal levels by the second and third quarter without significant advertising. Traditional retailers began experimenting with digital advertising, as consumers have embraced the internet to begin their shopping process. Unfortunately, this change resulted in a loss of market share to the e-commerce channel, which did not have to comply with non-essential retail directives.
Handling expense (warehouse/ delivery/service) declined slightly (from 7.09% to 6.88%), primarily driven by the lack of product for handling. However, the lack of personnel at the current salary levels may dictate an increase in this cost element moving forward.
Selling expense for retail sales associates declined in the latter part of the year, partially driven by the loss of staff from commissions left unpaid because of backlogs. This delay in commission is forcing retailers to consider paying on written sales instead of the more common delivered sales. We would anticipate that this cost element will increase in the coming year.
The next area of cost is general and administrative. Stable for the year after experiencing a significant increase in the first part of 2020, this cost area fell in Q3 with rent concessions and staff reductions, but Q4 brought a leveling off. We expect general and administrative to return to historic levels. The table/graphic illustrates the breakdown. The other impact of these cost ratios is the fluctuation in volumes by quarter reflecting a volume variance in that the majority of these cost elements are fixed. No government subsidies (PPP loans) were included in these expense elements, but were shown as other income until forgiven.
Credit expense has remained the same during the pandemic year, as seen in the table/ graphic, and, interestingly, the stimulus funds did not impact the credit-driven consumer. As important as expense elements are the above the line revenue elements. Other than merchandise sales, as seen in the table/graphic, protection sales and delivery income remained constant from 2019 to 2020. The results were historical net income levels, as seen in Graphic K.
The major concern is if this level of performance be maintained. As backlogs are diminished, will the demand continue? Without a doubt, the consumer has become more focused on the home. However, as the nation puts the pandemic in the rearview mirror, other discretionary expenditures will take center stage. Additionally, forced expenditure reductions, such as dining out and kids’ sports, will reclaim its share of the family budget. Expenditures for advertising will increase to reclaim consumer interest fueled by promotions resulting in the decline of gross margin.
With all these expected trends, there is a hidden issue of market share loss to other distribution channels. While most retailers’ sales increased significantly in the third and fourth quarter of 2020, they lost three to five points of market share. Answer this question: Could your store have sustained a sales decline of 3% to 5% before the pandemic? That is the hidden crack in our future.
Know When to Hold Them, Know When to Fold Them
For the last three quarters business has been great, increasing 13.9% in Q4 over the same quarter in 2019. While the pace declined in subsequent quarters, it was still a very profitable time for traditional furniture retailers.
However, prior to the pandemic, many single-market retailers were concerned about the future of the independent furniture retailer based upon the expansion of the large regional chains and the erosion of market share to the retailers such as Wayfair.
While the aftermath of the pandemic shutdown did create a tsunami of purchasing, concern was still present, with the Bureau of Labor Statistics projecting a loss of 16% of furniture stores in the next five years — a pace exceeded only by clothing stores and electronic stores. Many asked the question: Is it time to fold them?
One retailer that made that decision was Wilcox Furniture, a fixture in the Corpus Christi, Texas, market for 68 years. The company, led by George Moore for the past 30 years, decided, along with other stockholders, it was time to take advantage of the consumer demand and liquidate. With the assistance of Wahlquist Management, the liquidation sale began and two months of sales was generated in eight days.
The icing on the cake was when the sale of the real estate (four stores) was accomplished with a targeted email and buyers were secured. What was good for the stockholders was also good for the employees, in that the purchaser was another established retailer, Beale Furniture, out of Houston. The transition will occur by Memorial Day.
While George Moore will miss the furniture industry, it was the right time for everyone. The independent furniture retail channel will continue in Corpus Christi — a positive for the citizens.
As manufacturers keep finding new ways to balance these desires, the motion/recliner category continues to increase its share of upholstery. Whether it’s a recliner with all the bells and whistles — massage and heating, wifi connectivity, food trays, and even a six-pack cooler in the armrest — or a motion sofa that looks stationary, there is something for everyone.
When creating a motion piece that is both relaxed and refined, manufacturers must be careful not to sacrifice the comfort of traditional recliners. As Anthony Teague, SVP of merchandising for Jackson/Catnapper, points out when describing the company’s best-selling Calvin sofa, “We often talk about the ascension of the motion sofa from the basement to the living room, and the Calvin epitomizes the meaning of that statement. The secret to the more ‘stationary-looking’ motion Catnapper has successfully launched across the country is the fact that the category is still anchored around comfort. So many attempts at making reclining sofas that don’t look like ‘motion’ have failed because they are not giving the consumer the one thing they expect from motion — a great seating experience.”
Balancing comfort with the style of stationary has also led to success for Nice Link Home Furnishings. According to President Jay Carlson, “Our leather power motion and recliner are top sellers because they both provide comfort and convenience in a fashionable, high-leg stationary design.”
According to a FurnitureCore, Inc., survey developed by Impact Consulting Services, parent company to Home Furnishings Business, 57.7% of consumers surveyed felt that the style of reclining furniture was an inhibitor to their purchase in the category. In the same study, consumers were asked to pick the top four items they have now or would want to have in their next reclining product.
The results were heat/massage at 58.41%, followed by automated adjustable headrest and lumbar supports at 58.10%, storage drawer at 49.21%, hidden tabletop at 45.08%, docking station for telephone at 31.75%, built-in remote at 28.25%, built-in beverage cooler at 27.62%, and surround sound system at 26.98%.
While upholstery, as a percent of total furniture sales, has dropped slightly from 2019 to 2020, the motion category continues to increase its share of upholstery sales — up to 13.7% when combined with leather motion, according to a FurnitureCore Industry model.
Recliners as a sub-category have dipped down to 8.35% in 2020 from 9.09% in 2019, but the motion/recliner category finished out 2020 with 22.09% of furniture sales compared to 21.22% in 2018. The model also shows the growth of motion within the upholstery category – jumping to 23.56% in 2020 from 21.66% in 2019 and 21.39% in 2018.
With more manufacturers and retailers evolving with consumers to find that perfect balance of comfort and style, the sky is the limit for the motion/ retailer category.