Furniture retailers braced for slowdown after resilient 2007 performance
Despite a looming economic downturn, furniture & floorcoverings retailers have enjoyed a pick up in sales in 2007, according to the latest report by Verdict ResearchThe retail analysts estimate that the UK furniture & floorcoverings market will grow in 2007 at its fastest pace for three years. However, stripping out the boost to sales from higher inflation, year-on-year volume growth will be lower. Verdict believes that due to mounting cost pressures, it will be those retailers that can attract consumers on grounds other than price that will be best placed to prosper in what Verdict expects to be tough market conditions in 2008.
“The high proportion of homeowners on fixed rate mortgages is a key reason why furniture retailers have not yet experienced a softening in demand,” comments Nick Gladding, Lead Analyst at Verdict. “However, as the discount period on mortgages arranged 2-3 years ago expires and as the housing market weakens, trading conditions will become much tougher. The non-essential replacement and big ticket nature of furniture & floorcoverings products means that consumers are more likely to defer a purchase than in most other sectors of retail, particularly in the event of an overspend at Christmas.”
The pick up in market growth to 2.6% (from 2.2% in 2006) also reflects a higher rate of underlying price inflation driven by the increasing cost of manufacturing. Stripping out inflation, volume growth of 0.9% in 2007 is set to be lower than 2006. Verdict calculates sector inflation will hit a five-year peak at 1.7% in 2007 due to higher factory gate prices in China and other markets (including the UK) as well as increased global prices on raw materials. Furthermore, retailers face a higher cost base in areas such as rent and staffing. Due to the highly competitive nature of the furniture market, retailers have worked hard to absorb these costs without resorting to raising retail prices, although inevitably some of the cost increases are having to be borne by consumers.
Cost inflation invites different marketing approach
The pressures presented by cost inflation have prompted some retailers to begin to move away from heavy discounting and hi-lo pricing promotions - the mainstay of the sector for many years. Customers are savvier than ever and have become accustomed as well as suspicious of such heavy discounts. Though price promotions will undoubtedly continue to be a key part of furniture retailing, retailers are beginning to explore new ways of promoting their products. Marketing products on innovative features, style and design, and even the lifestyle that the product could help consumers to achieve, are examples of this.
Driving customer loyalty is a key challenge for furniture retailers. Furniture is so seldom purchased that customers do not show the same loyalty to a shop as in other sectors. Some furniture retailers are boosting loyalty by building a year round relationship with consumers through regular advertising. IKEA for example has now launched a loyalty card offering discounts to family shoppers. Through its destination status and broad product offer, IKEA is one of few furniture specialists able to develop a loyalty scheme.
After gaining furniture market leadership in 2006, Argos has consolidated its position as the UK's number one furniture retailer. Additional stores and the continued development of its multichannel strategy have been the key reasons for success. The retailer has continued to push forward with a dedicated home catalogue, while the introduction of trial furniture showrooms in around 30 stores have combined to add 0.1 percentage points to its share, taking it to 6.3%. This, when added to stablemate Homebase's 1.4% share, gives parent Home Retail Group a furniture market share of 7.7%, some two percentage points ahead of nearest rival and number two in the sector IKEA.
Frustrated for a number of years due to strict planning regulations, IKEA is seeing the fruit of its new found flexibility in store openings. It has opened an average of one store each year since 2003 and this, combined with investment in existing stores and the introduction of a transactional website, has added 0.3 percentage points to its share in 2007. On the back of this IKEA has become the outright number two player in the market, moving ahead of DFS which shared the number two position last year. With a further two stores set to open in December 2007 (in Coventry and Belfast) and another planned for Southampton in the final quarter of 2008, IKEA is set for more growth in 2008.
DFS remains comfortably the leading upholstery specialist. Benefiting from a formidable brand after years of heavy advertising, DFS has built a strong proposition based on quality and design. It has insulated itself from the turbulent market in recent years by taking a long term view of expansion and, with fewer than 80 stores, has much potential for future growth.
Former market leader MFI has seen its market share further decrease in 2007. However, it has worked hard behind the scenes in building a completely new supply chain and refreshing its ranges. The retailer now has a solid foundation to launch a recovery in 2008 when Verdict expects to see the retailer making more noise about its offer, which is likely to result in a rise in market share for the first time since 2003. That said, Verdict does not expect MFI to regain its market leading position in the foreseeable future.
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