Private equity investors’ interest in the residential furniture industry has been off and on for many decades. The first significant private equity investment in the industry involved Citicorp Venture Capital and its acquisition of Levitz Furniture, which at the time was the largest retailer in the industry. CVC’s activity in the industry continued when the firm later acquired the industry’s largest manufacturing source, Mohasco Industries.
Today, only 35 years later, at least 90 private equity firms have investments in the furniture, home furnishings, or mattress sectors, while more than 105 have invested and exited over that period. As you might expect, some have been superbly profitable while others were, shall we say, less successful.
Home furnishings, or furniture as the sector is commonly referred to, is perceived as a cyclical industry due to the fact that it has experienced five declines in the last 35 years, each time these declines proceeded periods of substantial growth.
The severe recession of 2008-2009 was especially damaging to home furnishings because the industry is reliant upon consumer confidence, consumer credit availability, household formations and housing turnover, all of which suffered during the U.S.’s most recent recession, which included a collapse in the housing market and extremely high unemployment. Consumer wealth plummeted with home values and the stock market, and home purchases nearly stopped, despite the low interest rates.
As a result, investor interest in home furnishings largely disappeared, and the public furniture stocks experienced record low stock prices. Even well-capitalized, leading brands reported losses.
The recession caused domestic and imported furniture manufacturing shipments to drop an unprecedented 30.2%, a decline not seen since the Great Depression. Since then, the industry has experienced a 24.7% increase through year-end 2013, but home furnishings sales remain below the 2006 peak. After the severe winter in 2014, home furnishings sales have rebounded nicely and are currently experiencing a renewed vigor that we have not seen since the recession.
With the improving conditions, investor interest in the home furnishings sector has recovered in the public stocks, many of which are trading near all-time highs, and from within the private equity community. This increased interest has occurred with only a lackluster recovery in housing so far.
In just the last year or so, some of the larger home furnishings investments have involved Bain Capital and Bob’s Discount Furniture, Freeman Spogli & Co. and Arhaus Furniture, The Jordan Company and American Freight, Brentwood Associates and Z Gallerie and the successful public offering of on-line furniture retailer Wayfair, which had among its investors private equity and Venture Capital firms such as Battery Ventures, Great Hill Partners, HarbourVest Partners and Spark Capital Partners. By our count, there have been over fourteen investments in the industry during the last twelve months by private equity and venture capital investors.
Our firm is an investment bank that specializes in the home furnishings sector, and we welcome these new investors and many others who are showing enthusiasm for home furnishings. In our opinion, this interest is well founded due to many reasons, including:
- The emerging Millennial generation, at 80 million individuals aged 17-35, are getting their educations, getting married, and starting or expanding their households. The rapid growth in new multi-family residential construction in 2013-2014 reflects the need for new households and is a precursor of a coming housing shortage, then a following boom. The U.S. underbuilt homes from 2007-2013. As new household formations resume the 1 million + per year pace experienced from 2000 to 2007, the housing need will become more apparent.
- The peak years for home furnishings purchases are ages 35-54. As the Millennials displace the 47 million Generation Xer’s, now 36-49, home furnishings will thrive as these young people and their children need larger residences and the necessary furnishings to make their houses homes.
- Meanwhile the 76 million post-war Baby Boomers, now 50-68, are buying better furnishings, and may complicate housing demand by deciding to downsize as their children finally leave home for places of their own.
- But beyond the obvious demographics, recent technological developments have caused our culture to place a greater importance on the “home” and its role in our daily lives. Already, to save time, congestion, energy and other expenses, more people are working from their homes. Our computers and improved communication technology allow this, an option not available to older generations. As more and more people begin to use the home as a base to shop, study, entertain, communicate (Skype, for example), bank and much more, “the home’s” role will become more significant, perhaps at the expense of offices, dining out, and even automobile ownership.
Certain investors are investing in home furnishing retailers and other sources so that they can capitalize on these new waves of young consumers and their revised spending and shopping habits. Additionally, we expect such investors will profit by using strong brand identities, more efficient logistics that utilize the latest technology as well as incorporating strategies that have both the physical presence and internet capability to reach the U.S.’s rapidly changing consumer mix. Most investors prefer products and concepts that are capable of developing a national presence, something few home furnishings retailers have currently.
Another attractive feature of the home furnishings sector is its fragmentation. Among retailers, only two approach a 3% market share, Ashley HomeStores and IKEA, both of which are privately held. Less than 10% of home furnishings retailing is done by public companies, and less than 30% of the suppliers to these retailers are publicly-owned. The remaining retailers are often family-owned companies that are facing generational issues, a need for expansion capital, and concerns about a changing retail environment. Taking all of these factors into consideration, we anticipate continued M&A activity within the industry for 2015.
