As our sales data indicates, the declining in-store demand has slowed down due to strong demand while unfavourable traffic. Online sales boomed and helped offset the decline in in-store sales. Manufacturers suffered from foreign manufacturers’ competition and the slowing down retail traffic but performed differently depending on their customers’ distribution channels. However, wholesalers seem to have also benefited generally from the increasing demand in 2018.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Generally, the demand for upscale furniture of US companies (including third party manufacturers) has been weak since 2015. Sales volume of those companies decreased significantly in 2016. While their competition disadvantage in price does not change, sales bounced back since 2017 as companies lowered price and demand grew.
• With less intensive competition, more expensive, high end products have become the major focus of companies in this sector and as well presented its potential as a major driver of US market since 2017.
• The demand for in-store home furnishing products of continuously declining seems to be making turn since the second half of 2017 as indicated by bouncing same store sales for those retailers.
• The demand for online products has been strong except for 2016 as indicated by the growth in online comparable brand sales of ecommerce companies and ecommerce department of traditional retailers and the fast growth in online sales seems, to a large extent, offset the decline in sales of traditional retailers.
• Consistent with the difference of sales among in-store retailers and online retailers, home furnishing manufacturers whose distribution channels cover online retailers have performed better in sales than manufacturers who depend on in-store retail channels.
• The generally weak demand for US products, resulted from international competition, seems to have exerted pressure on competition for price as seen that sales performance of those companies has been directly related with their ability to control costs, which makes difference between manufacturers and companies that source from third-party manufacturers.
• There has been strong increasing pressure from products price of third-party manufacturers in the past several years.
• Retailor seems to try to offset the decrease in traffic in their comparable stores by expanding business into new market.

 

Causes behind the trend

Economy situation/consumers spending/housing market, particularly represented by purchasing activities in durable goods, is the radical factor influencing demand for furniture, which played the roles behind growth in demand in 2017/18.

Competition from international manufacturers, with advantage in price/cost and benefited by e-commerce popularity/slowing down mall traffic in US market, has been the major reason causing shrinking demand for US companies’ product, especially in value products market.

Factors that caused slowing down traffic in malls such as changes in shopping habits may also be the factors behind the slowing sown traffic in home furnishing stores.

Vertically integrated furniture companies seem to be easier to absorb the increasing costs of manufacture due to being independent with third-party manufacturers. And this gives them more edges in competition in price-focus weak demand market.

Industry Future

In a long period of time in future, demand will probably resume to be stronger for high end product. The booming of online sales will probably been seen to continue.

Under the pressure of wage increase and facing competition of low costs foreign manufacturer, US companies may have to adjust their market strategy to focus on high end market.

In-store retailers’ pressure from slowing down traffic will still exist. Expansion strategy ( developing new market by opening new stores), to some extent, help ease pressure of sales for manufacturer and wholesalers, but how well it will go eventually in new market may really depend on how fast the climate of whole industry can turn around and how long the companies can undertake the shrinking margin. We have not seen significant turn in the general declining traffic based on comparable sales data.

General Financial Performance of Companies In the Sector

While the increased product price of third party supplier may play a role, the diminished upscale furniture sales of US companies in this sector is directly related to competition of international manufacturers, which possess price advantage and flexible distribution channels. Therefore, while performed well in high end furniture segment, their sales volume went down (about 5% and 8% in 2015 and 2016). As a response to the decreased sales, companies tried to push up sales volume (up by 1% in 2017) by discounting and expansion of distribution channels or stayed away from value segment and turned to focus on high end segment. 

We have seen many positive signals in high end market in 2018 as indicated by increasing price and sales volumes. However, companies seem to be still struggling in value market.   

Weak demand, working with increasing pressure of cost from third party manufacturers, squeezed the gross margin of companies, which has been seen typically down to about 20% from about 22% of 2014 but bounced back to about 21% in 2018. The typical average SG&A as percentage of sales is improved to about 12% and the average operating margin thus went up to about 9% in 2018.

The typical enterprise price/EBI(a) ratio: 13 (interest/EBI ratio of 3%).

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