Sept. 1, 2020

An Outlook on the Furniture Industry

Mergers & Acquisitions
Bo Stump
by
Bo Stump

Originally published in Home Furnishings Business

2020 has proven to be the most challenging and perplexing year of the new century. A global pandemic went from 0 to 6 million cases in a matter of months, with hundreds of thousands of casualties. The crisis sparked rapid job layoffs, business closures, plummeting GDP numbers, and a collapse in equity markets. Racial, societal, and political unrest followed, with the specter of a volatile U.S. presidential election on the horizon. However, now nine months into the new year— and six months following the virus’s debut in the U.S.— the home furnishings industry is now performing above its YoY monthly figures and the public markets are near all-time highs. (Unfortunately this rebound has not yet reached all in our polarized society.)

What will the new year bring? We have cause for optimism as COVID treatments and vaccines continue to move through trials, infection rates decline, and certain business indicators point towards recovery. Of course, if we have learned anything this year it is that life is truly unpredictable. Here are our observations for the rest of 2020 and into 2021, which is meant to inform readers about the near future of the furniture industry.

RAPID CHANGE

The furniture industry, like many others, has experienced rapid changes this year. Most notably:

Consumption Patterns – The existential COVID-19 mandate to work (or for many, live) at home all day, every day has been a boon to home and home office furnishings suppliers, as many consumers realized they needed a better home office, while others took the opportunity to upgrade dining and living areas. Many employers now give employees home office stipends of $250-$1,000, with flexible work from home (WFH) policies that should last until at least mid-2021. This work from home trend is unlikely to dissipate with a COVID vaccine or treatment. This has helped the industry recover from stark sales declines in March-April, with estimates that new orders in June were up 30% over 2019.

E-Commerce – Correlated strongly with changing consumption patterns (due to COVID-19 closures), we believe that the e-commerce channel grew at a 10-year rate in just six months. While e-commerce adoption has long been a juicy topic of discussion in the industry, it’s now a must have, not a luxury. We have noted rapid sales and profitability growth of the e-comm majors like Wayfair and Overstock, as well as smaller competitors reaping the rewards of long-term technology investments. Consumers continue to become more comfortable with making purchases online, and those companies able to satisfy this need will continue to grab market share.

Imports – Once believed to be a minor trade tiff, the overall U.S./China relationship is now at an all-time low (at least since President Nixon’s fabled trip to Beijing). We now know that U.S. Furniture Imports from China officially plunged 28% in 2019; the balance was mostly made up in Vietnam (35% growth YoY) along with growth in Malaysia (27%), Indonesia (8%), and India (7%). We now hear about Vietnam everywhere we turn, as well as the smaller producing countries, as capacity there becomes constrained. We do not expect this flight from China—at least for those in the U.S. market—to change in the short-term given the built-in effects of the trade tariffs and seemingly unbridgeable political tensions between both countries.

Made in USA – Similarly to imports, “Made in America” is back and credible. North American upholstery capacity continues to be on-trend, with major players expanding in Mexico, Mississippi, North Carolina, and elsewhere. Many larger Canadia companies are keen to find U.S.-based production facilities given the affordable real estate and labor, reduce FX exposure, and benefit from Made in USA branding. Overall, “re-shoring” eases trade/political uncertainty, reduces lead times, and helps the sales force close deals.

RISKS ABOUND

While the furniture industry has plenty to celebrate these last few months, we are not yet out of the woods. From a pessimist’s perspective, much of the initial increase in demand for furnishings (as well as U.S. aggregate demand) may be tied to a confluence of mostly one-time factors. These include:

  • 1x employer grants for home office expenses (mentioned previously)
  • 1x stimulus checks per adult of $1,200 (April-June 2020)
  • Turbo-charged $600/week Federal add-on to unemployment benefits (ended July 2020)
  • 100% forgiveness PPP loans (grants) to smaller employers (money mostly spent; forgiveness period on-going)
  • Treasury bail-out fund for larger corporations (money mostly spent; strings attached, ending in October)
  • Unlimited fed purchases of treasuries, corporate bonds, and ETFs to keep interest rates low and markets afloat (on-going)

With beefed-up direct stimulus to consumers now over, small business PPP money mostly spent, and corporate loans/grants ending (along with corresponding pledges not to reduce work forces), there is a strong chance for unemployment to rise, or at least stay stubbornly flat, as consumer confidence and spending correspondingly decreases. None of this will benefit the industry, and may well yet harm it.

CONCLUSION

Of course, if the year has taught us anything it is to expect the unexpected. We remain general optimists when it comes to business in America. It is still the best place to be! If forced to put on our forecaster’s hat, we would advise for a bumpy next six months as politics and COVID continue their seemingly eternal dance. But in 2021—as the virus and tensions hopefully dissipate—adjacent furniture suppliers to hospitality, office, and other institutional sectors should benefit from a rebound, as the home furnishings industry has this Summer/Fall. Home furnishings vendors should be able to weather any short-term bumps as consumer consumption patterns continue to move in its favor (or at least those who are offering an attractive product with online capabilities).

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