Are Furniture Rentals a Threat to Furniture Retailers?August 05, 2019
Almost half of all consumers would likely change their consumption habits to lessen their impact on the environment. Does that mentality extend to renting furniture rather than purchasing it?
New furniture rental startups promote sustainability and flexibility on their websites. IKEA cited its own company’s interest in more eco-friendly business practices as well as consumer interest in sustainability as rationale for its upcoming foray into the furniture leasing business.
But not all consumers rent furniture for love of the environment. Finances and varying lifestyle needs also play a role. The recent buzz about IKEA and other new furniture rental programs got us wondering what kind of staying power the furniture rental industry has.
We explore the furniture rental and furniture store industries and examine consumer interest in furniture rentals in this article to answer whether or not furniture rentals are a threat to furniture retailers.
Furniture Rentals vs. Furniture Retailers
Which industry is more successful: furniture rentals or furniture retailers? We will examine data from both these industries and their market leaders to arrive at an answer.
We will start with furniture rentals. The home furniture rental industry in the U.S. brings in $741.7 million in revenue and $89 million in profit. It has -2.7% project annual growth through 2023.
There are 803 furniture rental businesses in the U.S. The top 3 market leaders account for about 35% of total market revenue, which are:
- Rent-a-A-Center: 18% market share
- Aaron’s, Inc.: 10% market share
- Berkshire Hathaway, Inc.: 6% market share
Note: most of Berkshire’s business is outside the country, so we will not discuss it further in this article
How are these market leaders faring?
RAC rents furniture, appliances and electronics in its stores across the U.S., Mexico and Puerto Rico. About 70% of its net revenues come from its U.S. segment. Most of its U.S. customers (about 80%) are repeat customers. Furniture accounts for the biggest percentage of rentals revenue.
Rent-A-Center (RAC) experienced an 11% decrease in the number of its U.S. stores (which is 291 fewer corporate and franchise locations) from 2015 to 2017. RAC also experienced an 18% decrease in total revenue during this same time period. RAC attributed the revenue loss to fewer rentals and fees in the U.S. segment in its 2018 annual report.
Unlike RAC, Aaron’s has a manufacturing division (RAC relies on contracts from third parties to supply furniture and other products for consumers to rent). Aaron’s rents furniture, appliances, jewelry and electronics. Like RAC, furniture rentals represents a significant amount of its income. Furniture rentals account for the largest share of revenues in two of Aaron’s business segments (Aaron’s stores and its progressive leasing segment). Arron’s third business segment is DAMI, which offers private label cards and loans to subprime customers.
From 2016 to 2018, 9% of Aaron’s stores closed, which was 175 company-owned and franchise locations. However, in that same time period, total revenues increased 19% and net earnings increased 41%, according to Aaron’s Inc. 2018 annual report.
Key Insight: Although the overall home furniture rental is not expected to grow in the next 5 years, it is still a profitable industry. It is notable that the 2 biggest players in this industry closed down about 10% of their retail stores in the past few years.
What about the retail furniture industry? The furniture store industry brings in $64.5 billion in revenue and $2.8 billion in profit. It has projected 0.9% annual growth through 2023.
There are 29,207 furniture stores in the U.S. There are only 2 market leaders in the furniture store industry:
- IKEA: 9% market share
- Ashley Furniture: 7% market share
IKEA experienced a 4.7% increase in sales in fiscal year 2018, according to IKEA’s 2018 financial results report. IKEA opened 12 new stores in FY18, saw a 45% increase in online sales, a 3% increase in customer visits to IKEA stores and saw a 12% increase in visits to IKEA.com.
IKEA will start testing a furniture leasing program in all the markets it operates in starting in 2020, according to IKEA’s press release announcing its furniture leasing plan. The company will test leasing offers to enable customers to “acquire, care for and pass on IKEA products in more sustainable ways,” IKEA said in its press release. The decision to offer furniture leasing is based on its consumer research (more on this in the next section of this article).
Because Ashley Furniture is privately owned, data about its finances and its stores is not readily available. Ashley was projected to have a revenue increase at an annualized rate of 7.6% through 2018.
Key Insight: The furniture industry is growing and so are its 2 market leaders. The furniture rental industry has less revenue, less profit and have far fewer businesses in the U.S. than retailers in the furniture store industry.
Comparing the revenues and anticipated growth between home furniture rental and the furniture store industries makes a case that consumer demand in furniture rental is waning. In general, as per capita disposable income increases, furniture rentals tend to decrease. Younger consumers and low-income earners are the target customers for furniture rental companies like Aaron’s and RAC.
Many of these furniture rental companies offer financing options that don’t involve credit. Almost a third (29%) of the U.S. population are subprime borrowers (credit score under 650), RAC said in its 2018 annual report. Most rent-to-own industry customers (83%) in the U.S., Canada and Mexico earn an annual household income of $15,000 to $50,000.
But these numbers don’t necessarily capture all the relevant context, like the growing interest in sustainability and trends like #konMarie to purge items that don’t bring joy. There was a 130% increase in the number of Google queries for “rental furniture stores near me” in the last 12 months vs. a 50% increase in the number of queries for “furniture stores near me” in the same time period (from April 2018 to April 2019).
The new furniture rental startups is another sign of growing consumer interest. Two of the more well-known Furniture-as-a-Service (FaaS) include Feather and Fernish. They share similar business models—rent furniture and when the subscription service ends, consumers have the option to renew their rentals, purchase the furniture or walk away. Feather operates in the New York City and San Francisco Bay areas and Fernish currently operates in the Los Angeles and Seattle areas. Fernish says it is planning to add more markets in 2019.
Does this model sound familiar? Both Aaron’s and RAC have options to buy furniture as well. These new FaaS companies appear to target Millennials, the demographic most strongly associated with an interest in sustainability. (Read more about consumer interest in sustainability in our Sustainability Rising blog.)
Millennials are most likely to rent furniture, according to research from IBIS World. How prevalent is furniture rental among different age groups?
• 36% 25-44 year-olds
• 33% 45-64 year-olds
• 23% 65/older
• 8% 24/younger
IKEA conducted its own research to explore consumer interest in renting furniture. Findings include that small businesses in Switzerland are more interested in renting furniture rather than owning it; students in the Netherlands attach less importance to owning material goods and want to reduce their ecological footprints; and life-changing events like starting college trigger the need for temporary access to furniture, according to IKEA’s press release announcing its furniture leasing plan.
Research was conducted in the Netherlands, Sweden, Switzerland and Poland. The Ingka Group (IKEA’s holding company) said that their goal is to “develop subscription-based leasing offers that enable the company to maintain ownership of the product to secure reuse as many times as possible before material and component recycling at the end of life.” IKEA’s new furniture rental program will make their business a hybrid between selling and retail.
• 22% 35-44 year-olds
• 19% 45-54 year-olds
• 18% 55-64 year-olds
• 14% 65/older
• 11% 24-34 year-olds
• 11% 24/younger
• 4% businesses/other
So are furniture rentals a threat to furniture stores?
To recap, the signs that point to yes, furniture rentals are a threat, include:
• IKEA’s upcoming furniture leasing
• Growing consumer interest in sustainability
• New Furniture-as-a-Service startups
Signs that suggest furniture rentals aren’t much of a threat:
• Declining number of furniture rental stores (and increase in furniture stores)
• No projected industry growth in the next 5 years
• Furniture rental companies are less profitable than furniture stores
Our best answer to whether or not furniture rentals are a threat is that time will tell. How successful (or much of a failure) IKEA’s pilot rental program turns out will be a great way to determine how many consumers are interested.
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