Deep Dive: US Furniture Market 2017 Stores Face Softer Growth and E-Commerce Competition Deborah Weinswig Managing Director, FGRT deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 In this report, we provide an update on the US furniture market so far in 2017, as well as highlight what could impact it over the longer term. 1) Growth in furniture sales has weakened considerably year to date. Year-over-year growth in consumer spending on furniture averaged 2.5% in the first six months of 2017, almost half the 4.5% for all of 2016. 2) Market growth was even weaker in May and June, the most recent months for which we have data. 3) Soft growth in existing home sales and a weakening of real income growth are likely what is depressing expansion of the US furniture market. 4) US Internet sales in the broader homewares and home furnishings category totaled $19.2 billion in 2016. We identify the top online homewares and furnishings retailers as Amazon, Wayfair and Williams-Sonoma. 5) We note four factors that are likely to impact the US furniture market over the longer term: more people renting their homes, a greater proportion of the population living in apartments, a larger senior population wanting to age in place and millennials establishing households. 1
Table of Contents Executive Summary... 3 Introduction... 4 Market Overview: Growth Weakens in 2017... 4 How Big is the Market and How Fast Is It Growing?... 4 Macroeconomic Drivers Deteriorate in 2017... 5 E-Commerce Leads to Loss of Share for the Specialists Sector... 7 Market Shares Reflect a Fragmented Specialists Sector... 8 E-Commerce Market Leaders... 9 Looking to the Long Term: Four Demographic Trends Set to Impact the US Furniture Market... 11 1. Lower Home-Ownership Levels, More Renting... 11 2. More Apartment Living, More Single-Person Households... 12 3. Older Consumers Want to Age in Place... 13 4. Cash-Strapped Millennials are Forming Households... 14 Key Takeaways... 15 2
American consumers spent $114 billion on furniture in 2016. Executive Summary The US furniture market was worth $114 billion in 2016, when sales climbed by a solid 4.5%. Growth in consumer spending on furniture has softened considerably in 2017, averaging 2.5% year over year in the first six months of the year, according to the US Bureau of Economic Analysis (BEA). Growth was even weaker in May and June, the most recent months for which we have data. The performance of the residential property market has a major impact on furniture sales, and existing home sales growth has been tepid so far this year, according to the National Association of Realtors. Consumers ability to spend is crucial, too, and average real weekly earnings growth deteriorated in 2016, and turned negative in early 2017, although there has been a modest recovery since then. Furniture specialists sector sales are growing more slowly than spending on furniture overall, as Internet-only retailers continue to build share. E- commerce accounted for close to 12% of the broader homewares and home furnishings category last year, according to Euromonitor International, and is expected to climb to just over 13% in 2017. On the basis that around 5% of total Amazon sales are in the homewares and furnishings categories, we estimate Amazon would capture around onequarter of online category sales. Wayfair and Williams-Sonoma each capture sizeable shares of the online market, too. Established furniture players need to look past short-term fluctuations and prepare for fundamental shifts in US consumers lifestyles: 1. Lower home-ownership levels, more people renting: More Americans are renting homes nowadays than in previous decades. Renters looking to furnish their homes are likely to find lower-cost furniture more appealing than higher-value investment pieces. Moreover, many landlords of furnished rental properties will opt for cheaper furniture. 2. More apartment living, more single-person households: The proportion of the US population that is living in apartments is growing, as is the number of single-person households. Smaller homes and smaller households suggest greater demand for more compact and multifunctional furniture, as well as products offering storage solutions. 3. Older consumers want to age in place: More seniors want to live independently in their own home in other words to age in place rather than in institutions devoted to care. Seniors may look for furniture that offers them assistance in day-to-day living, including opting for simple changes such as replacing soft sofas with firmer, higher seating and arm rests that enable easier movement. 4. Cash-strapped millennials are forming households: Millennials are becoming more important as purchasers of furniture. These consumers are likely to look to retailers with strong value credentials and Internet-only retailers whose brands or offerings resonate with them. 3
Introduction The US furniture market has seen growth moderate significantly in 2017. In this report, we provide updated data on the market, including data on e- commerce penetration, and discuss key macroeconomic impacts on furniture sales. We then turn to the longer term to note four demographic shifts that we expect to have an impact on the American furniture market in the coming years. Source: istockphoto This report updates our October 2016 overview Deep Dive: US Furniture Market 2016: Preference and Trends. American consumers spent $114 billion on furniture in 2016. Market Overview: Growth Weakens in 2017 How Big is the Market and How Fast Is It Growing? American consumers spent $114 billion on furniture in 2016, according to the BEA. In addition, they spent a further $82 billion on adjacent categories such as lighting, carpets and window coverings. Figure 1. US Consumer Spending (USD Mil. Including Sales Tax) 2012 2013 2014 2015 2016 Furniture and Furnishings Total 160,520 166,167 174,773 187,442 195,855 Furniture 93,073 95,455 100,820 109,638 114,041 Clocks, Lamps, Lighting Fixtures and Other Decorative Household Items 34,686 35,806 37,254 39,012 40,805 Carpets and Other Floor Coverings 19,773 21,147 22,139 23,393 24,671 Window Coverings 12,987 13,759 14,560 15,399 16,339 Source: BEA Growth has softened considerably so far in 2017. Growth in furniture sales has weakened considerably so far this year Year-over-year growth in spending on furniture averaged 2.5% in the first six months of 2017, according to the BEA. This is significantly lower than the 4.5% for 2016 as a whole. 4
In May and June the latest two months for which we have data growth was weaker still, below the 2.5% year-to-date average, as we chart below. Furniture specialist stores are also seeing weakening sales, according to Census Bureau data. The latest sector data shows growth just remaining positive, at 0.2% year over year. A near-consistent trend is for growth in specialists sales to underpace growth in category spending. This is largely driven by the rapid growth in sales by Internet-only retailers, as we discuss later. Figure 2. US Retail Sales and Consumer Spending: YoY % Change 12.0 10.0 8.0 6.0 4.0 2.0 0.0 (2.0) (4.0) (6.0) 0.9 0.2 Furniture Stores Furniture Spending Linear (Furniture Spending) Source: US Census Bureau/BEA/FGRT 2017 has so far seen tepid growth in existing home sales. Macroeconomic Drivers Deteriorate in 2017 The explanation for the weakening furniture market may lie in the softening of key economic metrics, such as home sales and real earnings growth, in 2017. A substantial share of furniture sales is tied to the residential property market. Consumers tend to buy furniture when moving into their first home, and many take the opportunity to buy replacement furniture when moving on. Moreover, rising property prices tend to make home owners more willing to splash out on big-ticket purchases. 2017 has so far seen tepid growth in existing home sales, according to the National Association of Realtors. Aside from a robust performance in February and March this year, year-over-year increases in home sales have underpaced the 2015 2017 rolling average. US home sales data is split between existing homes and new builds. Existing home sales account for around 90% of residential property sales in the US, making it the most important metric to watch. 5
Figure 3. US: YoY Change in Existing Home Sales, by Month (%) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 (2.0) (4.0) 2015 2016 2017 4.7 2.1 Note: Through to July 2017. Source: National Association of Realtors/FGRT Year-over-Year (%) Average (%) Average real weekly earnings growth deteriorated in 2016, although has recovered somewhat this year. Big-ticket categories such as furniture are dependent on consumers willingness and ability to spend, and solid real earnings growth is one spur for that. Adjusted for inflation, average weekly earnings growth deteriorated in 2016 and turned negative in early 2017. There has been some recovery this year although to lower-than-previous levels. As with the softening of home sales, this deterioration in real income growth has been bad news for the furniture market. Counterintuitively, consumer sentiment has recently tended to show a negative correlation with real earnings growth: as income growth softened, confidence rose. Figure 4. US: YoY % Change in Real Average Weekly Earnings (Left Axis; %) vs. Consumer Sentiment Index (Right Axis), by Month 3.0 2.0 1.0 0.0 (1.0) 2015 2016 2017 Real Earnings Growth Consumer Senkment Index 100 95 90 85 80 Through July 2017. Source: Bureau of Labor Statistics/University of Michigan We note that there are some inflationary clouds over US discretionary spending for the remainder of 2017: Gasoline prices: Gasoline prices started to creep back up, year over year, in July and August (latest), according to data from the US Energy Administration. 6
Food prices: At the same time, US food prices have emerged from deflation to be mildly inflationary. Any further upward trend in foodprice inflation would squeeze consumers wallets. However, more important to furniture sales will be the performance of the residential property market: a rebound in house sales should underpin demand in the second half of 2017. Furniture specialist stores have tended to underpace growth in the total furniture market. E-Commerce Continues to Take Share from the Furniture Specialists Sector As we noted earlier, furniture specialist stores have tended to underpace growth in the total furniture market. A principal reason for this is the rapid growth of Internet-only retailers. E-commerce in total whether through Internet-only retailers or multichannel players accounted for almost 12% of homewares and home furnishings sales in 2016, according to Euromonitor International. (Note that the definition for this e-commerce data is broader than just furniture.) The share of e-commerce is expected to climb to 13.1% for 2017, according to Euromonitor. In absolute terms, Euromonitor forecasts that US shoppers will spend $22 billion on homewares and home furnishings online in 2017 (excluding sales taxes). We chart the diverging trends at specialists and in e-commerce below. Figure 5. US: Furniture Stores Sales as a % of Consumer Spending on Furniture (Left Axis) vs. E-Commerce Share as a % of Homewares and Home Furnishings Sales (Right Axis) 59 58 58 57 57 56 56 55 55 58.0 57.8 11.7 57.3 10.5 9.5 56.8 8.6 7.6 55.7 2012 2013 2014 2015 2016 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Specialists Share* E-Commerce Share** * Retail sales for furniture specialists include any non-furniture sales, so the percentages are indicative only. Consumer spending is adjusted to strip out sales tax at average annual rates. ** Includes homewares such as cookware and kitchenware as well as household textiles, lighting and furniture. Source: BEA/US Census Bureau/Thomson Reuters/Euromonitor International/FGRT 7
The home furnishings and homewares specialists sector is highly fragmented. Market Shares Reflect a Fragmented Specialists Sector The home furnishings and homewares specialists sector is highly fragmented. Even major names such as Williams-Sonoma and Restoration Hardware enjoy only a single-digit share of sector sales, while almost twothirds of the sector is accounted for by retailers that individually have only very small market shares. Figure 6. US: Homewares and Home Furnishings Stores Shares of Sector Sales, 2016 (%) Even major names such as Williams-Sonoma and Restoration Hardware enjoy only a single-digit share of sector sales. Bed Bath & Beyond IKEA HomeGoods Ashley Furniture Williams-Sonoma Rooms To Go Pier 1 Imports Raymour & Flanigan Macy's Home Store Restorakon Hardware American Signature Haverty Furniture Cost Plus World Market Crate & Barrel Ethan Allen Christmas Tree Store All Others 10.0 5.1 4.2 3.5 2.4 2.0 1.5 1.4 1.2 1.1 1.0 0.7 0.6 0.5 0.4 0.2 64.2 Source: Euromonitor International An alternative view of the top retailers comes from Furniture Today s Top 100 list of retailers. That list excludes generalists such as department stores and mass merchandisers. And it splits retailers into two categories: 1. Conventional furniture stores: This includes furniture stores with a traditional merchandise mix of furniture, bedding and decorative accessories. 2. Specialty stores: These are furniture stores with a specialized product mix. The data shown below are estimated sales of furniture, bedding and accessories. 8
Figure 7. US: Top Specialized Retailers Sales of Furniture, Bedding and Accessories, 2016 Conventional Furniture Stores USD Mil. Ashley HomeStore 3,835 Rooms To Go 2,350 Berkshire Hathaway Furniture Division 2,003 Raymour & Flanigan 1,307 Bob s Discount Furniture 1,158 Speciality Stores USD Mil. Mattress Firm 3,460 IKEA 3,200 Williams-Sonoma 2,715 RH 1,755 Big Lots 1,365 Source: Furniture Today Wayfair s revenues equate to about 16% of the online homewares and furnishings market. E-Commerce Market Leaders The market-share breakdowns shown above exclude Internet-only retailers. In the US market, Wayfair is the leading specialized Internet-only retailer. Wayfair generated US revenues of $3.1 billion in 2016, up fully 46% year over year. Euromonitor estimates that US Internet sales of the broader homewares and furnishings market totaled $19.2 billion in 2016. Wayfair s revenues equate to 16% of this online market size. Amazon is the major unknown in online furniture retailing, given the retailer provides no breakdown of revenues by product split, and because analysts estimates of the total sales made through Amazon, including thirdparty sales, differ. Amazon s gross merchandise volume (GMV), which includes sales made by third-party sellers on its site, was around $98 billion in 2016, according to Euromonitor. If we estimate that 5% of Amazon s GMV was in the home furnishings category in 2016, this would equate to just under $5 billion of US category sales and, in turn, a 2.7% share of BEArecorded furniture and furnishings spending after we adjust that data for sales tax. At 10% of Amazon GMV, home furnishings would equate to a 5% share of the total market in 2016. However, we think homewares and furniture are unlikely to account for 10% of Amazon s total sales, given the retailers strength in a number of other categories. Based on Euromonitor s online market size and homewares and furnishings categories accounting for a ballpark 5% of Amazon s US GMV, we estimate the online market share breaks down as follows. 9
Figure 8. US: Estimated Internet Retail Sales Share of Homewares and Furnishings, 2016 (%) Others, 45.4 Amazon, 25.6 Wayfair, 16.2 Williams- Sonoma, 12.9 Source: Euromonitor International/S&P Capital IQ/FGRT Source: Westelm.com Williams-Sonoma reported e-commerce revenues of $2,634 million in the year ended January 2017. These revenues spanned its various banners, including Pottery Barn, West Elm and Williams-Sonoma. Approximately 6% of group revenues are from outside the US, and we have adjusted for this in our market-share estimate above. Bed Bath & Beyond noted e-commerce growth of more than 20% on its earnings call for fiscal year 2016. However, the company does not split out online revenues. See also our September 2016 report Deep Dive: Global Furniture and Homewares E-Commerce. 10
Renters who need to furnish their homes are likely to find lowercost furniture more appealing than higher-value, longer-lasting investment pieces. Looking to the Long Term: Four Demographic Trends Set to Impact the US Furniture Market In this section, we look to the long term and identify four demographic shifts that we think could change what consumers look for when buying furniture. A number of these changes are incremental, and we expect their impacts to be felt over a period of years. 1. Lower Home-Ownership Levels, More Renting More Americans are renting their homes nowadays than in previous decades. Home ownership rates are now at under two-thirds of the US population, as we chart below. Source: istockphoto Figure 9. US: Home Ownership Rates, by Quarter (%) 68.0 67.0 66.0 65.0 64.0 63.0 63.7 62.0 2010 2011 2012 2013 2014 2015 2016 2017 Through the second quarter of 2017. Source: National Association of Realtors/FGRT Implications: Renters looking to furnish their homes are likely to find lowercost furniture more appealing than higher-value investment pieces. Renters are likely to move homes more often than home owners, may face uncertainty over when they will need to move and, in some cases, may find themselves moving between furnished and unfurnished properties. As a result, renters may find that flat-pack furniture or other cheap, semidisposable furniture offers them the flexibility they need. Moreover, in furnished rental properties, many landlords will opt for cheaper furniture, instead of seeking out quality furniture as an investment. 11
In an owner-occupied home, the person who buys the furniture benefits from the enjoyment of a quality product; in a furnished rented home, the benefit to the person who buys the furniture is largely in minimizing cost. The proportion of the US population living in a standalone house is declining slowly. 2. More Apartment Living, More Single-Person Households Likely related to the trend toward renting a home is the growth in the proportion of the population living in apartments rather than houses. As we chart below, the share of total households living in larger apartment buildings, of 10 or more apartments, in particular, has grown in recent years. The proportion of the US population living in a standalone house is declining slowly. This trend dovetails with a steady increase in single-person households in the US. Although the increase in the proportion of households occupied by just one person is very gradual, it is consistent, according to the US Census Bureau. Source: istockphoto Figure 10. US: Breakdown of Occupied Housing Units by Type of Housing Structure (%) 6.0% 6.0% 5.8% 5.8% 5.7% 12.6% 12.7% 12.7% 12.9% 13.1% 4.6% 4.6% 4.7% 4.8% 4.8% 7.9% 7.9% 8.0% 7.9% 8.0% 68.9% 68.8% 68.8% 68.6% 68.4% 2011 2012 2013 2014 2015 Mobile Home or Other Type of Housing 10 or More Apartments 5 to 9 Apartments 2 to 4 Apartments Aqached or Detached House Source: US Census Bureau 12
Figure 11. US: Distribution of Households by Number of Household Size (%) 22.80% 22.94% 22.79% 22.89% 22.44% 15.89% 15.75% 15.72% 15.50% 15.44% 33.80% 33.89% 33.75% 33.61% 34.01% 27.40% 27.41% 27.74% 27.98% 28.13% 2012 2013 2014 2015 2016 Four or More Three Two One Source: US Census Bureau Implications: Smaller homes and smaller households suggest greater demand for more compact and multifunctional furniture, as well as products offering storage solutions. IKEA has recognized this trend for a number of years and has successfully launched multiple collections and marketing campaigns. IKEA s latest initiative, in June 2017, was to collaborate with NASA: a team from the retailer spent three days at a spacecraft training center in Utah to understand how innovations can make living in confined spaces easier and more enjoyable. 3. Older Consumers Want to Age in Place Not only is the US population aging, but more seniors want to age in place in other words, to live independently in their own home, rather than in institutions devoted to care. The US Centers for Disease Control and Prevention (CDC) define aging in place as the ability to live in one s own home and community safely, independently and comfortably, regardless of age, income or ability level. Over 90% of seniors aged 65 and above prefer to stay in their homes as they age, according to the advocacy group AARP. Source: istockphoto 13
Furniture retailers are more reliant on young families setting up home or refurbishing their houses than on older consumers who may be living on more restricted incomes. Implications: A booming senior population does not translate into booming furniture sales: furniture retailers are more reliant on young families setting up home or refurbishing their houses than on older consumers who may be living on more restricted incomes and may have little reason to overhaul their home interiors. However, the aging-in-place trend suggests a niche for furniture that can cater to older consumers demands for independent living. Perhaps the most obvious examples are adjustable beds and motorized reclining chairs for less-mobile people. But more able seniors may want to make minor adjustments without making their house feel like a nursing home. These seniors may opt for simple changes such as replacing soft sofas with firmer, higher seating and arm rests that enable easier movement, or replacing low coffee tables with substitutes that are more easily reached. We expect to see more mainstream retailers offer ranges that are subtly adjusted to, and marketed at, the demands of seniors. 4. Cash-Strapped Millennials Are Forming Households Millennials are set to shrink as a proportion of the US population from 28.7% in 2015 to 27.2% in 2020, according to our analysis of US Census Bureau data. However, their importance lies in the growth in their earnings and spending power. We define millennials as those born between 1980 and 2000. This means the youngest are starting to enter the workforce and the oldest are climbing career ladders, building families and establishing households. Their spending and demand for furniture is, therefore, increasing. We note two characteristics of millennials: 1) they tend to spend less on furniture; and 2) they have a tendency to shop online. In part because they have not yet reached their peak earnings, millennials tend to spend less than older generations on furniture. Millennials currently tend to spend less than older generations on furniture: Indeed, as our previous reports have discussed, millennials tend to be more frugal when shopping for groceries and beauty products, too. In part, this demand for value is because these consumers have not yet reached their peak earnings potential. However, we think this frugality is partly a cohort effect, too: less favorable work compensation, higher student debt and an apparent preference to spend on experiences will likely continue to impact millennials retail spending. Source: istockphoto 14
Figure 12. US: Average Price Paid by Households for Selected Furniture Items in 2016, by Generation (USD) 1,382 843 961 271 288 256 177 145 175 Sofas Chairs Rugs Millennials Gen Xers Baby Boomers Source: Furniture Today Tendency to shop online: A second characteristic of millennials is their increased tendency to shop online, relative to older age groups. A number of surveys confirm this age effect, including, for instance, our own 2017 holiday outlook survey. Brick-and-mortar retailers that are seeking to capture millennial market share will need to offer online and cross-channel services that match those of the bestpositioned Internet pure plays. Implications: The rise of millennials as furniture shoppers should boost retailers with strong value credentials, whether that is specialists such as IKEA, or nonspecialist retailers such as Target. Meanwhile, the familiarity with online shopping will provide tailwinds to Internet-only retailers whose brands or offerings resonate with this age group; Wayfair and Amazon are among the names that look well positioned to capture share. Brick-andmortar retailers that are seeking to capture millennial market share will need to offer online and cross-channel services that match those of the best-positioned Internet pure plays. See also our February 2017 report Deep Dive: Millennials and Furniture in the US and the UK Ten Characteristics That Define the Market. Key Takeaways Furniture demand has proved soft so far this year. Moreover, rises in gasoline and food prices could exert pressures on consumers in the second half of 2017. The performance of the residential property market will be crucial. The brick-and-mortar furniture specialists sector is, in aggregate, losing share of the furniture category, while e-commerce continues to grow. Longer term, established furniture players need to look past shortterm fluctuations and prepare for fundamental shifts in how US consumers live their lives. 15
Deborah Weinswig, CPA Managing Director FGRT New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 deborahweinswig@fung1937.com John Mercer Senior Analyst Hong Kong: 2nd Floor, Hong Kong Spinners Industrial Building Phase 1&2 800 Cheung Sha Wan Road, Kowloon Hong Kong Tel: 852 2300 4406 London: 242-246 Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0)20 7616 8988 New York: 1359 Broadway, 18th Floor New York, NY 10018 Tel: 646 839 7017 FungGlobalRetailTech.com 16