Home Furnishings Industry Insights Fall/Winter 2017 1 Duff & Phelps Home Furnishings Industry Insights | Fall/Winter 2017 KEY Market Update E C O N O M I C INFORMATION The U.S. furniture and home furnishings industry is expected to experience continued growth in the coming years due to several positive secular tailwinds. The domestic economy and labor market continue to improve and discretionary spending is reaching its U.S. home building jumped to a 1-year highest level since 2006. This has led to a strong housing market, high in October as recent hurricane characterized by increasing new/existing housing starts and prices. disruptions in the South faded and Consequently, sales of furniture and home furnishings increased by communities in the region started almost 8% between 2014 and 2016 and over 4% from January to replacing damaged houses. Housing October 2017. starts surged 13.7% to a seasonally adjusted rate of 1.29 million units, the Millennials, who now represent the largest consumer cohort in the highest level since October 2016. furniture market, are increasing in age and buying homes—a trend that will likely facilitate further furniture industry growth. Meanwhile, On November 1, 2017, the Federal Open Baby Boomers, who are largely becoming “empty nesters,” are Market Committee concluded its two-day moving into smaller living spaces and need to refurnish their new policy meeting, voting unanimously to hold residences. As a result, furniture retailers will need to adapt their its benchmark federal funds rate between approach in a changing landscape from a generational point of view. 1.00% and 1.25% and to continue the process of balance sheet normalization, which began in October. Furniture companies must cope with a maturing omni-channel environment, as consumers shop online to make informed purchases Economic growth accelerated to an and for convenience. An omni-channel marketplace, driven by annualized rate of 3.0% in 3Q17, versus Millennial consumption, is an attractive ground for disruptive an expected rise of 2.5%. An increase in businesses. Design and assembly innovations, new technologies and inventory investment and a smaller trade eco-friendly materials will attempt to reshape the industry. deficit offset a hurricane-related slowdown in consumer spending and a decline in construction. Looking at the bedding/mattress category, the direct-to-consumer (DTC) channel continues to capture market share in the growing and The U.S. economy added 261,000 jobs sustainable industry. The mattress industry in the United States in October 2017, the most in more than generates over $14 billion in sales annually, and has grown at a a year. Meanwhile, the U.S. compound annual growth rate (CAGR) of 4.7% over the last 20 unemployment rate fell yet again to years. DTC companies are disrupting the industry’s current high- 4.1%, its lowest level since 2000. margin structure with a strong value proposition for the consumer, which is expected to attract a broader customer base going forward. DTC mattress companies currently represent less than 3% of the total $14 billion market, but are poised to capture additional share as innovation and competitive pricing continue to attract new consumers. Source: NAR Generational Survey: Millennials Increasingly Buying in Suburban Areas, IBIS World, Trading Page 2 Economics, FBIC Global Retail Tech, Tempur Sealy Investor Presentation, ISPA, Furniture Today, Furniture Today’s “Top Bedding Producers”, U.S. Census Bureau Duff & Phelps Home Furnishings Industry Insights | Fall/Winter 2017 On September 20, due to growing competition from major Headlines Across the Home furniture chains, the rise of e-commerce, and the changing shopping habits of young consumers, Rothman Furniture Furnishings Industry announced that it is closing all six of its St. Louis-area showrooms after 90 years in business. Jay Steinback, CEO, On October 10, Inter IKEA chief executive Torbjörn Lööf told the pointed to demographic data that shows Rothman is No. 1 in its Financial Times that the home furnishings retail giant, known for its market among ages 50 and up, but “under 30, we’re lower in the sprawling out-of-town warehouses, Scandinavian design, and Top 10,” he said. “So for the younger demographic, we’re their Swedish meatballs, will begin test selling its iconic flat-pack furniture grandfather’s furniture store. It’s been harder and harder; they’re through online retailers. The shift into online retail could include just a very challenging demographic to meet.” Amazon and Alibaba. The company will also start experimenting with smaller urban locations, online ordering, and pickup points in a move On September 5, West Elm and Leesa Sleep, a leading direct- designed to meet the changing shopping habits of its customers. to-consumer online mattress retailer, announced a partnership. Leesa replaces Casper as West Elm’s official mattress partner. On October 10, Furniture Today noted in a press release that the West Elm’s recent partnership with Casper had been rapid growth of the direct-to-consumer mattress boom is owed, in established in 2016. Leesa is one of the most successful upstart part, to spectacular gains from market leaders. Amazon, the No. 1 mattress players that have been upending the $15 billion bedding e-tailer, doubled its bedding business last year, hitting $250 industry and snatching market share away from mattress giants million in sales. The No. 2 bedding e-tailer, Casper, had an estimated Tempur Sealy International and Serta Simmons Bedding. Both bedding business (minus accessories) of $175 million last year, an Leesa and West Elm have a social component to their increase of 75%. The No. 4 player, Tuft & Needle, had a higher businesses. Leesa is a B Corp that donates one mattress for growth rate than its larger competitors; Tuft & Needle grew 200%, every 10 that it sells. West Elm, a division of publicly traded boosting its revenues from $40 million in 2015, to an estimated $120 Williams-Sonoma, emphasizes handcrafted, sustainable and million last year. Tuft & Needle is talking about opening mattress fair-trade products, and has committed to increasing its fair- stores stocked with Amazon gadgets and co-branded with Amazon. trade offerings from 20% in 2017 to 40% in 2019. As some companies struggle with the ever-growing competition, consolidation in the DTC channel becomes more likely. On August 21, Bradington-Young president, Craig Young, said that the 40-year-old upholstery maker, acquired by Hooker in On September 26, Blackstone completed the acquisition of 2002, has experienced “meteoric” growth with its luxury motion International Market Centers (IMC), which owns key market space in line. The line was launched in April 2015, at the High Point High Point, North Carolina, and Las Vegas. While a purchase price Market with four groups. By the end of 2016, it represented was not released, according to Furniture Today, the price is rumored about 25% of their business and year-to-date has reached 30%, to be around $1.45 billion. IMC was previously owned by Bain Capital according to Young. The company’s successful luxury motion and Oaktree Capital (who both acquired it in 2011 for $1 billion), and positioning and American-made quality story resonate most with operates 12.2 million square feet of market space, making it the Baby Boomers, the age group with the highest personal wealth single largest operator of furniture showroom space. and accounts for about half of all consumer spending, according to Visa and Moody’s Analytics. Source: Furniture Today, Honest Mattress Reviews, Fortune, The Financial Times, Newsroom Page 3 Home Accents Today, The Wall Street Journal Duff & Phelps Home Furnishings Industry Insights | Fall/Winter 2017 Capital Markets Industry Insights | Q1 2016 E-Commerce’s Influence on the Home Furnishings Sector Furniture Retail Industry Landscape Commentary on E-Commerce Landscape ▪ Furniture has recently become one of the fastest- Department growing segments of U.S. online retail and is also one Stores of the fastest-growing categories at Amazon.com— spurring the online retail giant to make a major push into furniture, including building four massive Bedding Stores warehouses focused on fulfilling large bulky items ▪ Although e-commerce poses many threats to Discount traditional brick-and-mortar furniture retailers, Department traditional retailers remain insulated vs. many other product categories: Lifestyle Stores – The large physical size and lack of standardized sizes in fully assembled furniture, which many Americans expect; the difficulties of home delivery Manufacturer in terms of scheduling, packaging and placement Brands – Furniture shopping is (inherently) an intimate E-Commerce experience; consumers often want to see and First experience the product(s) in person – Furniture is inherently fragile and difficult to repair Rental Stores and is expected to be “like new” – Furniture encompasses a vast spectrum of price, quality, complexity and product variations B&M Furniture – Complex sourcing infrastructure B&M Furniture ▪ Furthermore, the increasing percentage of online with E- sales has impacted suppliers in various ways: Commerce Presence – Fulfilling internet orders requires efficient supply chains and production capability Club Stores – Manufacturers need to employ systems with a strong technology backbone driving product development and logistics DIY Stores – Customer/retailer supplier relationships are becoming increasingly dynamic Companies selected based on Duff & Phelps