Home is where the hurt is

• GRAPH: How the housing market has slumped

The mood at the Marriott County Hall hotel last Wednesday was, as one retailer put it, “unbelievably pessimistic”. Leading furniture retailers had been convened by the British Retail Consortium to explain to the Department for Business and the Bank of England just how tough their world has become. The retailers didn’t hold back.

While the BRC and retailers present say the meeting was “positive”, store groups came away still concerned about what can be done.

Buffeted by low consumer confidence and a static housing market, shoppers are unwilling to invest in big-ticket purchases. Last week Habitat collapsed into administration, with plans for all stores outside of London to close, putting 750 jobs at risk while Homeform - which operates the Moben, Dolphin and Sharps brands - put administrators on standby, marking a terrible week for home-related retailers.

Hit the deck

Even stronger players like Carpetright have posted very weak trading. One furniture boss, who wishes to remain anonymous, says that big ticket is “having a torrid time”.

But what is driving the apparent return to the dismal days of 2008, when retailers such as MFI and Land of Leather collapsed? “It’s not complicated,” he says. “We have the lowest number of housing transactions in living memory. We have inflation with low wage rises. It’s a toxic cocktail. Big-ticket spend has never been under such pressure.”

Furthermore, he adds that those furniture players that suffered in 2008 now have weaker balance sheets and cannot sustain another period of subdued demand. “Their balance sheets just aren’t strong enough,” he says. “A CVA or a pre-pack is like using a sticking plaster to sort the problem out.”

According to the Land Registry, sales volumes in the housing market have declined from a 12-month peak of 67,367 in July 2010, to 38,336 in February 2011.

The VAT rise in January has not helped matters for furniture retailers either, leading them to either absorb the extra cost or pass it on to consumers by raising prices.

Deloitte strategic adviser Richard Hyman says home-related product has suffered more than any other. “The housing market is not moving, the volume of demand has reduced. Lots of retailers do not have the business model that can live in a trading environment of significantly reduced volumes.

“We’re facing a world where demand is reducing, costs are increasing and the selling price inflation is going up. There is simply not enough business to go around. It will be like this for several years yet. And it will get worse before it gets better.”

Verdict consulting director Neil Saunders says: “There will be a further shake out over the next few years. There will be more casualties on the indie side and on the multiple side.”

So if, as widely predicted, the sector does go through a further quake, what will the furniture landscape look like in five years time?

Less crowded, says Saunders. “There will be fewer players. It will become more consolidated and it won’t be as fragmented. Larger players such as Ikea and John Lewis will have larger market shares.”

Saunders says there are still some “bright spots” in the home sector. He believes that well known non-specialists in the furniture sector could benefit, such as M&S, Next and John Lewis.

“There are opportunities for them to expand in the home sector,” says Saunders. “These are trusted brands. People will be thinking ‘this retailer is not going to go bust on me’. They have existing customers so can do quite well.”

However, the rise of the general retailers in the sector puts further pressure on the specialists, which, according to Saunders, tend to have a legacy of large store portfolios “that doesn’t suit this trading environment”.

Saunders adds: “We won’t see the demise of specialists but we will see one dominant player in each category, so for beds, and sofas and so on.”

He says Ikea - whose UK and Ireland arm recorded a 1% rise in like-for-likes in the year to August 31 - is performing robustly and it still has opportunities for expanding its relatively small footprint, and is offering low price points. “They are also communicating great service and quality too, which is quite a winning message,” says Saunders.

Carpetright founder Lord Harris is optimistic on the five-year outlook. He says that while there will be fewer players “the market could be very strong” as the country benefits from the Government’s austerity measures, he said. “It’s hurtful but it’s got to be done. Those to come out of this will be even stronger.”

Saunders also says retailers such as Ikea benefit from having “everything under one roof”.

Cushioning the blow

At the time of going to press the directors of Homeform, which has 160 stores across its three brands, were “close to securing a deal that will safeguard the future of the Sharps and Kitchen Direct businesses” while advisers were handling a sale of the Moben and Dolphin brands. 

To ensure their survival in the future, brands like these will have to add a bit of excitement to their offering, argues Hyman. “Furnishings is a market that even in the really good times was never able to capitalise,” he says. “Furniture generally has not been done that well in this country. Retailers have tended to lack inspiration and excitement and therefore the wherewithal to stimulate demand.

“They have been reactive but not proactively manufacturing growth.”

One furniture retailer agrees the sector needs to up its game: “The furniture industry has paid scant regard to consumers in the past,” he admitsHyman says furniture retailers will have to inject more fashion and value-added products. He adds that the market itself will look different, with “far fewer shops”.

Saunders says home-related chains will have to have a renewed focus on customer service and store environment. He believes that furniture customers of tomorrow will increasingly be demanding more advice.

Beds retailer Dreams has been conducting extensive customer research on how it can better appeal to the customer of today and has presented products differently as a result, including room sets, while investing in staff training to better aid customers.

Saunders also anticipates that a better defined price architecture will emerge, around good/better/best ranging, pointing to value ranges launched by John Lewis and the Conran Shop, for example. “We’re starting to see that split,” he says, adding that the temptation to discount heavily in response to falling demand must be avoided. “It reaches a point when you can’t discount without eroding margins,” he says.

Online comfort zone

Multichannel will play its part too. It is no coincidence that those retailers performing robustly in a battered market have strong multichannel operations. Will furniture customers increasingly lean towards the internet as a way of purchasing big-ticket items?

“Online will certainly grow and probably faster than the high street, but furniture won’t be one of the major online sectors,” says Saunders. “For big purchases there is still a big desire to touch and feel.”

Saunders does believe that retailers will have to continue to adapt online, however, because their web operations will still be a source of fact finding, and price comparisons.

The furniture retailer that wished to remain off the record says his business is holding up because it is learning to “do things differently”. “We’re thinking of offering many more items that customers can buy from us,” he says.

Other furniture retailers have diversified in the face of a shrinking market. Carpetright has made a success out of selling beds, while ScS has begun selling flooring alongside sofas for the first time in its history. Feather & Blacks is selling children’s nightwear alongside its kids’ beds.

Hyman adds that the retailers that will “do OK” are those that deliver on their promises. But most of all, he reminds, they must offer product that is relevant to customers.

Retailers are saying things aren’t as bad as 2008 - yet. But trading is brutal and there are no economic signs of light on the horizon yet.

And that means ever more pressure on the furniture specialists to adapt, or more will fall by the wayside.