Sector Insight: Home furnishings - Home improvement

Growing competition is forcing furniture prices down while bringing style to the fore. Jane Bainbridge reports.

THE BACKGROUND

A quick glance at primetime TV reveals the extent to which the British are taking more pride in their homes. As a result, the furniture and home furnishing market has grown by 25% in just six years, and is predicted to grow by a further 23% in the next four. At the same time, demographic and lifestyle changes mean that retailers must adapt or see their market share clawed away in a sector that has become increasingly aggressive with the entry of DIY retailers and more general stores.

A combination of the Changing Rooms phenomenon, a buoyant housing market and high consumer spending helped boost sales of furniture and home furnishings by 25% between 1998 and 2004 to an estimated £10.98bn.

Lounge furniture dominates, with £2.3bn of sales, followed by kitchens (£996m) and beds and mattresses (£910m), according to Mintel.

MFI, IKEA, DFS and Courts are the main players, but it is those companies manufacturing and selling their own furniture that have enjoyed the highest margins, with category specialists experiencing the better growth.

Competition is growing, with Argos expanding its range and forcing down prices, while the DIY chains are offering more furniture. Areas doing particu-larly well are beds, bedroom furniture, leather lounge suites, casual dining items and real wood.

As most furniture remains a high-ticket item, purchase is driven by need, when people set up home, replace first furniture or have kids. Empty-nesters are another major market, buying new pieces when the children leave home.

The fact that the number of 25- to 34-year-olds - who buy most furniture - declined 10.6% between 1998 and 2004 is a major concern for retailers, although it is likely to be offset by growth among 35- to 44-year-olds and more affluent groups.

A shift toward marketing furniture using its design and style credentials will encourage replacement as consumers try to keep up with the trends.

But, while this boosts volume sales, it pushes prices down as shoppers demand a more limited lifespan from their furniture.

Promotion-led marketing

Brand advertising has little place in furniture retailing at present, with the key players more likely to focus on 'call-to-action' promotions, such as discounts and special events. Shoppers are tuned in to sales and often delay purchases until the offer period starts.

The factors least likely to sway shoppers include location - IKEA has only 12 UK stores but very strong pulling power - and loyalty, as shoppers don't necessarily return to an outlet at which they have previously shopped.

There are several specific categories of furniture retailers: the super-specialists with great choice in one area, such as Dreams for beds; furniture hypermarkets with a full range under one roof, such as IKEA; super-stylists offering a lifestyle range, such as Laura Ashley; and the micro-specialist, such as Durham Pine, offering a specific look for a particular market segment.

Mintel predicts the super-specialists will perform well, as will the super-stylists, but is more pessimistic about the general superstores.

Inferior in-store design, too little choice and old-fashioned styles could limit their appeal.

These retailers, such as Courts and Harveys, which offer a broad range of furniture for all rooms, lack leadership in any one group. This does not bode well for MFI, which has been shifting its strategy from its dominant kitchen position - where it has about 30% share - to selling furniture for every room in the house.

MFI was the leading furniture retailer in 2003 with a 6.3% market share, just ahead of IKEA. In November 2002, as part of a strategy to broaden its offering, it bought Sofa Workshop, whose products are now available in 172 MFI stores, as well as in standalone shops.

Although it started out as a flatpack specialist, MFI has repositioned itself and is aimed at the mass middle-market, with value-for-money products.

It has introduced kitchen brands Hygena and Schreiber, which are the core of its product range, and has altered its advertising accordingly to build the brands rather than just focusing on price.

High volume, low price

Swedish company IKEA is the world's biggest furniture retailer and its hugely successful formula of high volume, low price, stylish products for the whole home meant 35m customers visited its UK stores in 2003.

It invests heavily in advertising (£5.2m in 2003) to build its youthful appeal.

IKEA is the most profitable retailer in this sector, although a decision to put more staff on the shop floor may be responsible for a dip in profit margins last year. It needs new sites to take pressure off existing stores and improve service, but a site at Stockport recently failed to get planning permission.

'We want another 20 stores in the UK to get closer to the market, as all our stores are over-trading,' says Scott Cordrey, property manager at IKEA. 'We have sites identified, but below a certain store size, the economies of scale don't work for us.'

In the carpet market, Carpetright dominates and has built up share by developing smaller formats for department stores and towns. Allied Carpets, by comparison, has concentrated on margin ahead of volume and has subsequently lost ground.

The performance of the sector could be adversely affected by interest rate rises and a slowdown in the housing market. But overall, Mintel forecasts total consumer expenditure on furniture and carpets to increase by 23%, reaching £17.8bn by 2009.

The trend for more stylish furniture will continue and retailers must update product designs regularly to keep their ranges fresh. While the number of households is growing, they are becoming smaller, so multi-functional and smaller items will grow in popularity.

SALES AND MARKET SHARE (FURNITURE AND CARPETS) OF LARGE SPECIALIST

RETAILERS

Company 2003 2002

pounds m % pounds m %

1 MFI 911 6.3 861 5.6

2 IKEA 794 5.5 880 5.7

3 Homestyle 680 4.7 539 3.5

4 DFS 499 3.5 462 3.0

5 Carpetright 451 3.1 387 2.5

6 Courts 286 2.0 236 1.5

7 Magnet 270 1.9 257 1.7

8 Moben/Sharps 240 1.7 219 1.4

9 Allied Carpets 210 1.5 203 1.3

10 Furniture Village 120 0.8 109 0.7

11 Habitat 117 0.8 110 0.7

12 SCS 117 0.8 98 0.6

13 Furnitureland 115 0.8 103 0.7

14 Multiyork 70 0.5 60 0.4

Market total 14,423 100 15,501 100

Source: Mintel

ADVERTISING SPEND OF FURNITURE RETAILERS (pounds m)

Company 2003 2002 2001 2000 1999 1999-03

% chnge

1 DFS 61.3 59.2 50.4 42.6 34.0 80.0

2 Courts 20.0 13.4 13.7 13.6 9.9 102.0

3 MFI 16.8 13.8 12.9 14.3 11.8 42.3

4 Harveys 5.5 4.0 4.6 2.6 2.9 88.7

5 Furniture Village 5.2 5.3 5.2 4.5 3.8 36.8

6 IKEA 5.2 5.6 4.7 7.6 5.3 -1.9

7 Furnitureland 2.4 2.6 1.8 0.4 0.3 700.0

8 Reid 2.2 1.2 1.3 1.3 1.2 83.3

9 Durham Pine 1.6 1.3 1.3 0.8 0.6 166.7

10 Magnet 1.5 0.6 0.4 0.2 0.3 400.0

Source: Nielsen Media Research/Mintel

ANALYST COMMENT

Gavin Rothwell, Senior retail analyst, Verdict Research

A key dynamic in the furniture sector in recent years has been the arrival of price-led operators. IKEA, which opened its first UK store in 1987, revolutionised the sector with its low-priced contemporary furniture. In its slipstream, other such operators have strengthened - notably DIY retailers and Argos.

Our figures suggest DIY retailers have doubled their sales of furniture over the past five years to reach £900m in 2004. With the safeguard of relatively high barriers to entry in their core DIY sector, they have diversified significantly, with furniture and homewares the principal targets.

Offers are typically set at keen price points, with a relatively modern product design focus. B&Q, Homebase and Focus Wickes are all performing strongly in this area. Indeed, a large part of MFI's recent difficulties have been due to a far stronger competitive threat from the DIY retailers, B&Q in particular.

Argos, meanwhile, now ranks as the second-biggest furniture retailer behind MFI, with a forecast 5.5% share in 2004. It has retained strong price perceptions, updated its store environments, improved customer service and bolstered furniture coverage, incorporating a greater design element.

Alongside this has been a significant store expansion programme and the development of the Argos Direct delivery operation.

The outlook for further growth for these non-specialists remains positive, as they get more experience of selling furniture. The impact of this on lower-price specialist players is that they need to better justify their own price points and better differentiate their own product, or lose sales or be sucked into a margin-hitting price battle.

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