DFS joins victims of furniture downturn

News Analysis: With its first profits fall for 28 years, the retailer has been hit by the 'feelbad factor'

DFS FURNITURE, the UK's largest upholstery chain, yesterday added to the gloom surrounding furniture retailers when it became the latest chain to reveal that a collapse in consumer spending had led to a slump in sales.

The sofa specialist, chaired by the former Tory party treasurer Sir Graham Kirkham, said orders in the past four weeks have been "well below our targets" as "the fear of recession is causing a well-documented decline in consumer confidence". Sir Graham hinted that orders since the middle of September were 20 per cent below the same period last year, despite price-cutting.

The gloomy trading update came as DFS, rocked by two profits warnings this year, unveiled its first profits fall in 28 years, posting a pre- tax profit of pounds 34.1m, down from pounds 38.1m a year ago. The news prompted City analysts to slash forecasts for DFS profits in 1999 by 20 per cent and sent the shares crashing to an all-time low.

DFS's troubles capped a desperate week for furniture retailers and their share prices. On Tuesday Harveys, the UK's sixth-largest chain, warned of lower sales and issued a surprise profits warning which wiped 40 per cent from its share price. Four days ago the smaller chain, Essex Furniture, was forced into administration due to a severe cash-flow shortage.

The dire state of the market was highlighted by the latest figures from the British Retail Consortium, which showed a 12 per cent fall in like- for-like-sales in the past six weeks.

City analysts and industry figures believe these numbers are symptomatic of a wider malaise in the sector, and point out that as the economy heads into a slowdown, furniture retailers' sales and margins will bear the brunt of consumer spending declines.

The falls in last month's like-for-like sales at Harveys and DFS is even more startling as it comes against a weak comparison: sales in September 1997 were heavily hit by the death of Diana, Princess of Wales.

The macro-economic reasons for the slump are clear. Sofas and armchairs are "big-ticket" items - expensive purchases between pounds 500 and pounds 2,000, which consumers usually finance through credit or savings. When the economy slows and people worry about jobs and salaries, they switch spending to basic items, such as food and clothes, and defer the purchase of comfy chairs until better times.

This is precisely what it is happening in Britain where, in the words of Harveys' managing director, Rob Templeman, "fear of unemployment has reduced consumer confidence to a pretty low ebb".

Clive Vaughan, research manager for the retail consultancy Verdict, says: "There is a complete collapse in consumer confidence. People are nervous about prospects: they got their fingers burnt in the last recession, and the last thing they want to do is go out and buy a three-piece suite."

At DFS, Sir Graham believes this "feelbad factor" is evident in the sharp drop in the number of people visiting furniture shops, a clear sign that customers are opting out of big buys. "It is not the case of customers coming into the stores and not buying, it is just less footfall," he says.

What can retailers do to weather the slump? Louise Von Blixen, retail analyst with broker SG Securities, says: "The only way to get some sales is to be more aggressive on promotions at the expense of gross margins."

Harveys, MFI and DFS have all taken this route in the past few weeks, leading to what one executive described as "a bonanza of jolly good deals". But price-slashing can be very costly in terms of margin erosion.

Jon Massey, the DFS chief operating officer, said that after the two profits warnings and slump in share price the company decided to sacrifice margins to boost the top line. "We said: 'Come what may, we have to beat City expectations of a pounds 34m profit and the only way was to go for market share'."

The result was a rise in sales in the second half, paid for by a 3 per cent drop in margins. Mr Vaughan at Verdict believes price promotions are unlikely to bring long-term solace to the struggling furniture retailers. "If you were worried you could lose your job next week, would you buy a three-piece suite which has been reduced from pounds 800 to pounds 500? It doesn't matter how much stores cut prices, if the demand is not there, it is not going to be there."

Industry experts claim that the real saviour for the sector would be a series of interest-rate cuts. Ms von Blixen says: "The latest cut is not large enough and arrived too late to improve consumer confidence in the short term. We believe consumer confidence will remain depressed until consumers see significant cuts in their mortgage payments and feel more secure about jobs."

Monetary easing would also make life easier for a number of stores, such as DFS, which provide interest-free credit. Under these plans, companies borrow money from a finance company at the going rate of interest. As interest rates remain high, retailers have to divert more cash flow to pay the interest and may be forced to put up prices.

But until rates are cut substantially, furniture chains will remain under pressure. Industry experts predict that Essex Furniture will not be the only casualty. They point out that the chains, which have expanded rapidly into out-of-town superstores, are more vulnerable when demand dries up.

In investment terms, there is little prospect of a rebound in the stores' share prices until sales and margins improve. As Ms von Blixen says: "We do not believe there will be a rerating across the board, since consumer confidence is expected to remain low."

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
Life and Style
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions