Home Goods Sector Report - Cascadia Capital

Home Goods Sector

Report

July 2020

1000 S ECON D A V EN UE

S UITE 1200

S EA TTL E, W A 98104

M EM BER FIN R A / S IPC

Home Goods Market Update

M&A activity, though reduced for certain sectors, is likely to accelerate for

quality home goods companies with established online and omnichannel

presence, strong brand recognition, unique business models (i.e., vertical

integration with in-house logistics, etc.) and differentiated product offerings.

1.

2.

Industry spend data sourced from U.S. Bureau of Economic Analysis.

Independent retailer online sales data sourced from as of June 28, 2020.

Jan'20

CCI

Unemployment Rate

May'20

Sep'19

Jan'19

Unemployment

May'19

Sep'18

Jan'18

May'18

Sep'17

0.0%

May'17

98

Jan'17

5.0%

Sep'16

99

Jan'16

10.0%

May'16

100

Sep'15

15.0%

Jan'15

101

May'15

20.0%

1,500

5.5%

1,000

4.5%

Avg. Monthly Housing Starts

Q3 '21P

Q1 '21P

Q3 '20P

Q1 '20

Q3 '19

Q1 '19

Q3 '18

Q1 '18

Q3 '17

2.5%

Q1 '17

0

Q3 '16

3.5%

Q1 '16

500

30 Yr. Fixed Mortgage Rates

. . . Balanced by Low Rates & Ample Housing Stock . . .

Q3 '15

Though overall industry spend is decreasing (down 18.1% for furniture and

home furnishing stores YTD May 2020 vs. YTD May 20191), the shift towards a

work-from-home culture is fueling furniture, d¨¦cor and kitchenware spending

with select online and omnichannel retailers (online furniture sales from

independent retailers alone are up ~276% year-to-date2). The potential for a

post-quarantine pop in home sales aided by low mortgage rates also portends

a bright spot for retail, omnichannel and DTC home goods retailers alike.

102

Q1 '15

E-Commerce is more important than ever as consumers shift to online buying

patterns in response to quarantine orders. DTC and omnichannel retailers are

well positioned, and pure play retailers and manufacturers are likely to enter

the online/DTC marketplace post-crisis to diversify their revenue streams.

Consumer Confidence Index

Long term home goods sales trends are currently difficult to forecast given

historically-high unemployment rates, decreased consumer confidence,

potential impact to urbanization trends and stalled housing starts; however, as

the Millennial population ages into home buyers and Baby Boomers, now

empty nesters, downsize and redecorate, long term home goods demand will

undoubtedly grow ¨C despite short term downturns and growing pains from

adjustments to industry dynamics.

Reduced Consumer Confidence & Spending Power . . .

Privately Owned Housing

Starts (000s)

With shelter in place regulation, your home becomes your office, your

school, your favorite restaurant and everything in between. With retail

storefronts shuttered, consumers are purchasing more aesthetic and

utilitarian home goods online.

30 Yr. Fixed Rate Mortgage

. . . and Early Stage Growth in Millennial

Homeownership

First Quarter 2019

First Quarter 2020

60% 62%

70% 70%

75% 76%

79% 79%

35% 37%

Under 35

35 to 44

45 to 54

55 to 64

Home Ownership by Age Bracket

65 & Over

1

Home Goods Industry Landscape

The home goods industry is vast and

highly fragmented

Retail Storefront First

Online First, Disruptors & Other

? Total size of the retail U.S. home goods

industry is approximately $311B

¨C Reflects 1.6% year-over-year growth

versus LTM Q1 2019 and 4.3% CAGR

since 2015

? Though the overall industry is mature in its

growth stage, the online portion of the

home goods industry (~$39B) is

experiencing sizeable growth, with

significant headroom for further penetration

(14% online penetration currently)

U.S. Personal Consumption Spend

17%

$311B

42%

Furniture

41%

D¨¦cor

Kitchenware &

Small Appliances

Sources: Bureau of Economic Analysis; Wayfair Q1 2020 Investor Presentation

Select Home Goods Industry Constituents

¨C Furniture industry growing faster than

d¨¦cor, kitchenware & small

appliances (5.6% CAGR versus 3.5%

and 3.3%, respectively)

Furniture &

D¨¦cor Brands &

Retailers

Mattress

Manufacturers

& Retailers

Kitchenware,

Dinnerware,

Small

Appliances &

Other

Furniture

Manufacturers

Department &

Club Stores

2

Covid-19¡¯s Impact on Home Goods

? The Covid-19 global pandemic has driven a fundamental shift in consumer buying patterns, driving unprecedented online sales growth as

nonessential retail storefronts shutter under shelter-in-place orders

? Overall revenue for furniture and home furnishings stores was down 66.5% year-over-year in April 2020, though online trends are

promising:

¨C Online home goods site Wayfair experienced YoY revenue growth of nearly 20% in Q1 2020 and YoY growth of over 90% in April 2020

¨C Online sales for national independent furniture retailers are up ~460% year-over-year as of June 12, 2020

¨C Kitchenware sales have surged as consumers shift to cooking at home; for example, from March 15, 2020 to April 18, 2020, dollar

sales of electric pasta makers grew more than 5.0x over prior year and bread maker sales more than quadrupled

? Major purchases in the home goods sector align with retail storefronts in that they are inherently personal ¨C consumers will always enjoy

seeing, touching and trying a piece of furniture before making their purchase; that said, Covid-19 marks a hard shift in the industry and will

force all brands to think through omnichannel strategies and sourcing redundancies to ensure operational flexibility through future

pandemics and general sustained shifts in consumer buying habits

Cumulative Year-Over-Year Change in Consumer Spending

40%

Change in Consumer eCommerce Spending on Home & Garden

180.0%

Total Consumer Spending

Total Online Sales

20%

160.0%

Total In-Store Sales

17%

Daily YoY Growth

Cumulative YoY Growth

142%

140.0%

120.0%

100.0%

0%

(8%)

80.0%

61%

60.0%

(20%)

(40%)

(23%)

National Distancing

Guidelines Issued

March 1

March 15

First Stimulus

Checks Deposited

April 1

April 15

Sources: Klayvio Covid-19 Ecommerce Market Pulse; Earnest Research,

40.0%

20.0% National Distancing

Guidelines Issued

0.0%

March

March 1

March15

16

First Stimulus

Checks Deposited

April 131

March

April 15

April 30

3

Home Goods Industry Trends

Consultative Selling

& Enhanced

g Customer

Experience

? More brands entering the market = more need for consumer engagement;

independent retailers excel at engagement, while online retailers attempt to bridge

the gap via tools like online room designers and space visualizers

? Some brands are shifting to curated offerings to establish themselves as go-to¡¯s for

specific, often younger aesthetics (i.e. mid century modern, organic modern, etc.)

¡°Amazon Effect¡± ¨C

The Need for Speed

The Rise of Brands

Manufacturers

Going DTC

Operational

Flexibility for an

Evolving Market

? Approximately 60% of U.S. households are Amazon Prime members,

driving commercial expectations of prompt delivery after purchase

? Rise of millennial spending power is driving much of the change

? Launch of Amazon¡¯s private label furniture line, Ravenna Home, and

growth of Wayfair & others highlights need for industrywide evolution

? Though not historically fundamental to the home goods market,

branding has increased as manufacturers try to build customer

loyalty and marketing power in a growing sea of SKUs

? Example: Creative Co-Op acquired the Bloomingville & Illume

home d¨¦cor and candle brands to differentiate from its primary

wholesale brand line

? With enhanced branding and broad expansion of outlets selling their

products online, manufacturers are shifting to offer DTC sales platforms

that allow them to collect customer information directly, realize higher

margins and control the brand narrative

? Globalization, U.S. trade tariffs on China and the Covid-19 pandemic have shone a

light on the need for operational efficiency, supplier redundancies and high-quality

logistics partners; post-crisis, brands and manufacturers alike will need to analyze

their business models to ensure sourcing alternatives, labor cost and manufacturing

efficiencies, stability of logistics and accessibility to consumers across all mediums

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