What’s in Store For 2022?

Predictions and insights to help get you through to 2023

Furniture World recently met with Tom Liddell, vice president of Planned Furniture Promotions to get his thoughts about the likely challenges and opportunities facing furniture retailers in 2022. Liddell grew up in furniture retail, became a sales rep and then a manufacturing executive. An astute observer of the furniture industry in his own right, he prepared his comments after surveying retailers in trading areas across the country.

Staffing & Paying Salespeople

The challenges furniture retailers are likely to face in 2022 will vary depending on the type of store and its price point. One issue that seems to be certain is that just about everyone will have trouble retaining salespeople, warehouse personnel or both.

Because of shipping delays, instead of paying salespeople on delivered goods, some retailers have switched over to paying on written business. Since lots of those orders may never be completed, it’s a pretty big gamble. Let’s say a retailer pays five to eight percent commission, a salary plus three percent commission or a tiered commission based on how much business a salesperson writes. If a salesperson quits or leaves in the six months it takes to get products delivered, should 25 percent of these orders cancel because customers are tired of waiting or they find similar products in stock elsewhere, it’s a problem. The retailer may have paid out eight percent of sales without seeing any benefit. But, for many retailers that pay commissions, it’s the only way to have a chance to hire new salespeople.

A related issue has to do with commissions paid to salespeople on delivered goods. What happens if a salesperson gets fired or quits and the products they sold don’t get delivered until six months later? That depends on the company’s policy and state law. Only some states require that the salesperson be paid. From the salesperson’s point of view, this seems harsh. The argument retailers have made to justify not paying, or paying a reduced amount, is that these salespeople are expected to follow up with customers until delivery to avoid cancellations and ensure customer satisfaction. They say that when salespeople leave the company before the goods are delivered, they haven’t necessarily earned their commissions.

In 2022 the sky will fall for some retailers.
Those who were smart stashed customers’ deposit money in escrow accounts or set it aside.”

Sugar High at Retail

Lots of retailers are still cash-rich but many ignore the fact that it’s cash borrowed from their customers. Let’s say a furniture retailer collects 50 percent down on a $2,000 sofa that costs them $1,000. By the time it arrives from the factory, there have been three price increases so the $1,000 sofa becomes $1,300 dollars. The freight that was originally projected to be $150 is now $350. If the order was written before the retailer switched over to paying on written, they owe the commission. They also owe sales tax and delivery-related expenses.

We are having a kind of “sugar high” in our business right now. Furniture is in high demand and retailers are enjoying some of the best business they’ve ever seen. The problem is that it’s not necessarily profitable for them or their vendors. There’s a big wake-up call coming for many retailers.

What About Cash Flow?

About a year ago, I warned retailers to watch their cash. Since then, the situation has worsened due to price and freight increases plus surcharges. In 2022 the sky will fall for some retailers. Those who were smart, stashed customers’ deposit money away in escrow accounts or set it aside so that it didn’t appear in their checkbook balance.

Some states mandate that retailers hold customer deposits in escrow. More than half of the states require they have as much cash in their checking account as they have taken in deposits. Retailers don’t always follow these laws that are rarely enforced.

Will Freight Problems Persist?

Many smaller stores that are dependent on warehouse programs and can’t buy containers are having problems. For example, when a manufacturer finally does ship via LTL, not only is the freight cost astronomical but at this point backlogs and delivery are made worse by a lack of transparency. Often manufacturers and retailers can’t track their products. In some cases, they can’t even get carriers to call them back.

Here’s what I’m hearing from even big retailers. Manufacturers contract with carriers and bill for freight on their invoices to make it easy for retailers to pay one consolidated invoice. Manufacturers may take a slight markup on the freight, but here’s the problem. Since most dealers aren’t paying invoices until they receive their goods, and the transportation cost is included on the invoice, the factors are putting retailers on credit hold. Their invoices are going past due before they receive the furniture. Manufacturers and carriers are pointing the finger at each other. Ultimately though, it’s dealers who are going to get hurt.

Who Will Get Hurt the Most?

Promotional dealers are feeling the most pain right now. Just a few years ago retailers still sold $299 sofas. When the pandemic hit, the price went to $399. Now that there is very little product to be found they can run at $499. Some companies had entire stores full of $399 and $499 sofas. The new starting price point is $599. Jerry Epperson has been talking for years about the fact that when Jesus was a baby, they were selling sofas for $499. That has finally changed. In the bedding sector, reasons given for price increases were the cost of foam, steel, and wood. Get ready for additional increases, this time due to labor costs. Mattress manufacturing is very labor-intensive. Building a mattress is hard work and they’re having to pay significantly higher rates to find willing employees.

Did PPP Help?

Most retailers had a free ride with PPP programs. As retailers review their bottom-line profits for 2021, it’s easy to forget how much the government paid in wages and overhead in our labor-intensive business. Now is the time to take a closer look at and consider what their true profit picture is. Yes, they did a ton of business, but did they make any money? Then they need to figure out how they are going to make money in 2022.

Is it a Good Time to Expand?

That depends. Big retailers have warehouses full of inventory. Large national chains, like Bob’s and Raymour & Flanigan, might not be getting exactly the ideal selection of inventory they wished for, but they’re getting plenty of products to sell. Their vendors are taking good care of them. Medium size and smaller retailers aren’t being treated as well. They can’t get inventory and it’s having significant impact. Everyone knows that many manufacturers just aren’t supporting smaller dealers. Large regional and national chains generally get whatever they want even if they weren’t customers at the start of the pandemic. So, to answer the question as it relates to growth, large stores are growing because they can.

What About the Container Situation?

The container shipping industry had a record year last year. They made billions in profits and are paying cash for new ships. My view is that it’s one thing to make massive profits, and another to sabotage the system. It’s out of control and something needs to be done. Perhaps there will be a rash of class-action lawsuits representing everyone up and down the supply chain down to consumers. There’s a lot of greed right now outside and sometimes inside our industry and consumers will ultimately pay the price.

What If a Slowdown Comes?

One of the things that manufacturers are struggling with is that they don’t know what percentage of the gigantic orders retailers have placed over the past year are real. How much of this was placed by retailers who were hedging their bets? If business slows, it could be like a 600-wagon train. If the first horse on the lead wagon stops, the backup could get ugly.

I know of several manufacturing/importing companies that canceled all of their sold orders then asked retailers to re-submit them so that they could find out how much was real. They assigned priority based on when the original orders were placed and built-in retroactive price increases. This is unprecedented in the furniture business. Of course, retailers couldn’t say anything. They were stuck. But many have told me that they are making notes, taking names and when all this is over are planning to be loyal to the people who treated them well. Pretty much everybody I talked to in preparation for this article respects the way HomeStretch Furniture handled product allocations. They set up a system where every retailer could buy in proportion to what they bought pre-pandemic.

Situation With Reps?

Reps are getting paid on delivered, but the problem is, they’re not getting paid on surcharges. So, if a rep sold a $100 item and $70 of surcharges are added, they only get paid on the original $100. It does help to keep prices for retailers lower than if the reps had to be paid on the higher amount, but I’ve spoken to reps who feel like manufacturers have found a way to further reduce their commissions while enjoying record margins.

What Is on the Horizon for Retailers?

If current trends hold, the supply chain will probably adjust in a positive direction throughout 2022.

• Container prices have stabilized somewhat. Based on my research they are running between $10,000 and $17,000, depending on whether they’re on spot rates or under contract. Still, at these prices, the cost of a container can be almost as much as the value of the freight that’s in that container, which is insane.
• As a reaction to that, we are seeing a big, ongoing shift to production in Mexico. Companies that were already making product there have been pleased with the success they’ve had.
• Chinese rolling power outages are not a problem like they were, but raw materials shortages in China, Malaysia and Vietnam are. Production is running 60 to 90 days longer than projected.
• Based on reports from everyone I’ve spoken to, California’s ports are picking up a little bit. Warehouse space has become a big problem. Although retail showroom locations are still plentiful for retailers who want to convert or open new furniture stores, there will be a continued shortage of warehouse space in 2022. Even warehouses that have been empty for years are all full of product because all types of companies are stocking up as a hedge against further supply chain disruptions.
• Consumers are even more demanding and there are lots of “Karens” out there. I hope this won’t continue but fear it will. It’s just one more factor in a long list that will make retailing less enjoyable in 2022.

Checkbook Issues

Big retailers don’t need advice from me. They know what to do. Average medium-sized and small retailers are a different kind of animal. In those stores, the owner is the buyer, the merchandiser, the person who sets up the sales floor, dusts and pushes furniture around. Owners don’t have HR departments to make sure that the people they hire aren’t engaged in bullying or sexual harassment. They manage social media and try to keep Google ratings high. They are the head of everything in their stores, mediating arguments between salespeople and making decisions related to what to do with the employee that’s come down with COVID. It goes on and on. There aren’t enough hours in a day for them to run their businesses successfully. So, while it’s easy for me to say that they need to get control of the financial side of their business, I don’t know how they have time to think about it. Many retailers I speak to are working themselves to death, especially with as much business as they have right now.

The fact is that in 2022 many independent retailers need to manage their finances better to survive. A retailer’s P&L is just a snapshot in time. Like anything else, junk in, junk out. Many retailers supply their accountants with sales and incoming inventory numbers but don’t have control of their inventory. We recently completed a forensic inventory for a store that had $1,650,000 on their books and found it was half of the amount. Inventory discrepancies are not uncommon.

Cash management is often limited to retailers looking at their checkbook balance every day, and many don’t listen to their accountant’s advice. These are symptoms that can, and do, result in poor decision-making, which can’t continue if they want to ensure their success in 2022.

Consumers are even more demanding
and there are lots of ‘Karens’ out there. It’s just one more factor in a long list that will make retailing less enjoyable in 2022.”