From Home Furnishing Business
A Disappointing 3rd Quarter
For the Furniture Industry
The first quarter of this year in the furniture and bedding industry started off continuing the 5 percent plus growth over the previous year for all quarters in 2015. But as the year wore on, subsequent quarters did not perform to those levels. Quarter two fell to 3.7 percent growth and quarter three fell to 3.0 percent growth over the same quarters of 2015 (Table A). Year-end sales in 2015 totaled $92.5 billion. Third quarter year-to-date industry sales reached $71.5 billion, a 3.0 percent increase over the first three quarters last year.
These numbers reflect a weakening furniture store sales growth (which includes lifestyle retailers) and are in line with the government’s reports of personal consumption expenditures. Retailers are hoping for a bump in consumer confidence in the fourth quarter to help ramp up growth.
Furniture Store Sales
Furniture stores, which include all lifestyle furniture retailers, posted a dismal 1.3 percent increase in the third quarter of this year compared to the same quarter in 2015 (Table B). Retail store sales are at an average quarterly growth of 3.2 percent – down from a 5.7 percent growth (2014 to 2015). Furniture Store sales increased from $14.3 billion in the second quarter of 2016 to $14.9 billion in quarter three, an increase of 4.3 percent.
Personal Consumption Expenditures
Personal Consumption Expenditures for furniture also experienced a third quarter slump this year – increasing 2.1 percent over the same period in 2015. Over the previous six years, third quarter year-over-year growth averaged 4.4 percent. (Table C).
Economic Influencers and Catalysts
Real GDP. The furniture industry, aside from demographics, is driven by economic influencers and catalysts. Gross Domestic Product the measure of goods and services in the U.S., is chief among them. Real GDP growth has continued to decline since the first quarter of 2015 when growth was at 3.3 percent. Growth in 2016 has been steady, but slow, with quarterly averages between 1.3 percent and 1.6 percent (Table D).
Payroll Employment. The number of employed workers (non-farm) was at its highest level in history in October of this year at 149 million. However, employment growth this year has slowed throughout each quarter. In 2015 growth averaged 2.1 percent year over year, but has fallen to an average of 1.4 percent increase in October of this year (Table E).
Consumer Price Index. For furniture and bedding, prices have been relatively stable, falling less than 1 percent from the prior year’s quarter, until the second quarter of this year. In 2016 Q2 prices were down 2.8 percent and in 2016 Q3 down 3.1 percent (Table F).
Over the last five years, the Unemployment Rate has declined rapidly – dropping from 9 percent to 5 percent (Table G). From 2011 to 2015, the third quarter each year has decreased an average of 1.0 percentage points. Although only slightly moving 0.2 percentage points from 2015 Q3 (5.2 percent) to 2016 Q3 (5.0 percent), employment is now at pre-recession levels.
Consumer Confidence has not moved more than 6 points in any quarter over the last two years hovering from 95 to 101 (Table H). A confidence level of 100 usually indicates neither extreme confidence nor lack thereof. The year 1985 was chosen by the Conference Board as the base index of 100 because that year showed neither a peak nor trough in the business cycle. Consumer Confidence was at its highest in the year 2000 at 139. Conversely, Consumer Confidence was at its lowest of 39 at the bottom of the last recession in 2009.
Nothing impacts furniture industry growth perhaps more than home sales both existing and new.
Existing Home Sales. Home re-sales experienced healthy first and second quarters this year growing 5.0 and 4.2 percent from 2015. However, 2016 Q3 dropped 0.4 percent from 2015 Q3. At an annualized rate, third quarter existing home sales totaled 5.3 million units. (Table I).
New Home Sales. Part of the third quarter decline in existing home sales this year is offset by new single-family home sales that surged 23.1 percent in the third quarter to an annualized rate of 599 thousand units. After double-digit growth in 2015, 2016 year started with very slow growth in the first quarter of 1.6 percent. The second quarter rebounded, however, to 14.5 percent increase followed by the third quarter surge (Table J).
Housing Starts. Despite the strong third quarter in new home sales, housing starts did not keep up the momentum. Single-family unit starts increased by only 1.9 percent from 2015 Q3 to 2016 Q3 (Table K). Third quarter annualized starts totaled 759,000 single-family units. On a positive note, September starts were at the highest level since last February and the year should end with over 13 percent growth.
For multi-family units, the picture is not so bright. After a flurry of building in 2014 and 2015, starts are off significantly this year. While the first quarter of 2016 experienced 5.2 percent growth, the second and third quarters have posted negative growth of 9.5 percent and 7.7 percent respectively (Table L).
Many economists are projecting new single-family home building and sales to be strong in 2017, with moderate growth in existing home sales. Much of home buying is by first-time home buyers, the young Millennials who are finally making their move to be the consumers the furniture industry and many others have been waiting to see. But political and economic uncertainty can throw a wrench in at any time.
The industry has progressed for another year. The year, 2016, was quite different from 2015, as the industry slowed its growth to under 4%. No matter the change, we believe certain key factors remain important in measuring the strength of a retailer. The key methodology is presented below:
Market Share – 46 percent
The estimated industry sales from various published sources for each retailer is divided by the estimated retail volume for furniture and bedding sales in each of the markets in which they participate, whether Metropolitan Statistical Area, Micro Statistical Area, or Rural. Sales of appliances, electronics, and housewares are excluded.
Revenue – 20 percent
This category is based on estimated industry sales for each retailer based upon public published records or estimates based on certain retail parameters.
Retail Expansion – 15 percent
This category measures both store expansion and market expansion. The new stores or new markets are based upon public records.
Social Engagement – 19 percent
This year’s index considers social signals, website metrics, and third party scoring platforms to arrive at a ranked list of home furnishings retailers with the strongest online engagement.
First, we pulled data from Alexa, Facebook, MOZ, OpenSEO, Twitter, and Pinterest for the retailers in our database. The following shows the specific measurements:
Facebook Check ins, Likes, Talking About
MOZ DomAuth, External Links, MozRank
OpenSEO Google BackLinks, Google Page Rank, Google+ Likes
Twitter Followers, Likes, Tweets
Pinterest Pins, Followers
You will note that there were additions and deletions to the factors used. Specifically:
Retail Expansion – A major strategic element today is retailers adding new stores within their markets and expanding beyond their markets.
Industry Involvement – While impacting many retailers, the top performers belong to an association or buying group, resulting in little change in the performance ranking.
Social Media – Pinterest was added in recognition of its increased importance to communication with the consumer. Klout score was removed.
From that data, we used a basic ranking methodology, assigning a numerical value to the ranked list of each metrics. We assigned a one for each record within a specific metric, with one being the “best” score for the highest number of Twitter followers or the highest number of backlinks or the highest Pinterest score.
For all measurements except Alexa, the highest values resulted in a lower score, i.e. the highest Google Page Rank would result in the lowest score. Alexa ranks websites globally and nationally based on estimated website traffic, and the lower the score, the more popular the site.
Thus we arrived at 14 individual scores calculated for each metric. The highest two scores for each retailer were dropped to eliminate any outliers and then, we took the statistical average of those 12 scores. Ranking the scores from lowest to highest created the Power 50 Online Engagement Index for 2016.
Enjoy the lists.
As with the nation, the constant question is, “When will we get out of the morass?” Finally in 2012, industry sales for furniture and bedding reached 2008 levels only to inch forward, with 2015 finally seeing growth above 5%. The excitement was short-lived with growth slowing below 4% with the most recent quarter below 2%.
The forecast that follows shows a rebound to 4.5%, which is in line with others in the industry. However, I must admit that our forecast was done a week before the Presidential Election, with the expectation of the results baked in.
Since the election, we have reviewed our forecast and cannot find any justifiable reason to modify it. We share this predicament with others. The anticipated drop in the stock market happened, but reversed within 48 hours. Mortgage rates have increased because of uncertainty, which will impact our industry, but not as much as consumer confidence.
As a nation, the consumer population is segmented into age groups that are buying furniture and those that are out of the market. In fact, many demographic groups have not returned since the great recession.
Obviously, the promise of doubling the GDP with new job growth is music to our ears, but what action will produce this change?
The thought of tariffs on imported goods, whether the Far East or Mexico, will impact distribution. Does this signal the return of domestic production? If so, where will the capital investment come from for the new plants? More importantly, from where will the workers come?
There are more questions than answers. What is sure is that the facts are real. As a magazine serving the industry, we are committed to understanding and informing.
By Bob George
This will be a year of indecision, risks, opportunities, and crisis. When written in Chinese the word crisis is comprised of two characters, one representing danger and the other opportunity.
The traditional furniture industry is facing significant challenges with alternative channels, such as etailers and lifestyle stores encroaching on the middle and upper price points while the mass merchants with powerhouses like IKEA have an undeniable attraction to the consumer that is looking for lower price and more utilitarian furniture. In 2017 furniture sold through the traditional channels will fall below 40% of the total industry. Does this constitute a crisis?
The immediate unrest in the country will settle down. However, as we progress through the year, for the individual manufacturer and retailer, crisis will emerge. The way you approach that crisis will determine the long term survival of your company.
Retailers, secure with their position in the market, will be challenged by new competition. What has happened in larger markets will now begin to occur in the middle markets as regional chains expand to maximize performance. This challenge will require management to go back to the foundation of their business and examine what has made them successful and determine if the new competition is offering more. Gut feeling will not suffice. However, facts, such as what percentage of consumers considered their brand (brand awareness) before they made their purchase and how many consumers considered their brand, but didn’t shop are important. It is a fact that the consumer shops fewer than two stores when making their purchase. As always, just as important is the percentage of consumers who made a purchase after shopping (close rate).
The next level of understanding is how your target consumer perceives your brand in terms of price, service, selection, and all the many factors that influence their purchase decisions. The first step in dealing with a crisis is to know yourself and your competition. Then danger can become opportunity.
Manufacturers, challenged with distribution as new retailers enter a market, find their existing market share is being impacted. Often complicating the situation is the new retailer who is a good partner in another market. Historically shared distribution enabled by broad product lines was the solution. Today, however, manufacturing economics often preclude that as a strategy.
Again manufacturers must challenge their basic distribution strategy. There are 409 distinct markets in the United States in which 95% of all furniture is sold. What is the combination of retail partners who will maximize their market share?
Again, it is a case of making a crisis an opportunity by defining a clear path to success. The one thing that you can be assured of is that your competition is waiting to turn your crisis into their opportunity.
Planning for 2017
By Tom Zollar
This issue presents The Power 50 and our theme is The State of the Industry. Having spent 40 years in this business, I am well aware how much the list of top retailers has changed over that time. Many of the ones that zoomed to the top are now gone, almost like they burned themselves out getting there and could not maintain their success. Others that had steady, if not spectacular growth seemed to survive the ups and downs of the economy, to continue prospering. It has been said many times that staying on top is often more difficult than getting there. Yet some organizations tend to always be at or near the pinnacle of their area of endeavor.
In sports, names like Patriots, Crimson Tide, Buckeyes and others readily come to mind as teams that have consistently been on top of their game year after year. Everyone in each league plays by the same rules, their fields and equipment are pretty much the same quality, they have the same list of plays or strategies to draw upon and they all want to win their games. In our business, we all work under pretty much the same rules, have the same advertising opportunities available, carry relatively the same merchandise and want to sell as much as we can. So why so some continue to prosper while others don’t? Obviously they manage their business/team better, but how?
In one of my earliest columns, I talked about Big Ed Breunig’s “Six P’s” of retail that he taught me long ago. He said to succeed in our business you must have:
- Population - People to sell
- Presence – A place they will go to buy from you
- Product – Things they want to own
- Promotion – Ways to get their attention so they visit your store to buy
- Presentation – An easy to shop, visually stimulating environment to show them your goods
- People – Staff that is ready, willing and able to provide top notch assistance to your visitors
Every month he graded the effort in each of these areas and targeted those that did not meet the level he expected for improvement. From this list, he created action plans to continually drive his business forward. What a simple but effective way for an owner/manager to look at his/her business to constantly find ways to improve it.
While every one of these retail elements is critical to our survival and success, in my experience, it is the last four that are the most volatile and in need of almost constant attention or focus from upper management. Are we assorting the right products, displaying them the best we can, advertising to bring in the targeted customer and lastly, are our people providing the best customer experience possible? As a coach, I must say that it always seems to be the last one that gives us the biggest problem. Products, advertising and display are easy to manage compared to people. But, even if we do a stellar job of managing all five of the other areas, if our people fail to deliver, then our business/team fails.
Therefore, in many cases it is the inability to properly hire, manage and motivate people that is the main reason that businesses and sports teams fail to maximize their sales or win total. Jim Collins called it getting the right people, in the right seats on your bus in his book “Good to Great”.
As is often the case, I am not telling you anything you don’t already know or at least suspect. The question is why can some organizations do this better than others? In my experience, it is because the most successful businesses and teams excel at doing the seventh “P” – Planning! Having a solid plan, getting everyone onboard with it and consistently executing it is the key difference I see between highly successful organizations and the “also-rans”.
While most of us do create financial, merchandising and advertising plans at the beginning of each year, many do not spend nearly as much time and effort where it counts even more – their People Performance Plan. This should involve staffing, training, motivating and coaching your team to top performance month after month. It is a lot of work, but it is well worth it and a true differentiator in our markets.
You probably know the original five “Ps”: Proper Planning Prevents Poor Performance (Yes I know there is a sixth one, but I want to be PC). Here is a new six “Ps” to help us focus on this vital part of our preparation process for 2017:
Proper Planning Positively Propels People’s Productivity
One of the biggest mistakes I see many organizations make when they begin the planning process is not establishing goals or performance targets for every department within their organization. Basically, a plan is a map for your business and the two things you must know in order to use a map, are where you are and where you want to go. It is the same with a plan, with the goal being where you want to go or your destination. Once you know that, you can then decide what steps you need to take to get you to it, how to take them and when. That completes your plan.
This month is a great time to create your plan for next year. So here are some ideas about the areas in your business for which you might want to create a Performance Improvement Plan and a few metrics you could target in each:
Sales – This is the first one that comes to mind for all retailers because it drives the business and without it nothing happens. It is also the one we most often see goals developed for by our clients. However, quite often they only deal with total sales volume, which is the product of a lot of things happening together. Increasing/maximizing sales is obviously the main result you are interested in driving, but we find that targeting the things that go into the sale like Closing Rate, Average Sale and Revenue Per Up are better to focus on, because improving them will deliver the result you want. We have also seen goals for Items per Sale, In-Home sales % and Sketch % help get the right things happening on the sales floor. We recommend you look at where you are in all your sales metrics and determine two or three that you think can be improved. Target them on a quarterly basis, changing to new ones as you improve the originals. Just don’t give them too many goals or it will weaken their motivational power. Be sure to reward and celebrate success!
Office – Does your office run so smoothly that you never have issues with orders, paperwork or other processes? If that is the case you are in the minority, yet this is an area where we seldom see goals utilized as a planning or motivational tool. We suggest you find those parts of the office process that seem to constantly be causing issues within your organization and develop solutions for the problems, then set goals for improved performance. Each operation varies as to what part of the sales support, order fulfilment and customer service processes are handled, so it is tough to come up with any universal recommendations. However we are sure that your management team can come up with some good ideas in this area.
Warehouse, Delivery and Repair – There are many performance metrics that can be goaled in the back end of your business. In fact, next to sales, this is the most common area we see clients setting goals, paying bonuses and driving improvement. Perfect Deliveries %, Items Repaired, Open Repair Orders and Deliveries Made, are some of the targeted numbers we have seen. Depending on what systems you are using, you can find several great ways to focus this business area on improved performance and customer service.
Advertising – Most retailers do a good job of planning their advertising expenditures as part of their budgeting process. The best ones do great work in planning their creative to consistently deliver the message they want to targeted customers in their market. What we don’t see as often is a goal setting process that reflects the actual performance of the advertising other than just raw gross sales. While that is of course the major result, it is also good to track and set goals for each promotion that focus on traffic level, revenue per up generated, average sale, cost per customer, advertising to sales % and other meaningful numbers. This is especially true if you have an outside agency managing this process for you. What better way to hold them accountable for spending your money well?
Merchandising – Merchandising, along with adverting and sales, are the three areas of your business that most drive sales. Yet, we seldom see meaningful goals set for it in most small to medium sized retailers. There are many very critical numbers you can track with your business system that can be goaled to help you plan for improvement here too. Obviously Gross Margin, GMROI and Turn are very important to our business so they are good places to start. There are other areas a buying effort should manage such as freight costs, OTB and Vendor Selection that can also be targeted.
Yourself – So you thought we might forget about you? Remember that unless you develop and strive to make growth goals yourself, it will be tough for you to lead a goal oriented, growth focused team – walk the walk and talk the talk!