furniture

Furniture & Housewares - International

Industry Insight

Date October 2021


 

Current Trends

  • U.S. furniture and home furnishings stores increased sales by 16% in August 2021 over the previous year, marking 15 consecutive months of growth for the sector.
  • Furniture and housewares sales in the U.K. dropped by 0.8% in 2020, a less severe decline than expected. Sales have increased by 4.7% in 2021 and analysts expect this momentum to continue.
  • Experts project revenue for U.S. furniture stores will increase by 3.2% in 2021 as the economy continues to recover from the COVID-19 pandemic.
  • Increased demand and ongoing supply chain constraints are driving furniture sector price inflation and higher freight costs across the globe.

 

Approximate net recovery on cost

Synopsis

Post COVID-19 Sales Boost: Furniture and home goods retailers started strong in early 2020 but soon faced plummeting sales as the COVID-19 pandemic surged around the world. According to U.S. Census Bureau data, U.S. retail sales dropped nearly 59% by April 2020 over the previous year. Despite an annual sales trend of negative 4.9%, sales began to rebound by June 2020 as consumers shifted focus to home improvement projects.

E-commerce sales and the implementation of convenient, no-contact delivery options drove significant topline growth for furniture and home goods retailers in the second half of 2020. Sales have continued to increase in 2021 as vaccinated consumers return to stores. U.S. furniture and home goods stores increased sales by 16% in August 2021 over the previous year, marking 15 consecutive months of growth for the sector. Industry leader Bed Bath & Beyond reported a 49% increase in first quarter net sales over 2020 even after the divestiture of non-core brands brought total sales down by 24%. The company’s core brand sales and comparable sales increased 73% and 86%, respectively, for the period.

Experts predict revenue for U.S. furniture stores will increase by 3.2% in 2021 as economic recovery continues and homeownership rates increase. New privately owned housing starts grew 3.9% month-over-month in August 2021, which represented a 17.4% increase over August 2020. However, a recent Reuters report suggests “the sector is returning from the stratosphere and coming back to pre-COVID levels.”

European Trading Trends: Furniture and housewares sales in the U.K. dropped by 0.8% in 2020, a less severe decline than expected. Sales have increased by 4.7% in 2021 and this momentum is expected to continue. Consumers in most European countries, especially the more affluent sectors, continued to spend as much or even more on the home than in previous years. Contributing factors include the re-evaluation of living spaces, which became communal areas due to work-from-home and homeschooling activities and money saved by non-spend in other sectors such as travel, leisure and clothing. Additionally, and particularly in the U.K., this spending was additionally buoyed by the strength of the housing market.

Evolving Online Shopping Experience: Augmented reality (AR) is a growing trend in furniture retailing with the potential to reinvent the furniture shopping experience. The technology generates 3D images of furniture in consumers’ homes on their smartphones, bridging the gap between the online and in-store shopping experience. Research shows furniture is the most popular item consumers shop for using AR.

E-commerce sales remain key to sales growth for segment retailers while major brick-and-mortar retailers reported mixed performances in 2021. Store closures in 2020 boosted e-commerce sales, and while that has since steadied, data shows e-commerce sales grew more in the first quarter of 2020 than in the past 10 years combined. Consumers have continued to shop online throughout the pandemic, and most categories, including home furnishings, have seen significant increases in online consumer growth since June of 2020.

Brick-and-mortar-based home goods retailers reported significant increases to e-commerce sales, building on growth that began before the pandemic. For example, The Container Store reported 96% growth for their e-commerce sales for the year ended April 3, 2021. In late September 2021, HomeGoods finally ventured online, noting that it sees the e-commerce channel as a complement to its well-developed network of over 820 brick-and-mortar locations.

However, not all retailers have maintained the same level of momentum online. Wayfair, which reported a 49.2% sales increase in the first quarter of 2021, saw a 10.4% decrease by the end of the second quarter because of high period comps, though the company noted some consumer spending has begun to flow back to experiential categories. Bed Bath & Beyond’s digital sales represented 38% of sales in the first quarter of 2021, down from the extraordinary 66% in the first quarter of 2020 but still well above the 20% in the pre-pandemic first quarter of 2019.

Move to Ecommerce: Since the start of the COVID-19 pandemic, U.K. furniture markets have seen an unprecedented shift to online shopping. In fact, 80% of consumers have shopped for furniture online as result of not being able to visit a store, and 77% have purchased online, up from 63% in the previous year ended June 2021. Additionally, consumers have grown more confident in buying expensive furniture online; 30% of consumers purchasing online spent more than £500. In-store purchases decreased from 53% to 35% over the same period.

The pandemic has also influenced the fragmentation of expenditure to nonspecialists such as Amazon.com, big box and other superstore formats. While this fragmentation presents a challenge for furniture specialists, the sector will likely regain momentum as restrictions and anxiety ease in the second half of 2021. Additionally, many consumers still prefer in-person, in-store contact, particularly for bigger ticket items.

Non-specialists will need to be proactive to retain the foothold established during the pandemic as pure players regain customers. The challenge for the furniture specialists will be eased by pent up demand as some customers have delayed purchasing furniture during the pandemic.

Sustainability: Sustainability and ethical sourcing of materials have become increasingly important, particularly among younger consumers. Growing trends include vegan leather products, furniture rental options, which allow consumers to rent for 12 months with a corresponding option to buy, and upcycling furniture like Ikea’s buy-back program in which the company recycles the materials in exchange for in-store credit.

Special Orders Necessitate Special Appraisal Considerations: Due to the customized nature of furniture retailing, customers typically place deposits on ordered furniture and schedule delivery for a later date. As a result, a significant portion of inventory may have some type of customer commitment, creating a unique set of appraisal assumptions. Depending on the level of customization available, home furnishing retailers’ stock ledger reporting may include inventory with partial deposits against it. Subject to individual lender requests, there are multiple ways this inventory may be treated in an appraisal.

Because inventory with customer deposits would be considered unsecured in a bankruptcy filing, this inventory may potentially be available for sale in a liquidation. As a result, appraisal gross recovered dollars would include this inventory.

Additionally, furniture retailers typically track fully paid, or customer-owned, special orders in process or pending delivery. In this circumstance, a lender may deem this inventory ineligible to the borrowing base or create a reserve for the total deposit amount collected as a bankruptcy filing, and subsequent court-authorized liquidation may entitle the customer to collect the paid inventory or to be refunded the total deposit amount.

In the case of credit card purchases, customers who do not receive their goods because of a bankruptcy filing can and most likely will dispute the charge for failure to receive the goods. The credit card processor will in turn refund the customer and withhold remittance of those funds to the company. Gordon Brothers typically assumes all furniture items would be sold “as is” and special orders would not be accommodated in the event of a liquidation. The discounted pricing would reflect the lack of customization.

Delivery Important to Maximizing Value: Customers would likely have access to home delivery in a liquidation event, while special orders and product customization may not be available. Gordon Brothers typically assumes deliveries to customers would continue at the customer’s expense because of the size and bulk of many furniture items and the inconvenience of self-pickup.

Continuing delivery service provides an additional incentive for customers to purchase goods in a liquidation. Absent this service, gross recovery values could be negatively affected, especially on large items, such as sofas. and case goods, such as bureaus and bookcases.

Gross Recovery Considerations for Sample Goods: On-hand inventory will include sample goods displayed in a showroom setting. Floor sample inventory is prone to wear and tear and may require deeper discounting in a liquidation. Additional clearance items may include discontinued or damaged products, incomplete sets. such as a dining room table with no chairs or special-order returns on hand.

Understanding the floor sample inventory percentage to total inventory is key to an appraisal analysis because the gross recovery on these goods is typically lower than that of first-quality goods. Similarly, it is important for lenders to monitor levels of sample and second-quality inventory on an ongoing basis, as significant increases in this inventory may present challenges in a liquidation.



Note: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2021 GORDON BROTHERS, LLC.
 

Reference sources:U.S. CENSUS BUREAU, FEDERAL RESERVE ECONOMIC DATA, LINCHPIN, MINTEL: FURNITURE & DIY RETAILING, MCKINSEY, REUTERS, CREDITNTELL, PULSE RATINGS