Industry Insights | How Will the Home Market Recover After the Pandemic?

Home furnishings include a wide variety of products, such as furniture, architectural ceramics, lighting, flooring, coatings, wall decorations, hardware and electrical equipment, kitchen and bathroom renovations, home decor and textiles. These products can be mainly divided into two categories: one is furniture and home decor textiles, including furniture, textiles, and household decorations; the other is lightweight building materials, which include all home items and materials other than those in the first category.

The upstream of the home industry value chain is in the fields of raw materials such as wood, ceramics, and metals, where product added value is low.

The midstream consists of home product manufacturers, where the added value of products is higher than in the upstream sector. There are more than 15,000 home goods and furniture manufacturers in China, most of which are located in coastal export centers.

The downstream of the industrial chain is the circulation and sales of products, which has the highest gross profit margin. In most cases, home products are directly sold to end consumers through various retail outlets, including home shopping malls, branded specialty stores, department stores, supermarkets, traditional trading markets, online retail, etc. The home retail market, represented by B2C, accounts for the majority of China's overall home market.

After a brief recovery in 2021, the Chinese home market fell into a slump in 2022 due to the pandemic and lockdowns. Affected by the pandemic, a widespread credit crisis in the real estate industry, rising liquidity risks, difficulties in new housing delivery leading to a decline in sales area, and other factors, normal commercial operations of home businesses were disrupted in 2022. At the same time, demand for new home renovations and self-renovation in China declined, resulting in a sales volume in the home market that was more than 15% lower than in 2021. The total sales volume of the Chinese home market in 2022 exceeded 4 trillion yuan, with a compound annual growth rate of about -1% from 2017 to 2022.

Starting from the second half of 2022, the state introduced a series of policies aimed at 'ensuring delivery and preventing risks'. Both supply and demand sides were addressed simultaneously to replenish working capital in the real estate industry, alleviate liquidity risks faced by the industry, repair the trust chain in the real estate sector, and strongly support the industry's smooth passage through this downturn by providing a strong bottoming out.

In addition to favorable policy support and the positive factors of improved upstream real estate in the home industry, considering China's entry into the post-pandemic era, it is predicted that during the forecast period, with the Chinese economy accelerating its recovery and people's living and business production activities returning to normal levels, consumer demand in the home market is also expected to recover significantly.

During the forecast period, demand from new home renovations and improvement projects will drive the recovery of the home market; at the same time, considering the impact of the pandemic, delayed housing purchases and renovation demand will be released during the forecast period. In 2023, China's home market sales are expected to return to over 5 trillion yuan, showing a significant improvement in sales performance. Considering the advancement of urbanization in China and the consumption upgrade driving the level of home product consumption, China's home market sales are expected to achieve an annual compound growth rate of about 10% between 2023 and 2027.

With the full relaxation of epidemic control measures in China, the Chinese home and real estate markets are expected to improve significantly after a sluggish performance in 2022. Against the backdrop of an accelerating recovery of the Chinese economy, upstream real estate has received strong policy support to ensure a smooth passage through the downturn cycle, and the supply side of the real estate market will improve; at the same time, the demand for housing renovations that was lagging behind during epidemic control measures will gradually be released. Coupled with the normalization of production and sales activities on the supply side, domestic home consumption markets are expected to recover significantly under the influence of economic growth and continuous upgrading of consumer spending.

An increasing number of middle-class individuals and younger consumer groups represented by those born in the 1980s and 1990s are becoming an important segment in the home market. This group typically has a higher level of education and considers various factors such as product quality, design, environmental friendliness, and functionality when purchasing home products. They also have higher expectations for shopping experiences and convenience during the purchase process. The broader influence of domestic and international cultures also leads them to demand home products including imported brands and high-end customization, thus setting higher budgets for home purchases.

China has a large population base, which gives rise to a strong rigid demand for residential purchases, rentals, and improvements. Since 2021, a series of policy adjustments by the state towards the real estate industry have indicated that the era of extensive growth in the real estate sector has ended.

With the advent of the inventory housing era, as well as the demand for residential renovations and home products due to residents' aesthetic fatigue at home during the pandemic, which was released during the post-pandemic period, the renovation needs arising from self-occupied housing renovations and transactions of existing residences are expected to continue driving the steady development of the home industry in the future.

With the acceleration of urbanization construction in second- and third-tier cities and below in China, as well as the improvement in purchasing power among urban residents, this market segment is becoming an important growth point for the home furnishings market. Enterprises at the upper and middle levels of the industry, including high-end home furnishing manufacturers and distributors, are expanding their channel coverage to this growing market. Home furnishing malls, as the main retail channels for mid- to high-end products downstream, are rapidly growing and improving their layout in low-tier cities through operational models such as entrusted management and mergers and acquisitions, to meet the local residents' shopping needs for home furnishings products.

In addition, home shopping malls are also actively promoting regional 'benchmark stores' and other models, providing consumers in the covered areas and provinces with a more comprehensive and extensive selection of home products.

In recent years, with the rapid development of the internet and e-commerce, especially the surge in live streaming sales during the pandemic, new development opportunities have been created for the home furnishings industry. Considering that the home furnishings industry has strong offline attributes, consumers need to match products with each other and space when purchasing items. These factors have put forward higher requirements for the home furnishings industry to build online scenario experiences, online service capabilities, and full-domain traffic operations both online and offline.

Home retailers have been trying to establish strategic cooperation with e-commerce giants such as Alibaba and Tencent. Leveraging the existing advantages in channels, resources, management, and marketing of e-commerce, they are actively expanding their new retail business in the home sector.

During the pandemic, many enterprises, including those in the internet sector, have explored overseas business opportunities, and home furnishing companies are no exception. China has a mature and complete home furnishing product production industry chain and industrial cluster advantages. By opening stores overseas and establishing cross-border supply chains, Chinese home furnishing companies can choose to carry out overseas home furnishing product sales in countries and regions with rapid economic development, growing population and housing renovation demands. For example, regions such as Southeast Asia have rapid economic development and population growth. With the urban construction of these countries and regions, there will be a large demand for housing and renovations, which is conducive to the growth of home furnishing product sales and creates more home export business opportunities for the country.

With the proposal of the 'carbon peak, carbon neutrality' goals, reducing dependence on non-renewable energy such as fossil fuels, improving quality and efficiency, and developing in a low-carbon manner will be the main directions for the future development of manufacturing and service industries, including home appliance companies.

Home furnishing enterprises need to formulate long-term plans and goals, transform and upgrade as soon as possible, develop in a low-carbon manner, and reduce their excessive dependence on resources and energy. At the same time, home furnishing products are closely related to residents' lives. In addition to meeting environmental and safety requirements, how to reduce the excessive use of natural resources, launch environmentally friendly home furnishing products, and achieve sustainable development is also an issue that home furnishing enterprises need to continuously explore.

Home products are characterized by high discreteness, high correlation, and high complexity. The highly dispersed decision-making elements and participants during purchase lead to low marketing efficiency in the home industry. Therefore, participants in the home industry need to consider how to utilize advanced digital technologies such as big data, cloud computing, and artificial intelligence to empower marketing with technology, achieving innovation and efficiency improvements. For example, home retailers have created home design cloud services. By integrating intelligent online tools with designers, renovation companies, and home brands, they provide consumers with a display platform and space for scenario-based matching of home product sets. At the same time, they also offer more targeted product promotion and marketing services for tenants such as home brand manufacturers and distributors.