Get Behind the Numbers

June 11, 2015  by in Furniture Retailing, Industry   

By Bob George

The traditional furniture retailer appears to be stuck in No Man’s Land since the Great Recession. The industry has been slow-go trying to reach sales levels seen seven years ago.

 

Coinciding with the slow growth, profitability for furniture retailers has been remained stuck. No new merchandising strategies, like the gallery concept of the 1990s, have been implemented, and the Internet is becoming more firmly entrenched especially in some product areas. The cost of goods sold as a percent of revenue has varied little.

All of those things combined require retailers to pay attention to of all elements of business operation that contribute to cost and expense.

Last year Home Furnishings Business published its first Retail Metrics for Furniture Retailing.

With this issue comes the second comprehensive look at financial performance in the home furnishings industry via data collected throughout the year by Home Furnishings Business’ parent company, Impact Consulting Services.

This data is collected through Impact’s FurnitureCore application Best Practices, which provides an ongoing monthly measure of a retailer’s performance. This subscription-based online application allows retailers to compare themselves to other home furnishings retailers and devise a plan to better manage store operations. No individual retailers’ numbers are shared; only composite percentage results.

Retailers participating in FurnitureCore’s Best Practices submit financial information. That information is then matched to a standard chart of accounts to insure all expense categories are compatible. The study has been confined to traditional furniture retailers. Excluded are mass merchants, e-commerce retailers, vertical manufacturers like Ashley HomeStores or La-Z-Boy Furniture Galleries, and vertical retailers like Crate & Barrel. To insure a comparable evaluation, a balanced sample was selected to reflect a geographic mix, volume range and merchandise price points.

The focus of the financial comparisons is three-fold. Results are provided for all participants and reflect the performance of the entire sample.

Two additional retailer segments are featured for performance comparisons based on revenues—$5 million to $25 million and the larger $25-million-to-$100-million sales group. The groups were selected because they represent more traditional accounting practices and are consistent sources for evaluating pure financial performance.

Excluded are the mom-and-pop retailers with under $5 million in revenues as well as operations with more than $100 million revenue whose accounting practices are often driven by other objectives.

Retailers with sales between $5 million and $25 million have often grown from mom-and-pop stores and are usually very owner-focused in operations.

The larger retailers with sales between $25 million and $100 million may also reflect similar ownership, but have also developed more tiered management operations adding professional managers, for example, in warehousing and delivery functions. For these two revenue segments two best practices groups are featured—the top quartile includes the top 25 percent in performance and the best performers represent the elite top 10 percent.

The overall financial performance of All Participants is shown in Table 1.

Overview of Key Performance Indicators

While the industry has continued to grow, the profitability of all furniture retailers has declined compared to last year by 0.48 points. Gross profit tends to be slightly higher among the best performing smaller firms with sales between $5 million and $25 million, about 2 percentage points greater than all retailers.

This has always been the case with a fragmented industry consisting of a substantial number of retailers with less than $5 million in sales, which minimizes taxes. Figure A provides an overview of key indicators—gross profit, sales expense, general and administrative expense, net operating income, and credit expense.

Selling expense is consistent across the board with little variation. This category is comprised mostly of sales force compensation, advertising, and warehouse and delivery expenses. The variables are general and administrative expenses, which are better contained by the larger best performing retailers. The biggest chunks of general and administrative costs are occupancy rates of leases and administrative costs, primarily administrative and managerial salaries.

Each segment of financial performance is presented in more detail below.

Above the Line Income

Total revenue encompasses merchandise sales as well as returns, sales of product protection, and delivery income.

Returns: The thorn of merchandise returns represents about 3 percent of revenue. On paper it appears the best performing small retailers with between $5 million to $25 million in sales have fewer returns (Figure B). Many of those handle their returns outside of the tracking system with voided tickets and even exchanges. Meanwhile, larger firms are more likely to document these transactions negatively reflecting on their performance.

 

Merchandise Protection: Merchandise protection (Figure B) is an important profitability component for traditional retailers, with the exception of upper-to-premium dealers, who often consider it a negative. This income represents more than 3 percent of total revenue.

 

Delivery Income: Delivery income (Figure B) is getting harder to come by for smaller retailers, and, in general, the consumer is placing more free delivery demands on all consumer goods retail outlets. For now, many high performance retailers are able to offset delivery expense with this income which varies from 1.7 percent at best performing smaller retailers with sales of between $5 million and $25 million to more than 2 percent for larger retailers.

Cost of Goods Sold

Doubling the cost of the merchandise has been the mainstay pricing strategy for traditional furniture retailers. But to say the larger retailers “buy better” is debunked by the data. Regardless of performance, cost of goods sold accounts for about 54 percent of revenue (Figure C).

Gross Profit

The best performers in the $5-million-to-$25-million sales category maintain an additional margin point. However, the best performers among the larger retailers forego that point, recouping it in operations.

The 47 percent gross margin in the furniture industry (Figure D) is envied by many other retail sectors. Some vertical furniture retailers enjoy higher margins due to the direct sourcing models while electronics and appliance margins can run in the teens. With such healthy margins, why does the industry makes so little profit? Insight can be gained in the financials detailing how much the industry spends selling the product and running the business.

Selling Expenses

The advertising cost of attracting the consumer to the store, converting that consumer to a purchaser by trained personnel through sales, and successfully delivering that product to the consumer’s home through warehousing and delivery represents a significant 23 percent to 25 percent of revenue (Figure E).

Advertising Expense: All retail segments are spending slightly more than average on advertising with the exception of best performers in the larger $25-million-to-$100 million sales segment where advertising costs fall slightly (Figure E).

While advertising channels may differ by size of retailer, the total percent of revenue varies only slightly. Larger retailers will use more broadcast or air channels while smaller retailers rely heavily on print mediums, but the cost results are similar. Advertising represents a significant expense of about 5.5 percent to 6 percent of sales among the size segments. It is imperative that advertising’s effectiveness be measured on a weekly basis and the only measure is number of visits—or ups—to the store or the website.

 

Sales Expense: The largest component of selling expenses is the compensation cost of sales associates, as well as the cost of managing and motivating of them. Included in sales expense (Figure E) is sales associates’ commission, as well as sales management, bonuses, contests and similar activities. Overall, sales expenses run about 8.6 percent of sales. However, smaller best performing companies tend to have lower sales expenses than larger companies with sales between $25 million to $100 million that have additional layers of personnel.

Warehouse, Delivery and Service: The after-the-sale cost of warehouse, delivery and service is an advantage for retailers with sales of  $5 million to $25 million. Moving beyond the $25 million sales volume requires a different level of expectation that is just now emerging in the furniture retail industry. Overall warehouse and delivery is a significant 8.1 percent of revenue (Figure E).

Often a retailer’s upfront performance is negated by the backend if a retailer is unable to manage it correctly. As reported earlier, merchandise returns can total more than 3 percent of sales. Warehouse and delivery must be effective and if not, outsourcing should be considered.

 

Advertising Expense: All retail segments are spending slightly more than average on advertising with the exception of best performers in the larger $25-million-to-$100 million sales segment where advertising costs fall slightly (Figure E).

While advertising channels may differ by size of retailer, the total percent of revenue varies only slightly. Larger retailers will use more broadcast or air channels while smaller retailers rely heavily on print mediums, but the cost results are similar. Advertising represents a significant expense of about 5.5 percent to 6 percent of sales among the size segments. It is imperative that advertising’s effectiveness be measured on a weekly basis and the only measure is number of visits—or ups—to the store or the website.

 

Sales Expense: The largest component of selling expenses is the compensation cost of sales associates, as well as the cost of managing and motivating of them. Included in sales expense (Figure E) is sales associates’ commission, as well as sales management, bonuses, contests and similar activities. Overall, sales expenses run about 8.6 percent of sales. However, smaller best performing companies tend to have lower sales expenses than larger companies with sales between $25 million to $100 million that have additional layers of personnel.

 

Warehouse, Delivery and Service: The after-the-sale cost of warehouse, delivery and service is an advantage for retailers with sales of  $5 million to $25 million. Moving beyond the $25 million sales volume requires a different level of expectation that is just now emerging in the furniture retail industry. Overall warehouse and delivery is a significant 8.1 percent of revenue (Figure E).

Often a retailer’s upfront performance is negated by the backend if a retailer is unable to manage it correctly. As reported earlier, merchandise returns can total more than 3 percent of sales. Warehouse and delivery must be effective and if not, outsourcing should be considered.

 

Store Sales Expense: A small, albeit important selling cost, store sales expense, is a full percentage point lower by the best performing retailers with sales between $25 million and $100 million compared to the best performing smaller companies with sales between $5 million and $25 million (Figure E). Retail technologies exist to eliminate the sales counter, costing and additional 1 percent or more. Not using technology and requiring the consumer to check out can significantly impact the retail experience.

 

 

General and Administrative Costs

While not directly touching the selling process, the final piece to profitability is the control of general and administrative expenses. General and administrative expenses are, for the most part, fixed expenses and must be controlled relative to the potential volume.

Primary components include occupancy costs—the place to conduct business and the costs to keep it open; the cost of the management team that develops and executes a strategy, and finally the technology and information systems that are essential in controlling the process.

These expenses can be as much as the selling expense in some cases (see previous Table 2) and generally vary significantly by the size of the retailer, especially in terms of occupancy and administrative costs (Figure F).

Store Sales Expense: A small, albeit important selling cost, store sales expense, is a full percentage point lower by the best performing retailers with sales between $25 million and $100 million compared to the best performing smaller companies with sales between $5 million and $25 million (Figure E). Retail technologies exist to eliminate the sales counter, costing and additional 1 percent or more. Not using technology and requiring the consumer to check out can significantly impact the retail experience.

General and Administrative Costs

While not directly touching the selling process, the final piece to profitability is the control of general and administrative expenses. General and administrative expenses are, for the most part, fixed expenses and must be controlled relative to the potential volume.

Primary components include occupancy costs—the place to conduct business and the costs to keep it open; the cost of the management team that develops and executes a strategy, and finally the technology and information systems that are essential in controlling the process.

These expenses can be as much as the selling expense in some cases (see previous Table 2) and generally vary significantly by the size of the retailer, especially in terms of occupancy and administrative costs (Figure F).

Information Systems: Technology is a growing cost at 1 percent of revenue (Figure F) regardless of company size. The successful implementation and ongoing maintenance of systems necessary to run a business smoothly can be painful at times but are critical to profitability. The larger retailers investing more in information systems have achieved an advantage in processing the customer order after the sale, often by transferring the process to sales associates.

Occupancy: The best performing larger companies enjoy 4.7 percent occupancy costs, compared to 7 percent to 8 percent for all participants or smaller retailers (Figure F). Often these larger retailers have the upper hand with the ability to secure the best locations. Time-starved consumers are placing a priority on location wanting to shop closer to home or visit retailers along their normal shopping routes.

Administrative Expense: The largest chunk of administrative expense comes from management salaries along with bonuses, professional fees, and insurance. Overall administrative fees can total 8 percent to 10 percent of the business in the best performing companies. Larger companies do a better job of controlling these costs than the smaller retailers by 1 percent of total revenue or more. The decision to hire managerial positions is a hard one for many companies, but can produce big results with the proper personnel.

Credit Income and Expense

Retailers acting as credit houses are disappearing and what was once a key area of profitability is now a crucial place to control costs.

Net credit expense totals 3 percent of revenue for the best performers regardless of size and 3.5 percent for all participants (Figure G). 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.

Net Income: Overall furniture retailers are struggling to make a profit. However, the larger best performing group with sales between $25 million and $100 million is achieving net incomes above 6 percent (Figure H), almost double the best performing smaller retailers with sales between $5 million and $25 million.

In 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 membership in a retail performance group that allows for open and frank discussion with peers of the barriers to achieve certain objectives.

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.