The price is right?

Having negotiated one challenge after another in recent years, we’re now some months into a cost of living crisis that threatens to create significant hardship and recession. Here, Paul Farley asks the furniture trade how operators might create better margins without implementing substantial price hikes – and if consumers can be persuaded to pay more for furniture right now …

Against a backdrop of unprecedented material cost rises, the war in Ukraine put further pressure on materials like timber, and set in motion a chain of soaring energy costs.

Many had no option but to share the burden with their customers. In April, inflation was running at 7% – the highest in three decades – with furniture prices up 17% YoY. With few signs of improvement and weakening consumer confidence, the trend continued into the summer. Shop prices were up +16.6% in June, reported the BFM.

Anecdotally, it seems that many material prices are levelling out – but prices remain high, and uncertainty remains.

Many saved money during the pandemic – but how much remains to facilitate big-ticket purchases? (photo courtesy iStock/DNY59)

THE RETAILER VIEW

Huw Williams (Toons Furnishers): Prices are now at the limit which most customers will bear. However, with long delays on most products, anything that can be supplied quickly could attract a premium over the normal retail for that quick availability, giving better margins.

Peter Harding (Fairway Furniture): The current ‘crisis’ has been coming for years. Since the ‘Credit Crunch’, governments around the world have pursued a policy of expanding the money supply through quantitative easing, alongside historically low interest rates. Money had been too cheap for too long, and a benign, low-inflation environment was not considered a problem, as China’s expansion supressed prices globally.

The pandemic, and with it enormous Government spending on support measures, has been the proverbial straw that broke the camel’s back, igniting inflation. The consumer boom brought about through paying people to do nothing for months at a time and a lack of holidays, etc, leading to having lots of spare money, was a perfect storm. Yes, much of this inflation is transitory and short term, but the Ukraine crisis has served only to exacerbate it.

The reality is that furniture prices have been too low for too long, and that this sharp upward price adjustment is not surprising. Furniture became so relatively cheap and affordable that it engendered a much shorter replacement cycle. I don’t think people need to be persuaded to pay more for furniture, because if they want to change anything they are having to pay more due to market conditions anyway.

Achieving better margins without executing substantial price rises can only be achieved by suppliers being more realistic. I believe many have taken the opportunity of the pandemic to ‘bake in’ their own margin increases above what raw material price increases necessitate, which retailers have to absorb if they want to keep prices down. After a decade or more of tight cost

control, many retailers, like ourselves, have little or no scope to absorb these cost price rises. If anything, a market slowdown will mean we have to reduce consumer prices to retain market share, at the cost of profitability.

Steve Adams (Mattress Online): In the short term, yes, we can keep inching prices up – I believe there is still disposable income floating around. If we move into a sustained recession with high inflation we will inevitably end up sacrificing margin – unless you have the cash reserves and cash flow to weather the storm and wait for the next boom cycle.

Neil Barker (Barkers Furniture): No-one can afford to be uncompetitive. A customer needs to know they are getting value – but that’s clearly not always about being cheaper.

Harnessing technology to save wages when staff leave is the key for me. Electronic systems that enable sales staff to do the inputting so nothing is double entered. A price ticket system where current costs and RRPs can be imported with one click and price tickets just print off. A web system where product can be added to the site that is already in an online library. That can save another three wages there.

Steve Pickering (Sussex Beds): Improving efficiency is our strategy to combat rising costs, and I believe it is best for our customers too. We have just signed off a £200,000 investment programme to overhaul our entire IT infrastructure, replacing the current multitudes of systems with a singular ERP system. The ERP will provide one singular source for all data, which will remove double and triple entry throughout the business.

New integrated warehousing and logistics software will greatly improve the quality and speed of stock management across the business. Automated route planning and vehicle capacity management will optimise fulfilment. Business, departmental and team performance management will also be improved with the introduction of real-time data dashboards for every department and individual, providing them with their key KPIs on demand.

I do believe our customers can be persuaded to pay more. Our ‘why’, our ‘purpose’, is to provide a great night’s sleep, and this is our non-negotiable. Consumers who shop with us are seeking a great bed which will meet their needs, and to sacrifice either the quality of our products or our service would not be accepable.

I believe it is actually irresponsible to absorb cost increases. It is my responsibility to ensure the long-term security of the business to ensure we continue to service our past, present and future customers, and also protect my teams’ livelihoods. This can only be achieved by ensuring both expenditure is managed and margins are protected.

Royce Clark (Collier & Clark Group): Personally, I see huge value in retailers developing their own brands to allow them to create more margin. Many of the big brands are going down the D2C route, and margins overall are much tighter. The brand should really be the name above the door …

THE SUPPLIER VIEW

Rob King (Julian Bowen): In the current climate, it’s impossible to not pass on increases, especially when the near future offers little change.

Consumers are seeing increases across all products and sectors, so why should furniture be shielded from the current utilities, fuel and sterling issues? What you look to do is sell the benefits that you and your products offer, extolling the value you offer to the price-conscious consumer in one sale whilst focusing on design with the next.

What you must try to avoid is cutting specification costs to increase margins. You are going to get found out and have a longer negative effect on your business. If the product needs changing, so be it, but you should strive to be upfront with your customer.

Flexibility in service, with greatquality product and sensible pricing, will hopefully see businesses through a difficult trading period.

Mark Gannon (Sofa Source): Creating better margins can be done by increasing the specifications within furniture. Technology is getting more and more cost effective to include in sofas, and it’s something the customers are craving. The inclusion of electrical features in sofas such as USB/wireless charging, cooler cup holders and Bluetooth sound creates more value

IN TRYING TIMES, THE INDUSTRY IS FORCED TO LOOK AT OTHER WAYS

TO OFFER THE CONSUMER VALUE

for the end-user while allowing for increased margins. Offering more value to the customer will in turn persuade them to pay more for the item. Although increasing prices are inevitable, adding these value propositions to the pieces will soften the blow.

To continue to be cost effective you must be embedded in your production’s facilities. At Sofa Source we are involved every step of the way, including sourcing and costing the raw materials which our production facilities use. It’s only with these kind of cost controls we can effectively curb the inflation of price hikes.

Shipping is having a big effect on the cost of product being wholesaled in the UK and Ireland. Again, it’s only with volume, and a strong relationship with our shipper, that we were able to get a more preferential rate in the marketplace.

If anything, the higher cost of doing business is creating a barrier to market entry which is making it too risky for the low-volume shippers to bring product in, both due to cost and the risk of getting it wrong and being left with an overpriced product that isn’t performing. Larger manufacturers face the same problems. However, this is creating an opportunity for them, as they can bear the brunt of misses better than smaller ones.

Other USPs provide more value from a buyer’s perspective. We are seeing a market pull towards more sustainable products. It is very much in the early stages, but it is beginning to trend. Buyers are willing to spend more for a sustainable product. For example, circular products – a known end-oflife for the products is becoming a new fixation. However, in the UK, the difficulty is the UKFR chemicals which are required, and require incineration to burn off the treatment.

On-trend/innovative products would allow for an increase in the price of furniture over your competitors. Buyers will pay more for something different and new, as it is hard for them to benchmark the pricing or find a cheaper alternative.

Tom Bayliss (Kettle Interiors): In trying times like these, the industry will be forced to look at other ways to offer the consumer ‘value’ – whether that be sourcing different products, in different ways, and potentially from different markets, or changing the service offering to create new USPs.

It’s early days with regards to the increased cost of furniture, and I think we need to let the consumer feed this back over time before we really understand what the medium- to long-term sustainable cost of furniture looks like. Naturally, the industry is very sceptical about what Mr or Mrs Jones is willing to pay. However, often I think the consumer is willing to pay more than we perceive, given how infrequent furniture purchases are in general.

John Conroy (working with The Furniture Makers’ Company): People can be persuaded to pay more for furniture and get better margins by giving a better offer. So, a recliner sofa becomes a power recliner. Add Bluetooth speakers, add power headrests, add wireless phone chargers, add storage solutions … give a customer more reason to want to spend their money.

Shaun Peel (MattressTek): The price of everything is going up, which has a domino effect on the costs attributed to materials and supplies for the making and manufacturing of products. We have always been hot on automating processes and streamlining production lines, reducing downtime and bottlenecks.

Steve Reid (Simba Sleep): I think, as much as possible, we need to avoid moving the price a customer pays for our products. I am firmly of the opinion we sell healthcare products – such is the importance of a good night’s sleep – and I believe people should be investing more in this than other areas (even other items of furniture).

So, to that end, I do believe that customers can be helped to understand

FURNITURE PRICES HAVE BEEN TOO LOW FOR

TOO LONG

(photo courtesy 123RF/meepoohyaphoto)

the benefits of certain technologies and the positive long-term impact on them, and whilst I’m not saying they will then easily pay more in this day and age, they will at least understand better what they are buying and why the cost of it is what it is. They understand the value better.

I believe it’s important businesses focus on their cost bases and ensure that they are being as effective and efficient as they can be to ensure that prices can be as competitive as possible for the customer.

Also, brands/retailers should be scouring the market for finance solutions that allow their customers to (responsibly) spread the cost of purchase of their products. A monthly cost is much more palatable than a big upfront cost.

THE SERVICE PROVIDER VIEW

Rebecca Maloy (AIS): I think we are indeed going to see some tough trading over the next few months, and the consumer will be watching the pennies more than ever. Retailers will potentially need to cut their cloth differently – it’s not as simple as persuading people to pay more.

We all know prices have moved due to various factors including raw materials over the last year or so, and as a result we have seen prices move up across the board. It’s across the industry and affects all of those involved, so there is still a somewhat ‘level playing field’, just with a higher cost base.

In the main, a customer looking for their new bed won’t have shopped for a bed for a good number of years, so they won’t be as aware of how things have changed as those of us living it every day. With the current situation with inflation, I’m sure there will be an expectation that they will pay more than the last time they shopped, as is the case down to our weekly food shop.

Irrespective of pricing, we need to display great value at every price point for consumers. Having key ‘from’ price points in the selection as an initial hook, supported with a range giving the ability to upsell through your price architecture – then working with suppliers to offer promotions to help close the order, and the customer feels they have got a great deal. Again, this comes back to customer experience, from how the store looks to sales expertise, service and product offer, ticking all the boxes and giving customers confidence to buy.

Gavin Boden (Rhenus Home Delivery UK): People will pay what they think the piece of furniture is worth, nothing more. I’ve seen consumers buy a chair for £1000, which is only worth £400 because the wrong label was on it. Value is in the eye of the beholder.

Adam Ashborn (Reborn Marketing and Design): The biggest cause for the cost of living ‘crisis’ is the reliance on imported goods globally. Before the pandemic struck, businesses noticed the prices increasing due to the trade war between the US and China, but now, following a global lockdown, the world’s nations are trying to financially recover. Furthermore, with the current situation in Ukraine, it may be time to look inward to find new ways to source and make products.

Sourcing from local producers in the past seemed to come with a higher price tag, but with the cost of fuel, logistics, manufacturing and labour continuing to grow, and the value of the currency depreciating, it is becoming more apparent that being self sufficient could be more cost effective