From Home Furnishing Business
Editor's Letter: Outmaneuver the “Disruptors”
by Bob George,
In today’s business environment, the concept of the “disruptor” economy dominates the headlines. Business models that emerge to challenge the established process is not a new phenomenon. Decades earlier, the concept of “category killers” was the scourge of the small business community. The chief characteristic of these new business models is signifi - cant capital to allow rapid expansion and a high tolerance for risk- obviously not characteristics of the new entrepreneur or family business.
Currently, the most impactful is the ecommerce retailers that increase advertising spend (12%) and focus on digital (Internet) while providing free delivery (14%), eliminating the physical presence (store) for the consumer with a goal of making a profi t. For most, such as Wayfair, profi t is still in the future. While not yet profi table, Wayfair and etailers in total have taken 15-18% marketshare. The result, as with all category killers, is the loss of smaller furniture retailers and a fi nancial impact on larger retailers. Not only is the retail sector impacted by the disruptors, but also the supplier sector and they must change to accommodate this new player in the industry sector. They need to provide a different level of support, such as bett er collateral, as well as absorb some of the additional cost associated with a national distribution strategy, such as returns and additional packaging.
The retail disruptors create supplier disruptions that create a model just to serve their needs— a model without showrooms at market, or sales representatives to serve the retailer— becoming suppliers with an outstanding supply chain.
What should an established furniture retailer do? Establish a disruptor model. Typically, this strategy is not possible. However, an established retailer can migrate his model to refl ect the changing industry and to off set the industry. However, this will require the diffi cult decision to consider changing long held beliefs. For example, with this issue we have addressed the Internet and how it has matured into an important strategy to communicate with the consumer. If managed properly, it can be very cost eff ective, but it must be measured for eff ectiveness. With this accomplished, other media can be released such as newspaper, television, and circulars. You cannot have both. Advertising cost is declining — speed the process, release the old, and embrace the new. The new disruptor didn’t begin with the old approach to advertising.
Another example is real estate — own versus lease. The old adage of “let the store feed your family and real estate fund your retirement”… Disruptors do not want to be in real estate and therefore can expand faster into the key consumer shopping areas. Related to this is the size of stores. The productivity of 100,000 square foot stores compared to 50,000 square foot stores provides a distinct advantage. Not only is gross margin per square foot of selling space higher, but occupancy cost is lower. Additionally, the emerging consumers prefer the smaller footprint of curated merchandising. More traditional retailers are “twisting” themselves into pretzels to justify purchasing the closing big box stores in malls to capture a great real estate deal. Commercial retailers love it!
Of course same day delivery is considered a must. But the disruptors are pushing consumers out 2-4 weeks. Consider the reductions in inventory.
The message is not to create a new “disruptor” model, but to tweak your old model to more accurately refl ect today’s consumer and improve profi t at the same time. Consider the data below and get more from our June 2019 cover story “Retail Metrics for Furniture Retailing”.