Bet on Black

March 21, 2014  by in Business Strategy, Industry   

Let’s talk about ways to keep furniture stores out of Red.

“Lowest price” might appeal to consumers shopping for furniture, but the competition among home furnishings retailers to meet that goal is killing bottom lines at a lot of stores. Particularly in case goods, our product essentially has seen price deflation over the past two decades. Over that time, furniture’s consumer price index is flat, while other consumer goods sectors’ have risen. This article takes a look at ways retailers can add to the top of the line—and maybe plug a few cracks where money is leaking and shaving already slim margins—with a particular focus on merchandise protection sales, delivery and returned product.

SELLING PROTECTION

A dirty little secret about furniture retailing: Some stores’ margins are so slim that the only way they make money is through the sale of product protection plans. We’ll spend some time here, since even if your store isn’t desperate, those plans can give you a little more breathing room on the bottom line. Protection is a concept with which other sectors are doing pretty well.

“I purchased a television from Best Buy a few weeks ago,” said Joe Milevsky, CEO of Acworth, Ga.-based consultancy JRM Sales & Management. “I asked about the percentage of customers who buy warranties.

They said it was 12 percent of most big-ticket purchases—not even big-ticket, anything over $50.

“To me, it’s providing a high level of service, and it’s necessary addition to profit for any retailer. I don’t believe it should be forced on somebody, but it should always be presented in a positive light.” John Egger, CEO of Profitability Consulting Group, is blunt with his clients about protection sales.

“If your team isn’t averaging closing on protection for 4 percent of sales, you have a problem,” he said. “It’s a profit center that takes extreme discipline. It can’t be an add-on, it needs to be presented in an educational way.”

Egger’s last point is of particular importance, and one naturally shared by providers of product protection. We asked a few about how retailers can get more out of their protection sales. They agreed that slapping a plan on the table at the end of the sales process is not the best strategy.

That makes it a hard sell, and consumers shy away.

“Where many store associates fall short is they try to make the protection sale an add-on,” said Chris Taylor, director of sales for the furniture and rent-to-own channels at Protect-A-Bed, whose mattress and bedding protection products are in more than 7,000 storefronts nationwide. “To me, the way to do is that the same questions you use on educating the customer to buy furniture are the same ones you use to sell protection. ‘What don’t you like about your existing mattress? Part of the reason you’re here looking for a new mattress is that you didn’t have a protector on the old one.’ It’s about getting more life out of your mattress.

“The cardinal sin—you make the sale and then ask, ‘Oh, did you want to add a protector to that?’ Use the questions you’re asking to encompass all the consumer’s needs. It’s all one sale.” Bringing up protection at the end of the sale rarely succeeds, agreed, Tim Vaughan, national accounts sales director at Guardian Products. He suggests incorporating protection when a salesperson is pre-qualifying a customer’s needs and/or describing what the store offers—in home design, next day delivery, etc.

“A savvy salesperson is proud of their store’s offerings and basically assumes the protection sale while asking questions whose answers help the customer realize the need for protecting their investment,” Vaughan said. Alan Salmon, president of Montage Furniture Services believes sales associates must focus on the true value of the protection plan.

“Do not oversell it—‘don’t worry, it covers everything,’” he said. “No, it doesn’t.

Everyone loses in that scenario, except the RSA. There is coverage in there that will be of value to the vast majority of people at some time during the term of the plan. If RSA’s do their discovery effectively they should tailor the value to the needs of the consumer.”

CLOSING ON PROTECTION

We asked protection vendors if they have a sense of the close rate on protection sales as a percentage of total sales for their clients.

“We have some ways of ball-parking performance based on a dealer’s sales, or estimated sales, and most dealers are pretty open about their performance,” Salmon said. “The most common way this is measured is as a percentage of total sales rather than an attachment rate, i.e. five plans sold on 10 furniture sales equals a 50 percent attachment rate.

“As a percentage of total sales, 5 percent is considered good performance, and 7 percent is leaderboard. Our best guess at an industrywide level is 3 percent of sales.” Guardian’s Vaughan gave a similar number for a likely average nationally—2 to 3 percent—for gross sales of furniture protection sold on sales of all furniture, including upholstery, case goods, area rugs.

He added that mattress accessories/pads are a higher percentage relative to the mattresses sold—especially when in a specialty mattress.

“All retailers value and therefore promote protection differently,” Vaughan said. “Some stores sell 6 percent to 9 percent of total furniture sold, and some are 1 percent or under.”

Taylor at Protect-A-Bed said the answer varies widely, and on a number of issues: whether the retailer’s measuring the performance of the category; and the compensation model that is or is not in place to encourage protection sales. He added that Protect-A-Bed’s offerings don’t vary from the traditional protection model.

“Our approach is that (bedding protection) is a product driven sale, and it’s good for mattresses the customer already owns,” he said. “As a product-focused provider, we’re looking to give a tangible benefit. We give the consumer a lot of options to choose from. There’s no if in what we do— here’s what happens when a human body sleeps on a mattress.”

How can retail sales associates handle objections to adding protection to the consumer’s purchase?

“That’s where the training, and the retailer’s commitment to the category, comes in,” Taylor said. “If you don’t set expectations, it gives salespeople little incentive to overcome objections.”

He also believes attachment rates don’t tell the whole story. “There are two key factors: average unit selling price and attachment rates,” Taylor said. “The one metric that captures both those factors is the percentage of retail sales. Divide Protect-A-Bed sales by the value of overall business, the sales of the category that it was designed to protect.

“Why that’s important, generally speaking, is that the margin on protection business us higher than many other categories on the floor,” he said. “If you put importance on it, you’ll get performance out of it.”

Customer objections to buying a protection plan generally go back to the core issue of not incorporating the idea early on in the sale of the product to be protected— or not mentioned at all.

“Sometimes customers have objections, but most of the time, when it’s not sold, it’s because it was never brought up,” he said. “That’s the number one reason protection doesn’t get sold.”

He believes its important to acknowledge objections along the lines of “Yes, we have heard about other negative experiences but we here at …”

Break down the cost in little bites: Point out that protecting the sofa for five years is $1 per month; and that furniture is frequently the shoppers third or fourth largest investment—they insure their house and car don’t they?

“Reemphasize the biggest features for that particular customer, which should have been discovered through successful pre-qualifying,” Vaughan said. “And again, the protection concept cannot be introduced at the end of the sale—customers are turned off.”

Salmon said if sales associates have done the discovery properly they ought to be able to handle much of what comes up in the way of objections. It also helps to find some success stories previous shoppers have had.

 

GO YOUR OWN WAY?

Some retailers are exploring the possibility of formulating their own protection plans.

“The advantages are that they may save money up front, and they can treat their customers differently if they’d like,” said Vaughan. For example, “Mrs. Smith has been buying from them for 20 years and she spills bleach on her sofa (no one covers) but she wants it taken care of—they can.”

There are challenges there, he added. Does the retailer have the customer service staff there to handle all claims? Will they have to say “Yes” more often—when they say “No,” the retailer gets the blame, not Guardian or a similar third-party provider. “Maybe most important is, do the states they sell in require the programs sold to be underwritten by an insurance company, if the retailer should go out of business?” Vaughan said. “This is an increasing mandate from state commissioners. Is the retailer aware of and capitalized for this?

“We’ve been around since 1977, and just in the last 18 to 24 months we’ve gotten underwritten. There are 16 states where you can’t do business if you’re not underwritten.”

Montage’s Salmon believes the topic of formulating their own protection plans rates a separate article.

“Suffice it to say that there are pros and cons to a self-insured strategy—you own the profits, but you also own the losses,” he said. “From what I have seen and heard, the concept is being sold by some as a no-lose option, but this business is not as simple as some would have dealers believe.”

DELIVERY: TO CHARGE OR NOT

With retail margins what they are, is “free delivery” a concept that’s outlived its time?

Charging for delivery is a scary step for some retailers, but they might take heart from airlines—with few exceptions, you won’t check a bag on an airplane without paying a fee. There was a lot of grumbling, but now its par for the course. If you offer free delivery, make sure you can afford it.

Third-party delivery services “are not running a company for charity, and if you farm it, they’re going to charge enough to cover their expenses,” noted JRM’s Milevsky. “A lot of retailers don’t treat delivery that way. What I see, and that’s from 100 financial statements I look at, is that the percentage (of furniture retailers) that charge anything is low. I’d say the percentage that charge enough to cover the direct expenses of delivery and the indirect cost of things like management’s time is lower.”

There are real costs involved that the retailer has to recoup in some way: fuel, truck maintenance, time for two delivery people, the list goes on.

“We’ve shifted 78 clients to charging for delivery, and not one has gone back,” said Egger at PCG. “Delivery should be a profit center, not a break-even.” Milevsky also believes delivery can be a profit center. Retailers need to break down those costs and develop a charge formula. “That includes accounting for any revenue from delivery charges, payroll for delivery personnel, expenses for running a truck to the customer’s home, and management costs in terms of time,” he said.

“Look at it as a separate P&L statement. A lot of (retailers) rationalize that they can’t charge for delivery because their competition doesn’t do it.

“For my clients, if their margins are inadequate, I’m going to tell them to charge enough for the product to make a decent margin, and then charge for delivery to cover what they’re spending there.” Retailers need to get the full picture of delivery costs, and that includes reading some fine print, said Dan Schneider, CEO of SIB Development, Charleston, S.C.

“They have to really understand their truck leasing, what’s in the lease, what’s not and the extra costs involved,” he said. Also, beware accepting your current arrangements out of force of habit.

“Say a retailer got their first and second trucks from so-and-so, and they’re getting their 100th from the same guy,” Schneider said. “The furniture business is such a legacy business—multiple generations working for the store.

“They’ve formed the same type of relationship with some of their vendors. They’ve been working together so long that they assume they’re getting the best deal, and that’s not always the case.”

PRODIGAL PRODUCT

Merchandise returns leach money out of retail operations in several ways—time, labor and fuel to pick the item up from the customer; a piece of furniture that will only go at a damaged-goods price if it can be sold at all; plus the more intangible aspect of customer goodwill.

Egger believes minimizing return goods starts at the back end. “If 10 percent of your deliveries require a trip back to the house, that’s huge overhead,” he said. “As independent retailers we have to be more than gracious—we have to be quick and decisive. And you can’t get better advertising than a customer who’s satisfied the first time around.”

Egger suggests 98 percent as a perfect delivery goal: “If you fall below 95 percent, you’re not getting it right.” It’s not all on the back end. Be mindful of overselling on the sales staff’s part.

“What are they telling people you can actually do and not do?” Egger said.

Milevsky said his clients understand the importance of taking the time up front to get it right the first time. Inefficient delivery operations, last-second add-ons add to cost. Are you “selling on approval”?

He also believes that what happens on the sales floor can impact the level of returns. Beware sales associates creating unreasonable expectations on the customer’s part.

“The salesperson says, ‘If you’re not happy, we’ll pick it up,’” he said. “It makes the sales process easier, but adds a lot of stress to the rest of the operation. … A lot of the issues on the delivery side of the business are created by over-selling by the salesperson.”

There’s an educational aspect to selling furniture, especially wood furniture that can prevent returns. “For sure it’s something we have to watch and have to understand how to deal with,” Milevsky said. “If wood looks different than it did in the showroom, that’s nature’s fault.” HFB

Margin on Merchandise

There’s margin, then there’s margin. Operating margin for the entire operation? That’s easy. Determining margin down to each vendor, product category and individual item? Today’s operating systems have the ability to sort that data, but there’s a lot of fine print to read. Read it anyway. JRM Sales & Management CEO Joe Milevsky said furniture retailers should set margin goals for overall business, by category, and by individual product from each vendor, based on what the market will bear.

The number of vendors even a small furniture store might carry can make for a lot of homework on management’s part. “I look at the appliance experience, where you have a handful of manufacturers, and they own everything,” Milevsky said. “You buy a Kitchenaid or Jenn-Air? Guess who owns that—Whirlpool. “A furniture dealer has thousands of resources to choose from, and one problem is we tend to make it more complicated than we need to when we’re putting a package together,” he said. “With the exception of a handful of names, the ‘brand’ is not very important to consumers. She wants something that looks good and will last.”

The good news is that once you know which products are making money on you floor and which are not, there are a lot of choices from which to choose in finding new vendors who might offer more margin-friendly pricing and terms.

“I believe in allegiance to vendors, but if I can’t get the margin I need out of a product, I’m going to look for what I need until I find it somewhere else,” Milevsky said.

John Egger, CEO of Profitability Consulting Group, tries to get retail clients to carry as much private label merchandise as possible.

The idea is that exclusivity allows a margin bump since the product is unique to the store—or at least in the market it serves. When it comes to making more money on each sale, though, it’s

“Retailer, Heal Thyself.”

“The worst person about getting margin is often the store owner—90 percent of the time, he wants to be the cheapest guy in the market,” Egger said. “Owners and salespeople have to realize that if you’re the cheapest on every item in the store, you’re likely to go broke.”

PARTNERING WITH VENDORS

Dan Schneider, CEO of SIB Development, suggests looking for a landed price on goods from vendors to make sure retailers know how much they’re paying for freight. “Can you negotiate terms to get a discount for paying in 10 days or COD?” he said. “There might be manufacturers who need the money right now who would be willing to give up a few points.”

Retailers also can improve margin by honing in on their sales processes—and some vendors are looking to speed that along. Take mattress vendor Kingsdown. Bedding is the most profitable, quickest-turning category overall in the home furnishings sector, but there’s always room for improvement.

The vendor’s “Bed Match” point-of-sale program, in conjunction with a detailed sales process, analyzes a shopper’s size, sleeping habits, particular aches and pains, and preferences to suggest specific mattresses that fit their needs. “The consumer can get fitted to the right bed with measurements based on real science,” said Kevin Damewood, Kingsdown’s executive vice president of sales and marketing. “We’ve found that approximately 60 percent of the people who try this process buy the bed; and the average sale is around $2,700 for a queen size. “At wholesale, the average cost of the product we’re selling for Bed Match is $600 to $625 a piece, so we’re aiming for higher tickets at higher margins.”

When the process is followed, Damewood said the conversation with the consumer doesn’t mention price until a specific mattress and alternatives are found.

In addition, retailers participating in the program can bring a competitor’s mattress to Kingsdown for analysis—with the competitor present at the test—and put that information into the Bed Match system for use at retail.

“We don’t want consumers to think this is contrived science,” Damewood said. “The consumer typically hates shopping for mattresses because they worry about pressure from commissioned salespeople, and so much of the product looks the same.” He identified several types of consumers for bedding: 35 percent to 38 percent of consumers are value shoppers that don’t really care what they sleep on; 15 percent are a luxury brand buyer that will always buy the best; and another 35 percent are buying a new mattress for a health issue, a category that continues to grow.

“To build margin, what you want to do is sell the highest quality bed you can within those categories,” he said. “If retailers continue to improve their sales process, they’ll sell more and have happier consumers. With the Internet and blogs the way they are today, having a happier consumer is a very important thing.”

Plugging the Leaks

There are more ways money can drain from a retail operation than Dan Schneider can count. In most cases, the remedy boils down to paying attention.

Schneider is CEO of SIB Development, a Charleston, S.C. - based consultancy specializing in fixed-expense auditing and cost reduction consulting.

Furniture retailers are in the business of selling furniture, and top management always pays attention to aspects of that business such as buying goods and merchandising those goods on the floor. Schneider said to beware letting money trickle away by ignoring such “non-core” costs as phone bills, trash bills or monthly maintenance contracts on, say, copy machines.

“Owners often put things like that in the hands of a middle manager with no fiduciary responsibility,” he said. “When you add these spends up it can be tens of thousands of dollars.” Say that person actually does a good job negotiating contracts and payments for services. “You have cases where they never communicate that to accounts payable,” Schneider said. “They have to tell the person cutting the check to be aware of new pricing.”

NICKELS AND DIMES

Schneider said bank fees are something many retailers pay little attention to; or if they do, they might be scared of riling the bank if they think they’re too high.

“Sometimes you get a great rate or line of credit,” he said. “To get that rate you’re required to bank with them, but you might be getting nickeled-and-dimed on ‘treasury fees’ like transaction processing charges.”

How well do you understand the ad rates for you print and billboard advertising?

“You might have a marketing person doing that buying, but they might not have fiduciary responsibility,” Schneider said. “You want a finance person involved in the process. Also, marketing people are creative, they aren’t numbers people.”

And while everyone wants to trust their employees, make sure they’re always working for your business’ benefit, not the benefits sometimes offered by service providers wanting to maintain the account: “Maybe they’re enjoying free tickets to sporting events in town,” Schneider said.

Flipping that coin, Schneider’s seen situations where a service vendor also was a customer at the store. Don’t feel too beholden.

“You might have gotten $1,000 from that sale, but over the years you might be saving $10,000 working with someone else,” he said.

FINANCING OPTIONS

“A lot of retailers leave money on the table by not offering a secondary financing option,” Schneider said. Say a person doesn’t qualify under your regular financing package. “There are plenty of financing alternatives to explore that will handle that business,” he said. “The customer gets the furniture— even if at a higher rate—and you get the sale. You’ve already spent time and money on your marketing and advertising to get them in the door.

If your margins are down 10 percent and you’re letting 30 percent of your customers walk because they don’t qualify, you can offset that right there with a secondary option,” Schneider said Plugging a store’s money leaks can involve very basic things. Take utilities.

“Put Wi-Fi thermostats in all your stores to make sure the heat’s not running all night,” Schneider said. “That cost is about $100 a thermostat—the technology has decreased in price so much. That alone can save thousands of dollars.”

 

More on Delivery

Making the call on whether to perform your own delivery or employ the services of a third party to get the customer orders to their homes depends on two things.

The first—your target for the percentage of sales delivery should cost (in Impact Consulting’s Best Practices survey that is 3.56 percent). The second is whether your own delivery operation makes that goal on a consistent basis. If the answer is “no,” a third-party carrier could well be worth looking into.

“The driving factor is cost,” said Charles Johnson, president of Diakon Logistics, Manassas, Va., whose home-delivery customers include a number of top 100 U.S. furniture retailers. “Is it cheaper to outsource or have your own in-home delivery?” Johnson believes retailers have to look at both “hard” and “soft” costs when making the call whether to keep deliveries in house, or outsource them.

Hard costs include trucks and maintenance, labor, workers compensation, damages to product and insurance. “If an employee drops a $2,000 sofa and it cracks, the retailer eats that,” Johnson said. “If we do it, we pay for it,” adding that an exception would be if there’s a problem with a product that’s contracted for delivery “in the box.”

“Soft” costs aren’t as apparent, but retailers should consider them, especially if they want to manage delivery in house.

“If you have a warehouse general manager who has 40 home delivery people running 20 trucks a day, that takes up a lot of that manager’s time,” Johnson said.

Retailers need to factor that time as a portion of that manager’s salary in gauging the true cost of delivery. The same holds true if someone is doing double duty on delivery and other functions in the business.

REMOTE CONTROL

Control over the delivery process is another issue to consider. “Are you willing to give up control for a third party to be the last person to touch the furniture?” Johnson said. “That’s when choosing the right prospective partner is important.”

A good third party partner’s delivery personnel work for the retailer, as far as the consumer is concerned; and adopt the customer’s delivery process and standards as its own.

“If retailers create a true partnership, that control issue shouldn’t be such a concern,” Johnson said. “Their requirements are our requirements.

They set the standards, and we live by them.”

IN GENERAL

Johnson had suggestions for retailers looking to hone their delivery operation.

“The best measurement of your delivery expense is to look at it as a percentage of delivered retail sales,” Johnson said. If you’re looking at delivery cost as a percentage of overall revenue, which might include product protection, warranties and interest on private paper, you aren’t getting a true picture.

Taking delivered sales, say your goal is to keep delivery cost at 5 percent of those sales. If you’re going over your target, that’s when you look for problems, and if you consistently can’t meet that figure, it might be time to consider working with a third party.

Watch for how other numbers can impact delivery cost, as well, Johnson suggested. Take average ticket. For hypothetical purposes, say one year you had $100 million in delivered sales with an average ticket of $2,000; and the next year you had the same sales with an average ticket of $1,800. That equals more deliveries, with a corresponding increase in your delivery cost percentage.

Multiple deliveries on the same order are a no-brainer when it comes to driving up delivery cost. Maybe the product was out of stock or there was damage; perhaps the sales associate wrote up the wrong box spring for a mattress.

“Some retailers say they’ll eat that cost, but they need to recognize it,” Johnson said, adding that retailers should choose their battles on this topic. “When you make a decision to make a multiple delivery, is it a $600 order or a $4,000 order?” Do you deliver product before taking it out of the carton?

“If the retailer isn’t doing a robust quality control check when a container comes in, say opening one in 10 boxes before authorizing the load for delivery, they can see some return trips,” Johnson said.

Delivery is all about productivity, and if you’re not routing efficiently, you’ll make more trips, or need more trucks.” Johnson suggested that retailers considering one-day delivery perform a ZIP code analysis of where they’re taking 90 to 95 percent of their deliveries.

“You might find that in ZIP code X, you made 10 deliveries last year,” he said. “Your salespeople need to explain if someone lives outside that area, then they’re looking at next-day or five days depending on your operation.”

And, if you offer same-day delivery, actively promoting that service can save money. It might seem counterintuitive, but Johnson said getting the word out on the service increases delivery efficiency by increasing the density of orders going out for same-day delivery. If one customer a day wants it that day, the retailer might have to send a truck out for just a single stop.

Another factor Johnson said to consider with delivery is the number of days in the week when service is offered. “Let’s say you have 50,000 deliveries a year and your offer sevenday delivery,” he said. “If you scale back to six days, you might need more trucks, but they’ll have more density; and instead of going 10 miles per stop, you might be going seven. “You also don’t have warehouse operations, product inspections and other related functions seven days a week,” Johnson said. “You reduce your overhead because you don’t have that staffing seven days a week.”