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By Bob George
With this issue we have focused on advertising and the challenge of bringing the consumer through the door.
The changing buying process of the consumer results in fewer store shopped. Thus the retailer’s fate is often determined in the murky world of the internet and social media.
Without a doubt retailers will continue to spend $6 out of every $100 in sales to entice the customers into the store. While television is losing its power and targeted direct mail seems to hold promise, net gain in effectiveness seems to be small. The dream of social media is still to materialize beyond antidotal stories that are hard to replicate.
Retailers have mastered the art of focusing the consumer on the buying process removing the barriers of price -“Lowest price ever”, finance – “No interest for 60 months”, and service –“ Same day delivery, no problem.” In essence, we have taught the consumer to “drink the water.” That, however, is not what marketing is. Shouldn’t the main objective of marketing be to make the consumer “thirsty”?
Where is the romance associated with furniture that is seen in other consumer durables, such as automotive, communications, and appliances? If consumers are influenced by this type of advertising they would believe that their new car or new telephone solves all of their problems and makes them a part of the “in crowd” that always has the right companion in a beautiful world. Even the new double-stacked, front-loading washer makes the working mother seem to be enjoying that mundane task. The furniture product has much greater potential to truly impact one’s life, but are we communicating the same?
We have broken the responsibility of traditional channels of distribution in the furniture industry. The designers and producers of the product must create the buzz for their new offerings. The retailer’s role is to convince the consumer that their store is the place to buy – best price, best service, most knowledgeable store personnel and so forth.
Several years ago at an industry function a senior executive of Wayfair over several glasses of wine stated that they were not in the furniture business, rather in the media business. Specifically, they were developing a more effective way to entice consumers to buy home furnishings. As the company and the internet grew to 15% of industry sales, that comment made has resonated again and again. Now Wayfair is opening their first stores and pursuing proprietary product.
It pains me to see the success of new start-ups such as Casper, formed in 2014, and now with sales over $100M. It is not their success. I commend them for that. Rather it is how they captured the imagination of the consumer. However, now they have recently announced a partnership with West Elm to sell their products via that retailer’s bricks and mortar. It causes me to reflect.
Is this a new model in which the product purveyor creates a new product and excites the consumer to seek it out? Or is it the old model that the traditional furniture industry has forgotten?
With the sophistication of the internet has come the booming growth of e-commerce. The combined furniture and home furnishings industry has been one of the big recipients of this growth second only to the clothing/footwear industry. It is estimated that 2015 internet sales of furniture alone now totals an estimated $14 billion or 15 percent of furniture industry sales. (Source: Impact Consulting Services, Inc. proprietary industry model and U.S. Census Bureau’s E-Commerce Report issued June 2016 covering years 2004 to 2014.)
Furniture Industry Sales
Since the bottom of the recession in 2009, total furniture industry sales have grown 24.1 percent, and much of that growth can be attributed to the rise in e-commerce. Actual brick and mortar store sales of furniture are up 13.8 percent since 2009 while e-commerce has grown by 168 percent. (Table A)
In 2004, e-commerce sales were inconsequential in relation to brick and mortar store sales which accounted for 93.4 percent of the total furniture industry. Over eleven years, the share of e-commerce has grown from 3.2 percent to 15.3 percent in 2015, while brick and mortar sales fell to 82.9 percent of total furniture dollars (Table B).
Along with furniture e-commerce sales, other home furnishings products – floor covering, window treatments and home accessories – have grown at an even faster pace than furniture. The table below shows that while furniture e-commerce sales have grown 440 percent since 2004, home furnishings have growth 697 percent to $13.9 billion (Table C).
Brick and Mortar Stores e-commerce
Retail sales of furniture and home furnishings products are sold through three avenues – brick and mortar stores, internet shopping (e-commerce) and finally mail order and other miscellaneous non-store retailing. In the first instance - brick and mortar stores -consumers can physically visit the store or they can often visit the store’s website and make an online purchase. Many of these retailers offer expanded product offerings on their websites not available in stores. While some large brick and mortar merchants have been successful in online retailing of furniture and home furnishings products, furniture and home furnishings stores as a whole have been much less successful with online attempts. These websites serve as much to draw the consumer into the store as to generate online sales. And while e-commerce sales among furniture and home furnishings stores almost doubled from $330 million to $651 million 2004 to 2014, this only increased internet sales to less than one percent of furniture stores volume in 2014.
Comparing furniture and home furnishings stores to other retail brick and mortar companies, furniture and home furnishings stores lag behind in percent of e-commerce sales to total sales, though none are exceeding three percent of sales via e-commerce (Table D).
The phenomenon of e-commerce has been the rise of what was once called “Non-Store Retailers”, now referred to as “E-Commerce Retailers” – companies without physical stores competing with brick and mortar establishments. The new Census Bureau study reports sales of furniture and home furnishings through e-commerce retailers increasing from $4 billion to $24.3 billion in ten years (2004 to 2014) – a growth of 503 percent (Tables E).
Along with furniture and home furnishings, other consumer merchandise lines dramatically increased sales through e-commerce retailers. At $46.9 billion in sales, clothing/footwear leads e-commerce retailer sales in 2014 up from $7.1 billion in 2004. By far, the fastest growing products sold by e-commerce retailers, clothing/footwear increased 561 percent over the ten year period. Furniture and home furnishings experienced the highest growth among e-commerce retailers coming out of the recession 2009 to 2014 – jumping an average of 20 percent per year. Sporting goods sold through e-commerce retailers also experienced high growth in the last few years, but electronics and computer hardware have tapered off with sales increasing a yearly average of five percent since 2011 (Table F).
Of the five selected merchandise lines in Table G, clothing/footwear holds the highest share of e-commerce retailer dollars and grew from 13.3 percent share in 2004 to 18.4 percent share in 2014. Furniture and home furnishings also saw a gain in share – finishing 2014 at 9.3 percent. As more merchandise lines like clothing and furniture have increased their internet presence, two broad product areas have lost share among e-commerce retailers -- electronics and appliances and computer hardware. Once the king of e-commerce, computer hardware fell from 15.1 percent share to 6.3 percent in ten years. Electronics and appliances slipped down from 10.8 percent share of e-commerce retailer sales to 9.2 percent.
Retail Trade Total
While internet purchases have made major inroads into many consumer product areas, e-commerce is still a small part of overall retail sales. According to the new government e-commerce report covering years 2004 to 2014, sales from e-commerce for all U.S. retailers, both brick and mortar retailers and e-commerce, for all consumer products excluding gasoline totaled $298.6 billion in 2014. This reflects an increase of 14.3 percent from the year before and a 311 percent change over ten years (Table H). Meanwhile total retail sales, excluding gasoline, grew 30.3%.
According to the Census Bureau, the internet claimed 7.3 percent of all retail sales, excluding gasoline, in 2014, up from 2.3 percent ten years before (Table I).
While the growth of internet sales of some products appears to be slowing, other product areas, like food, are still in their e-commerce infancies. The rapid growth of furniture industry sales by successful e-commerce retailers are challenging the brick and mortar stores and presenting a distribution dilemma for manufacturers. In the next issue Statistically Speaking will continue to address e-commerce and the future customer.
By Tom Zollar
One of the basic retail facts of life that we have often referred to in this column is that whatever happens on your sales floor is the result of three major business dynamics working together: Advertising, Merchandising and In-Store Experience. I often find that many retailers look at their sales metrics as only giving them the results of their selling effort. When in reality, virtually any sales report you analyze also provides great insight into how your two other important areas are doing. Since the theme of this issue deals with Advertising, we will take a look at ways for you to use some existing sales metrics reports to help you improve the power and focus of your efforts in that area.
As we have often said, your Total Sales Volume = Traffic X Close Rate X Average Sales. Traffic is really the main driver of your sales engine and dramatically influences your results. Without customers there will be no sales or as an old retail axiom goes: “A strange thing happens when you don’t advertise – NOTHING!” That’s a good way to look at it, but in reality the number of potential customers your advertising efforts drive into your store is only part of the equation.
Many retailers end up being a bit short sighted in that they tend to only judge the success of their marketing program on the amount of traffic it creates. However, there is another dynamic of the opportunities it creates that is just as vital and in some cases more important than the QUANTITY of bodies delivered to your doorstep. That is the QUALITY of those that answer your call! In other words, no matter how many people you bring in, if they are not the ones your merchandising and sales effort are targeting, you will never maximize your potential.
At this point you might say: “Well DUH, I know that, but what do I track and how do I analyze it to determine the quality of the Ups my promotions, ads, online presence and events are bringing in?” Of course the main indicator will be your total sales, but that is basically the end result you are looking for from all three of your main business efforts and as we have often said, it is very hard to coach a result because too much goes into it. You really need to break it down into its main ingredients, the “what makes this happen” elements, that can be analyzed and improved.
We have found that the most useful number in your entire sales measurement process is Revenue Per Up or Performance Index as many call it. It is the main indicator of both the effectiveness and the efficiency of your overall effort, with serious implications about each of its ingredients. In the June issue we defined it and briefly discussed how it can be used to help direct your coaching efforts with your sales staff. Several articles last year went into more depth about using it as a sales improvement tool.
To a certain extent, your staff is only as good as the traffic you feed them. So the QUALITY of the Ups your advertising generates has a direct impact on how well they perform. Therefore, by default, Revenue per Up can be a great indicator of how well you are doing at delivering qualified potential customers to your selling team. Similar to its sales use, it can also serve as a value or contribution generated measurement for your Advertising effort. We use it as a “Red Flag” for where we need to focus our sales coaching effort and it works well that way for advertising too. For the most part its best application is as a trend indicator, meaning it can show you the direction you are going and also give you extremely useful comparatives to other previous promotions or events. The latter seems to be its strongest asset for analyzing your advertising program.
As stated, you need to judge your promotional efforts based on both the quantity of Ups generated and the quality or qualifications of those that respond. Therefore, you will need to find a way to get your sales reporting system to produce a report that gives you all the information you need to not only analyze those two important metrics, but also the main elements that create Revenue per Up, which are Closing Rate and Average Sales (remember that CR X AS = Rev/Up). That will allow you to actually drill down further into the data to determine where the weaknesses or strengths exist. Then you can develop a strategy to maintain or enhance the good and improve the bad.
The graph below gives us a dramatic visual picture of how a store’s monthly traffic and Rev/Up have fluctuated over a 12-month period. It also indicated how the two have interacted, since we know that the level of traffic will heavily influence how well a store can interact with each potential customer that comes in the door. This is a great way to get an idea how well your staffing level is handling the fluctuations in traffic load that your advertising and seasonal variations cause. That is always the first thing to look at because if your store is chronically understaffed, then you will see greater fluctuations in Rev/Up as your staff struggles to service the traffic you get in busier months.
It should be said that basically the store reflected below is properly staffed and during most months its staff can deal with its workload. However, as you will see, when things like vacations, sick leave and other events reduce your normal staffing level, performance does suffer (particularly when top writers are absent). In this case, we saw that impacting mainly the summer months and December.
Here is the graph and some ideas of what you might look for:
·April – High Ups and Low Rev/Up in this case possibly indicates a good urgency in Ad message which drove people in but did not give them as strong enough reasons to buy. CR was good, AS was low - Look into what deal was offered and whether financing was part of it, something was missing.
·May – Close to being a “Normal” month with average CR and AS. Staff worked efficiently with traffic, consider repeating Ad with some tweaks to build AS.
·June – Traffic dove and rev/Up held steady. Probably should not run this Ad again, it did not drive traffic and even with lower Ups, performance did not improve significantly. Look for something else to do.
·July thru September – Strong traffic for summer season, but poor performance. How much was this due to staffing issues and how much was due to a weak advertising message? This is the biggest opportunity for improvement you have. Therefore, study it and come up with a better plan next year for both areas!
·October – What happened? Traffic tanked and so did performance! When this happens in a traditionally strong month, it is almost always caused by a failed advertising effort. Don’t repeat what you did, come up with a better program next October!
·November – Wow, the perfect storm: traditionally the best business month, ran strongest promotion and was fully staffed! Find ways to repeat this effort if you can!
·December – traffic good but performance dropped. How much was staffing related and how much was caused by a weak advertising effort? In this case it was most likely the former since long term, top writers normally get time off for holidays, which kills performance. Try to mitigate this in the future!
·January – Traffic dropped but performance shot up. Possibly weak urgency in message that failed to drive potential customers into the door, but those that came had a strong reason to buy. Good analysis, however in this specific case the traffic drop was caused by bad weather, not bad advertising. Don’t mess with Mother Nature!
·February – Weak traffic, great performance again caused by weather and shorter month. But we know that our promotion caused those shoppers to buy, so use it again.
·March – Great Traffic, but big drop in performance. What caused it? Some might have been caused by staff overload, but the reason to buy was not strong enough too. Should have been a great month. Give them more reasons to buy next time.
·April – What happened? Traffic off year-over-year, but performance improved. Possibly the urgency of message was not as strong as prior year. Definitely an opportunity to improve! Compare what you did and talk with staff to see what worked and what did not.
The winningest football teams all measure, grade and coach performance improvement in their offensive, defensive and special team’s efforts, because they all contribute to the results on the playing field! You need to do the same in Sales, Merchandising and Advertising. I hope this gives you some ideas about how to study the last but not least area!
Many conversations start with furniture retailers bemoaning the absence of traffic in their stores. Even though many are experiencing increases in sales driven by higher close rates and average tickets, they still remember the days of more customers coming through the door. We will not address the reasons, pre-shopping research on the Web and the time-starved consumer, because this area has been covered in previous issues (May, 2016). Our focus is on how to get consumers, while diminished in number, through the front door.
Compared to other retail categories, marketers consider furniture as blessed with universal desire. In no study since the 90’s has the consumer, when asked if his or her home needs redecorating and would that redecorating involve the purchase of furniture, at a minimum 87% of consumers responded with a positive Yes. This finding was according to ongoing research by FurnitureCore, our market research group.
Then what is the problem? What are the barriers that are preventing the consumer from acting on this need? On the horizon we see one of the greatest waves of household formations since the Baby Boomers. This is the emergence of the much-discussed Millennials.
That, however, is the future. Let’s not forget the household formations that haven’t occurred in the last decade as the economy and student debt force a delay in marriage, child birth, and household formations. However, at some point, the youth must emerge from the parents’ basement.
What is the current barometer? According to a just-completed survey, consumers are at various stages of shopping. The following graphic illustrates.
First the bad news: Even though they have an interest in furniture, 52% have no immediate plans to purchase. How can we change their minds? If you watch many of the decorating televisions channels’ “before and after” programs, you would come to the conclusion that someone needs to change their minds.
Unfortunately, according to recent research, only 22.3% of consumers indicate that an advertisement had prompted them to purchase a furniture item if they were not in the market for it. Regrettably, with two-income families and consumers spending less time physically in their homes coupled with the lack of home entertaining, the need to improve the decor is not high on the consumer’s “importance” meter.
One of the major factors in this loss has been obsolesce. With the economic downturn, car buyers kept a new car 71 months as compared to 38 months in 2002. This has created a pent-up demand for cars that has resulted in record sales for cars in the past two years.
What do we need to say about cell phones? Each quarter brings the latest from Apple followed shortly by the latest from its competition. These ongoing modifications distract the consumer from other large expenditures.
The appliance sector has built-in obsolescence with the average life expectancy of a refrigerator at 13 years and a washer/dryer at 10 years. One cannot ignore the non-functioning refrigerator as one would the threadbare arm of a chair.
Nevertheless, we cannot reconcile ourselves to waiting for our turn. However, advertising can be a powerful tool to encourage the consumer to postpone the purchase that car or that cell phone in order to create a great environment for escaping the demands of living.
And now for the action. Those who are finally actively shopping for furniture have made up their minds and will buy furniture. Currently, approximately 15% are in that frame of mind. The obvious advertising activity that is associated with the furniture industry is in place to bring them into the store. That is the infamous promise of substantial discounts with financing so generous that it seems you will NEVER have to pay. And then there is the ultimate, the “going out of business” deal. Unfortunately, according to research, the consumer does not believe this.
Now for the second stage – These include those who are thinking about buying furniture because they need furniture or just want to buy furniture. These consumers should be our target for advertising. Currently, 26.4% of consumers are at this stage. Unfortunately, over half of these consumers will be at this stage next year if furniture dealers do not spur them to action.
What causes this lack of action? The first is the other consumer durables. In the past decade home furnishings has lost 1.8% indexed point of its share of expenditures. Being distracted by that new car, new phone, new appliance, or new entertainment device is a fact
Another approach starts when the consumer was just thinking about a purchase. This involves exposing the consumer to decorating ideas and new products that may pre-sell them on your store.
Finally, the consumer that has just purchased furniture. Currently, this represents 15.5% of the households. Traditional thinking has been that these consumers are out of the market. This is not so. With significant credit lines on credit cards, the consumer can be in the market anytime. According to research, the best performing retailers have consumer purchases from those consumers who have bought in the last 18 months at a 30% level. Yes, these are your best customers, those who have already decided that your combination of merchandise and service are their best decision.
The Millennials are the most researched generation in history as marketers try to predict how they will spend its estimated $200 up to $600 billion dollars annually starting next year. Also known as Generation Y, these young adults, ages approximately 17 to 34, represent the largest generational cohort in history with numbers now exceeding 83 million.
Numerous articles and studies imply this generation intends to spend more of its money on experiences and less on things. However, other studies are showing these 17 to 34 year olds actually want many of the same things as previous generations – to settle down, buy a home, and have a family. And while that may be true, those American dreams have been hard to come by. Though home ownership rates are still falling for Millennials, for the last three years these young adults have become the largest age segment of home buyers, according to the National Association of Realtors.
This is the second of two articles profiling Millennials. Last month’s article explored demographically how the Millennials have altered the population, income, education, and household characteristics of young adults. This article delves into Millennial home buying trends, shopping attitudes and habits and whether they lend themselves to home furnishings purchases in the future.
While Figure 1 shows how the sheer size and education of this generation will lend itself to consumers pouring into prime furniture buying years, Figure 2 depicts the negative results of the Great Recession and a delay in marriage and homeownership among Millennials.
Millennials are therefore arriving late to the home buying industry and in turn the home furnishings industry. But studies show many Millennials actually would prefer to own rather than rent, but opportunity and financial barriers are hindering them. These first-time home buyers have been sitting out the housing recovery largely because of financial reasons. The Great Recession ushered in a poor job market to go with the average Millennials increasing college debt.
According to The Institute for College Access and Success (TICAS) Project on Student Debt (Table A), the graduates with debt grew from 65 percent in 2004 to 69 percent in 2014 to an average of $28,000. In fact, the Census Bureau reports that one in five young adults is living in poverty, up from one in seven in 1980.
Along with staggering college debt, young adults are faced with a slow to increase median income (Table B). Millennials ages 25 to 34 earn $31,219 annually, down over 10 percent from a peak of $34,459 in 2007. According to a recently released survey by the National Association of Realtors (NAR) of over 6,000 home buyers July 2014 to June 2015, Millennials purchasing homes have a median household income of $77,400 and take a median of four years to save for a down payment.
First-time home buyers fell to just 30 percent of units sold in February. Historically it should be at least 40 percent. Even with Millennials waiting longer to buy homes, they still account for the majority of home purchases and this number should grow as more of the generation ages into their 30’s. For three years Millennials have comprised the largest group of recent home buyers, 35 percent in 2015 compared to 32 percent in 2014, more than the previous smaller Generation X (26 percent), Baby Boomers (31 percent), and the oldest Silent Generation (9 percent) (Table C, NAR Survey).
While many Millennials sought the urban lifestyle for renting, most appear to be leaving the city for the suburbs when it comes to buying a home. In 2015, only 17 percent of Millennial home buyers purchased inside an urban or central city area compared to 21 percent a year ago (Table D). The higher costs of in-town properties in many urban areas are driving them to the suburbs where they are looking for more affordable and larger homes.
As the economy improves and Millennials grow their bank accounts, settle down, and become homeowners, how else will they spend their money? What influences and guides their purchases? How does this generation shop? Forbes magazine conducted a study on the consumer characteristics of Millennials in 2015 and surveyed 1,300 young adults. Table E shows that a majority of Millennials are loyal to brands (60 percent) and want them to engage with them on social networks (62 percent). Seventy-five percent hate corporate greed and find it very important to give back to society, especially through local communities. Compared to fewer than three percent relying on TV news, magazines, or books, 33 percent of Millennials look to blogs for recommendations and design ideas.
Just because Millennials are a digital generation does not mean they want to completely abandon traditional ways of shopping. Instead, they expect to have a streamlined experience between physical stores and the internet. According to a study conducted by Accenture on the shopping behaviors of Millennials (Table F), 68 percent of young adults demand an effortless transition from smartphone to personal computer to physical store when searching for the best products. Forty-one percent said they practice “showrooming” by checking out a product at a nearby retail store and then shop for it online to find the lowest price. Millennials love loyalty programs and 95 percent said they want brands to reach out to them by sending coupons via text, email or mailed to their homes.
The home furnishings industry will need to pay attention to young adult’s marketing expectations and shopping behaviors as the glut of the generation pours into their prime furniture buying years over the next five years. The hope is that Millennials will make a growing impact on the furniture industry, already estimated to be around $21 billion in 2015, according to industry consulting firm Impact Consulting Services.
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