COVID Shutdowns Crushed Home Furnishings And Furniture Stores. The Squeeze Will Continue.
The COVID-19 retail shutdowns earlier this year did as of yet incalculable damage to some sectors in retail. When the government determined which retailers could stay open for the duration – and which had to close – the scales of retail commerce were weighted to favor e-commerce, mass merchants, dollar stores, grocery, and home improvement retailers. That left many others, like fashion, jewelry, footwear, and furniture and home furnishings stores, hanging by a thread.
Two recent studies – one from UBS and another from IBM
The UBS study looks at the number of permanent store closures by retail sector, projecting trends out to 2025, when it predicts a total of 100,000 retailers will be forced to close as online penetration rises to 25%.
The IBM study projects retail sales by sector through year-end 2020, based on macroeconomic trends, including unemployment, savings rate, new home sales, and consumer confidence.
IBM’s analysis predicts retail will contract by only about 3% overall (excluding automobiles, motor vehicle parts, and gas stations), but it shows huge swings with many more loser sectors than winners, with electronic shopping the biggest winner of all, up 20% year-over-year.
Within the reports, which deliver not unexpected if sobering news, one finding popped that goes against the current narrative in home furnishings and furniture retail. With people spending more time in their homes and taking on home improvement projects, conventional wisdom holds they will turn next to buying things to decorate their homes.
But retailers that make a living selling products to furnish homes still have a rough road ahead of them.
Struggles for home furnishings retailers will continue
Through the first half of 2020, UBS finds that home furnishings stores rank among the hardest hit by permanent store closures, totaling 820 stores closed, including 200 Art Van furniture, 450 Pier 1, and 56 Sur La Table home furnishing stores. Bed Bath and Beyond
Looking further out, UBS expects 11,280 home furnishings stores to close by 2025, ranking this third in total number of closures after clothing and accessories stores (-23,940) and consumer electronics stores (-12,490). Consumers’ shift to buying online will play havoc for retailers that haven’t invested in technology, shares UBS senior research analyst Michael Lasser.
“A quarter of all retail sales will be done online by 2025. That will necessitate fewer stores,” he says. “Retailers that effectively harness the power of omni-channel and are able to use those physical locations as hubs of distribution will be well-positioned. But smaller players are particularly vulnerable to the changing landscape.”
Shifting retail sales online in the home furnishings and furniture space is challenged by the expense of shipping bulky and heavy items, especially for retailers that have to compete with free or low cost shipping from Wayfair
But for smaller independent home retailers that is but one of numerous other challenges to make online retail work. They simply don’t have the bandwidth, even if they have e-commerce capability.
“Even before the crisis, furniture retailers were mostly not up to the task of handling even a smaller amount of non-physical customer engagements properly,” wrote David McMahon, founder for PerformNOW and contributing editor at Furniture World magazine. “It is a classic case of retailers doing things the same way as always because those things ‘kinda’ worked.”
While McMahon reports that home furnishings retailers have experienced increases in lead traffic, coming from email, telephone, social media, website, and other digital media, they have been “hard pressed to handle this increase due to compromised human resources and outdated processes.”
Even while some furnishings retailers have enjoyed tailwinds from people wanting to spruce up their homes, Russell Bienenstock, editorial director and CEO of Furniture World, expects the bloodletting to continue.
“Those retailers that were weak before the pandemic for a variety of reasons, or were over leveraged, are having serious problems, but my impression is that the pandemic accelerated the inevitable,” he shares.
Retailers that are benefiting now include those retailers that quickly ramped up their digital e-commerce capability and adapted their store operating procedures during the shutdown to service customer in-store through private appointment selling that generated both higher close rates and bigger ticket purchases.
“Furniture store owners who didn’t close down 100 percent during the pandemic are doing better than those who couldn’t figure out how to continue to communicate and sell,” he continues.
These are strategies – better management of digital-generated customer leads, e-commerce, and continued appointment selling – that can more home retailers not stuck in outmoded business models forward. They will also benefit from reduced competition when competing stores close.
“Better positioned retailers are actively picking up the slack,” Bienenstock says.
Home retailers have to climb out of a big hole
Looking out through the rest of the year, IBM forecasts home furnishings and furniture stores to end the year down 14%, not as bad as some segments, like department stores off 61% or footwear down 53%, but bad enough.
Karl Haller, who leads the Consumer Center of Competency, a consultancy group within IBM of retail and CPG industry experts, explains, “Overall, the retail economy has bounced back quicker than I thought and frankly quicker than most thought.” But he adds that home stores suffered a major blow through the retail shutdowns, which leaves a “very deep hole to dig out of.”
Haller goes on to explain that the retail trade data reported by the Census Bureau on home furnishings and furniture retail diverges from the personal consumption data from the Bureau of Economic Analysis.
Specifically, personal consumption of home furnishings, which largely measures consumer demand, hasn’t dropped, while sales of home goods through home furnishings and furniture stores has.
“This discrepancy shows the big acceleration toward digital customer engagement,” he continues. In other words, demand for home furnishings remains strong, but consumers are shopping for those goods in places other than home furnishings and furniture stores.
“During the period of time when consumers could only purchase from retailers that were open, consumers learned they could buy the things they want elsewhere in those essential businesses. Now consumers have started to shift their spending toward those channels. It will take a large effort on the part of retailers in the non-essential channels to win back customers,” he continues.
Looking deeper into the home data, Haller sees bubbles in spending that will not be sustained, such as the surge in demand for home office equipment earlier and child-sized desks and chairs now for back-to-school.
“Yes, there are people who are moving and remodeling their homes, but sales of desks won’t continue strong month-over-month. People are not going to need to replenish a desk,” he shares.
Another unsustainable bubble has come from consumers, especially those at the highest-income quintile, shifting spending from discretionary services, like travel and dining, toward discretionary durables, like furniture. This likely will shift back to services once people can do the things they couldn’t do while the pandemic was raging.
Home retailers need to find their “essential”
As Haller studies retail in general, and home furnishings, in particular, he sees macro-shifts happening in consumer attitudes that will continue to disrupt retail for years to come.
“People are rebalancing their wants and needs, with a growing emphasis on health, wellness, and comfort in the home. And fundamentally new shopping patterns are emerging. Digital customer engagement is the norm now, and the traditional home furnishings retail segment has not been the most digitally savvy,” he believes.
“In this digital shift, customers are becoming more comfortable with their fulfillment methods happening differently from their buying and shopping,” he continues. “That makes it almost an arbitrary decision for a retailer to classify a sale as a store sale versus an online sale. Virtually every sale has digital engagement to it.”
And that digital-engagement component fundamentally changes the role of the store from a hub to collect and store goods for an eventual sale to a place to generate demand.
“Traditional retail, which is buying something for X and selling it for Y, has less and less value to consumers and less and less economic value,” he says. “The ability to generate sustained economic value doing that is declining and rapidly approaching zero, especially when dealing with discretionary purchases. You have to provide more than a product and a place to buy it. You have to create demand,” he says.
Haller points to two home furnishings retailers – Ikea and RH – as ones that have learned this lesson. “Their stores, whether it’s the meatballs at Ikea or $17 cocktails at RH, drive interest, buzz, and excitement that pays dividends to the store,” he says. “It gives people a reason to go there, rather than buy something from Wayfair or Amazon. This is especially important for retailers that sell more on emotion than function,” and virtually everything in retail hinges on emotion.
In the home furnishings retail sector, Haller foresees “accelerated corporate Darwinism,” or survival of the fittest. To become one of the fittest that will survive, it is essential for retailers to find their “essential” value to the customer, and it is not just being a place to buy stuff.
“For three months we were told by the government what was essential retail and what wasn’t,” he says. “Now the only person telling you if you are essential or non-essential is the customer.”
Haller concludes, “The challenge for every retailer within the ‘non-essential’ space is to go out and find your essential again. And it probably won’t be the same one that it was a year ago. This is the challenge facing every retailer that depends upon emotional discretionary purchasing.”