Value-led homewares specialist Dunelm has delivered one of retail’s strongest performances over the past two years. A new digital platform served it well in the pandemic and its low-cost operating model has protected margins, but as the post-Covid homewares boom relaxes amid the cost-of-living crisis will it be able to sustain its success?

Dunelm strengthened its performance over both 2020/21 and 2021/22, focusing on extending its digital capabilities, which meant when the pandemic changed the shape of retail it was able to meet the heightened demand. 

The first full 12 months of open stores for two years saw Dunelm sales rise 18% to £1.6bn in the year to July 2, 2022. This followed a 26% surge in revenues to £1.3bn at the height of the pandemic in 2020/21, driven by its online business.

 

Dunelm boss Nick Wilkinson says the operating and economic environment is “extremely challenging” but he is confident that Dunelm is “well-prepared to weather the current economic pressures”, having emerged from the pandemic as a “bigger, better business”. 

Despite an 8% drop in sales in Q1 2022/23 (to 1 October) against very strong comparatives, Wilkinson says the retailer is continuing to trade robustly, with total sales up 36% against the same period pre-Covid. 

With its staunch focus on value chiming well in the current climate – and the retailer having fared well in the previous recession – our Prospect analysts assess Wilkinson’s prognosis.

1. Ongoing digitisation making Dunelm a ‘bigger, better business’

Since taking the helm in 2018, Wilkinson has ramped up Dunelm’s technology strategy. The retailer’s online ambitions were given a serious boost a couple of years earlier when it acquired the Worldstores Group and its Achica and Kiddicare operations. 

Dunelm said the acquisition was an opportunity to accelerate the growth of its online operation, “more than doubling its size”, although the key gains were in areas like digital development and fulfilment. 

Under Wilkinson, it sold the Achica members-only home and lifestyle brand, which did not fit with the Dunelm model, and incorporated the other two businesses into Dunelm.com.  

Moving Dunelm.com to the Worldstores platform towards the end of 2019 allowed the retailer to finally provide a full click-and-collect service and make other improvements including better payment and delivery options.

It was great timing as it was critical in helping it meet the surge in online demand during the pandemic and – as Wilkinson contends – has seen Dunelm emerge from the crisis as a “bigger, better business”.  

Digital sales surged 115% to £616m in 2020/21 to account for 46% of total sales. With its stores able to open throughout 2021/22, digital sales fell back by around 10% to £554m, accounting for 35% of total sales. But this compared with nearer 15% ahead of the pandemic.

 

The retailer opened a new dedicated ecommerce fulfilment centre in Stoke, Staffordshire, at the end of 2021 and brought on a new furniture hub in Daventry, Northamptonshire, at the beginning of 2022.

While it might have been late to the party, Dunelm now has a sector-leading fulfilment offer, including same-day click and collect, with customers able to pick up “thousands of items” in as little as three hours. 

Thanks to this continued investment, Prospect forecasts that online sales will settle at around 40% of Dunelm sales by 2026/27.

2. Stores at the heart of Dunelm’s ‘total retail system’

Its 180-strong network of superstores is at the centre of Dunelm’s ‘total retail system’. 

Ongoing investment in the store network has two main purposes – to make the stores more service- and experience-oriented and to closely integrate them with the digital platform.

Despite its belated introduction, click and collect now forms an important part of the retailer’s cross-channel experience and more than a third of customers picked up additional products when collecting their orders last year. 

Many of the customers who shopped with Dunelm for the first time online during the pandemic are now shopping in store, or across both channels, which contributed to a 10% increase in shopping frequency in 2021/22.

Multichannel (and multi-category) customers shop on average five times more often and spend seven times as much as customers shopping through single channels and categories, according to the retailer.  

While it is still targeting a network of around 200 superstores, with London and the Southeast a key focus, relocations and refurbishments have taken an increased share of Dunelm’s store investment of late.

In the past year, the retailer has remodelled a number of its larger stores to extend the furniture departments, for example, showcasing more of its home-delivery range.

While it waits to learn whether customers are willing to travel further to visit these stores, it has enabled the staff within them to talk to customers and showcase the product virtually through video calls. 

 

As expected, sales densities declined sharply during the pandemic as stores were forced to close, hitting a low of £150/sq ft in 2020/21, according to Prospect estimates.

But with store sales recovering strongly in 2021/22, sales densities are estimated to have risen to a high of £215/sq ft. This is a healthy level for a value-based out-of-town retailer with such a significant online operation and we should expect to see it increase as footfall strengthens, providing a useful boost to the bottom line in tough times. 

3. Focus on ‘outstanding value’

Dunelm’s primary focus is providing “outstanding value” for its customers, giving the retailer a strong competitive advantage right now.  

The bulk of Dunelm’s product offer is own-brand, so it has been able to mitigate inflation by redesigning and re-sourcing in collaboration with its suppliers. 

Dunelm advert October 2020

The average item value at Dunelm across stores and online is £13

Spending on big-ticket items has come under pressure during the current financial crisis, but Dunelm’s value-for-money offer means it actually stands to benefit from customers looking to enhance their homes as they’re increasingly price-conscious. 

Its ‘Dun Your Way’ online Christmas page highlights decorations and candles starting from £1, for example, as well as gifts and loungewear from £5. 

In his 2021/22 results presentation to analysts at the end of September, Wilkinson pointed out that the average item value across stores and online is just £13, while furniture and made-to-measure – what Dunelm terms “considered purchases” – stand at £129. 

The retailer employs a ‘good – better – best’ hierarchy of price and quality tiers across its core product ranges, widening its appeal across a broad range of customers. 

Wilkinson says cash-strapped consumers are not only searching for the cheapest price but looking for quality and longevity in their purchases, underlining the strength of offering value at all price points. As such, the retailer also stands to benefit from shoppers trading down from more expensive rivals over the coming months. 

Widening its product offer and increasing ranges like home office by up to 60% has helped it to buck the current trend and increase its furniture sales across 2021/22. 

4. Gaining share in a large and fragmented market

Dunelm is a strong brand with broad appeal in a large and fragmented market, and it boasts a 50,000-strong product range across 30 sub-categories, but there is a lot more to play for.  

While it’s the market leader in homewares, its total share remains low at just over 10% according to GlobalData UK, and its share of the furniture market sits at just under 2%. This gives it major headroom for growth across all product categories.  

The retailer is on a drive to increase customer numbers again this year and is pivoting more of its digital teams into areas such as customer acquisition, optimisation and fulfilment efficiency. It also wants to widen the range of categories shopped and increase buying frequency.

Active customer numbers increased by 8.5% in 2021/22, with London and the Southeast accounting for 40% of the growth following a raft of store openings across this region in the past few years. All income levels and age groups contributed to the growing customer base.  

According to an internal analysis by Barclays, the number of “most valuable” customers (who shop across multi-categories and channels) grew 16% in the year and spent 6% more than last year, with 41% of sales coming from 11% of customers. 

This augurs well for future growth as the customer base is set to rise during the downturn.

dunelm5-1320x987

While Dunelm is the market leader in homewares, its total market share hovers at just above 10%

5. Making ‘every pound count’ right across the business

Dunelm’s strategy “to make every pound count” applies right across the business.

Chief financial officer Karen Witts says Dunelm is a “robustly underpinned business” thanks to its “relentless attention to operational detail” and “controlling the controllables”. 

While the integration of Worldstores put pressure on the bottom line for a prolonged period, Dunelm has continued to hone its low-cost operating model and strengthen its bottom line, making it consistently one of the UK’s most profitable homewares retailers. 

Benefiting from the robust sales growth in 2021/22, pre-tax profit of £212.8m was 35% higher than the previous year, lifting margin from 11.8% to a stellar 13.5%. The retailer said this reflected “a full year of open stores, strong gross margin and a tight operational grip on costs”.

 

As a highly cash-generative business, with a strong balance sheet, Wilkinson says it will “continue to invest judiciously during the current economic downturn”. 

Prospect’s prognosis

Dunelm is moving forward as a serious multichannel contender and looks well-placed to weather the current challenges by virtue of its strong commitment to value. 

Prospect forecasts that sales will hit the £2bn mark by 2026/27, driven by an ongoing increase in customer numbers, many of whom will be trading down from more upmarket rivals as incomes continue to be squeezed.

The onus on management will be to ensure that these customers remain loyal to Dunelm once the economic outlook improves, although previous recessions have proved that the search for value tends to become part of the consumer psyche following prolonged downturns. This suggests that Dunelm could make long-term market share gains from its less value-focused rivals. 

In the meantime, increasing scale is providing the retailer with ever more clout across its supplier base, giving it the wriggle room required in volumes and margins to navigate the choppy waters ahead. 

Prospect predicts that Dunelm will be one of retail’s winners over the next couple of years.