Power Play

October 16, 2015  by in Business Strategy, Industry   

Furniture retailers continue their march to expand into new markets. Are any bold enough to make a push for a national presence?

 

Since the furniture industry’s emergence from the recession, retailers have been on the move plotting expansion plans, opening stores in new markets and gobbling up real estate in popular power centers.

The industry is back, and retailers are making bold moves to capture consumer dollars.

Analyzing the growth strategies of some of the industry’s larger regional chains, begs the question as to whether or not a multi-line, national furniture retailer could emerge on the U.S. landscape.

Not since Heilig-Meyers has the industry seen a national furniture chain. Prior to its bankruptcy filing in 2000 and eventual liquidation, the retailer had more than 1,000 stores across the country. The chain’s overexpansion could have been the proverbial straw that broke the business.

Is there a retailer amongst the industry ranks who could make such a power play by rolling out a successful plan that incorporates smart marketing, spot-on merchandising that translates across regions and a logistics plan to hold it all together? Could it work? What would such an animal even look like?

“The typical reason for a national chain is the economy of scale to allow efficiencies in product procurement, advertising and other functional areas,” said Bob George, managing partner of Impact Consulting Services, parent company of Home Furnishings Business. “With furniture retailing there may be a point of diminishing returns well before national distribution.” 

George points out that while vendors always want to minimize, regional taste differences abound for product styles and designs. “This is quite evident in our consumer product testing,” he said.

Last year, the industry witnessed a number of regional players set plans in motion to expand, broadening their reach into neighboring markets. Notably, Nebraska Furniture Mart made the daring move to jump across market lines into the Dallas market with its fourth superstore located in The Colony, Texas. The 1.85 million-square-foot complex continues to generate buzz and consumers are still showing up in droves five months after the May grand opening.

This year is shaping up a bit differently, and we note a number of powerhouse regional players inching into other markets.

Each of the movers could cause a bit of disruption in each of their targeted new markets.

“The impact of a larger national player entering a market that has a dominant regional player is typically a loss of 10 percent to 15 percent market share to that retailer,” George said. “This is not enough to remove a regional retailer’s dominance, but it is enough to weaken the regional retailer’s financial performance.

“The major question is: At what pace can a larger retailer expand without overloading its infrastructure,” he added. “The desire is there, but reality sets in.”

Four major retailers are marching forward with full force expansion plans. Two of them—Rooms To Go and Bob’s Discount Furniture—operate in the promotional and middle price points. The other two—Havertys Furniture Co. and Raymour & Flanigan—deal in the upper middle to upper price points.

These four retailers—the ones we see as having the greatest potential for a national presence—should have their sites set on the markets with more than $100 million in sales. According to George, these markets represent 65 percent of the overall market.

Examining the promotional to middle price point market first, Rooms To Go and Bob’s Discount Furniture collectively own about 10 percent market share in those price ranges in their respective markets, George points out. Looking at the middle to upper price ranges, Havertys and Raymour & Flanigan control about 6 percent market share.

“Each of those percentage marks are within the sweet spot for profitability,” George said.

The map above shows the markets in which Rooms To Go and Bob’s Discount Furniture currently operate. It also outlines the markets ripe for the plucking and ready for expansion.

 

Rooms On the Move

Seffner, Fla.-based Rooms To Go currently operates 132 stores in 60 markets across 10 states, but the retailer has ambitious plans for growth in current markets and beyond that are tied to the expansion of its network of distribution hubs.

The retailer’s 1.45 million-square-foot distribution center and showroom on Interstate 95 in Dunn, N.C., is nothing less than impressive in its presence. Product started flowing into the center last month and is expected to be ready for shipping by the end of the year.

The compound includes a 60,000-square-foot store set to open during High Point Market.

Earlier this summer, privately held Rooms To Go expanded its Lakeland, Fla., distribution center and also built out its distribution center located in Katy, Texas, outside of Houston. Consideration is being given to expanding a Dallas-area center, as well.

Over the next year and a half, Rooms To Go plans to open 11 stores in its current markets. Cities on the list include Atlanta (a replacement store), Nashville, Tenn., Orlando and Fort Lauderdale, Fla. Texas stands to gain Rooms To Go units in San Antonio, Austin, Dallas and Houston during that time frame, too.

New stores are in the planning stage for South Carolina and Virginia.

 

My Kind of Town

Bob’s Discount Furniture continues its march into the Mid-Atlantic and Midwest by recently opening its 63^rd store as it pushes into Pennsylvania. Located in Reading, Pa., it is one of three stores the retailer has opened in Pennsylvania and New Jersey this summer and fall. The retailer currently operates 63 stores in 27 markets throughout 11 states.

Up next—the Chicago market, the retailer’s most western reach yet.

Earlier this year, Bob’s Discount Furniture expanded to the Midwest area by leasing a 751,966-square-foot distribution center near Chicago in the Heartland Corporate Center in Shorewood, Ill. It is Bob’s Discount Furniture first Midwestern distribution center and the retailer expects to occupy it by the fourth quarter of this year.

“We’re delighted to secure this much first-class space in such a desirable location,” Kaufman said. “The facility will support our exciting expansion plans into the greater Chicago market.”

Bob’s Discount Furniture will expand into the Chicago area with five stores in the first half of 2016. The Shorewood, Ill., center will service the new stores.

“This is an exciting time for us,” said Bob Kaufman, co-founder of Bob’s Discount Furniture. “We’ve been embraced whenever we enter a new market and success breeds success. People like value and we’re a value store.”

George points out that moving beyond a 200-to-400-mile radius from a home base location calls for an additional warehousing and delivery module. “Once established, the future geographic area can be absorbed,” he said. “Bob’s large warehouse signals more than just Chicago’s five planned stores.”

Boston-based private equity firm Bain Capital purchased Bob’s Discount Furniture in 2013 in a $350 million deal with plans to expand the business into new markets. The retailer, known for its odd but effective television commercials that pin the Bob-O-Pedic against brand name Tempur-Pedic, had grown by about two stores per year since Kaufman co-founded it in 1991 with his cousin, Gene Rosenberg, in Newington, Conn., but it has quickly seen expansion into the Chicago, Philadelphia, Pittsburgh and Baltimore markets.

Kaufman sold a majority stake to private equity firm Saunders, Karp & Megrue, which was later acquired by Apax, in 2005. It was KarpReily/Apax that later sold the majority stake to Bain Capital.

The Bain Capital deal was about a growth strategy. Bob’s Discount Furniture had 47 stores when Bain Capital acquired majority ownership, and has expanded by 16 stores in the past two years.

“There’s a real opportunity to grow this business substantially,” said Tricia Patrick, a principal at Bain Capital. “We believe in Bob’s Discount Furniture’s quality furniture at deep value fills an important need in the market. With strong growth prospects, we see no reason why Bob’s could not grow to be a nationwide chain.”

However, the next frontier for Bob’s still remains unmentioned.

The private equity firm has vast experience purchasing well-known retail companies.

“Bain’s been investing in the retail business for decades,” said Ted English, Bob’s CEO. “Their expertise coupled with our expertise makes a great marriage as we grow the business and take it to new places. Bain brings the experience and resources we need to support our continued expansion to serve more customers in more places, and provide opportunities for advancement for our people.”

Kaufman has remained the face of the company since Bain Capital’s acquisition and English remained as CEO. The retailer hired William Bracker as vice president of marketing in July to help guide the brand as it grows and expands into new markets. Bracker was hired at the time of this rapid expansion for Bob’s Discount Furniture, which opened four stores Memorial Day weekend in the greater Pittsburgh and Baltimore areas.

“We continue to be very excited about the long-term growth prospects for Bob’s and have been thrilled with our partnership with Ted and the entire Bob’s team thus far,” Patrick said. 

According to the Motley Fool, Bob’s Discount Furniture will most likely remain under private equity ownership for the near future, as the typical holding period for a private equity firm is five to seven years. Bain Capital hasn’t disclosed its exit strategy, whether it will be to IPO Bob’s Discount Furniture or sell it to a rival furniture retailer, but the possibility remains that Bain Capital will choose to IPO Bob’s Discount Furniture as it did with Dunkin’ Brands Group and Michaels Stores.

Southern Ways

Havertys Furniture Co. has opened two stores in the new markets of Rogers, Ark., and Waco, Texas, and one in Southeast Florida in Coconut Creek, Fla., during the first six months of this year. Its store count was 122 at the end of the second quarter of this year, compared to 118 during the same period last year. The retailer operates in 72 markets in 16 states.

“We are encouraged by the improvements in the macro environment in both housing and wages, key drivers of our business,” said Clarence Smith, chairman, president and CEO of Atlanta-based Havertys. “We have strengthened our brand in existing markets and have expanded into new communities.”

Smith explains Havertys is having consistent success in its custom upholstery business and it has increased by double-digits for eight of the past 10 quarters.

“Our free in-home designers’ consultations are generating business in the near term and establishing relationships for future sales,” Smith said. “As we further separate ourselves from the promotional furniture stores, we believe the on-trend customer will continue to identify Havertys as their preferred store.”

Havertys expects to increase its selling square footage approximately 3.2 percent this year based on increasing its store count by a net three locations. Its total capital expenditures are estimated to be in the $32-to-$33 million range this year depending on the timing of spending for new projects.

The publicly traded retailer opened its first Fort Lauderdale, Fla., store in late August after investing approximately $3 million while converting 50,000 square feet of a former Carls Furniture building into a newly designed store.

Havertys signed two leases to take over two former Carls Furniture stores in Fort Lauderdale, Fla., and Coconut Creek, Fla. Carls Furniture closed the last three of its regional stores in June 2014 after 73 years as a South Florida furniture mainstay. 

 

Northeastern Powerhouse

Liverpool, N.Y.-based Raymour & Flanigan is the quiet giant in the Northeast who continues to methodically plot its expansion. The retailer has 110 stores, including clearance centers, in seven states covering 30 markets. The state of New York is home to 52 locations; Pennsylvania has 20 and New Jersey has 19 Raymour & Flanigan stores. Other outlets are in Connecticut, Rhode Island, Massachusetts and Delaware.

The retailer’s growth historically has come through a combination of acquisitions and store openings. In the 1990s, the company expanded out of its home state into New England, New Jersey and Pennsylvania when it bought the Furniture Unlimited stores.

Between 2000 and 2006, the retailer opened more than 50 stores in six states.

By 2007, Raymour & Flanigan’s appetite for acquisitions was back, and the company bought Alpert’s Furniture. The following year—2008 just as the recession was hitting—Raymour & Flanigan opened 12 stores and two clearance centers along with a customer care center to meet the expansion needs in New Jersey and metro New York.

Also in 2008, the retailer picked up Levitz Furniture leases while that giant liquidated, and Raymour & Flanigan opened 10 stores in the New York City area.

Four years ago in 2011, the retailer added to its online presence and currently has an e-commerce platform. To support the e-commerce function, Raymour & Flanigan has partnered with a delivery service to expand its delivery capability to all Eastern Seaboard states.

This spring, Raymour & Flanigan signed a lease for a 40,000-square-foot store in New York’s Harlem. The store will be part of a 200,000-square-foot, six-story retail complex that will also include an Olive Garden, Whole Foods and American Eagle Outfitters.

Throughout Raymour & Flanigan’s expansion, the retailer has chosen to remain relatively close to home in its heavily populated cluster of seven states.

 

The Holes

When studying the location maps, it’s curious to note the skipped markets in the western expansion. In the Midwest, Bob’s leap frogged right over the states of Ohio, Indiana and Michigan. Perhaps the regional players there—Morris Home Furnishings, Kittle’s Furniture and Art Van Furniture—are viewed as having a stronghold in their respective markets.

Art Van has made its on move into the Chicago market. The retailer opened its eighth and largest store in Downers Grove, Ill., in August. The industry should be prepared for a head-to-head showdown once Bob’s stores are opened in the market.

Moving south, both Rooms To Go and Havertys bypassed a wide swath through the center of Mississippi.

While Rooms To Go currently has one store in the state, it’s located in Gulfport, Miss., down south. Jackson, Miss.-based Miskelly Furniture currently has six stores in its home market. Havertys has two stores in the Memphis, Tenn., market, but none in Mississippi.

 

Is it Worth It?

Retail expansion isn’t for the faint of heart. It takes strategic planning, a whole lot of capital and a big dose of fortitude to turn it into a success.

At the core of the planning stage for an expansion is a consideration of how much it costs to steal market share as compared to the cost to hold onto market share.

While the emerging national retailers are looking to feed their growth appetite, regional retailers who are already entrenched in an enticing market should be exploring means to remain competitive and hold onto their turf.

The following graph illustrates a perspective of performance maximization for regional retailers to consider.

“The major unspoken question for a regional chain is: How much market share must I have in order to deter one of the emerging nationals from moving into my market,” George said. “When faced with an emerging national, at what point would the home-base retailer consider acquiring versus taking? Taking share is an expensive venture.”

Next on the horizon, George suspects more venture capitalists to jump in with two feet to boost the emerging nationals along. “Bain Capital (with its Bob’s investment) is already in it,” George said. “It won’t be long before others follow. We can only hope that the retail furniture sector fares better with financial engineering that the manufacturing sector has.”