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From Home Furnishing Business

Navigate toward Profit

By Bob George

Staying on touch with retail metrics can turn a mediocre operation into a High Performance Company.

Finding financial prowess in the furniture retailing business can be a tricky proposition. What numbers are key performance indicators? What components of the business can add to the bottom line, and which ones will have a detrimental effect? It has been several years since a comprehensive survey of retail financial performance has been published. In fact, the National American Home Furnishings Association report was last issued in 2009 based on data from fiscal year 2008. This is the first time Home Furnishings Business has published such a comprehensive look at financial performance in the home furnishings industry. Impact Consulting, parent company of HFB, compiled the survey for the NAHFA and has continued to maintain the data since that time using the same methodology. Currently, the information is available in the company’s Best Practices application of FurnitureCore.com via subscription basis. The online information allows retailers to compare themselves to other home furnishings retailers and devise a plan on how to better manager store operations. Participating retailers submit financial information that is then matched to a standard chart of accounts to insure all expense categories are comparable. The study has been confined to traditional furniture retailers. Excluded are mass merchants, e-tailers, and vertical manufacturers, like Ashley HomeStores or La-Z-Boy Furniture Galleries, and vertical retailers like Crate and Barrel. To insure a comparable evaluation a balanced sample was selected to reflect a geographic mix, volume range, and merchandise price points.

Graphic A presents this breakdown.

Table 1 on the following page presents financial ratios for 2013. As can be seen in Graphic B (page 19), while the industry has recovered from the Great Recession kicked off in 2008, the financial performance of the furniture retail sector has not completely regained its footing. In fact, compared to 2008, the bottom line is a mere third (1.4 percent net income, 2008).

However, a significant difference arises when we analyze using different parameters like retail volume or price points. For example, let’s examine using sales volume. From the analysis in Graphic C (page 19) it can be said that it is all about volume. However, it appears there is a no-man’s land between $5 million and $25 million—operations too big to be run by an owner-manager, but without enough volume to justify a much larger organization. The following will explore the reason by each major operating rationale.

Furniture retailing has a number of elements that can contribute to or detract from revenue. Things like delivery, income and fabric protection are all considered above the line items. Smart management of these elements often defines a retailer’s success, or in some cases, failure.

Returns: Smaller retailers tend to handle many of their returns outside of their tracking systems by simply voiding the ticket or making even exchanges. The retailer at $25 million and above is more likely to record the transaction and feel the brunt of this major issue for the industry. However, retailers above the $100 million level show a significant difference. Is this an indication of tighter procedures or the introduction of a restocking fee?

Merchandise Protection: Merchandise protection, like fabric protection, is often considered to be a gold mine with the exception of those retailers in the upper to premium tier who often consider it a negative. For the midsize retailer—those with sells between $5 million and $100 million—merchandise protection is an important profitability component.

Delivery Income: Delivery income is beginning to become part of the consumer’s ire along the same lines as airlines’ charging passengers for checked baggage. However, for now, it is an important part of offsetting the delivery expense and can impact it by as much as 60 percent to 75 percent. Many high performance furniture retailers are able to offset the cost of deliveries.

GROSS PROFIT

The ongoing confrontation between manufacturers and retailers is to arrive at a selling price to maximize the volume sold to consumers. While this is a point of significant research in other retail sectors, the furniture industry is still playing a game of dare.

Retailers remain in the power position for now because few suppliers have managed to create and maintain brand names that resonate with the consumer.

Nevertheless, for many retail sectors, such as electronics and appliances with margins in the teens, the furniture industry’s gross margins are envied. The table in Graphic E (page 20) explores our current position. The information presented in Graphic E kills the myth that big retailers buy better and have better margins. However, those dealers may have a strategy of low price that consistently drives revenue at reduced gross profit levels. It’s important to point out that many vertical retailers, like

Restoration Hardware and the like, enjoy margins of 12 percent to 15 percent higher because of their direct sourcing model. Now let’s discuss how the industry makes so little profit beginning with what appears to be such a healthy margin.

SELLING EXPENSE

The cost to motivate consumers to put home furnishings at the top of his or her discretionary spending and, more specifically, at your store through advertising is the first step in the process.

After arriving at the store, sales management takes over converting prospective buyers, and keeping the sale is the task of the backend. As we discussed earlier, between four percent and six percent of revenue can be lost through merchandise returns. Such returns can be attributed to the back-end operations, as well as to the front-end floor staff.

Advertising remains a function of volume with the foundation for smaller retailers pushing their expense up ¬about two percent. However, it is important to manage advertising expenses. It’s imperative to control costs while measuring the advertising’s effectiveness on a weekly basis. The only measure is number of visits—or ups—to the store or the Web site. With such scrutiny, advertising effectiveness will improve. Weekly sales are secondary results influenced by a number of other factors.

Sales Expense includes not only the sales associates’ commission, but also sales management, bonuses/contests and similar activities. The January/February 2014 issue of Home Furnishings Business provided some significant perspective. Warehousing/Delivery completes the cycle of selling expenses, and it must be managed intelligently. Often a retailer’s upfront performance is negated by the backend if the retailer is unable to manage it effectively. If that’s the case, management should seriously consider outsourcing warehousing and delivery functions.

Hidden in the other factors is Sales Office. Retail technologies exist to eliminate the sales counter which can cost one percent or more, but can zap consumers’ excitement for the furniture purchase. Graphic F (to the left) presents this information graphically.

GENERAL AND ADMINISTRATIVE EXPENSE

To complete the selling process requires a place to conduct business (Occupancy), a management team to develop and execute a strategy, and, technology, which is becoming more and essential in controlling the overall process. In total, this expense is almost equal to the selling expense. See Graphic G on page 21. Do the larger retailers have an advantage over the smaller retailers because of volume? Not proportionately. However, the ability to attract top talent and secure the best locations is often the case. The focus is not to reduce the expense, but to make the most effective decision. We believe the expenditure for information for both systems and data will expand. Of course, we are invested in this area via our portal FurnitureCore.com, which offers business intelligence to our clients.

The importance of location which impacts occupancy cost has always been key, but it’s stepping up to be a major factor today as time-starved consumers want to find furniture retailers adjacent to their Saturday shopping routes The management team (Administrative) is a major decision and can be the difference between a $50 million retailer and a $100 million retailer. It is a matter of management talent. The decision for a $10 million retailer to hire a sales manager is excruciating, but the increase in close rates and average ticket can increase sales by 20 percent if properly managed. This is true in all areas—delivery, warehousing, and advertising. Results can be produced when someone is focused on the task. If a retailer cannot execute the administrative tasks, it makes more sense financially to hire an outside supplier. This is especially true with delivery functions where costs can be reduced and customer service improved.

CREDIT INCOME AND EXPENSE

This area of expense was, at one time, a key area of profitability for retailers when many carried their own paper. Some still operate as credit houses; however, the likes of the former Heilig-Meyers are only in the memories of the seniors of us still in the industry. Today, credit is a crucial place to control cost. Graphic H (to the left) provides the statistics.

From our perspective, credit is a selling expense that has emerged as a perceived necessity to generate consumer traffic. In our experience, less than 30 percent of consumers opt for offered credit promotions.

SUMMARY

Keep in mind; our numbers are only guidelines to stimulate thought and discussion of how to profitably run a retail operation. We caution any specific retail figures, to be comparable, must be compiled to conform to these classifications. We believe an ongoing focus on a company’s statistics is the path to high performance companies. It is not achieved in a month, but is part of a continuing process. Such a process is greatly enhanced with a membership in a retail performance group that allows for an open and frank discussion of the barriers to achieve certain objectives occurs with retail peers.

While the overall industry statistics are discouraging, there are individual retailers who achieve 10 to 20 times this performance level. We challenge you to be one of those. Home Furnishings Business is committed to providing input to your process. HFB

 

 

Best Practices

FurnitureCore’s application, Best Practices, provides an ongoing monthly measure of a retailer’s performance. No individual retailers’ numbers are shared, only composite percentage results are provided. Contact info@furniturecore.com for more information.

Want More?

A more detailed Operating Performance Report—2013 is being prepared and will be available in April. The report will detail further each expense category as well as segments by price point and region. Contact info@furniturecore.com to reserve a copy.



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