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Online furniture sales to grow: Are Harvey Norman, Fantastic and Nick Scali prepared?

The latest issue of Industry Insight, a report by research firm IBISWorld takes an in-depth look at what the report describes as “the explosive growth of online furniture sales.”

Investors and businesses are of course familiar with the structural shift occurring towards online retailing, however until now bulky goods retailers such as furniture retailers have been somewhat immune from the online world given the higher freight costs involved and the desire of many shoppers to view the item in person, given that the purchase of an item such as a coffee table or sofa is generally considered an important long-term decision.

This makes the following findings by IBISWorld all the more interesting and concerning for traditional retailers and their shareholders:

“IBISWorld estimates that just 3.7% of domestic furniture sales are carried out online. However, online household furniture sales are forecast to grow by a massive 17.8% annualised in the five years through 2013-14, to reach $297.5 million. In contrast, traditional bricks-and-mortar furniture retailers are forecast to expand at an annualised 1.1% over the same period.”

For Australia’s major listed bricks-and-mortar furniture retailers Harvey Norman (ASX: HVN), Fantastic Holdings (ASX: FAN) which owns the Fantastic Furniture and Plush brands, and Nick Scali (ASX: NCK), the online trend has the potential to shrink their profit margins.

While each firm does have an online presence, currently their furniture is not available for purchase online. This situation is largely the result of their imbedded cost base, which is tied up in shop fronts. The difficulty for these retailers is adapting their business models to online so that they can partake in the growth coming from online sales and not allow upstart online-only competitors with lower cost bases to steal market share.

Foolish takeaway

With the pick-up in housing currently underway, Harvey Norman, Fantastic and Nick Scali are all hoping for a significant pick-up in sales too. In the past 12 months, Nick Scali and Harvey Norman’s shares have rallied 119% and 80% respectively, while Fantastic’s share price has fallen nearly 28%.

All three companies must actively adapt their business models to the realities of online sales; however the stock most likely worth further investigation by investors at present is Fantastic Holdings given its significant share price underperformance.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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