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From Home Furnishing Business

Coach's Corner: Some Words of Wisdom About How to Be Successful

This year, I decided to take a similar approach and present some ideas about how we can be more successful both as leaders and individuals from an expert in that area, the great Zig Ziglar. He was truly one of the most gifted teachers and trainers we have ever seen, and his central message almost always dealt with helping people succeed at whatever they try to do. He made everyone he touched better for the time they spent listening to him speak. Today we have the ability to search for him on YouTube and get hours of wonderful exposure to his wisdom and wit.

I had the opportunity to see him live along with General Schwarzkopf and other great speakers at the “Success 1993 Seminar,” my boss took all of his direct reports that year. His message still rings as strong and true today as it did then, so I have decided to share some of the main points he made from my notes of that event. I have often used his powerful and thought-provoking statements as topics for training sessions, sales meetings and other presentations. They never fail to get the listener’s attention and elevate their ability to better understand what it takes to be successful in their life. Perhaps they will make a difference for you and the people you lead.

Here is what Zig had to say that day 25 years ago with my comments about what I think it means in our lives:

  • Success is a matter of character – Claim the qualities you want to have as yours, talk to yourself about success and you will succeed. At the center of any successful effort are the attributes of positive attitude and strong commitment, which are core elements of character. Create a vision of what you want to be, so you can plan a path to where we want to go, then coach yourself along the way.
  • The choices you make in life are what is important. But don’t give up. Only less than 2 percent of scholarships in the U.S. go to athletes. The number one reason people fail is not the choices they make, but the fact that they give up. The choices you make are critical at every turn in your life but giving up is the real killer.
  • Where you start does not matter, it is where you want to go that really matters. How often have you heard a success story about someone that rose above a tough early life to achieve great things? Those people found a way to gain strength and determination from their situation that created an attitude, commitment and vision to succeed. Instead of a negative they turned it into a positive that drove them down their personal path to the future they desired.
  • The way you see the future is what is most important. Your personal vision of what the future holds has far more impact on what will actually happen to you than anyone else’s. So, do not be overly worried or influenced by what others say will happen. Be true to yourself and your perception of your future.
  • Do not let the economy or the media determine or dictate your success. News about the economy and opinions about the state of the world put forth by our media pundits or politicians have become some of the major negativity drivers we have today in our society. We are constantly bombarded by bad news, plus visions of doom and gloom today. Social media in particular tends to cause a great deal of not very positive interactions or opinions to become mainstream topics of conversation. Successful people can tune out these distractions and stay true to their course.
  • How you view yourself is important, do not blame others – If I chose to overeat, I chose to be fat. This one is critical because it is how we perceive ourselves that drives most of our decisions, which in turn controls how we behave. This self-image is the key factor in our view of the world and can lead us to success or failure. Strong people succeed by being honest with themselves and weaker ones fail because they lie to themselves. What you see is what you get!
  • Plan, prepare and expect, because what you put in your mind will most likely happen. This simple truth is central to every great performance we ever see or produce. No artist, athlete, businessperson or musician succeeds without first creating a plan to achieve the result they want, getting themselves properly prepared to execute their plan and then visualizing/believing they will achieve the outcome they want throughout the process. You must have all three ingredients to make it happen.
  • Increased vocabulary = Increased I.Q. This has proven to be the case. Words are how we express ourselves and the more of them we know and properly understand, the better we can think and the more able we are to communicate our thoughts to others. They are the most important tool we have in life and we need all we can fit in our toolbox to be as successful as we can be.
  • You must value and demonstrate commitment in order to succeed. Make a list of what you want to do then do it without fail. Lots of people make to do lists that are never completed because they lack the strength of commitment to get it done. Don’t tell yourself or others you are going to do something and then not do it. Here he used his famous analogy about the Kamikaze pilot about to leave on his 39th mission – was he really committed?
  • Wisdom is the correct use of knowledge. Many people gain a great deal of knowledge in life but fail to demonstrate wisdom because they don’t consistently apply what they know to what they do. Having a strong connection between what you have learned and the actions you take or tell others to take is truly the key to having wisdom.
  • You must have the courage to implement wisdom. As an extension of the above point, the reason people sometimes have knowledge but do not do wise things is because they lack the courage to act on what they know to be true. This is a big reason why many managers and leaders fail – they would rather be liked than take the tough actions that need to be done. Ultimately, they end up looking foolish instead of wise.
  • The size of your hope is your real limitation. What a great way to say the obvious. Those who have the most hope, can dream the biggest dreams and as a result create much more positive results than those that have lost hope. As Winston Churchill famously said: “Never give up!”
  • Most people with problems are in some sort of denial. Everyone encounters problems as they go through life. Successful people deal with them and move on while others deny they exist or do not focus on solving them, allowing them to be dragged down by issues that should have been eliminated. You must face your problems, not run from them.
  • The more you express gratitude, the more you will have to be grateful for. Be thankful for the opportunities you have. Get in the habit of reflecting on the good things in your life instead of dwelling on the bad. You will find far more positive than negative if you do and as a result create more successful outcomes for which to be grateful.
  • You most often find what you are looking for. Another basic truism from Zig. Some people don’t know what they are looking for, so they will certainly fail to find it. Others know what they want but fail to look hard enough for it. Having the vision of what you want in mind as you search for it, will most likely help lead you to it.
  • The gift of encouragement is one of the greatest you can give – spread it around. One of the things that great leaders do is consistently motivate people to succeed and the main tool they use on a daily basis to get that done is encouragement. It is the most critical element in keeping people focused and moving in the right direction. It is also what helps people achieve results that they themselves might not have thought where possible. It is the grease that keeps the wheels going around in any team effort – use it liberally. Don’t forget to encourage yourself too.
  • Motivation is the spark that lights the fire of knowledge. I have often written and spoken about the WIIFM principle in human interaction. If you do not answer the question “What is in it for me?” for those you are leading, they will not be motivated to achieve the results you want. That motivation creates the need for knowledge and drives people to seek it out. Once they have it, getting them to use it, thus exhibiting wisdom, will lead to a successful effort far more often than not.

I hope I have done Zig justice with my interpretation of his message here. If you or your staff want to have productive downtime, I highly recommend you search out online videos of his presentations and watch them. Every one of them that I have seen has been well worth the time I took to view it.

Good luck -on your road to success!

Statistically Speaking: Get Ready for Generation Z – the iGeneration

It has sometimes been said that America gets the generation it needs when it needs it the most. During the next five years, over 20 million consumers tagged as Generation Z will pour into young-adult status with the leading edge surpassing the age of 21 this year, graduating from college and entering the workforce. Studies suggest they are self-confident and more traditional and pragmatic than older Millennials, and will demand total integration in their shopping experiences. They are tired of hearing about all of society’s problems. They get it and believe they are the generation to fix it.

The total wave of approximately 66 million Gen Zers will continue for 16 years. Much has already been studied and surveyed about these consumers who have never known a world without the internet or smartphones. Here’s what we know so far.

How big is Generation Z?

Researchers have been non-committal in defining the actual end of the Millennials and the beginning of Generation Z (also being called the iGeneration or iGen), but recently the generational research giant Pew Research Center has defined this cohort as being born between 1997 and 2012, a period of 16 years, matching the year span of Millennials and Gen Xers. Based on current estimates from the U.S. Census Bureau, Generation Z is currently about eight percent smaller than Millennials and roughly two percent larger than the older Gen Xers, who are predominantly their parents (Figure 1). The impact of future immigration will swell their ranks further.

Ethnically Diverse

As shown in Table A, Generation Z is the most ethnically diverse of all the generations preceding it. Forty-eight percent of 6 to 21-year-olds in 2018 (Generation Z) are non-white, significantly more compared to 39 percent of Millennials in 2002, 30 percent of Gen Xers in 1986 and 18 percent of Early Boomers in 1968. As immigration continues to impact Gen Z, they are projected to become even more ethnically diverse falling below 50 percent white in the future. Because of this diverseness, early indications show they are they less judgmental and more accepting of cultural differences.

College Enrollment and Early Employment

On their way to being the most college educated, Generation Z has the highest percent of 18 to 20-year-olds enrolled in college among those no longer in high school – at 59 percent in 2017 (Table B). Millennials in 2002 were the first generation to reach over half (53 percent) of young adults in college – up from 44 percent of Gen Xers in 1986.

Generation Z will enter the workforce with the least job experience of any cohort (Table C). Only 19 percent of Gen Z teens 15 to 17-year-olds in 2018 were employed full or part time during the previous year compared to 30 percent of Millennials the same ages in 2002 and 41 percent in Gen Xers in 1986. Numbers are also lower for Generation Z 18 to 21-year-olds with only 58 percent holding a job in 2018, compared to 72 percent and 78 percent of Millennials and Gen Xers, respectively.

Although many Gen Zers have not been in the workplace, numerous studies indicate they have an advantage over older Millennials. According to Dan Schawel, founder of Millennial Branding, “They (Gen Z) appear to be more realistic instead of optimistic, are likely to be more career-minded, and can quickly adapt to new technology to work more effectively.” He adds, “they come to the workplace better prepared, less entitled and more equipped to succeed.”

Coinciding with college education, many in Generation Z are born to more affluent families with parents having relatively higher education than previous generations. Expressed in constant 2017 dollars, Generation Z ages 6 to 21 in 2018 lived in households with an average income of $63,700 – 2.1 percent higher than Millennials in 2002 (Figure 2). In 1986, Gen Xers lived in households with an average income of $52,800 – 20.6 percent below today’s Generation Z.

Media and Shopping Preferences

Because the internet/smartphones and brick and mortar shopping have always been a part of the fabric of Generation Z, it has never been an either/or experience, but rather the two meld together. Smartphones serve as support for the brick and mortar shopping experience, not a competition to it.

Gen Z are “more traditional shoppers than Millennials,” said Katherine Cullen, director of retail and consumer insights for NRF. “They are killing the idea that online and offline are separate.” It will be interesting to see as these young Gen Zers age into personal credit cards if their shopping habits move more online.

According to Brandon Pierce at SPS Commerce, the previous generation of Millennials “is accused of killing this or that industry (also television sitcoms, traditional sit-down dinner dates, golf and of course, retail shopping at malls and stores). In reality, they’re only disrupting the way things have been. They still buy the products they want, consume media like movies and shows, buy groceries and eat food from restaurants. They just prefer to go about it differently. It’s a matter of needing to change old, traditional ways of marketing and selling to keep up with a younger generation’s preferred way of living. Basically Generation Z is going to be an intensified version of the Millennial tidal wave of change.”

Studies and surveys are being published almost monthly, detailing how young Gen Zers currently shop. As shown in Table D, currently 98 percent of Gen Zers prefer to shop in brick and mortar stores, while almost half (46 percent) research items on smartphones before making in-store purchases. 60 percent prefer the mall to shopping – likely due to socialization and inability for younger teens to drive to multiple retail locations. 70 percent influence family decisions regarding items such as furniture, household goods, and food and beverage.

In a survey by the IBM Institute for Business Value, “Uniquely Gen Z,” Gen Zers were questioned on items most purchased themselves and purchases by their parents they heavily influenced (Table E). The top purchased items by Gen Zers are clothes and shoes, books and music, apps and toys and games – over 50% of respondents choosing these items. While a low amount actually bought furniture themselves (15 percent), 76 percent responded that they have influenced parents on furniture purchases.

With the influx of Millennials, many brick and mortar stores strengthened online capabilities. Now arrives Generation Z demanding a fully integrated shopping experience forcing internet-only companies to turn toward brick and mortar options.

What Sells: Youth Furniture: Room for Growth

All of this is great news for the retailers selling shopper savvy parents and grandparents who may initially balk at the idea of spending hundreds of dollars toward youth furniture they worry their child will simply outgrow. The category has been viewed as home essentials that unfortunately would have to endure the wear and tear of childhood just to be sold at a garage sale or donated to make room for life’s next steps. Luckily, due to design shifts and a new generation (Millennials) emerging into the furniture buying market, manufacturers are taking note of the growing demand of youth furniture and are finding unique ways to make the category more appealing by guaranteeing longevity and storage solutions for small spaces.

According to Lina Racaniello, VP marketing & ecommerce at Dorel Living, “We are starting to see more online interest and growth in the youth category as Millennials enter into the parenting stage of life. More specifically, new parents are looking for quality furniture pieces online, which reflect a modern aesthetic at an affordable price. Our Little Seeds collection fits perfectly into this growing customer demand. Our motto is that it all starts with a seed, and just as your little ones grow, their furniture can grow with them. Our furniture is created with quality and style in mind that can last throughout different growing phases. As small space living becomes the norm, we are constantly looking for clever ways to incorporate additional storage or sleeping space without sacrificing quality and price.”

Other manufacturers are ensuring endurance that will stand up to the stresses of childhood and beyond. Scott Sullens, VP of sales and youth merchandising at Legacy Classic, says, "When buying better end youth product, customers are looking for longevity.  They want to know that when their child leaves the house, they will have furniture that also works as a guest bedroom. We are designing product that is relevant for today’s consumer with designs that transcends age.”

According to research based on a FurnitureCore industry model developed by Impact Consulting Services, parent company to Home Furnishings Business, when consumers were polled on their attitude towards a home furnishings purchase for a child’s room, an overwhelming majority of 69.7% reported that they furnished the room with stylish, good quality furniture to last for years to come. Only 21.21% of these consumers stated that they would not put much money into a child’s room due to destructive tendencies of young children. Another 9.09% said that their priorities where in other rooms within their home.

Honing in further on the trends surrounding the youth category, the same study found that over 55.6% of consumers hoped their youth furniture purchases would someday be used in a spare bedroom or their child’s first apartment. Only 33.3% purchased furniture for the sole use during childhood only, and 11.1% listed ‘Other’ as a response. Of these purchases, the favored style of youth furniture is Traditional, leading the pack with 66.67%. Contemporary was also popular at 25.93%, and Mission and Theme tied at 3.7%.

Retailers and retail sales associates, it is time to be confident in merchandising and selling the youth category. Watch your category sales grow!

Editors Letter: Are There Storm Clouds?

I know that the new tariffs are giving everyone the jitters. Even though the Washington politicians are saying that the Chinese are paying the tab, there are many suppliers wishing it would happen because the retailers are reluctant to take the 10-12% price increase. Unfortunately it is not going to happen and the consumers will have to pay more.

What it the concern? For the last two quarters furniture/bedding sales growth rate declined 4.1% and 1.8% respectively compared to last year. As of this writing, the results of Memorial Day have not been a block buster. 

I am not saying that we are going into a major correction. The politicians will always keep the printing press running to get re-elected. Also, except for the Great Recession, the economy always increases the first year after the election. 

This is just a cautionary letter. It is better to anticipate what you should do if we have a down turn. If sales decline, what would be the game plan based upon current performance at 3.2% net income? The average retailer could incur a 10% loss in sales before going into the red. Obviously, the top quartile could endure more of a downturn. The table below presents the numbers. 

What could cause a loss of 10.2%? Consider: 

  • A new regional competitor moving into your markets. Who are the invaders- see the April issue, “Competitive Battlefield”
  • A decline in close rate due to the retirement of several million dollar writers. Yes, they will retire and often in clusters – every close rate point on average represents 3% decline in sales
  • A decline in average unit selling price results in less gross margin per unit sold/delivered. Beware- lower price points may not be a good strategy to combat tariff price increases

The question is, “What can a retailer do to prepare for disruption?”

  • Control fixed cost, such as advertising, that increased this year .4% over last year. Measure the effectiveness of each advertising strategy
  • Decrease sales office expense, which increased .3% over last year by investing in automated point of sale processes 
  • Adding/renovating stores- Do our stores need to be as large as 100,000 sq. ft.? The new consumer (Generation X) and the emerging consumer (Millennials) detest the larger format

We could continue and would like to discuss, but running out of pages. You know the drill and have been there before. The main thing is to have a plan. 

Cover Story: Retail Metrics For Furniture Retailing

The retail climate for furniture has remained relatively steady over the last five years at 5.6 percent average growth according to Impact Consulting Services (parent to Home Furnishings Business) FurnitureCore.com industry model. Furniture stores overall took baby steps last year as these retailers slightly outperformed the industry total with 6.8 percent growth versus 6.6 percent for all channels. This growth was despite a slowing in the fourth quarter that continued through the first quarter of this year. Combined furniture and bedding industry sales grew only 1.8 percent in the first quarter versus the same quarter in 2018. Preliminary reports show furniture store first quarter sales appear to be down 2.5 percent. (Table A). 

This is the sixth Home Furnishings Business report on Retail Metrics for Furniture Retailing providing a comprehensive look at financial performance in the home furnishings industry via comprehensive data collected throughout the year by 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 retailer’s numbers are shared, only composite percentage results. (See Methodology for additional criteria used in the Retail Metrics report.)

The focus of this article’s financial comparisons is two-fold. Results are provided for All Participants and reflect the performance of the entire sample compared to last year. In addition, the Top Quartile results are presented in three retailer size segments for performance comparisons based on revenues – Under $5 million, $5 million to $25 million, and Over $25 million. The Top Quartile includes the top 25 percent in performance. It should be noted that retailers participating in FurnitureCore’s Best Practices application are retailers focused on improving their company’s performance and does not reflect the industry in total.

 

The sales ranges not only reflect size of retailer, but in turn the differing operational characteristics the company size brings to profitability. The Under $5 million retailers are the surviving Mom and Pops who have developed niches and strategies for staying in business. Retailers with sales $5 million to $25 million have often emerged from Mom and Pop stores and are usually very owner-focused in operations. The larger “Over $25 million” retailers may also reflect similar ownership, but have also developed more tiered management operations adding professional managers, for example in warehousing/delivery functions. Depending on size, this top sales range may also have accounting practices that are driven by tax strategies. 

The overall financial performance of All Participants is shown in Figure 1. Each portion is further compared to the Top Quartile in each size segment with more in depth analysis.

Overview of Key Performance Indicators

Higher operating costs tell the story of the decline in Net Operating Income from 6.4 percent in 2017 to 5.7 percent last year. Table 2 gives an overview of key indicators – Gross Profit, Sales Expense, General & Administrative Expense, Net Operating Income, and Credit Expense. Gross Profit of 48.7 percent was down from 48.9 percent in 2017 impacted by slight increases in Cost of Goods sold -- from 51.1 percent of revenues in 2017 to 51.3 percent last year.

The importance of controlling all facets of the business is reflected in the performance level of the Top Quartile retailers compared to All Participants, also shown in Figure 2. Small Mom and Pop retailers under $5 million in sales and their larger counterparts, $5 million to $25 million retailers, did a much better job at controlling Cost of Goods sold than much larger dealers over $25 million. Top performing retailers in all size ranges outperformed the total group at reducing Sales Expense, G&A costs. All Participants were surprisingly able to bring down Credit Expense. Sales Expense is comprised mostly of sales force compensation, advertising, and warehouse/delivery expense. The biggest chunks of G&A are Occupancy costs (rent/lease) and Administrative costs, primarily administrative and managerial salaries. 

Each segment of financial performance is presented in more detail in the below. (Note: Historical 2017 data has been slightly revised from previous reports.)

Above the Line Income

Total Revenue encompasses merchandise sales as well as returns, sales of fabric/leather protection, and delivery income (Table B). Improvements in each component are detailed below.

Returns: Merchandise Returns (Table B) represent less than 1 percent of total revenue for the group, a significant improvement from 1.4 percent in 2017. However, smaller retailers tend to handle many of their returns outside of the tracking system with voided tickets and even exchanges which is reflected in the Top Quartile lower numbers for these retailers. Meanwhile larger firms are more likely to document these transactions negatively reflecting on their performance.

Merchandise Protection: Merchandise Protection (Table B) is often an important profitability component for traditional retailers, with the exception of upper to premium dealers, who often consider it a negative. This income usually represents around 3 percent of total revenue with its importance growing slightly higher among top performing retailers.

Delivery Income: Free delivery (Table B) has become the expectation of consumers in all retail outlets with revenues falling consistently every year. High performing smaller retailers in both sales range categories under $25 million are more likely to provide free delivery to their customers. Retailers are also experiencing a growth in customers who want to pick up their own purchases from the store.

Cost of Goods Sold

As tariff wars keep cropping up, the threat to a retailer’s Cost of Goods Sold becomes a never-ending crisis. An improvement in Cost of Goods Sold for the retailer is accomplished by either “buying better” or simply not having to discount its merchandise so heavily. The total group last year saw slight growth in COGS at 51.3 percent of revenue in 2018 compared to 51.1 percent the previous year. The two smallest Top Quartile groups, $25 million or less were able to best that percent usually performing in the 49 to 50 percent of revenue range. (Table C)

Gross Profit

With lack of improvement in Cost of Goods Sold, Gross Profit declined slightly as well for the total group. For All Participants, Gross Profit fell from 48.9 percent of revenue in 2017 to 48.7 percent in 2018. Again, Top Quartile performers in the two groups under $25 million sales reached Gross Profits between 50 percent and 51 percent in 2018. For the group over $25 million, the higher cost of Goods Sold is reflected in their lower 46.5 percent Gross Profit. (Table D)

The gross margins of the Furniture industry at 48 plus percent are the envy of virtually all other retail industries. And some vertical furniture retailers enjoy even higher margins due to their direct sourcing models. By comparison, according to the Census Bureau, in 2017 gross margins for electronics and appliance stores averaged 32.7 percent; warehouse clubs and superstores, 23.1 percent; department stores, 32.6 percent and pure electronic shopping retailers 41.2 percent. One of the paradox’s of the furniture industry is its high gross margins and small profits. With such healthy margins, why does the furniture industry make so little profit? Tracking how much of it the industry spends on selling the product and running the business brings these low profits into focus.

Selling Expense

After the cost of the goods, Selling Expense is the highest cost segment of the business (Table E). For several years this figure has remained relatively constant. Between 2014 and 2017 Selling Expense grew only 0.2 points from 23.8 percent of revenue to 24.0 percent. This past year the total group reported a 0.4 point jump in Selling Expenses, from 24.0 percent to 24.4 percent. This is the cost of attracting the consumer to the store (Advertising), converting that consumer to a purchaser by trained personnel (Sales) and successfully delivering that product to the consumer’s home (Warehouse/Delivery). All Selling Expense categories grew more costly in 2018 with the exception of Warehouse/Delivery/Service expense. Each category is discussed in more detail below.

Advertising Expense. Retailers are spending more to attract customers. The cost of promoting product experienced a big jump as retailers now have a smorgasbord of advertising choices, including the internet. Advertising costs increased from 5.6 percent of revenues in 2017 to 6.0 percent in 2018. (Table E). Advertising channels still differ by size of retailer where larger retailers will use more broadcast/air channels while smaller retailers may rely heavily on print mediums. And advertising on the internet is adding options for all retailers. Very small Mom and Pop retailers are increasingly required to spend more on advertising to attract customers. 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. (Table E)

Sales Expense: The largest component of selling expenses is the cost of the sales associates, along with the cost of managing and motivating of them. Included in Sales Expense (Table E) is the sales associates’ commission, as well as sales management, bonuses/contests and similar activities. Sales expense is increasing throughout all industries as retailers struggle to find motivated sales associates. Overall, Sales Expense was up 0.2 points from 9.4 percent of sales in 2017 to 9.6 percent last year. Small retailers under $5 million have the highest sales expense of the top performers at 10.3 percent of revenues.

Warehouse/Delivery/Service: The “after the sale” cost of Warehouse/Delivery/Service is also a significant expense to the retailer. Last year retailers made significant progress in controlling these expenses. As previously mentioned, many customers are choosing to pick up purchases from the store. Also, the low cost of gasoline throughout the year may be a contributing factor. Warehouse/Delivery/Service expenses fell from 7.3 percent of revenue in 2017 to 6.9 percent last year (Table E). For Top Quartile performers, the larger the company in our retailer group, the bigger the cost for all Warehouse, Delivery, and Service expense. Top performing retailers over $25 million in sales spent 9.4 percent of revenues in the category. Often a retailer’s upfront performance is negated by the backend if the retailer is unable to manage it correctly. Many mid-sized retailers are now outsourcing this function in an effort to bring this cost down.

Store Sales Expense: A small but important selling cost, Store Sales Expense, averages 1.9 percent of sales for the total group (Table E). Retail technologies exist to eliminate the sales counter which can cost one percent or more, but can negatively impact the consumer’s excitement for the furniture purchase. 

General and Administrative Expense

The final piece to profitability is the control of General and Administrative Expenses which, for the most part, are 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 and generally vary significantly by the size of the retailer. In 2018, G&A totaled 18.6 percent of revenue, the same as the previous year, an important feat considering this is the one part of operations that does not touch the selling process (Table F).

Information Systems: Technology costs are still well under 1 percent for the total group as well as the best performing retailers and are holding steady (Table F). Even smaller retailers are embracing the implementation and ongoing maintenance of systems necessary to run a business smoothly understanding these systems 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: Costs for keeping the doors open ran a significant 8.2 percent of revenue for the total group last year, up from last year’s 8 percent. The best performing companies in the under $5 million and $5 million to $25 million ranges enjoy Occupancy costs around 6 to 7 percent (Table F). Large retailers over $25 million spend less often having the upper hand with the ability to secure the best locations. But in many prime areas real estate rents are escalating. Nevertheless, consumers are increasingly placing a priority on location wanting to shop closer to home or visit retailers along their normal shopping routes. Many retailers are looking at ways to lower the size of their store footprints as a way to respond to the pressures from e-commerce retailers. 

Administrative Expense: The largest chunk of Administrative Expense is management salaries along with bonuses, professional fees, and insurance. Overall Administrative fees for All Participants are down from 9.4 percent of revenue on average in 2017 to 9.1 percent in 2017, with total costs for management salaries as a percent of revenue holding steady. Top performing retailers regardless of size are keeping Administrative Expense in the 8 percent to 8.5 percent of revenue range (Table F). Spending money on managerial positions is often a difficult decision but can often produce big results with the proper personnel. 

Credit Income and Expense

Retailers acting as credit houses continue to disappear and what was once a key area of profitability is now a crucial place to control costs. Net Credit Expense fell significantly in 2018 to 2.8 percent of revenue compared to 3.3 percent in 2017 for the All Participants. Top Quartile retailers had mixed performance with retailers over $25 million reporting Net Credit Expense higher at 3.5 percent (Table G). From our perspective, credit is a selling expense that originally emerged as a perceived necessity to generate consumer traffic. But in our experience, fewer and fewer consumers opt for offered credit promotions. Many consumers are instead opting for promotions from personal credit card companies as opposed to store credit promotions. 

Net Income (% of Revenue)

Net Income finished at 3.5 percent of revenue last year, down from 3.6 percent in 2017 for the total group. For the Top Quartile in each size range, improvements in General and Administrative Expense, especially Occupancy costs, led the way to more than doubling the Net Income performance of All Participants. For the best performers, depending on the size of the company, Net Income ranged from 6.8 percent to 9.3 percent among the top 25 percent (Table H).

Summary

Collectively for the traditional retailers in our total group in 2018, keeping costs down proved to be difficult last year. Gaining as a percent of revenues were advertising costs, salaries in all areas, and rents, just to name a few. The strides made in Delivery/Warehouse/Service, despite the decline in Delivery Income, along with gains made at reducing Credit Expense were not enough to pull up final Net Income. For the two Top Quartile groups under $25 million, the progress made in Cost of Goods Sold, Occupancy, and Administrative costs, propelled them to more than double the performance of the total group. The largest Top Quartile, retailers over $25 million, also did better at controlling Occupancy and Administrative costs than the total group, but had much higher Cost of Goods Sold. Indications are that salaries and rents will continue to become more costly in the future forcing the retailer to look more closely at all areas of performance. HFB’s June issue article entitled Statistically Speaking addresses the increasing costs of wages.

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. 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. 

The overall industry statistics reflect growth last year and many retailers are achieving exceptional results. We challenge you to be one of those. Home Furnishings Business is committed to providing input to your process.

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