Ecommerce Eats Retail: Which Retail Categories Have Fallen First?
To understand furniture’s trajectory online, it’s important to put the category into the broader context of e-commerce’s rapid inroads into brick-and-mortar retail.
Today, nearly 15% of all U.S. retail occurs online, if you exclude categories like cars and fuel. However, this average masks a wide variety of online penetration rates for different types of products. Some categories are now over 50% online (Music and Videos) while others are stuck at low single-digit online penetration (Groceries).
To date, the driver of how fast a category has moved online has been how “Amazonable” the product is. With pure plays like Amazon making the aggressive moves in eCommerce, categories that fit their model well have been the first to fall.
How well does a category fit in an Amazon box? We think there are two dimensions you can use to quickly assess how “Amazonable” a product is:
Product Certainty: How well a product can be understood online
Distribution Efficiency: The ratio of the product price to delivery cost
As an example, let’s look at consumer electronics – a perfect fit for Amazon and eCommerce.
People can be fairly certain what they are buying when shopping consumer electronics online, thanks to known brands, model numbers, detailed feature comparisons, and a wealth of consumer and professional reviews.
Distribution efficiency is also good – Products are well packed, can be shipped via efficient carriers like UPS, and bring a lot of bang for the distribution buck, as the prices of consumer electronics relative to the space taken up in a warehouse and the expense of shipping are pretty high.
Take these two factors, and consumer electronics is a “top right” Amazonable category, in which close to 30% of all retail sales now happen online. This is by no means a perfect framework, but if you think about the categories you buy on Amazon, or where brick-and-mortar retailers have most suffered, you’re likely talking about “top right” categories.
The Home Goods Market
So, where does the $275B U.S. Home Goods market fit in this framework? Kind of in the middle, which isn’t a particularly actionable finding, nor that interesting.
However, this market does get interesting when you break down this category into its two constituent components:
Décor, Kitchen, and Bath (UPSable items like lamps, occasional tables, mixers, or towel rods), a $150B-$175B market in the U.S.
Furniture (larger items like sofas, sectionals, queen bedroom sets), a $100B-$125B market in the U.S.
These two categories occupy very different positions when it comes to how Amazonable they are:
Décor, Kitchen, and Bath
Décor, Kitchen, and Bath perform extremely well online. With lower price points that reduce the “understand it well enough online” certainty hurdle plus the ease of shipping via UPS, online penetration for these items is believed to have risen to the low teens.
In this category, Wayfair is exceptional at using their vertical focus, data and analytics disciplines and strong foundational operations to dominate this segment online. Above all, they’ve got a phenomenal vendor network for these products. For these manufacturers, Wayfair fills a real need, providing distribution for vendors that in many cases are being squeezed out of a consolidating retail landscape.
That said, as a “top right category” there are a lot of players in online Décor, Kitchen, and Bath. With 75% of Wayfair’s business able to be shipped in a UPS box, the company’s main competition is eCommerce giants like Amazon and Overstock, big box stores like Target and Walmart, and speciality décor retailers like Williams-Sonoma and Crate and Barrel.
Wayfair has a huge head start in home décor online. But, this will be game the largest player wins —and there are many etailers and retailers in this scrum.
Conversely, Wayfair’s massive success has had little impact on brick-and-mortar furniture to date. When Wayfair sells a lamp, it has little impact on furniture retailers whose businesses are anchored by larger, pricier products like sofas and sectionals.
This is where the relative advantages of brick-and-mortar come into play. Furniture is a harder sell online— average order values often top $1,000, there are few meaningful brands, and it’s ridiculously expensive to ship unless/until you have a massive local scale.
Between lack of product certainty and an upside-down price to logistics expense ratio, it’s hard to get more “bottom left” than furniture. In the $125B furniture market, online furniture sales sit at a modest 5%-6% of retail.
In this quadrant, the game is just beginning.
To protect your furniture manufacturing business, you should consider buying business insurance.
Despite the rapid growth in online sales in most categories of retail, the furniture industry’s percentage of online sales has held constant over the last few years at approximately 7.5% of the total.
More, according to Statista, this percentage was down from a high of 14.6% in 2010. The in-market results show a reversal of the general trend to shift more towards online. And this raises questions about the future of the furniture industry. How will brands succeed, retailers stay in business, and the industry to grow in general?
Few industries face greater macro-challenges than furniture, and no industry has done less to adopt the macro-innovations that are commonplace in other lines of trade. Let’s take a look at the structure of the industry and propose a way forward.
As manufacturers, especially case good producers, consider their future, they battle three forces that make their prospects dim.
Changing consumer expectations of luxury: As technology finds its way into automobiles, phones, homes, and almost all other consumer durables notions of luxury are shifting to a broad range of experiences. These differing levels of experience highlight engagement and entertainment – they are affinity technologies that build audiences. Furniture is the opposite, defined by basic frames that have not changed for decades, designs that have few innovations for health and fitness, nor do they have their own intrinsic experience. These designs position furniture at best as enabling technology which in turn limits its ability to keep pace with evolving definitions of luxury. Your sectional may contain a cooler making entertaining easier, but it’s the television that keeps the guest-focused and the adrenaline pumping.
Slow adaptation to trends: For decades the industry has been characterised by batch manufacturing processes with long set-up times for each production run. Frames and tooling are not easily changed, and automation is very low throughout the industry. Colours are forecasted and programmed into trends years in advance. This legacy manufacturing approach disconnects the industry from the second-by-second opportunities that emerge through social media and accelerated marketing. This structural slowness not only keeps the furniture behind trends but severely limits its ability to create a broad social meme. A key metric throughout the industry that symbolises slowness is the slow turnaround time for special-order merchandise.
Retailer logistics: Delivery is the most costly and damaging part of the furniture supply chain. In addition to creating damage and problems during the actual delivery, retailers are devising strategies to minimise their service involvement with the customer. Not only does this abdicate a major part of the service value chain, but it also will increasingly put pressure on suppliers to come up with solutions to protect the value of the both the retailers’ and manufacturers’ brand.