The big-picture analysis of independent furniture retailing tends to focus on a phenomenon that is all too common in today’s economy—disruption. Independents across North America face profound challenges arising from the growing power of national and multi-region chains, the rise of ecommerce, and shifting shopping patterns among younger generations. But even with these formidable headwinds, it would be a mistake to assume that lending opportunities in furniture retailing are dead. At least among a certain type of niche operator, these changes are translating into an increased need for capital. With the proper due diligence, providing that capital might not be as risky as you would think.

Viable furniture chains are scattered across the country. The composite picture looks something like this: With eight or ten stores in a one-or two-state region, the business was founded early in the 20th century. Generations of customers grew up knowing the chain through ads in the papers and on AM radio, UHF TV and local cable. This local furniture retailer earned a strong reputation for customer service and for carrying a full range of brands. Successive owners purchased their real estate and sank lots of money into targeted inventory. They learned lessons as their products and customers evolved over the years – allowing the company to maintain a relatively solid balance sheet.

Operators like this have every intention of continuing, but cash flow can be challenging. While they want to adapt to the changing times, they need standard asset-based lending—17 to 20 percent interest is simply not viable for them. Second-tier lenders have an opportunity to serve this end of the marketplace, but they must be selective in doing so. These retailers represent the best of the independent furniture business and are distinguished by the strength of their operations relative to those of their more lethargic competitors. They are defined by their willingness to make productive, adaptive changes in business strategy aimed at capturing new, younger market share. 

To accomplish these aims, they need an accurate analysis of their business, a plan for the future and the capital required to execute the new strategy. 

Targeting the Right Borrowers 

In considering whether to lend to an independent furniture retailer, it is important to gauge the degree to which it has taken stock of itself. Furniture stores often sit in the same locations for decades while customers around them change. Given the current state of disruption in furniture retailing, a true analysis will reach well beyond the typical appraisal of the company’s hard assets. To truly understand the value of the brand—and subsequently the assets—valuation experts start with a deep dive into the retailer’s marketplace and demographic base for quantifiable information about shopper ages, incomes and interests. A careful revaluation of the merchandising strategy, including pricing, mix, and turns, is also needed to ensure merchandise mixes that neither overemphasize nor underrepresent certain categories. These days, it is unwise to carry slow-moving items, even if they do add to the ambiance of the store. Does the retailer strive to maximize productivity down to the last square foot?

Further, how does the chain’s staffing compare to standard industry parameters? Is the retailer running effective branding, marketing and advertising campaigns that include digital and social media? What is it doing to take a competitive—but realistic and balanced—approach to operational matters such as warehousing, delivery logistics and customer service policies?

Viable lending candidates need to understand their place in the market as well as the precise value of their major assets. A brand update or new merchandise/pricing strategy may be necessary. In partnership with valuation and disposition experts, they are willing to squeeze actionable information from their POS and customer data to determine which strategies should be pursued. Hunches are no longer good enough. 

Embracing Generational Change 

When it comes to gaining this fresh perspective, the importance of objectively reassessing customer preferences and buying behavior cannot be overstated. For independent furniture retailers, the trajectory of one generation in particular—the Baby Boomers—is crucial. At its peak in 1999, this massive generation was comprised of 78.8 million Americans. By 2050, according to the Pew Research Center, its ranks are projected to shrink to 16.6 million. Even the youngest Boomers’ children have largely left home. As a result, this generation is downsizing, moving into smaller homes and discarding larger, nonessential furniture. These lifestyle changes are accompanied by the need for smaller-scale pieces that offer mobility, comfort and affordability—so carrying more of this type of merchandise is one way to continue serving these customers. In evaluating a potential borrower in this sector, a key question is whether the operator has taken note of this major demographic shift and its implications for the business. 

Independents should also think carefully about how to appeal to Generation X. Anywhere from 35 to 55 years old today, Gen Xers often lead growing families with substantial economic resources. These tech-savvy buyers stand to inherit billions of dollars from their parents in the years to come. Per Pew Research, there will be 64.6 million Gen Xers in 2028—a significant demo that will still be purchasing goods long after the Boomers. These shoppers have a sense of brand loyalty and are wary of disposable furniture. Although they are sophisticated online shoppers, their focus on brands and shopping experiences makes them good potential customers for well-run independent furniture stores. 

How should independent furniture retailers interact with even younger shoppers—the elusive Millennials? These shoppers will likely overtake the Boomers in 2019, according to Pew, as their ranks grow to 73 million, (versus 72 million Boomers). And yet for independent furniture retailers, there are good reasons to be cautious about shifting the business model to focus mostly on the youngest members of the Millennial generation. For starters, they often have budgets limited by student debt and an economic environment in which the cost of living often outpaces real wage growth. Additionally, they tend to move frequently and are more open to purchasing ready-to-assemble items. Thus, to target the youngest of these shoppers is to go head-to-head with those Internet and discount retailers that are already stealing market share. Fortunately, with time, older Millennials will increasingly seek better-quality furniture and show a greater willingness to wait for the delivery of goods. Efforts to cater to Gen X should eventually gain traction with the leading edge of the Millennial generation as well. 

Updating Key Processes—A Critical Step  

As mentioned, older furniture stores that have spent years or decades serving Baby Boomers often rely on print, radio and TV-based media buys. But today’s furniture retailers need a fresh perspective on branding, social media (direct interaction with the shopper), content marketing, Website development, and search engine optimization. Marketing today must be a multi-channel effort. Has the retailer approaching you for funding conducted a comprehensive audit of budgets, media sources and the functionality and demographic appeal of its Website? Savvier retailers know that digital advertising must be in the mix regardless of the age of their targets, but at what investment? By introducing more promotions against which a transaction can be measured, such as a redeemable coupon for discounts or services, furniture retailers can measure the effectiveness of different media.

Lenders may also want to consider whether the potential borrower is taking full advantage of “force multipliers” like buying groups, which offer savings on shared infrastructure such as Website design and maintenance, or special pricing from preferred vendors for inventory-management systems or payroll programs. The better buying groups offer access to private-label credit programs with various payment options, including no-interest or fixed low-interest financing for extended periods. 

Reevaluation of real estate, too, can have a significant effect on the viability of the strategy. Naturally, the lender will assess the net orderly liquidation value of the prospective borrower’s owned real estate and/or any low-cost, long-term leases that could potentially be sold in connection with strategic store closings or a full GOB. As an aside, if the retailer does aim to close underperforming stores as part of a strategic realignment, it must guard against creating the impression of a chain-wide failure. Smart operators and consultants know how to protect the brand.

Outfoxing the “Apocalypse”

Given the shifts in play in the furniture business, it is simply a fact that more independents are headed toward the end of their lifecycle. In some cases, this is due to disruption; in others, the owner is just ready to retire and doesn’t have a viable succession plan. The key takeaway for lenders? Proactive and adaptive furniture operators—and there are plenty of them—truly do have bright prospects with the right strategic partners. Just as the “retail apocalypse” in the U.S. apparel sector does not mean that all brick-and-mortar apparel shops are doomed, even decades-old furniture chains can survive by finding the best sites, targeting the right customers and executing on customer service, tech and merchandising. In an industry that is ripe for growth and repositioning, standing still is not an option. To move forward, independent retailers need resources. That makes them a niche opportunity for second-tier lenders who ask the right questions, use data wisely and conduct thorough due diligence.   TSL