American Furniture Warehouse’s CEO says inflation, the end of stimulus money and a tight housing supply are all playing into a slowdown in consumer demand
GREENSBORO, N.C. — Six months ago, American Furniture Warehouse here was reaping the rewards of having carefully prepared for the supply shortages that were plaguing the industry. It had containerized much of its business, and it kept buying more and more goods, even as suppliers pushed out shipping dates so that merchandise would continue flowing despite the delays.
When consumer demand shot through the roof after the lockdowns, the Greensboro, N.C., retailer — no relation to the Colorado-based Top 100 chain with the same name — was ready. It’s 100,000-square-foot showroom was overflowing with goods, while some other stores with more programmed floors struggled to stay in stock, and AFW ended up posting the best sales year in its history.
But a lot has changed in the roughly half year since Home News Now sat down with CEO Jason Fletcher for a report on the retailer’s pandemic strategy. It doesn’t look that different at first blush. The store is still well stocked. Container rates are still crazy high and unpredictable. Despite delays, it’s going to be another record sales year, he said, with business on track to be up 30% to 40% over 2020. Black Friday business was strong.
However, on closer inspection, the numbers and results are deceiving.
“It’s good, but definitely the great times are over,” Fletcher told Home News Now recently about business trends overall. It may not be bearing out yet in the monthly retail sales estimates compiled by the U.S. Department of Commerce or in the quarterly reports of publicly held home furnishings and other retailers, but Fletcher said a slowdown is here.
He’s seen it both in the lower foot traffic to the store and in the influx of goods, primarily from domestic stationary upholstery producers, that are suddenly abundant again.
“I’ve cancelled some orders,” he said. “I’ve sent a note to a couple (of sources) saying I can’t take anything else this year. I’m good.”
Fletcher said there are two parts to this current slowdown. The first relates to the promotional side of the retailer’s business, where demand had been driven by all the pandemic-related stimulus money and extended unemployment benefits that put many consumers in a position to splurge on home and other goods. With the exception of childcare tax credits, all of this came to an end in North Carolina around the end of August into September.
“Up to that point, because of all that excess cash, they were keeping up with all the price increases that were happening,” Fletcher said of the consumer shopping for promotional goods, which generally have a shorter replacement cycle than step-up goods. But now, he added, those same customers are starting to balk and push back on the higher prices. Because of that shorter cycle, some see how item prices have climbed. But even if they don’t know the difference between a starting sofa today vs. two years ago, they do see the change in what they’d be paying every month if they’re on a financing plan, so they’re less willing to open their purse strings.
The other part of the slowdown affects more of the midpriced business and has to do with the still, white-hot real estate market. North Carolina has been one of the states with a net gain in populations, drawing people from up north and major metros. They’re coming with no furniture and nothing to sleep on, Fletcher said, and they can’t wait 12 to 14 weeks for furniture.
While this may sound like a good thing, especially for a business like AFW, which prides itself on its in-stock position, the supply of homes has not been able to keep up with the demand for them. Fletcher said the situation got even worse over the summer when lumber prices shot up and some home developers took a pause. Homes that should have been finished by now remain unfinished, waiting on windows are other materials held up by the supply chain.
“And when there are not a lot of houses turning over, you’re not moving, you’re not buying new furniture, mattresses, those kinds of things,” Fletcher said.
Taken together, the slowdown at promotional and middle prices is real. So why then has it yet to show up meaningfully in the official federal government numbers? Earlier this month, the U.S. Department of Commerce reported furniture and home furnishing stores sales rose an estimated 11.9% in October over the same month a year ago. This marked the 17th consecutive year-over-year monthly gain for the sector.
Fletcher doesn’t argue with the increases to date. Indeed, his own business is on track for a double-digit increase this year.
“But you need to ask the question: How much of that dollar increase is simply because of inflation and the price of goods going up?” he said. “We’ve talked about how the $399 sofa doesn’t exist anymore. That same sofa is now $549 or $599. 2021 dollars are even different from 2020 dollars.”
Asked why that shouldn’t be considered a positive for the industry — making more dollars on fewer units, Fletcher said it would be if inflation wasn’t happening everywhere for both the consumer and the retailer. The industry is spending more money on gas, on trucks, on freight, on labor. It’s really just trading dollars, he said.
A LinkedIn exchange with the leaders of Houston-based Exclusive Furniture suggested the same thing when HNN reported on the October retail sales release. More dollars for fewer units is good, but, “My question is that how much of the 11.9% jump in October sales over the same month a year ago has to do with the 15-20% price increase in average unit sold?” asked Fawad Zavary, Exclusive’s vice president of operations. “Are the sales really up or is the increase in costs fueling the retail sales (increase)?
His brother and Exclusive CEO Sam Zavary added, “If sales were only up 11% most stores lost market share and lost customers. We need to take a look at the number of customers sold in 2019/2020 vs. 2021, average closing ratio, door count, average ticket, and keep in mind the price increase.”
Both AFW in Greensboro and Exclusive have succeeded, in part, by not staying married to a set lineup during the pandemic and by their ability to pivot quickly to the goods and suppliers that keep their stores in stock during the period of unprecedented consumer demand. Fletcher even made wholesale changes to AFW’s advertising strategy, moving away from a product-and-price message and to a more general in-stock message.
“We’re still advertising in-stock,” but I can see that very quickly shifting back to product and price,” Fletcher said. “Because, No. 1, my inventory is filling up, particularly stationary upholstery. I can call any number of my vendors and get (what I want) so I feel more comfortable advertising specific items.” (And if sales reps and managers are calling him with best-selling SKU’s, that tells Fletcher the bigger players in the industry are filled to the brim, too.)
“But also, because demand is slowing and the warehouse is filling up, I need to move some things, so I’m going to start giving up some margin in some areas to get velocity, get things turning and get in front of people.”
Which brings us to the potential good news that comes with waning demand — both for consumers and retailers. For nearly a year and a half, such as AFW haven’t really had to sell anything. If you had the goods, the goods sold themselves, Fletcher said. The same goes for suppliers. Manufacturer reps didn’t have to sell. They couldn’t. “They were just putting in blanket orders or dealing with customer service issues.”
But Fletcher said he believes all of this is about to change. Reps and sales managers will start hitting the road again and actually pushing items. “Maybe there will be some deals again,” he said. “And if I’m getting full (of inventory) I’m going to have to mark some down to move it.” That’s good for the consumer, who has been paying top dollar throughout the pandemic.
“It’s not that we’ll have to merchandise again. We’ll get to merchandise again,” he said. Today, the stationary side of Flethcher’s store is filled mostly with grays, browns and a couple of blues. That’s it, because these were the safest bets for suppliers looking to keep retailers stocked and the mass market satisfied. The special things, such as a second or third color option or a power upgrade option were out for AFW because the supply disruption made it impossible to stock all the necessary options reliably.
But going forward, the customer isn’t going to have to settle for what they can get. “We’ll be able to help them get what they want.”
“I do think the great days are over, but they can still be good,” Fletcher said. “It means we’ll have to focus on the fundamentals of giving our customers a great experience, and taking care of customers and our people in order to thrive in this environment.
“People are alway going to need furniture and mattresses. They’re going to need us. Are you going to be top of mind when they do?”