Is furniture getting back on its feet?

The carcasses of collapsed furniture retailers lie sprawled across the country for all to see, with scores of empty shops remaining unoccupied, some still bearing once proud names such as Land of Leather and MFI.

They are a stark reminder of how the sector has been ravaged in the recession. After last autumn’s collapse of Lehman Brothers, consumer confidence was shaken to the core, house prices plummeted and consumer spend shrank. It was big-ticket purchases that suffered first, and the freeze was acutely felt by furniture retail, which is inextricably linked to the housing market.

But while furniture retailers are by no means out of the woods yet, is an upturn in the fortunes of the sector’s retailers on the horizon?

And market-leading sofa specialist DFS also made unprecedented job cuts in September last year, as it sought to navigate through the recession.

Last week the BRC-KPMG Retail Sales Monitor showed that UK like-for-like sales rose 2.8% in September, while total sales climbed 4.9%. Furniture and flooring were the best performing categories.

John Lewis, a leading seller of furniture and a barometer of how the big-ticket market is generally performing, is starting to see improvement in its performance in the category.

“We’re definitely seeing an upside in furniture at the moment,” says Dave Brittain, head of furniture buying at John Lewis.  He concedes that the uplift has a lot to do with soft comparatives last year. “The past 18 months were probably the hardest anyone here can remember,” he points out. “Things got particularly bad around the time of Lehman’s collapse. Sales fell off a cliff. No one expected it to be as bad as it was.”

But things are looking up. Last week furniture like-for-likes at the retailer jumped 18%, and Brittain expects the growth to get stronger between now and Christmas.

John Lewis was forecasting growth in October and November, but sales started to rise in August. Brittain believes that is down to the strength of the John Lewis brand. “We’re a brand that customers trust, we can hoover up business where people are nervous about spending on big ticket,” he says.

Those still standing

While the many collapses in the sector have served to prove just how badly the recession hit, they have also provided opportunities for the survivors. Those left behind have been able to mop up market share left by the collapse of rivals such as MFI, which fell into administration for the second time last November, blaming the very poor market, the withdrawal of credit insurance and the failure of key suppliers.

At the start of the year, Chris Dawson, owner of furniture retailer The Range, opened a raft of temporary stores under the new fascia Trading Bargains to sell stock bought after the collapse of MFI.

The recession has provided opportunities for new chains too. World of Sofas opened its doors earlier this month in Scotland. Chief executive Paul Briant, one of the founders of Land of Leather, wants 60 stores across the UK within five years (Retail Week, March 13).

Clive Gilbert, managing director of Cargo, which is opening stores at the moment, said a number of factors have contributed to an uplift in sales in the sector. “Big players have dropped out of the market or downsized their chains,” he says. “And there’s a huge number of independents gone. Also, people are investing back into their homes because they’re not moving.”

The Conran Shop managing director Nick Moore agrees with this last observation, and has noticed footfall increase in the past six to eight weeks for the first time in 12 months. “Customers are coming to terms with the fact they can’t move house, so are prepared to refresh parts of their home instead,” he says.

The Conran Shop, which opens its first Irish outlet in department store Arnotts this month, has introduced a lower price-point range in the recession to widen its appeal. Moore says this has helped draw in customers, as well as the fact that The Conran Shop is a “trusted” brand with a “good heritage”.

Marc Henstridge, head of risk at credit insurer Atradius UK & Ireland, has changed his stance on furniture retailers in recent months. He says that, at the end of last year, he felt “very uncomfortable” insuring his clients against furniture retailers.

“Today I don’t have that view,” he says. Instead, he takes a “moderate” view. He maintains, however, that there is a dilemma: “How much market is Argos going to take? What is Ikea going to do? What moves will Tesco make?” There are still unanswered questions in how the market will play out.

Not out of the woods yet

According to PricewaterhouseCoopers director of strategy Kien Tan, it is no great surprise that the sector is experiencing a “small bounceback” in furniture sales. He says there will be some deferred purchases from the last two to three years, since the overall housing market started to slow.

He also points out that those consumers still in work have “never had it so good”, with interest rates and mortgage replacements at an all-time low and VAT having been temporarily reduced. A PwC survey shows that consumer confidence has been slowly recovering during 2009, and is now more positive than in April 2008.

But there is a danger of getting carried away by these developments. “These are not the green shoots of recovery,” says Brittain. “Without a shadow of a doubt there will be more retail collapses in furniture.”

Stronger players, which have not emerged unscathed in the downturn, may agree. Ikea, the world’s largest furniture retailer, saw years of growth come to a screeching halt this year, when it made an unprecedented 5,000 global redundancies from its 120,000-strong workforce. Its global president and chief executive Anders Dahlvig told Retail Week in May that the UK furniture market was “the worst I’ve ever seen it”, and that he believed there was no other furniture market in the world suffering more.

PwC analysis shows that during the last recession, the only retail categories to fare worse than furniture were other ones involving big-ticket purchases, such as large home appliances and
jewellery. Consumer spending on furniture declined by 17% from peak to trough over a period of seven quarters, and then took another nine quarters to recover to pre-recession levels.

History repeating itself

So if the current recession is anything like the last, furniture still has some way to go before fully recovering. During the last recession, like this one, there was a “major shake-up in the UK furniture retail market”, according to Tan, with the emergence of Ikea and Argos as “major forces in the sector” as well as exits such as Lowndes Queensway.

A major shake-up has occurred this time round too, with the list of well known fallen furniture retailers reading far longer than others in the wider retail industry.

Tan says “the combination of new entrants, discounting, the emergence of new out-of-town outlets and deferred purchases that helped the furniture market bounce back”, in the last recession.

Tan believes any hints of a recovery may only be short term, due to the “worsening macro fundamentals”, including VAT going back up next year, tax increases, the end of the stamp duty holiday, public sector spending cuts and the rise in unemployment. He also points out that British homes have “never been in better shape” – advances made in the field of home improvement in the early part of this decade mean there are fewer deferred purchases that need to be made.

He adds that consumers will return more quickly to small discretionary treats, rather than big-ticket purchases, which can be “delayed until confidence fully returns or there is a sustained recovery in the housing market”.

Gilbert highlights that while top-line sales may be on the up, the bottom line may not look so healthy. “There are a lot of price promotions going on, so while the sales are there, the profits might not be,” he says. “It’s too early to tell if furniture has turned a corner, and it’s dangerous to start talking about green shoots.”

What the furniture sector can at least hope for is that the worst is behind it. Most of those that were going to fall have collapsed already. It is now up to the survivors to ready their businesses for what is going to be a tumultuous 2010.