WINDSOR BAY COMMUNICATIONS INC. Michael John Knell, Managing Partner P.O. Box 3023, 120 Street Brighton, Ontario K0K 1H0 Telephone: 613.475.4704 Facsimile: 613.475.0829 E-mail: [email protected] Twitter: www.twitter.com/HomeGoodsWriter Linked In: ca.linkedin.com/pub/michael-knell/12/200/a37/

Furniture in

A sampling of facts every one working in the industry should know

May 2017

Michael J. Knell Publisher & Editor/Home Goods Online Managing Partner/Windsor Bay Communications Inc.

WINDSOR BAY COMMUNICATIONS INC. Publishers of www.HomeGoodsOnline.ca, HGO This Week and The HGO Merchandiser Canada Revenue Agency Business Number: 13325 6610

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Four facts

Canada is a member of the G7 advanced, industrial countries

The median, after tax income for Canadian families was $56,000 in 2015, while unchanged from 2014 it’s up 2.9% from 2012.

There were 14.3 million households in Canada at the end of 2016.

The average household spent $588 on furniture in 2015, up 2.6% over the prior year but still less than the recent peak of $602 spent in 2012.

Furniture Manufacturing & Distribution

Canada’s furniture industry is relatively small. Total shipments for 2016 were $2.35 billion, essentially unchanged from the prior year.

The industry has organised itself to serve only two markets: Canada and the United States. Despite the enthusiasm with which the Canadian Government has embraced the Comprehensive Economic & Trade Agreement with the European Union, its enactment is not likely to have any significant impact on the residential furniture industry in the short to mid-term.

The largest segment within the industry produces case goods in three broad categories: bedroom, dining room and accent/occasional furniture including tables, bookcases, wall units and entertainment centres.

Shipments of case goods were valued at $1.58 billion in 2016.

Canadian exports in this category totalled $789.1 million last year – $682.9 million went to the United States, the industry’s only significant export market. Wood furniture exports to Europe (basically the United Kingdom, The Netherlands, Germany and Sweden) amounted to less than $17 million last year.

Imports of case goods were valued at $1.05 billion in 2016. Our largest source of product is the People’s Republic of China, whose imports are valued at $301.5 million. After that is Vietnam at $224.1 million and the United States at $116.5 million.

With the exception of Italy – whose exports to Canada were valued at $72.9 million last year – our furniture trade with Europe in this category is statistically nil.

Shipments of upholstery – including both stationary and motion furniture covered in both fabric and leather – were valued at $612.1 million in 2016.

Exports were valued at $264.0 million, with $260.0 million sold to retailers in the United States.

Canadian upholstery makers sold more to Kuwait, Saudi Arabia, the United Arab Emirates and Qatar (about $2 million) last year than they did to Europe, where our only customer seems to be the United Kingdom (who only bought about $500,000 worth).

2 In fact, Canada imports more upholstery than manufacturers domestically and has for the past five or six years. Total imports were valued at $1.15 billion last year. Our two largest sources were the People’s Republic of China ($624.1 million) and the United States ($354.6 million).

Once again, the only importer of upholstery into Canada worth mentioning is Italy, whose shipments to retailers in this country were valued at $34.5 million last year. In all fairness, it should be noted imports from Poland, Norway and Romania have increased steadily over the past three years, although their combined value is about $32.0 million.

There are two factors affecting furniture trade between Canada and Europe. The first is scale. Furniture made for Canadian households is typically larger than that made for households across Europe, including the United Kingdom. However, furniture makers in Canada and generally have been moving towards adding ‘condo-sized’ product to their assortments. These pieces are perhaps more in line with what a European consumer would desire.

The other is the cost of freight. Frankly, it’s cheaper to ship a container from China to Canada than it is from Portugal to Canada – $3,000 compared to $4,500. It’s possible this could change over time.

Furniture Retail

 Furniture store sales in 2016 were $11.1 billion – a new record high.

 They were up 5.1% over 2015.

 Furniture store sales grew in each of the six consecutive years from 2011 to 2016.

 HGO believes they will be up again in 2017, although the rate of growth may slow considerably and end up in the range of 4.0% to 4.5%.

 Home furnishings store sales grew slightly in 2016 to $6.2 billion.

 Despite our growth, furniture stores still account for only about 3% of all non-automotive retail store sales – that is brick and mortar sales – in Canada. This ratio hasn’t changed in the past 20 years.

 HGO estimate of average independent furniture store sales in 2014: $2.5 million.

 A surprising tidbit: No one knows how many furniture stores there are in Canada.

 HGO’s estimate: about 2,600 – including store fronts for the national chains and regional players, members of the buying groups as well as the non-aligned independents. This is a far cry from the 4,000 or so estimated to exist in 2008.

 HGO estimates the number of independent, family-owned and operated furniture, and major appliances stores at no more than about 1,400 at this time.

 Furniture stores in , Ontario, and account for 89% of sector sales, on average, every year.

3  Average gross margin for all furniture stores (2014): 41.1%

 Average gross margin for the independent furniture stores (2014): 40.4%

 Average operating profit margin for all furniture stores (2014): 3.3%

 Average operating profit margin for independent furniture stores (2014): 4.6%

 Average sales per square foot for Canadian furniture stores (2013): $238

 Average number of inventory turns per year for Canadian furniture stores (2013): 3.8

 Furniture stores remain the consumer’s preferred platform to purchase furniture and accounting for 82.3% of furniture sales and 89.2% of mattress sales in this country.

 The fastest growing channel is e-commerce – both in dollar volume terms and in the number of players in the market. Furniture and home furnishings stores generated just under $300 million in online sales in 2014. That’s three times higher than in 2011, but was still just 1.8% of overall sales. However, e-commerce represents less than 2% of all furniture sales in Canada at this time.

Purchase Drivers

Retail sales of furniture and mattresses are linked to three distinct factors:

 Housing starts and re-sales  Consumer confidence  Availability of credit

According to a study published by the Canadian Real Estate Association, the average Canadian consumer will spend $6,500 on furniture and appliances within three years of taking possession of her home.

According to Canadian Mortgage & Housing Corporation, housing starts totalled 197,000 in 2016. They are forecast to fall about 3% this year.

CREA estimates housing re-sales will total approximately 530,000 units this year.

Based on current trends, there home buyers should generate $4.7 billion in new furniture, mattress and appliance sales over the coming three years.

Every consumer confidence survey asks about whether now is a good time to make a major purchase – including a home, a car or other big ticket item such as furniture or appliances. The average of those saying now IS a good time to make these purchases has averaged 25% for the past decade. Indeed, it has climbed over 30% only a handful of times since 2005.

This means in any given month, 75% of Canadian consumers believe now is NOT a good time to buy furniture, mattresses and major appliances.

4 The other key factor driving furniture purchases is the availability of credit. Following buying a home and a car, the next largest investment made by most Canadian families is in furnishing their homes. There is no data suggesting what percentage of furniture purchases is made using credit, but it is believed to be greater than 50%.

Household debt as a percentage of household income (including mortgage payments) has reached new highs in recent years. The Bank of Canada recently established the debt to income ratio at 1.69 – including mortgage debt. This means the average Canadian household owes $1.69 for every $1 earned in disposable income.

Fun fact: it is estimated that one-third of all Canadian households are debt free.

On a positive note, there are still consumers in the marketplace. People are still shopping for furniture. The challenge for retailers is to convert shoppers to buyers and they believe that if they present the right product, in the right style at the right price, the sale will be made.

Facts about Statistics Canada

Statistics Canada divides ‘brick and mortar’ big ticket home retailers into three categories:

 Furniture and home furnishings stores  Electronics and appliance stores  General merchandise stores

All three sell furniture, mattresses and major appliances to one degree or another. For example, Best Buy Canada now sells all three via its web site.

Statistics Canada defines a furniture store as any retail establishment that generates 51% or more of its annual revenue from furniture and mattresses on a consistent basis.

Home furnishings stores sell everything from floor coverings to lamps and lighting, accent and occasional furniture, decorative accessories and wall art. Home Outfitters and The Bombay Company are two good examples.

General merchandise stores include both typical department stores, such as Sears Canada and The Bay as well as discounters such as Walmart Canada as well as big box stores such as Costco Canada.

The Group of Large Retailers includes some 80 companies identified by Statistics Canada as retailers who either have stores across the country or are the dominant players in their home province. For the big ticket home category the group includes merchants such as the Brick; Leon’s Furniture; The Source; IKEA Canada; BMTC Group; Best Buy Canada and Visions Electronics, among others. It also includes: Hudson’s Bay; Sears Canada; Wal-Mart Canada; Costco and, Canadian Tire Corp. Sleep Country Canada, this country’s largest mattress specialty retailer was added to the GLR in 2017.

The Structure of Furniture Retailing in Canada

There are currently more than 75 known channels of distribution for residential furniture, mattresses and other home furnishings in Canada. This explosion in the ‘routes to market’ has

5 significantly altered the competitive landscape over the past two decades. The most significant of these channels distribution are:

 National full-line furniture stores: (e.g. The Brick; Leon’s, IKEA, Sears Home)

 Regional full-line furniture stores: (e.g. Brault & Martineau; Ameublesment Tanguay; Lounsbury’s; Dufresne Furniture & Appliances; Tepperman’s Furniture; City Furniture; Lastman’s Bad Boy Furniture & Appliances)

 Destination stores: (e.g., Finesse Furniture in Edmonton, Alberta; Stoney Creek Furniture in Stoney Creek, Ontario; Germain LaRivière in Laval, Quebec; Jan Eden’s in Burnaby, British Columbia; Gallery One; Halifax, )

 Mattress specialty stores: (e.g. Sleep Country Canada; Mattress Mart; The Brick Mattress Store; Mattress Mattress)

 Buying group banner stores: (e.g. Accent, Home Furniture, BrandSource Canada)

 Family-owned independent stores: (e.g. Bennett’s Home Furnishings in Campbellford and Peterborough, Ontario; Kullberg’s Furniture in Brandon, ; Coleman’s Furniture World in Corner Brook, Newfoundland)

 Manufacturer gallery/franchise/license stores: (e.g. Thomasville, La-Z-Boy Furniture Galleries; Ethan Allen, Ashley Home Stores, Norwalk)

 Online or e-commerce stores: (e.g. Wayfair Canada, Cymax, Modern Furniture Canada, Novosbed, Endy Sleep)

 Department stores: (e.g. The Bay, Sears Canada)

 Discounters/junior department stores: (e.g. Walmart)

 Big box stores: (e.g. Costco, Home Depot)

 Office superstores: (e.g. Staples)

 Non-furniture stores: (e.g. Loblaw’s, Home Hardware, Canadian Tire)

 Home décor specialists: (e.g. Home Outfitters, Pier One; Bombay)

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