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From Home Furnishing Business

What Does The Barometer Say?

For those that remain, another management challenge is on the horizon. Many traditional furniture retailers learned to manage in an environment of supply chain problems and rapidly increasing prices. The result was a significant financial return. Now it is another set of management disciplines on the financial side. The starting point is financials on your desk by the second week after the close of the month. And yes, expect a cash flow from your financial team – not from your CPA. The following graph illustrates the cash flow factor for top quartile retailers. What is your cushion?

Fasten your seatbelts. It’s going to be an exciting ride. Understand your expenses and the impact on cash flow. Question every decision as to impact on cash flow.

What Sells: MOTION FURNITURE: A Study in Contrasts

Form vs Function
The longstanding battle between fashion and functionality has never been more evident than in reclining furnishings. Consumers are embracing the influx of stationary upholstery-inspired styles yet overstuffed traditional motion frames retain their place in the market. Similarly, demand is great for power motion innovations, yet manual recliners still dominate entry level price points. The fashion factor ensured by hidden buttons, cupholders and features is prized, while conversely, at the other end of the spectrum fully lit tabletops and worksurfaces are popular. When it comes to scale, more is more for consumers who equate volume with value. At the same time, many motion manufacturers are finding success with smaller silhouettes targeting apartment dwellers and downsizing boomers.

Design Options
Design directions in recliners and reclining sofas and sectionals continue to mirror the trends in stationary upholstery. “The cover is essential,” explains Marietta Wiley, vice president of merchandising and product development for Parker House. “Consumers are looking for fashionable fabrics on motion like what they’re seeing in higherend stationary upholstery—interesting textures and soft, lofty constructions.”

From sleek European styling to classic chesterfield tufting, reclining furniture encompasses every major design style. Contrasting welts, decorative stitch patterns, leather and mohair trims, and unique nailhead options are additional elements being used to elevate and distinguish motion designs. The result is an ongoing acceptance of motion sofas and chairs and their promotion from mancaves and home theaters to the living rooms of America.

This growing array of reclining options is resonating at retail. “Today’s consumer loves the ability to personalize sectionals to the perfect size and angles that enhance their living experience,” explains Anthony A. Teague, executive vice president of Jackson Furniture.

Statistically Speaking Post-pandemic sales in the motion category are holding steady. According to a FurnitureCore, Inc. survey developed by Impact Consulting Services (parent company of Home Furnishings Business), the combined upholstery category (stationary + motion), as a percent of total furniture sales, is holding at 34.1% in the first quarter of 2023, compared to 34.7% at the end of 2022 and 34.2% in 2021. Motion upholstery comprises 36.9% of all upholstery sales this year through the end of Q1—unchanged from its 2022 yearend share of 36.9% and down slightly from a 37% share in 2021.

As expected given macroeconomic changes, annual growth projections for the category are slowing. Motion upholstery is tracking 3.9% growth year to date in the first quarter of 2023—equal to the stationary upholstery category for the same time period—but down from 7.8% growth in motion sales in 2022, 24.7% growth in 2021, and 21% growth in 2020.

Statistically Speaking: Furniture and Home Furnishings Stores Face Marketing Challenges

Furniture stores rapidly increased sales beginning in mid 2020 during the pandemic and accelerated quickly during the consumer demand that followed. Since 2019, store sales have grown 23%. That growth, however, came in spurts with 3.1% decrease in 2020, 25.6% increase in 2021 and 1% growth last year. The paradox is that at the same time furniture store sales were growing, their share of total consumer spending on furniture fell at a rapid rate. Other furniture channels charged ahead further widening their gap. Table A shows that in 2022, the 1% increase in furniture store sales produced $78.96 billion, while consumer spending grew 6.3% to $213.45 billion.

Figure 1 details the growth for all products for the key furniture and home furnishings sales channels. Last year sales growth for both furniture and home furnishings stores was near the bottom of the list of other retailers marketing furniture products. However in 2021, the year before, as demand exploded, furniture and home furnishings stores growth was among the highest. At the top of the list in 2022 is e-commerce players with growth of 75.8% between 2019 and 2022 and 10.4% 2021 to 2022 in all products. All other channels except e-commerce fell below double-digit growth in last year.

Home furnishings store sales jumped coming out of the pandemic then flattened in 2022 to less than 1% growth (0.9%) (Table B). Home furnishings stores posted sales of $64.37 billion last year, unable to make a dent in the consumer spending total of $131.35 billion. Figure 2 details the primary home furnishings product categories.

The historical percent annual growth over the last five years 2018 to 2022 for furniture and home furnishings stores compared to consumer spending shows the slow growth of these channels heading into 2020 (Figure 3). Also shown are preliminary estimates for the first quarter of this year discussed in more detail below.


The ups and downs of the quarterly sales for both furniture stores and home furnishings stores are depicted in Table C. Advance March data from the Census Bureau suggests that sales in the first quarter of this year will be be up 2.3% for furniture stores compared to Q1 of 2021 and up 1.5% for home furnishings stores.

Over the last 10 years, the compound annual growth rate shows furniture store sales have grown at an annual rate of 4.7% versus consumer spending increasing at twice the rate at 9.8% annually (Table D).

Home furnishings store sales in the same 10-year period grew at a CAGR rate of 4.4% compared to 7.4% for consumer spending on lamps, floor coverings, window treatments, tabletop and cookware. But much of that growth occurred before 2017 after which e-commerce ramped up rapidly (Table E).

Growth in Stores
The competitive pressure on furniture stores began in earnest just before the start of the Great Recession in 2007. Although regional chains were also hit, mom and pop stores, especially, began closing, and that downward spiral continues for these small independents. Since 2012, 4.6% of furniture stores have closed. In 2021 there were 22,300 furniture stores in the U.S., down from 2007’s peak of 27,600, a difference of 19.4% (Table F).

Furniture stores with multiple locations appeared to stabilized around 2018, and the vast majority have survived. Many have either added locations or additions are planned. Table F below compares the number of corporate firms (in thousands) with the number of stores (establishments) since 2001.

Note that there have been some closing announcements during and following the pandemic. In the second quarter of 2020, Art Van closed all 85 of its stores in Michigan. A few large independents and regional chains announced closings last year, with many of the independents citing retiring family owners as the reason. Independents going out of business in 2022 include N.E. Liebman, Mechanicsburg, PA; Whitley Furniture Galleries, Zebulon, NC; Larrabee’s Furniture, Littleton, CO; Lastick Furniture, Pottstown, PA and Rotman’s, Worcester, MA (announced at the start of this year). Regional chain Weekends Only (eight stores in Missouri and Indiana) also announced it was shutting down.

Home furnishings stores have battled to say open, with 10.3% closing since 2012. And while they tend to be one-store locations, between 2018 and 2022 big chains have either shut down completely, like Pier 1 and Tuesday Morning, or suffered significant store closings, like Bed Bath and Beyond. In 2021 there were 23,100 home furnishings stores, compared to 33,200 at their peak in 2007, a difference of 30.5%.

The decline of the mom and pop independent furniture and home furnishings stores is evident in Table H which shows that the ratio of number of store locations to corporate entities. For furniture stores, the average number of stores per corporate firm up to 1.8 in 2020 (the most current data available). For home furnishings stores that tend to be more independently owned single stores, that ratio is 1.47, not significantly different in almost 20 years.

Employment
As the number of furniture and home furnishings stores closed, so with them went employees. Over the years, the actual average number of employees per store fluctuated more because of economic downturns and upturns than anything else. In the early 2,000s employment tended be a bit higher when furniture stores carried more employees in warehouse and delivery jobs that are now outsourced or no longer needed. Table H shows that especially for furniture stores, employment per store grew to an average of 10.2 employees in the years following the Great Recession before falling during the pandemic. This increase in average employees per store can be attributed to the demise of smaller mom and pop furniture stores who carried fewer employees. In the recovery following 2020, employment grew quickly to a current average of 9.9 employees per furniture store location. Home furnishings stores have taken a similar path with current average employees per store at 9.7. Table J shows the total industry employees since 2002. In terms of total shakeout of stores and employees, furniture store employment fell 3.6% in the four-year period 2018 to 2022 from 228,800 employees to 221,700. At the start of this year, February employment is down .05%, which is typical coming out of the holiday season.

Home furnishings store employment fell 11% from 2018 to 2022 with big hits from store closing, some scattered over years by Pier 1, Bed Bath and Beyond, and Tuesday Morning, to name a few. Home furnishing store employment fell from 267,200 employees in 2018 to 236,800 in 2022. Employment is down 4.6% in February this year, which is also typical of employment seasonality.

Editor's Letter: What Goes Up, Must Come Down

Since 1974, the compounded annual growth rate (CPGR) has been 6.1%, gradually falling from the 8% level as we experienced economic ups and downs. The graphic below presents the historic growth annotated with the significant happenings:
While our CPGR growth is below what is defined as good (10-15%) there are challenges that are unique to our industry. The pandemic gave rise to an increase in revenue at retail driven by an increase in prices due primarily to transportation and increase in gross margin objectives enabled by supply and demand. Now that prices are declining and written orders at retail are weakening, it is tempting to lower the gross margin objectives. The industry should hold strong and resist the urge to discount. Note I said the industry. When one competitor does so, others follow.

Our products are a bargain when compared to other consumer products and have been so for years – refer to our feature article on page 8 for consumer price index compared to all consumer products. Let’s stop the race to the bottom. Just realize you can’t make money buying/displaying/selling/delivering a $399 sofa.

Cover Story: IT’S TIME TO GET YOUR MARKETING ON

The industry is toying with us, with both recent growth and extreme declines – 13.5% December to January. We need to recognize that what fueled our growth was not increased consumer demand for furniture but the supply chain disruption. The pandemic forced an increase in prices that the industry passed on to the consumer. As can been seen from Graphic 2, the industry and/or the consumer had not, in the past, valued our product as compared to other consumer products. The graphic compares the consumer price index for furniture indexes to all other consumer durable products:

Yes, the industry has grown in the past 50 years, increasing 47% ($81B - $119B). Prior to the pandemic, generating on average net operating income of 3-4% during that period. There are many reasons for this lack of growth including quality reduction, alternatives for discretionary spending, etc. The industry had, for the most part, a “drive to the bottom” strategy. Yes, there were moments such as the bedding sector’s introduction of premium bedding with foam construction as a selling point, however, the pandemic’s increase in unit prices drove the industry post-pandemic to 57.6% ($118B to $186B) in three years doubling the net operating income.

Yes, it has been a great period of growth in revenue and profitability, but we must not be deluded. It was not an increase in demand as can be seen from the national sample of store traffic shown in Graphic 3:

The main takeaway is that the average unit price will now decline as transportation cost normalizes as it is already doing, and gross margin objectives are revised downward. It is time to begin MARKETING.

Marketing is a combination of functions beginning with ADVERTISING and transitioning to RETAIL EXPERIENCE (Facility/Visual display), then embraced by SALES and concluded by LOGISTICS (Warehousing/Delivery). The starting point is product that must be correct in terms of quality, value and style. The featured content in our January/ February 2023 issue of Home Furnishing Business detailed the demands of merchandising.

As we begin to discuss marketing in the furniture industry, we need to recognize that the dynamics are controlled by the consumer.

For the traditional furniture retailer, the challenge is the transition from the Baby Boomers to the generation that followed. Generation X is becoming their prime consumer target. Graphic 5 illustrates the concentration of age/income sold and compares the number of consumers purchasing to the number of consumers households in the market:

To begin the marketing discussion, we must understand one fact, “It takes a village to sell furniture.” That means all stakeholders must participate; the manufacturers, the retailers supported by markets, buying groups and associations.

Marketing For Manufacturers
Many manufacturers have adopted the strategy of “build it and they will come,” with ‘it’ being the PRODUCT and ‘THEY’ referring to the retailer and consumer.

ADVERTISING to its primary customer (B2B), the retailer has been reduced to a market presence – High Point and Las Vegas. While an argument can be made that this portion of advertising doubles with the addition of Las Vegas, the question must be asked, “did it double the expense?” For many retailers, Las Vegas is an important market for bedding and an opportunity for key executives to visit with top management and to scout new vendors. The pandemic exposed some of the weakness of the market concept. However, the industry responded to the challenge by opening more with “every Tuesday” and virtual showrooms. While the lack of new product reduced the need for market, the challenge of finding any product available was a real need.

Actual advertising as defined by product catalogs with the 11x17 sales sheets had diminished as product sampling followed production offshore. The logistics of photography became too much of a challenge, however it did not eliminate the need for this material. Interestingly, retailers are creating their own photography studios utilizing various new products or constructing their own. Did the retailer just give up? From a cost perspective it would be more efficient for one entity to execute for many.

And then, there is B2B advertising in print magazines such as Home Furnishings Business, which have faced the same decline, as manufacturers relied on free ink instigated by public relation firms placing products couched as editorial.

Of course, many marketers believe digital is as effective as print to communicate to both retailers and consumers. However, we question this approach when product is involved. A lo-res image viewed in seconds cannot communicate the value or create excitement.

What about the manufacturer’s commitment to advertising to the consumer? Except for furniture manufacturers such as STRESSLESS and bedding manufacturers such as TEMPURSEALY, all have disappeared from television. However, the verticals such as BASSETT, ASHLEY, LA-Z-BOY, and ETHAN ALLEN are communicating their unique product to consumers to the benefit of their company owned stores as well as their dealers. In a recent consumer survey by FurnitureCore about the importance of brand, manufacturer’s reputation increased postpandemic to the number two spot to 21.36% when asked the following:

The question is what brand? When pressed further, the consumer recited the direct-to-consumer bedding brands such as Casper and Purple, but not the emerging furniture brands such as Maiden Home, Floyd, and Joybird. This should be a warning to traditional furniture manufacturers based on what has happened with the direct-to-consumer bedding brands that are taking 15-20% of the floor space of traditional retailers. The other challenge is the once established brands such as Broyhill, Lane and others being purchased and merchandised again at a lower quality and price to a deceived consumer. Witness the success of Big Lots with the Broyhill name prior to the United meltdown.

No matter the strength of the advertising message, a proactive SALES EFFORT must be mounted. It is the exception for a retailer to pursue the new product. With only about 30% of the dealer base attending market on average depending on the percentage of dealer base in the top 200, the sales reps must complete the task.

And what is the task? The United States is divided into 404 distinct markets (MSA) in which 91.2% of all furniture is sold. Graphic 8 presents the statistics. A major question for manufacturers is in how many of these markets do they have a presence? Interestingly, most manufacturers do not know. According to FurnitureCore’s database on average, a manufacturer has coverage of 70-75%. To maximize performance, total coverage is required. Obviously, the smaller the market size, the less coverage. This is the opportunity for a tag team approach utilizing an in-house representation with a field sales rep.

How many sales reps does a manufacturer need? It depends on the service levels required to maximize performance. Traditionally, sales representatives have been left alone to produce the results —after all they are paid on commission. Additionally, they are independent contractors and cannot, by law, be directed. However, that hands-off approach may not be correct for today. The first question is often the hardest to answer by marketing management. The service level indicated in Graphic 9 illustrates what we mean.

There can be a difference in philosophy in determining the criteria. For example, the best performing retailer above average market share may receive the most frequent visits, or the below average market share may receive more or a combination of both.

Once the criteria are set, typically, the result is there is not enough time. The answer is to change the service criteria or the dreaded solution, cut territories. While painful to execute, the result is increased sales and commissions:

The only measure of sales performance must be market share. Did the manufacturer get an increasing or decreasing share of what was sold in the territory? It is a difficult thing to measure with variance in the market being ± 20-30%.

Graphic 11 illustrates the most recent performance (Q4/2022) between the 404 markets. It illustrates the ineffectiveness of the question, how is business? Unless you are speaking with your competition.

Once the retailer is excited about the product and the sale is made, all that is left is to move the product to the retailer’s warehouse on a timely basis at an expected price. The pandemic has disrupted that step not only increasing prices but destroying dependability and increasing inventory levels.

This level of failure will ultimately lead to an industry discussion that has lingered for years. Should furniture be sold delivered or FOB the manufacturer’s plant.? Historically, there was some justification when the plant was in North Carolina, but now, when it is in China, should it be another discussion? During the pandemic container costs and on shore delivery soared to never anticipated levels. Transportation contracts were ignored as container company’s position was, “If you want it at that price, you will need to wait on it.” Would the manufacturer have a better negotiating position?

Marketing For Retailers
The memory muscle is beginning to kick in with the retail sector. For several years, advertising was not required. Advertising as a percentage of revenue declined during the pandemic year (2020) to 3.92% and only now has it begun to increase to the 5% level. As with merchandising that was discussed in a previous issue, the retailer is confronted with communicating with five different generations as illustrated in Graphic 13.

The first challenge for the industry is to influence the consumers choices for disposable income purchases. The pandemic shutdown allowed the home furnishing purchase to move up in priority to number two behind a car purchase. The objective would be to maintain that performance.

However, price will not do it, but the dream of a beautiful home will. Graphic 14 below presents the statistics.

The challenge is how to communicate to each of these divergent generations. While the Internet has emerged from the pandemic as the medium of choice, television remains a solid number two. The results of our recent consumer survey on furniture purchases are shown in Graphic 15.

It is certain that the Internet/social networks emerged as the number one method of communication with more than 50% of consumers selecting this as number one motivators. Only Baby Boomers were less at 34% remaining with television at 32%. Understanding how the retailer is positioned within the market against their competition with their target customers is critical. Graphic 16 presents the findings of a consumer survey (a retailer effectiveness study).

These four statistics measure a retailer’s performance: DID NOT CONSIDER – Effectiveness of Advertising
CONSIDERED NOT SHOP – Effectiveness of Message
SHOP BUT NOT BOUGHT – Merchandise Line-up
SHOP AND BOUGHT – Sales Management
Obviously, there is some overlap between the statistics.
Another interesting performance statistic from the study is:
HOW THE CONSUMER PERCEIVES YOUR STORE AGAINST YOUR COMPETITION. Graphic 17 lists the major purchase motivators and how each retailer is perceived. The cost per UP in 2022 has fluctuated around $20 comparable to the same number in 2019.

Once the consumer is motivated to visit the store, the next objective is to CONSUMMATE THE SALE. The pandemic introduced another dimension in the selling process, which was beginning the sale in the home. Using live chat or text or just the phone, the sales associate can finalize the sale or schedule an appointment. However, when the restraint of the pandemic subsided, the consumer continued using the web presence as the pathway to the purchase but visited the stores next. Many retailers have abandoned the proactive selling. However, those that did not, continued to reap the benefits while ecommerce sales to retailers with a brick-and-mortar presence have increased. Graphic 18 presents the statistics.

The sales volume generated by the individual retail sales associate (RSA) has skyrocketed with the increase in average ticket. Graphic 19 provides the current (2022) level.

As you can see what the dream was – a million-dollar writer is now commonplace to be replaced by a two- million-dollar objective. The increase in average unit dollar obviously disrupted the compensation of the typical RSA. However, with the stress of the pandemic most retailers did not address the issue and the RSA received the same bump in comparison as did the owners in net operating income. Graphic 20 summarizes:
As can be seen from the comparison of the two tables, 2019 to 2022, the RSA received more of a bump. As the unit sales price returns to a more normal level, the RSA compensation will or must come down, another challenge that the industry must face. This issue may be the death blow for the commission structure. The close rate while experiencing an increase during the “shut down” period and the rebound thereafter has returned to the upper 30%. Graphic 21 presents the monthly statistics from the geographically dispersed sample of a balanced group of retailers by volume.

Sales per square foot of selling space has increased to an average of $240 per square foot annually increasing driven by average unit selling price. Interestingly, the performance of retailers over $100M did not outperform the smaller retailer as much as pre-pandemic.

With the increasing occupancy cost and the availability of space, the trend is to smaller spaces. Havertys in Atlanta is opening express stores of 12,000 square feet.

Compared to pre-pandemic, the consumer is somewhat pleased with their shopping experience, as illustrated by Graphic 22.

We wanted to better understand the consumer’s perspective of the retail sales associate by asking the following question:
As can be seen, most consumers were more satisfied in each element of the selling process.

With the sale complete, the final step is DELIVERING THE PRODUCT. This is where traditional furniture retailers can shine when compared to the ecommerce competition. The opportunity to deliver an undamaged product is important to personnel that share the same values as the retailers they represent.

The cost of the total handling process at 7.48% of revenue offset by 2.91% from delivery income according to FurnitureCore — financial best practices for top quartile retailers— the cost as a percent of revenue has increased (7.05% - 7.48%) and delivery income has also increased (2.26% - 2.91%).

As would be expected with the supply chain disruption, retailers scrambled to find product — any product. Retailers ended the pandemic period over inventory as indicated by their inventory turn as of Q3/2022, shown in Graphic 24. While overall inventory turns declined 18% for all retailers, larger retailers declined 29% reflecting their ability to purchase and warehouse the product.

The pandemic disrupted the consumer’s buying habits and the supply chain disrupted the process of both manufacturers and retailers.

Unfortunately, when the dust has settled, traditional furniture retailers have lost as of 2022 3-5% of the total industry market share. To whom did we lose? Value retailers such as Big Lots, home improvement chains such as Home Depot and mass merchants. It is time to get our game on.

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