The persistent problems within the home building materials industry have come to a head during this downturn. Beijing recently piloted a policy encouraging the exchange of old furniture for new, which has seen participating businesses increase their revenue by at least 30%. However, this initiative alone cannot reverse the overall decline of the furniture sector.
Bafanglong Lighting City, established in 1999 and located along Beijing's West Fourth Ring Road, was once a major hub for lighting fixtures. Over more than 12 years, this business thrived until March of this year, when it ceased selling lighting products and transitioned into the sale of flowers, birds, fish, and insects. As the first casualty among Beijing's home furnishing stores in 2012, Bafanglong marked a significant shift in the industry.
In reality, since 2009, the Lighting City has faced challenges due to the global financial crisis and stringent real estate regulations. Reduced foot traffic and the departure of merchants led to this 7,000-square-meter market deciding to transform earlier this year.
The pattern of failure and transformation seems contagious. Other home furnishing markets like Xinglong Home Furnishing Building Materials City, Jinkailide Home Furnishing Store, and Dongfang Jiayuan Lishuiqiao Store have either shut down or pulled out of operations.
In November, Beijing launched another pilot program promoting the exchange of old furniture for new. Liu Chen, Secretary General of the Beijing Market Association Home Furnishing Market Branch, stated that businesses involved in the trial have seen a minimum 30% boost in income.
Can this "shot in the arm" revive the struggling furniture market?
Absolute Excess
The policy encouraging the exchange of old furniture for new was first suggested by the Ministry of Commerce. In February 2012, when discussing China’s commercial operations in January, Vice Minister of Commerce Jiang Zengwei visited the old furniture recycling center and requested Real Estate to draft a report on their recycling experiences to guide the Ministry of Commerce in formulating related policies. Beijing became the first city in the country to pilot this initiative, with five companies—Actual Home, Red Star Macalline, Jimei Home Furnishing, Chengcheng Home Furnishing Plaza, and Lanjing Lijia Dazhong Temple Home Furnishing Plaza—starting a one-month trial in November.
According to recent updates from the Beijing Municipal Commission of Commerce, between November 1 and November 25, these five pilot companies sold 18,584 pieces of traded-in furniture worth 106 million yuan, representing 24.2% of the total sales of similar furniture.
However, Meng Guoqiang, Chairman of the China Construction Material Circulation Association, argues that policies alone cannot fully revitalize the furniture industry. The long-standing issues in the home building materials industry will continue to surface during this downturn. These include the chaotic expansion of hypermarkets, where dealers struggle to keep pace with the rapid growth of these stores. Larger enterprises are fiercely competing, while smaller, weaker stores risk being pushed out.
Both Meng Guoqiang and Liu Chen agree that the total area of furniture stores across the nation is excessive.
Over the past decade, the furniture industry enjoyed annual growth rates of 20-30%, even surviving the financial crisis and being labeled as a "sunrise industry." Consequently, furniture stores have continuously expanded. Around 2008, numerous stores opened nationwide, recruiting both manufacturers and distributors. Some businesses recognized the risks and began to withdraw. Currently, most manufacturers no longer directly operate in malls, relying instead on distributors.
On September 13, American home improvement giant Home Depot abruptly closed all seven of its building materials stores in China. As the second-largest retailer in the U.S. after Walmart and the world's largest home building materials superstore, Home Depot (China) announced on September 15 that it would refocus on professional retail stores and online sales.
British DIY chain B & Q has been losing money in China for six consecutive years. The wave of store closures that swept B & Q three years ago shows no sign of stopping. After closing a store in Nanjing earlier this year, the number of B & Q locations in China has dropped from 63 at its peak to 40.
Meng Guoqiang believes that domestic large-scale brands overlook these issues. On one hand, they overestimate their ability to dominate the market and push competitors out. On the other hand, they aim to secure land deals, leveraging the favorable terms offered by local governments during investment incentives.
In December 2009, Red Star Macalline operated 60 stores in 38 cities across China. In less than three years, it added over 40 more shopping malls. By 2020, Red Star Macalline plans to expand to 200 stores nationwide. The home furnishings industry is racing against time. Last year, the group opened 12 new stores and plans to open 17 more this year, targeting third- and fourth-tier cities like Daqing in Heilongjiang, Quanzhou in Fujian, and Lu'an in Anhui. However, reports indicate that some stores have already closed.
Unstoppable Elimination and Adjustment
Wangli Baili Home Supplies Mall, Yanzhao Furniture City, Liangdu Home Mall, Hongyanqiao Building Material City, Dachao Furniture City, Love and Celebrity Decoration Center, Lianrijiayuan Furniture Building Materials Street, Bixi Square, Lize Building Material City, Tianwei Building Material City, and Lanjing Lijia Building Material City have faded from public view.
During this downturn, the impact feels more severe. The demand for newly constructed residential properties is declining, and social housing typically purchases decorations in bulk, bypassing traditional sales channels. "This presents a new challenge for stores," said Meng Guoqiang. "In the future, developers will construct more pre-decorated units. Can home stores adapt by becoming distribution centers, logistics hubs, or large wholesale centers?"
Simultaneously, the aggressive rise of e-commerce poses a new challenge to traditional furniture and building materials retailers. "They must either serve as e-commerce exhibition bases or develop their own e-commerce platforms." Meng Guoqiang noted. During the Taobao Double Eleven Festival, the daily turnover of the home building materials branch exceeded 1.2 billion yuan.
Red Star Macalline has begun extending its franchise business to the Internet. Its e-commerce strategy includes a B2C platform focusing on home building materials, flash sales for home textiles and small household items, and group-buying for household goods, covering various segments of the e-commerce market.
However, Meng Guoqiang believes that the threat from e-commerce is not yet overwhelming. Most e-commerce transactions involve low-cost products, with high-end furniture largely unaffected. Yet, if the current trend continues, e-commerce could seize a significant market share in the future.
The business model of domestic furniture stores primarily involves collecting rent and management fees. For instance, at Actual Home, rent is partly fixed based on the shop's location, while management fees are charged according to the store's sales. May and October are peak seasons, and compared to merchants based in malls, the malls hold a stronger negotiating position, ensuring steady income. Liu Chen emphasized that furniture stores need to cater to consumers, ensuring service rigidity, and adopting large-scale marketing strategies. He also noted that the development of complexes might be a future trend.
Merchants at Lanjinglijia Home Plaza in Dazhong Temple informed our reporters that business improved starting October this year.
Correspondingly, the National Building Materials Home Furnishing Prosperity Index, jointly released by the Ministry of Commerce's Department of Circulation and the China Building Materials Circulation Association, surged to 130.29 in October, increasing 9.47% month-on-month and 7.52% year-on-year. This marks the second-highest peak since the index was introduced in March 2010, surpassed only by 134.9 in May 2010.
In October, sales at building materials and furniture stores also rose significantly. Data from the China Building Materials Circulation Association shows that sales of building materials and home furnishings above the national scale reached 142 billion yuan in October, a substantial 20.28% increase from the previous month. However, cumulative sales from January to October amounted to 1.0391 trillion yuan, a year-on-year decrease of 4.6%.
Liu Chen believes that the real estate market is beginning to recover, and the trade-in policy has also spurred some previously hesitant consumers.
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