Have home retailers peaked?
The category was on the rise, but the pandemic drove exponential growth. Retailers must now navigate how to sustain momentum in the years ahead.
When the coronavirus pandemic took hold in the U.S., nearly every aspect of the retail industry was impacted. But the divide between those retailers deemed essential versus nonessential became increasingly apparent as the weeks, and then months, went on. One category, despite being nonessential, gained from the circumstances brought on by the pandemic: home. The sector experienced unprecedented demand from consumers adjusting to new realities and living situations and looking to make life at home more comfortable. The category stood in stark contrast to other discretionary categories, namely apparel, where sales plummeted from 2019 figures as a result of changing consumer preferences. Throughout 2020, consumers lives revolved around the home. But even prior to this past year, the space had been gaining steam. Going forward, will home retailers continue this sales momentum or have they reached their peak? A category already on the rise The homeownership rate in the U.S. between 2005 and 2009 was among the highest recorded in the 15 years leading up through 2019. In that period, it was between 66% and 67%, according to data from the American Community Survey. When the Great Recession hit, the homeownership rate dropped, falling to 65.4% in 2010 — the first full year following the economic downturn — and 63% in 2015, a 4.2 percentage point decline from 2007. In the years since, the homeownership rate has been steadily inching its way up again, notching 64.1% in 2019. Retailers selling in the home furnishings, home improvement and mattress categories saw sales gains that coincided with the growing number of homeowners. "Across the industry for the past six years, it's grown every single year," NPD Group analyst Joe Derochowski — who tracks small appliances, housewares, personal care items, bedding and home environment products, like air purifiers — said of the categories he covers. "The reason why it was growing pre-pandemic was because the demographics were favorable, and the consumer needs were favorable." Joe Derochowski Analyst at The NPD Group The largest generational demographic, according to the Census Bureau, is millennials. Over the past five years, this group has been hitting key milestones that tend to be associated with gift-giving: getting married, having children and buying a home. Other cohorts, particularly Gen X and Boomers, aged 41 to 75, are more likely entering the next phase of their life: empty nesters. This may mean childhood bedrooms get turned into offices or guest bedrooms are in need of renovation or a general interest in refreshed decor. Without children around, this group may also be entertaining more on the weekends or hosting dinner parties, creating a greater need for kitchen items. "The reason why it was growing pre-pandemic was because the demographics were favorable, and the consumer needs were favorable," Derochowski said. Get retail news like this in your inbox daily. Subscribe to Retail Dive: Email: Sign up Consumers also began eating more meals at home both because of the economic downturn just over a decade ago and because younger generations became more conscious about their health and the food they consume. "Back in 2009, when the recession hit, the younger generation — who has always been the heaviest restaurant consumer there is — stopped going to restaurants as frequently as they did, and they started eating at home," Derochowski said. "You're making foods at home, so you need a lot of that stuff. Now the kitchen becomes the focus." Around this time, that group also stopped going to bars as frequently for the same reason and began entertaining friends and family at home, he added. Generational and economic factors weren't the only elements to positively impact the category over the last several years. The market itself has become increasingly accessible to consumers, both through more retailers popping up online and a greater price range for goods. The home goods segment has increasingly gone digital in recent years. With tech advancements like augmented reality, consumers have become more comfortable making home purchases online. Take the mattress category for example: The bed-in-a-box phenomenon made this shift to e-commerce easier — for both the retailer and consumer. "Not only do you have more places and opportunities to buy, you have a much larger variety of price points to participate," Matt Katz, a managing partner at SSA & Company, said. "I think home is much like how apparel was 10 years ago where folks are very willing to mix high-end products and entry-level products in the space, and get great results."
Home takes center stage No one could have predicted the seismic impacts the coronavirus pandemic would have on the world, let alone the retail industry. Employers sent their workers home. Schools transitioned to virtual learning. And nearly every recreational activity was taking place at home. As it became apparent that stay-at-home life would extend longer than just a few weeks, consumers realized that working and schooling in the same space created a need to upgrade, or actually establish, a suitable home office. Categories related to home office solutions, organization and remote schooling saw double- and triple-digit dollar sales growth in the five weeks ended April 4, 2020, according to data from the NPD Group. More time at home also meant more meals were being consumed from home. Instead of going out to restaurants, consumers were cooking. Instead of grabbing a salad at the place around the corner from the office, at-home workers turned to their own kitchens for lunches. "The available set of things on which we could spend our money changed. We couldn't go out to restaurants. We couldn't go on vacation. I would spend a lot less money on gas. So all of a sudden, there's this sort of consumption that simply couldn't happen." Hart Posen Professor at the University of Wisconsin School of Business For the same reason some consumers began making more meals at home prior to the pandemic, health-conscious individuals felt it was more important than ever to make healthy choices as the world battled the virus. Health concerns, Derochowski said, also drove increased sales of air purifiers, vaporizers and floorcare items, including disinfectant products for the home, this past year. As consumers spent so much time at home, they sought out ways to entertain themselves within their spaces. Instagram feeds were covered with pictures of viral baking trends, including sourdough bread loaves and focaccia gardens. At the start of the pandemic, the NPD Group said dollar sales of hand mixers nearly doubled from 2019, while dollar sales of stand mixers grew 69% year over year in the six weeks ended April 25, 2020. "The available set of things on which we could spend our money changed," said Hart Posen, a professor at the University of Wisconsin School of Business. "We couldn't go out to restaurants. We couldn't go on vacation. I would spend a lot less money on gas. So all of a sudden, there's this sort of consumption that simply couldn't happen." A lot of that money shifted to making the space where consumers spent the majority of their day — whether working or schooling or doing recreational activities — more comfortable and more functional. For the same reason consumers bought more at-home exercise equipment, sending Peloton sales up 232% and 128% in the first and second quarters, they also shopped for things like desks and kitchen appliances to make their personal spaces more conducive to their "new normal." Small kitchen appliances like coffee makers were popular purchases in 2020 because consumers were no longer commuting and stopping by their favorite coffee shop or leaving the office for a mid-afternoon coffee break. Larger household appliances, like dishwashers and washing machines, experienced more use during the pandemic in many households, accelerating replacement timelines. This, coupled with consumers taking on more home improvement projects, helped fuel exponential growth for retailers like Lowe's, The Home Depot and Ace Hardware. For fiscal year 2020, Lowe's and Home Depot reported year-over-year revenue gains of 24.2% and 19.9%, respectively. But the big chains weren't the only ones to gain. Smaller rival Ace Hardware also reported double-digit sales increases from 2019 of 27.9%. "You also have a lot of things in the home that have now worn out," Katz said. "We've all been sitting on our couch for a year and a half and so many of us are looking for couches. I would imagine that paint on the walls has gotten chipped, wallpaper's gotten damaged, floors have gotten worn, staircases have become loose." Caroline Jansen/Retail Dive; Source: Earnest Research Patio furniture and outdoor heaters also saw an uptick in demand because the outdoors were among the few places it was deemed safer to gather in small groups. "I think this is what the pandemic has shown is that we, as a society, love the outdoors," Katz said. "And while that's hiking or fishing, or running or biking, it's also lounging and sitting and talking and eating. And so what we've done to our patios, what we've done to our terraces, what we've done to our backyards, to capture more space and value in our home, also requires product and maintenance." The pandemic also sped up some traditional timelines for people, particularly when it came to buying homes. The pandemic forced a good chunk of the workforce to work remotely, making it less critical to live in or near cities. This spurred a migration of many to the suburbs, giving them more space, which needed to be furnished. House prices across the board have been up roughly 18%, signaling heightened demand. According to Statista, the U.S. homeownership rate reached 65.8% in 2020, the highest it's been post-Great Recession since 2010 (when it was 66.5%) by the firm's measure. "You're now getting people buying these homes a little bit sooner [in life]," Derochowski said.
How the pandemic propelled retailers that otherwise were at risk Out of 16 major home retailers Retail Dive analyzed — including home furnishing, home improvement and mattress companies — all but four posted revenue gains from 2019. Of that group, 11 reported double-digit percentage gains. This represents a stark contrast from many of those retailers selling in apparel, which faced losses throughout the year. How the pandemic impacted home retailers financially 2020 earnings results RetailerSubsectorNet Revenue (in billions)YoY changeNet Income (in millions)YoY changeThe Home DepotHome improvement$132.1+19.9%$12,866+14.4%Lowe'sHome improvement$89.6+24.2%$5,835+36.3%Ace HardwareHome improvement$7.8+27.9%$316.9+125.7%Williams-SonomaHome furnishing$6.8+15%$680.7+91.2%RHHome furnishing$2.8+7.6%$271.8+23.3%At HomeHome furnishing$1.7+27.3%-$149.7+30.2%Bed Bath & BeyondHome furnishing$9.2-17.3%-$150.8+75.4%OverstockHome furnishing$2.5+75%$46.2+134.3%WayfairHome furnishing$14.1+55%$185+118.8%Conn'sHome furnishing$1.4-10.2%-$3.1-105.6%Haverty'sHome furnishing$0.75-6.7%$59.1+170.5%LoveSacHome furnishing$0.32+37.4%$14.7+196.9%KirklandsHome furnishing$0.54-10%$16.2+130.5%PurpleMattress$0.65+51.4%$10.9+187.9%CasperMattress$0.5+13.1%-$89.6+3.7%Tempur SealyMattress$3.7+18.4%$348.8+84.1%Source: Company documents But even as the sector as a whole has been on the rise for the last several years, some retailers have faced greater challenges than others, like At Home, Wayfair and Overstock. "They have struggled for quite a while, and they've struggled principally because they have been loss-making businesses that have been relatively inefficient as they've been growing their companies," RapidRatings CEO James Gellert told Retail Dive.
Wayfair and Overstock in particular, Gellert said, have been rated in RapidRating's high-risk zone in all but two years since 2014. But as more consumers began investing in their homes and doing more shopping online, those companies stood to benefit. Since Wayfair went public in 2014, the home goods brand failed to turn a profit quarter after quarter. That is, until the second quarter of fiscal 2020. For the full year, the retailer's total net revenue rose 55% from 2019 to $14.1 billion, while its net income shot up nearly 119% to nearly $185 million from a loss of $984.6 million a year prior. Wayfair was also able to benefit from a less promotional environment this last year because "there was more limited supply relative to demand goods," Wedbush analyst Seth Basham said. It also benefited from a lower advertising rate for at least a portion of the year during a time when consumers were actively seeking out home goods. "It was pretty easy for them to acquire customers at a low cost, which benefited their margins," he added. Historically, Wayfair, like other DTC brands that have gone public, put a lot of money into its advertising and marketing in order to acquire customers. In 2019, the retailer spent $1.1 billion on advertising, representing 12% of revenue that year. This past year, while the advertising dollar amount was higher, at $1.4 billion, it represented 10% of net revenues, a two percentage point decline year over year. Caroline Jansen/Retail Dive; Source: Company documents This rate of growth, however, likely won't last forever. There's an expected slowdown in Wayfair's top-line growth as vaccines become more widely available and consumers begin to leave their houses, Basham said. But he believes it will be able to post quarterly growth through the back half of this year and possibly into 2022 because the home category is expected to continue its growth online. "Over the course of the past five years or so they've taken anywhere from 20% to 40% of those incremental sales dollars, and we expect them to be able to take somewhere in that same range going forward," he added. For Wayfair, which has gained 10.9 million active customers this past year — a 54% increase — putting its total customer base at 31.2 million, advertising expenses should be partially alleviated in the future. "Over time, they should be able to advertise less, spend less on advertising to their existing customer base. That customer base, as they develop loyalty, does not need to be retargeted as frequently to make additional purchases," Basham said. "Historically, the company has spent about 7% of repeat customer revenue on advertising to those customers, and that should come down a bit over time." But a number of factors will impact the timing of when those rates come down. For example, first-year customers, which Wayfair gained a lot of during the pandemic, have a higher advertising rate than third- or fourth-year customers. Overstock similarly was able to capitalize on selling online in an in-demand category this past year. The retailer reported a 75% year-over-year net revenue increase, while its consolidated net income rose 134% to $46.2 million from a loss of $134.7 million in 2019. "These companies are seeing a huge surge because of the pandemic, which is positively influencing their financial health," Gellert said. And At Home, which has a large brick-and-mortar presence, has been able to reap the benefits of selling in an in-demand category as well. The retailer reported net sales in 2020 increased 27.3% from the year-ago period to $1.7 billion, while comp sales increased 19.4%. But, there are other concerns. While all three of these companies have been able to report sales and profit gains, some have benefited more than others. RapidRatings tracks two key indicators into how companies are performing: the Financial Health Rating (FHR), which is the primary risk measurement indicating the likelihood of default in 12 months, and the Core Health Score (CHS), which is a measurement of core financial health, reflecting long-term sustainability and operational efficiency. In both metrics, 100 is the best score and 0 is the worst score. "The core health scores now for Overstock and Wayfair have strengthened significantly. Overstock's core health is now 53 and Wayfair's is 61. Their financial health — Overstock is currently at 74 and Wayfair's at 62. These are very strong," Gellert said. "In contrast, you look at At Home. At Home's financial health rating today is a 45, but their core health score is a 28." He added that the fact that At Home relies so heavily on brick and mortar contributes to its challenges. The retailer on May 6 also said it entered into a definitive agreement to be acquired by Hellman & Friedman for $2.8 billion, a deal that would place it back into the hands of private equity. However, for all three companies, as well as other players that were previously struggling in the space, their problems haven't gone away in spite of the recent sales boost, Posen says. "They got better. When you look at their numbers for e-commerce transactions, they're much better than they used to be. But they're still struggling. They're still underperforming," he said. "The pandemic didn't strongly help poor players, in the sense that it's not going to save Bed Bath & Beyond, and if Pier 1 had survived long enough to make it to the pandemic, the pandemic would not have helped them. The pandemic has mostly helped players that were well positioned before." Retailers like Wayfair, At Home and Overstock will need to address the costs associated with acquiring and retaining customers if purchases from those customers start to dwindle off. "A tailing off of spend with them, yet their costs remain constant, we are going to see more inefficiencies creep back into their businesses, and we will see a reduction in their financial health," Gellert said.
Can 2020's growth be sustained? With the space growing over the last five years and seeing an explosion of demand and sales last year, has the sector peaked? Not quite, but it's unlikely the category can sustain the massive year-over-year gains over this year. "Consumers that have been at home and have been buying online and buying product for their homes, they will continue to do that to some degree, but they certainly won't do it to the degree that they have," Gellert said. "In some respects, these companies are at the height of market condition favorability for their businesses. It doesn't mean that it's black and white — that they weren't doing well, now they're doing well and that they will not do well again — but we are likely to see a trailing off of this extra spending on at-home products." The companies that have been able to take the circumstances of the pandemic to better their position in the space — Wayfair, At Home and Overstock — might be at higher risk than some other companies that were already in a better position prior to the pandemic. For example, on RapidRatings' scale, Williams-Sonoma has a Financial Health Rating of 89 and a Core Health Score of 78, according to RapidRatings data. The Home Depot and Lowe's rank close to the top on RapidRatings' scale RetailerFinancial Health Rating Core Health ScoreWilliams-Sonoma8978The Home Depot8783Lowe's8283Overstock7453Wayfair6261Bed Bath & Beyond5227At Home4528Source: RapidRatings "Generally speaking, you will see higher core health companies better able to withstand shocks to the system and weaker ones worse off in a short situation," Gellert said. "When you look back at the retailers that have filed for bankruptcy over the last year or so — everything from Ascena and Francesca, J. Crew — most of these companies had both weak financial health ratings and weak core health scores." Over the last 20 years, Gellert says that over 90% of companies that have failed have had Financial Health Ratings of 40 and below. Pier 1, for example, had a Financial Health Rating of 15 and a Core Health Score of 25. As the world emerges from this crisis and consumers begin to leave their houses again, Gellert expects the health ratings of these companies to slide slightly. "The question is, how much more efficient have they gotten as a business in being able to monetize the customer acquisition dollars? Or looked at another way, is customer retention more efficient than customer acquisition?" Gellert said. "Have they built up enough loyalty due to selection, due to speed of delivery, due to customer service and due to quality of product that will keep people who bought from them the first time during the pandemic, keeping them buying more and more?" Basham agrees that sales growth will begin to slow, but added that he doesn't expect growth to decline quite yet. In fact, eMarketer projects the sector will continue to grow over the next five years, reaching $383.3 billion by 2025, but the rate at which it grows is expected to slow from 3.9% in 2021 to between 3.1% and 3.3% from 2022 to 2025. Digital sales in the space are expected to reach $177.9 billion by 2025, with the growth rate to reach 14.9% in 2022 before slowing slightly, though remaining above 2021's projected growth rate of 12.3%. "There certainly has been some level of demand pull forward for home goods, because of the pandemic and people staying at home more, and buying things that they might not have bought otherwise or might have bought a couple years later, because they're using things more frequently in the kitchen or appliances," Basham said. "But there are a lot of other drivers here that are more sustainable in nature," like unprecedented strength in the housing market. "We're talking about growth in existing home sales double digits, home price appreciation double digits," he added. Growth in the industry has been lifted to the double-digit range from the low- to mid-single digit range, according to Basham, who added that that's likely to continue in 2022. "What happens in housing tends to flow through the whole retail space with at least a six- to nine-month lag, but it could persist for as long as a year and a half or two years," he said. While things like eating out and entertainment will see a boost after largely not being able to participate in those activities for the past year, entertaining at home will also see an uptick, Basham said. Since the level of comfort among consumers to get back out and return to a pre-pandemic "normal" will vary, for some consumers, entertaining at home among a small group of friends will likely remain important. "I do believe that people will continue to take pride in their home because that's where they're going to entertain. Even if we have vaccines and people are back in the public, there will still be — for the foreseeable future — limits on restaurants, limits on sporting events and concerts," Katz said. "Some of those people who are not able to, or not comfortable going to restaurants and sporting venues and concert venues, will entertain at home. They will find their own personal bubbles of friends who they feel comfort with, and they will entertain." "There are only so many homes you can decorate and furnish and there are only so many homes you can refurnish and redecorate. There comes a point when their customer base is somewhat saturated and the pandemic has created a perfect storm for them positively." James Gellert CEO of RapidRatings There's also a potential for a broader shift when it comes to where employees work. Pre-pandemic, some companies swore off remote work, but have since seen it's possible. While it's unlikely offices are going away entirely, more businesses are starting to adopt a hybrid model, meaning that at least sometimes, some consumers will be working from their homes. "I don't think everyone working from home is the long-term dynamic — and lots of people will go back to the office — there'll be a lot more people working from home going forward because we figured out, by this forced experiment, that for some types of jobs and for some types of people, it's actually pretty productive and cost-effective," Posen said. And while digital sales saw increased growth throughout 2020, retailers shouldn't rule out the power of stores yet. "I strongly believe that they're going back to the store," Posen said. "I strongly believe that there's tremendous pent-up demand for the kind of social interactions associated with going outside." The retailers that stand to benefit and emerge in a stronger position are the ones that are able to marry both their physical and digital channels in a complementary manner, which means some will need to improve their online channels. Something that TJX's HomeGoods business has been able to do particularly well in store has been its ability to create the ultimate treasure hunt experience for its customers. It's something that, for a while, Pier 1 was also able to do. But as Pier 1 leaned further into its digital channels, recreating that experience online proved difficult, so it adjusted in-store merchandise with fewer SKUs to align with its website, which ultimately hurt the brand. In order to truly survive online in a post-pandemic world, retailers need to address how to recreate that treasure hunt experience online without sacrificing the in-store experience, Posen says. Coming out of this crisis, demand will naturally drop and positive market conditions will revert to some degree, according to Gellert. "There are only so many homes you can decorate and furnish and there are only so many homes you can refurnish and redecorate. There comes a point when their customer base is somewhat saturated and the pandemic has created a perfect storm for them positively," he said. Even still, pandemic-induced habits that will persist, coupled with existing trends, make for a strong home sector in the years to come. "I know we will still be eating more meals at home. I know that health and wellness will still be important. And because of that, these other things will fit into it," Derochowski said. "There's clearly ways that retailers and manufacturers can better market to ensure that this stays of importance, but it's one of those things that should still be important."