Over twenty years ago, with the demise of the national chains (Sears/Montgomery Wards/JC Penny) to be followed by the national furniture chains (Levitz/ Wicks/ Helig-Myers), the warning of “alternative distribution channels” became the caution. While many alternative channels have fallen by the wayside and new ones such as Wayfair in the eCommerce channels have emerged, the warnings were correct.
Traditional retailers whether independents, regional chains or manufacturing direct face significant competition in these alternative ways to buy furniture. In the disruption of the pandemic in Q1/2020 our sister company, FurnitureCore, registered a decline in market share of traditional retailers (independent and regional chains) due to the lockdowns in 2020.
The challenge is to recognize these SILENT COMPETITORS and decide, do we want to compete with some of these giants for the “trash furniture” or more specifically the $399 sofa that is missing from the assortment? It is the beginning of a new year and a new strategy.
Now, before we go too far, there is a need for people to live in a stylish home at an affordable price point. That is the major challenge. In today’s world of $1000 phones where does the beautiful room fit.
In a recent national consumer survey FURNITURE is faring well in position number two only behind cars compared to 2019 prior to the pandemic. The table below present the rankings. Maintaining that position of intent to purchase is the challenge in MERCHANDISING.
MERCHANDISING is the sum total required to create a product from design to manufacturing to transportation to marketing to the retail floor or website. Then the retailer moves forward creating the presentation along with the message that will be used in the marketing and down to the retail sales associate that communicates to the consumers. In summary, a product that excites the consumer at the price point. What is important to the consumer? In a recent national survey conducted by FurnitureCore, a sister company of Home Furnishings Business, consisting of consumers that had purchased furniture and when asked to rank the importance of certain features, QUALITY by far was number one in their minds. The table below shows the consumers’ ranking. When you made your most recent furniture purchase, the following are some features that may have brought that product to your attention. Rank these features in order from 1 to 7 of the importance of each with 1 being the most important feature, 2 being the second most important, etc. If you do not think a feature is important to you, please do not rank it.
When you made your most recent furniture purchase, the following are some features that may have brought that product to your attention. Rank these features in order from 1 to 7 of the importance of each with 1 being the most important feature, 2 being the second most important, etc. If you do not think a feature is important to you, please do not rank it.
Merchandising is a process not a flash of brilliance, nor is it a cold calculation of another point of gross margin. It is a creative process. In today’s diverse consumer base and competing needs for disposable income, there is a requirement for a more data driven approach. However, the numbers will never replace the creative input provided by the merchant. The following presents the elements in the process:
Reflecting back, when you questioned the MERCHANT, how he – yes typically a male and for the most part the owner of the store – made the decision on the product he purchased. The answer was the people that were his customers, specifically, “Well, Mrs. Jones, they are well off and Mrs. Smith is as well, but sort of frugal, and Mrs. Brown has great taste, but they struggle” … and so forth. He really knew his customers not the specific purchase but the lifestyles of people.
Manufacturers that were considered to be PROJECT MAVENS, typically the owners, cultivated relationships with these merchants and got specific input on what would sell. This input continued as recently as 20 years ago, but more organized with dealer counsels at Broyhill, Booker and others.
Today the industry has moved away for the most part from this collaboration as retailers have gotten larger and more diverse and manufacturers have expanded their product offerings. The challenge to avoid the impact of “fast furniture” is to restore the “human hands” in the process. We can not return to the small factory in the foothills and the predominant local mom and pop community store. However, we can use a more analytical approach to determining the product promised and the product offered to the consumer. It may not be as good as “Mom’s apple pie, but, “not bad.”
Let’s start with a 35,000-foot perspective. There are 131.21 million households in the United States from single homes to condos/cluster home to apartments. Living in these shelters are approximately 100M furniture purchasers annually segmented by age/income as shown below:
These households are the targets for furniture manufacturers and retailers. Each year approximately 75% of these household make a significant furniture purchase. As of October of this year, based upon a national survey of furniture purchasers conducted for Home Furnishing Business by FurnitureCore, 17.8% were engaged in the shopping process significantly up from 13.4% in 2019.
This consumer target at a national level is interesting but not actionable to either the retailer or manufacturers. First, if we drill down to a market (MSA) level, we find the demographics vary 200% in age and 400% in income. In other words we have young markets (Manhattan, KS) and old markets (The Villages - Florida) as well as affluent markets (East Stroudsburg, PA) and less affluent (San Rafael, CA). The tables below present some examples.
The merchant must go beyond sheer demographics to identify those “Mrs. Smith’s that have the income but are frugal” and the “Mrs. Brown’s that have the taste level but lack the means.”
This introduces lifestyle into the equation or physiographic clusters. When a typical furniture retailers customer base is analyzed, we find that they sell to everybody, but specific clusters emerge. The graphic to the right presents:
The “chic society” and “doing well” are the descriptions that replace the mental image of “Mrs. Smith” and “Mrs. Brown.” The starting point for understanding the retailers customer base is who you are selling. Now, availability of data allows the determination of the age/income of the “Head of Household” simply by use of the home address. The processing of your sales each quarter allows the definition of your customer base, and when compared to the households in your market footprint a concentration factor can be produced. The concentration factor is simply the probability that a person in this age/ income segment would be a customer. The graphic below illustrates the concentration of a traditional furniture retailer:
Obviously, this must be drilled down to the product level and for some the store level which introduces the possibility for tailoring the merchandising line-up for those customers within a defined perimeter. Today, the concept of a “destination” store has disappeared because consumers will not drive the distances to shop.
As can be seen from the graphic, the retailer sells to everyone, but 73% are their primary consumer (shaded brown). A retailer or manufacturer obviously wants to sell everyone but too broad of a selection results in a confused customer. The goal is for the consumer to comment, “this is my store, it knows what I want.”
As the United States has become more diverse and the Internet has exposed the consumer to a global lifestyle, along with the increase in the more visual social media platforms of Pinterest and Tik-Tok has stimulated the home furnishing consumer. As the styles evolved from traditional, manufacturers and retailers coined the term “transitional” contributing to a lack of clarity. Home Furnishing Business has found one of the better ways to communicate style is the use of a room scene along with a descriptor. The scenes to the right are the current descriptions:
In the recent consumer survey, TRADITIONAL, while still the largest descriptor (38.4%) continues to decline. When the consumer was asked their current decorating style, Cottage casual continued to increase. The graphic to the left presents the findings: But even more interesting is the increasing decline of the traditional style when the consumer was asked about their “dream” style. The statistics are shown below:
The pandemic and the disruption of the supply chain has played havoc with the industry’s price structure. Unit prices have increased resulting in record sales in the furniture sector and specifically furniture stores as can be seen in the graphic: While revenue has increased as the average ticket increased, unit sales did not. The net results are the shifting of price increments.
While revenue has increased as the average ticket increased, unit sales did not. The net results are the shifting of price increments.
The graphics below present the unit sales by price point for a STATIONARY/FABRIC/SOFA comparing 2019 Q1 – Q3 to 2022 Q1 – Q3.
As can be seen from the graphic, the promotional price points < $399 declined 11.3 % with the opening price points of upper $999 – 1099 increasing by 9.0%. Will the price points shift back to the promotional price points? Will the value merchants (Big Lots/American Freight) and Mass Merchants (Home Depot/Costco) capture that price point? Should we care? The cost to buy/sell/deliver a $399 sofa is the same as a $599 sofa. What does your consumer want? What can your retail sales associate sell?
CREATING THE TOTAL ROOM
One of the most important elements that differentiate furniture stores from mass merchants and value merchants is the retail sales associate. The opportunity to inspire the consumer to not just purchase a sofa, but to create a beautiful room is the traditional furniture retailers unique difference.
But first it requires some cooperation between the upholstery buyer and the occasional buyer. The questions of “what goes with what” is often forgotten. There is technology that analyzes words in product descriptions to suggest purchase combinations. However, the talent of the visual merchandisers working with the buyers to create looks to include upholstery/occasional/ accessories has improved the consumer’s experience and increased the average ticket at the same time.
The pandemic mentality of “can we deliver what we sell” has cut short the effort to add to the ticket. The graphic on the next page presents the industry statistics for attachment rates.
With the pandemic and the supply chain disruption came a significant increase in gross margin (48.71 – 51.93%). The table below presents the comparison.
GROSS MARGIN MAJOR PRODUCT
As is evident from the table, all product categories experienced increases especially outdoor driven by supply and demand as consumers moved outdoors for entertainment due to COVID.
The downside to this increase in gross profit was the increase in inventory. The measure of GMROI (Gross Margin Return On Investment) as shown below:
While overall, the measure fell slightly ($2.94 - $2.70) from pre-pandemic, the top retailers decreased substantially ($5.30 - $3.27). As can be seen from the graphic to the right for ALL RETAILERS the gross margin per square foot of selling space continues to increase driven by the larger retailers (red line):
MEASURING THE RESULTS
The final step in a more analytical approach to merchandising is to understand how effective the product line-up is in attracting those consumer segments that are part of the overall strategy. Again, a furniture retailer does not necessarily need to sell everyone. The very focused retail verticals such as Arhaus, La-Z-Boy, and Love Sac know their customers, a very focused target. Understand your targets as presented to the right. The approach to measuring the effectiveness is simply a more comprehensive “WAR ROOM” that is digital instead of the difficult to maintain wall of pictures with post-it notes. The same information is needed. Sales in dollars and units; Gross profit and average unit sales all in rank order. The table presents an actual example with some redaction illustrating top 10 performers. That could be expanded: the comparison of top sellers overall to top sellers by demographic segment, there is significant deviation in top sellers. A critical merchandising analysis of price point and style will give guidance to how to expand sales to this demographic segment.
While the knowledge of what is selling to who on the retailer’s floor is important input to the consumer preference, but this is after the fact. In the ideal world, sharing of this information with the manufacturer would be invaluable. Another approach would be for the manufacturer to solicit input from the consumer. While in person focus groups are ideal, the costs and logistics can present a challenge. However, the use of Internet focus groups can provide a broad sample of consumers on a timely basis. The use of digital model early in the project development process can avoid costly mistakes. The graphic on the next page illustrates the output. Merchandising has evolved from the intuitive perspective of the merchant. The challenge is to integrate a more analytical approach to deciding WHAT WILL SELL.
Health and wellness are taking priority in consumer spending and mattress makers are seeing their share of the sales. “Today’s consumers are looking for better goods because they understand how quality sleep benefits their life,” explains Mark Kinsley, president and CEO of Englander. The link between health and home has never been stronger and is generating increased consumer interest in the origins of mattress components. “With the heightened awareness of sleep and its link to physical and mental wellness, the appeal of natural and organic products in our homes now includes the mattress which we spend one-third of our lives on … and more people are willing to pay more for materials that are better for their health and offer luxury sleep comfort,” says Trina Solomon, director of marketing for Diamond Mattress.
Mattress sales continue to climb according to industry research. Estimates from the FurnitureCore model developed by Impact Consulting Services, parent company to Home Furnishings Business magazine—shows the bedding category grew year over year from $18.48 billion in 2020 to $22.56 billion 2021. This shows the bedding category as stable with approximately 12.9 percent of total furniture industry sales in both 2020 and 2021. Third quarter mattress sales in 2022 finished at $17.37 billion, a respectable 3.9 percent increase over the previous quarter’s sales. Growth measured year over year in Q3 was smaller, with a 0.7 percent increase compared to sales in the same period of 2021 ($17.26 billion).
While post-pandemic home furnishings sales have softened, the demand for wellness and health-related products continues to grow. Addressing these consumer priorities appears to be a key strategy for mattress makers working to retain their share of consumer spending.
The rapid increase in mortgage rates in the Fall of 2022 put what many feel was much-need pressure on the housing market to slow its pace of record price increases. However, prices have not decreased as much as expected as tight inventories have protected the industry from sharp declines. In addition, falling mortgages four weeks in a row to December 8 has not spurred demand. At press time, mortgage rates were 2X the rate in January of 2022, but home prices still 6% higher.
A correction may be ongoing, but fewer economists now suggest there will be a 2023 housing crash. Some even predict that slightly declining mortgage rates beginning in November may suggest the housing industry has weathered the worst of it. How long the correction will last is in large part in the hands of the Fed and whether additional rate increases are forthcoming. Current, existing home owners are sitting tight. Also, there is another wrench in the new housing crisis and subsequent recovery. New household formations are now accelerating while housing supply remains near historic lows, with not enough new construction in the pipeline.
All of these housing factors and their impact on the furniture industry are examined in more detail in this insallment of Statistically Speaking. Each housing factor discussed is divided into two sections – (1) the current situation, and (2) the future drivers going forward.
Current Situation. In the first week in January of 2022, a 30-year fixed rate was at 3.22% and a 5/1 ARM 2.41%. Eleven months later, the fixed rate had more than doubled to 7.08% and the 5/1 ARM had jumped more to 6.06% (Table A). Since that height last November, mortgage rates have continued to drop four straight weeks (at press time) almost three-quarters of a point, the largest decline since 2008. Last December 8, a 30-year fixed rate dropped to 6.33%. Since November 11, the rate for 5/1 ARM exceeded the 30-year fixed and has no longer become attractive.
Future Drivers. While the decline in rates has been large, according to Freddie Mac, “homebuyer sentiment remains low with no major positive reaction in purchase demand to these lower rates.” Interest rates have priced many homebuyers out of the market. Couple that with inflation and economic fears, and homebuyers have chosen to sit this one out for a while.
New and Existing Home Sales Current Situation. The surge in home sales that began during the pandemic and continued through 2021 peaked in January 2022 at a combined 7.3 million new and existing units (annualized). Both new home sales and existing homes sales have been in free fall since then. During the first nine months of last year through October, the most current data at press time, new home sales fell 23.9% and existing home sales were down 31.7% (Table B). Low inventories and declining pending homes sales data suggest November and December continued the trend.
Future Drivers. Besides the stability of mortgage rates, the key drivers for housing demand going forward include, among others, new household formations, consumer confidence, the affordability of housing, and new construction on the horizon, which is examined in more detail later in this article.
Current Situation. Housing prices, both new and existing homes sold, have been skyrocketing, especially since 2019. The annual median price of a new home increased 41.1% between 2019 and October 2022 YTD while existing home prices grew 42.2% during the same period. (Table C). Despite falling home sales throughout the summer, prices continued to grow, but softened for existing home sales with rising interest rates. New home prices slowed briefly with the impact of higher rates, but the median price of a new home in October was still $493,000, a new record. This price was 8.2% above the prior month of September following a two-month slump after recession fears surfaced in the media and larger interest rate increases became evident. October new home sales prices were also up 15.4% over October 2021. Meanwhile, the median price of existing homes sold fell in October for the fourth straight month from its peak in June of last year. October's median existing home price of $379,100 was 8.4% below June's record of $413,000.
Future Drivers. Low inventories should keep prices from falling significantly, especially if interest rates stabilize. More importantly will be whether the economy responds to anti-recessionary efforts by the Fed.
Housing Inventories Current Situation. Low housing inventories have been a hot topic over the last three years as one of the prime drivers of increasing home and rent prices. During the buying frenzy beginning in 2020 through October of last year, inventories for housing units for sale dropped 56.7% and available rental units declined 16.3% (Table D). But as housing demand has slowed in recent months, months’ supply of inventory has increased as this factors into available inventory and current demand, which has been low.
Future Drivers. New construction of homes and apartments and slower demand are the two key drivers of inventory levels and also key to easing the housing price wars. Unfortunately, in 2023, especially in housing units for sale, current housing starts don’t appear to be high enough to appreciably impact inventory without a sharp decline in demand.
Housing Construction Permits and Starts
Current Situation. It takes a while to permit, start, and complete a new home or condo (seven or eight months per the Census Bureau). And an apartment building takes well over 1-1/2 years (17.5 months per the National Association of Home Builders). The length of the process provides a unique window into the future inventory of new homes and apartments.
For single-family homes and condos, building permits were issued in a frenzy and new units started beginning in the summer of 2020 and peaked at the end of 2022. About 50% of building units permitted are started within the same month and 90% are underway within two months. Therefore, housing and apartment starts track closely alongside permits. Single family starts peaked in the winter at the end of 2020 at 1.3 million annualized units but were down to 855,000 starts by October of last year. Total starts for the first nine months of 2022 were down 6.6% over 2021. Meanwhile, multi-family apartment starts stayed strong at 612,000 last April (Table E). Year-over-year October 2022 YTD total average multifamily unit starts are up 17.5%. Future Drivers. Home and apartment builders, much more so than existing home sellers, have to look into their crystal balls as the housing demand landscape may have changed by the time a project is started to completion. Understanding changing demographics is essential to the planning that goes into building, especially since the pandemic. For example, is there a trend toward moving out of the city and into the suburbs? Or, what is the affordability picture for younger households? No matter the current consumer demand, mortgage rate or inflation rate today, new home and apartment inventories were set in stone months ago for new homes and much earlier for apartments.
Current Situation. With the flurry of building in 2020 and early 2021, new homes and condo completions remained strong in most of 2022 through September and then began to decline, as economic uncertainty set in (Table F). New homes were completed in the first nine months of 2022 at an average annualized rate of 1 million, which was 5.3% higher than the first nine months of 2021. Meanwhile multi-family completions, which had begun construction over 1-1/2 years prior, slowed slightly in 2022 to an average annualized rate of 343,000 for the first nine months, down 6.5% compared to the first nine months of 2021.
Future Drivers. Table F also shows estimated new home completions through the first six months of 2023 based on what is already in the pipeline, and the picture is not pretty. Based on starts seven to eight months prior, new home completions in the first six months of this year are estimated to decline a total of 26% in annualized units.
Multi-family units will pick up some of the slack in housing as there will be more apartment units built this year since the mid1980s (Table F). Buildings begun over 1-1/2 years ago, should come online growing an estimated 33% in total annualized units over the first six months of this year compared to 2022. The second half of this year could bring another 24% growth in units over the first half of 2023. With the high number of apartment completions coming this year, the furniture industry has an opportunity not seen in years, to market apartment-suited home furnishings, especially to the 25 to 39 year age group, which is growing rapidly.
The one-year growth in housing starts by region gives us a glimpse of what we might see in the months ahead for new houses and the longer future of multi-family apartment buildings. Compared to the first nine months of 2021, total new home starts were down 6.6% and multi-family starts were up 17.5%. One-year growth for new home starts declined in all regions, with the Northeast dropping the most by 15.6%. The Midwest was down 6.3% in one-year new home starts with the South declining 5.1% and the West 8.0%. All regions posted very good growth in multi-family apartment building starts during the same period, except for the West which was up only 2.7% for the first nine months of 2022 compared to 2021 (Table G).
Current Situation. The population has been growing for many years in the 25 to 39 age group as Millennials flooded into adulthood. However, numbers have been declining for the 40 to 54 group, the households in their prime earning years. Last year there were 7.5 million more people in the younger Millennial age group than the older adults (Table H). The Census Bureau is also reporting unexpected growth in new households coming out of the pandemic for younger adults.
Future Drivers. According to the Census Bureau, the demographics will change dramatically over the next 10 years impacting the housing and furniture needs of households under 55 in ways not seen since the Baby Boomers came on the scene. In 10 years, it is estimated the total population ages 25 to 54 will grow by 8.9 million, and almost half will be in their prime furniture buying years by then. This explosion of households will be the subject of an upcoming issue of Statistically Speaking.
In the ongoing research by FurnitureCore, LLC, a sister company of Home Furnishings Business, in Q1/Q2 of 2020 as the pandemic became a fact, the consumer’s purchase motivator ranking moved MANUFACTURER’S BRAND from position four of six to two of six. The table below compares 2019 to the initial pandemic period.
The following is a list of motivators that influence a purchase of furniture: Rank in order of importance to you with “1” being the most important:
As can be seen from the graphic, DESIGN returned to its previous level, post pandemic, in importance but MANUFACTURER BRAND remains a solid #2 after QUALITY. The question is what are manufacturers doing to establish brand presence with the consumer? While consumers list shelter magazines as the THIRD most preferred influencer, there is a lack of advertisers of furniture in these magazines.
While the emerging direct to consumer (DTC) manufacturers are actively promoting their brands to consumers, traditional manufacturers are relying on the retailers to promote their brands. Manufacturers should learn from the bedding sector. Brands such as Casper, Purple, and so on have overtaken the traditional brands from a consumer’s perspective. Their new brands are now invading the traditional retailer’s floor.
Should traditional manufacturers rethink their consumer advertising strategy?