Let’s talk about the elephant in the room, price

Over and over again we hear that retail doesn’t understand the financial and economic pain points faced by furniture manufacturers. There remains significant pressure for firms to meet the price points directed by retailers, especially those operating in the low-cost space.

In this case, it’s not a simple case of “it’s not me it’s you”, but more a case of it’s not you, it’s not me, it’s the market.

You can’t have your cake and eat it too: The customer is looking for affordability or luxury… and sometimes a bit of both.

According to furniture retailers, there are two types of consumers:

  1. The value seeker – and an individual whose focus is on savings of price, time, and frustration.
  2. The quality seeker – individuals who value and search for durability and quality.

Whilst these categories are distinct, consumers will buy in the price bracket above their level of affordability if they believe in the longevity and the quality of the product.

According to the McKinsey Marketing & Sales COVID-19 US Pulse Survey, affordability will be the most important factor considered by US consumers when buying products (Mckinsey & Co., 2020). Globally we are seeing an increase in price point polarisation. Consumer demand for furniture is largely dependent on disposable income. Increasing levels of inequality and unemployment due to the COVID-19 mean that the overall market may shrink while the demand for durability, multi-purpose use and quality increases. This is particularly an issue for retailers who traditionally cater to a mid-level market and/or have not positioned themselves very distinctly to cater for an increasingly polarised market.

In today’s modern age, consumers have more access to design, trends, and products now more than ever because of social media. Because of this, consumer aesthetic demands are becoming more prominent, and consumers are now dictating trend, price, quality, and durability requirements, where historically retail was dictating product to the consumer.

Actions speak louder than words: Retail needs to keep up with the customer to remain relevant

The implication of the consumer polarisation trend, and more specifically the growth in the low-cost good quality demand, is that retailers and manufacturers need to understand which market segment they wish to target, their markets (shifting) demand parameters (quality, durability, price thresholds) and then drive value chain sourcing strategies to meet those requirements – whether it be through working with existing suppliers, verticalization of their supply chain or sourcing from multiple suppliers on a needs basis.

There aren’t plenty of fish in the sea: The SA market is small and has limited disposable income to purchase furniture

Furniture is an expensive product and, in many ways, considered a luxury good. According to McKinsey, low-income and high-income South African households are taking significant steps to save money but in different ways. Low-income households tend to trade down to less expensive brands or private labels, and high-income households look for promotions, shopping around, buying in bulk, or using coupons and loyalty cards (McKinsey Co., 2020).

In many households, furniture is not considered a priority. The price sensitivities of the various LSM’s suggest that high-end furniture product demand is limited to approximately 5 million buyers (LSM 9 & 10) (SAARF, 2015) meaning that the majority of the SA customers are positioned to purchase low-cost mass-market products.

In response, SA retailers are predominantly orientated towards the lower-priced mass market:

All’s fair in love and war: Aligning product pricing and quality to the high-end or low-end markets is necessary to remain relevant

The challenge to SA manufacturers is therefore to be able to offer the end consumer the same degree of quality, design, and price of large volume Asian market manufacturers, locally.

Being in ‘the middle’ is not a viable option for sustainable growth. In a market largely dominated by demand for a low-cost product, manufacturers must adapt to this market’s needs. Alternatively, the manufacturer needs to adapt its capabilities to service the high-end furniture market, understanding the demand requirements of that segment and the high degrees of competition for a very small sub-sector.

This is not goodbye: There is still a chance for local manufacturers

For some, the proverbial ship to service retail had sailed, with the influx of cheaper imports from Asian countries dominating the low-cost mass market, and sight of increased local market share waning. While the thought of meeting the challenging demands to meet local retail price points combined with other product specifications can seem daunting, infuriating and a lost cause, there is hope.

Amidst the C-19 crisis some key opportunities arose:

  1. Shipping cost escalations have created a cost advantage for local manufacturers, combined with global supply chain risks, it is more important now for SA retail to localise.
  2. To meet the customer needs local retail is looking to partner and invest in their local supply chains to support growth.

More so now than ever we are seeing an incessant need for localisation of furniture products. Retailers are searching for firms that can support their strategic positioning and clearly articulate their value add in a manner that supports the retailer’s growth strategy. If firms can do this, then perhaps there is a bright future ahead for this industry.