Growth outlook is positive
A slow and uneven reopening of the global economy after Covid-19, continued global and local supply chain disruptions, rising logistics costs, geo-political tensions and changing demand profiles means no firm can continue operating ‘as is.’ These disruptions have amplified the need to strategically diversify sourcing to reduce risk exposure and remain focused on growth.
Despite the significant headwinds over the last two years, the global furniture industry is expected to grow by 35% from R8 trillion in 2021 to R10.8 trillion by 2027. The South African furniture industry is also anticipated to experience growth of 4% year-on-year over the next 3 years.
Global leaders are pursuing omnichannel and sustainability strategies
Our review of the global leaders in furniture, namely IKEA, Wayfair and Nitori, found that their growth is driven by a rise in omnichannel retailing and sustainability strategy.
In terms of omnichannel growth, IKEA saw a 73% increase in its digital business in FY21, which accounts for 25% of its total revenue, while Nitori experienced a 159% increase in online sales in the last year. On sustainability, the Economist Intelligence Unit’s 2021 research highlighted that search for sustainable goods had increased by 71% from 2016-2021. As of 2020, the eco-friendly furniture market size was valued at $37 billion, and expected to increase to $60 billion by 2027.
All three retailers are working to unlock market opportunities for sustainable products, as well as take active steps to improve the environmental and social impact for their sourcing and logistics models. Nitori has reduced their plastic waste by 78% and carbon emissions by 115 tonnes by switching from polystyrene packaging to recyclable paper packaging. While IKEA is expected to save EUR 100m per annum through eliminating plastic packaging in its supply chain. Sustainable materials sourcing, product and process circularity and partnerships have all been implemented by the three firms.
These lead firms don’t deploy these growth strategies in isolation, relying heavily on high-functioning supply chains to support their growth. These supporting value chain strategies include active custodianship of the full value chain, logistics optimisation, and investment and partnership in research and development.
The South African value chain has not realised omnichannel nor sustainability growth
In comparison, the South Africa furniture market is less advanced than the global furniture market. The industry has limited export orientation and historically has been heavily reliant on imports. Local retailers predominantly sell through brick and mortal stores, with online sales on average not exceeding more than 5% of total sales. Sustainability is also not yet a reality for local furniture retailers although publicly listed companies are repositioning their strategy to be more sustainable in line with global trends. Omnichannel capabilities such as supplier-to-consumer sales, flat packing and online-to-offline retailing models have not been realised to its full potential either.
From a manufacturing perspective, South African furniture manufacturing is labour-intensive, with limited use of technology and automation as is emerging global practice. 90% of manufacturers are small to medium-sized enterprises, and therefore cannot offer the scale required by large local retailers, especially in small, trend-relevant furniture products.
Reviewing the latest annual reports of five local furniture retailers, several key themes emerged:
- Investment in the local furniture value chain to reduce inventory lead times;
- Diversifying and de-risking through acquisition, supplier management, inventory management and vast distribution networks;
- Omnichannel capabilities to drive sales;
- Social media as an emerging driver of consumer purchasing power;
- Debtor management to mitigate against 92% retail credit default rates.
There are opportunities to align SA furniture value chains to global best practice
Should omnichannel and sustainability be pursued by South African retailers, the value chain (retailers and manufacturers) will need to develop data-driven strategies and build partnerships to drive operational capability, capacity, competitiveness and compliance upgrading aligned to the shifting demand profile.
Opportunities to do so are outlined in this report. They are reliant on a mix of technology, process and culture changes at both the strategic and operational levels within firms.