November 9,
2016 by Jane Chero in Business Strategy, Industry 
It’s almost impossible to identify the typical furniture purchaser, but we’ll take a stab at it.
She is an internet-surfing, HGTV-watching, middle-income household member who rarely reads newspapers and doesn’t pay much attention to radio and TV ads, but wants new bedroom furniture or a new sofa.
Of course, that’s a glittering generality, but it does broadly summarize the results of a recent consumer survey completed by Impact Consulting, parent company of Home Furnishings Business.
The survey makes it crystal clear, for example, that an inviting website is a must for any retailer. But it also debunked some conventional wisdom about the shopping habits of Millennials, and duly noted the increasing role of men in the final purchase decision.
Other key findings from the survey included:
- More than 78% of consumers shopped at three or fewer stores before making their most recent furniture purchase, and about half only shopped at one or two stores.
- A plurality of consumers – 26% -- said they made their most recent furniture purchase from an independent retailer, while another 19.7% went to a regional furniture chain. Some 11.7% said they made the purchase online, but only 5.2% said they bought from a department store.
- Nearly half of those surveyed purchased either bedroom furniture (24.2%) or an upholstered sofa (23.2%). Casual dining was a distant third at 9.7%, entertainment walls and armoires were mentioned by only 4%, only beating out infant furniture.
- Despite the negative perception many consumers have of furniture shopping, more than 58% of those surveyed rated their shopping experience as a 6 or 7, on a scale of 1 to 7, with 7 classified as “excellent.” Another 26.7% rated it a 5, while less than 5% assigned a 1, 2 or 3 rating.
Even aging Baby Boomers love to surf the internet
If you’re a furniture manufacturer or retailer who hopes to grab – and keep – the consumer’s attention, having a vibrant, informative website is a classic no-brainer in this digital age. And that’s regardless of whether your target consumer is a Millennial furnishing his first apartment or an affluent Baby Boomer redecorating her home after the kids off go to college.
That was one unmistakable conclusion drawn from the survey, which showed that internet research is the first step most consumers take once they’ve made a decision to shop for furniture.
When asked to rank seven possible steps (in order of importance) they could take as part of the shopping process, internet research came out with an average ranking of 2.01, well ahead of the other six possible steps – visiting a store to see the product; consulting a professional for advice; doing research in magazines; saving newspaper ads and articles; responding to radio and TV ads; and getting recommendations from friends and relatives.
In fact, internet research was the top-ranked step among all age groups under 55. There was very little difference between consumers under 25 (1.62) and those 45-54 (1.94). The survey didn’t ask what type of device was primarily used for the research, but the preponderance of people staring at their smart phones in virtually all public settings makes that answer pretty obvious.
Even though internet research wasn’t the most common first step among consumers 55 and above, it was a strong second to going to a store and seeing the product. For those 55 to 64, going to a store had an average ranking of 1.99, vs. 2.19 for internet research, and for those 65 and above, a store visit scored 1.82 vs. 2.32 for internet research.
But across all age groups, internet research and a store visit ranked well ahead of all other possible steps.
It’s no surprise that visiting a store to see the product on display was the most common first step for the 55-and-over crowd, but it might surprise some to learn that an in-store visit was the second most important step in all other age groups by a wide margin. And yes, that included those tech-savvy Millennials who were born with a smartphone attached to their hip.
Ranked last or next-to-last for every age group were consulting a professional for advice and responding to radio and TV ads.
The latter finding may come as a surprise since radio and TV advertising has been a staple of furniture and bedding advertising for decades, but the finding could force some retailers to reconsider how their advertising dollars are being allocated.
It was no surprise that radio and TV ads came in dead last among Millennials with an average ranking of 5.41 – even beating out newspapers – but it also ranked next-to-last among all other age groups, trailing only consulting a professional.
Furniture is a want, not a need
That statement may sound a bit harsh, given that “conventional wisdom” tells us furniture most often is purchased following a move to a new home or apartment, or when that hole in the blue plaid sofa in the living becomes too large to be covered with an afghan.
But what’s really driving furniture purchases is the latest redecorating project, or simply the desire to purchase new furniture – regardless of the condition of existing furniture.
Call it the HGTV effect.
In fact, 37.7% of those surveyed said redecorating or the desire to purchase new furniture was the principal reason they made their most recent furniture purchase. That clearly indicates the purchase was a “want,” since only 27% said they were replacing old furniture – a “need.”
Another 18.5% said the principal reason was a recent move.
When broken down by age group, the survey indicated the desire to get new furniture and/or redecorate – a “want” -- peaks in the 25-34 and 45-54 age brackets.
Interestingly, furniture replacement – a “need” – becomes more important as consumers age. More than 30% of those surveyed in all age brackets 45 and above said replacement was the primary reason. That’s an indication people are downsizing as they become empty-nesters, especially for those 65 and up. In that bracket a full 37.6% of those surveyed said replacement was the primary reason.
Factors rarely mentioned by survey participants were the purchase of a second home, marriage and divorce – all of which are considered “needs.”
Men are from Pluto. Women are from Neptune?
When it comes to furniture purchases, the differences aren’t as great as you might think. (There’s that conventional wisdom rearing its ugly head again.)
While women still initiate the discussion about purchasing furniture and make the final decision the vast majority of the time, the gap between women and men appears to be shrinking. This could have significant implications for retail advertising, since most of it is still directed at women.
For example, while respondents said a woman was the first to note the need or desire to purchase furniture 71% of the time, that was down from 81.4% in 2015.
The survey showed men made the first move 28.4% of the time this year, up from 18.2% in 2015.
Women made the initial store visit 69.8% of the time, down from 78.9% in 2015. For men, the trend was obviously in the opposite direction. They made the first visit 30% of the time this year and 21.1% in the 2015 survey.
More men also made the final purchase decision – 22.4% in the most recent survey vs. 12.7% in 2015. Females made the call 40% of the time in the 2016 and 2015 surveys, while it was classified as a joint decision 37.6% of time in the most recent survey and 47.2% of the time in 2015.
The increasing influence of men is especially evident in men ages 35 and up. In the 34-44 bracket, for example, men made the final purchase decision 29.5% of the time, and made the final call 22.1% of the time for ages 45-54.
And regardless of age, men made the final decision 42.1% of the time in households with income of $250,000 or more. In that income bracket, women made the decision only 26.3% of the time, and it was classified as a joint purchase 31.6% of the time.
Clicking before hitting the bricks
As discussed earlier, internet research is by far the most popular way to begin the furniture shopping experience, but do many people take it a step further and actually buy their furniture online?
The short answer is yes – especially for those under 35. But even when all age groups are lumped together, an impressive 11.7% of those surveyed completed their purchase on the internet. That trailed only two other types of retailers – independent retailers (26%) and regional furniture store chains (19.7%).
To no one’s surprise, the internet was the leading retail distribution channel for purchasers under 25 (tied with national chains and mass merchants at 19.7%), but at least 10% of consumers in every age category except ages 45-54 made their most recent purchase online.
The percentage of consumers purchasing online tends to go down, however, as income goes up.
For example, while 17.2% of consumers in the $50,000 to $74,999 income bracket made their purchase on the internet, it fell to 11% for $75,000 to $99,999 bracket; 10.1% for the $100,000 to $149,999 bracket; and 7% for the $150,000 to $249,999 bracket.
Among those making their purchase online, some 47.8% used a website operated by an existing brick-and-mortar retailer. Another 35.7% used an online-only furniture retailer, and 16.5% said they ordered from a manufacturer’s website.
Online purchasers said the ease of shopping, price, and a wider product selection were the most positive aspects of making an e-commerce purchase, in that order.
The most negative factor cited by survey participants was the inconvenience of returning the product, if necessary, which was followed closely by not being able to see and touch the actual product. The third most negative factor was concerns about delivery, although it trailed the first two by a wide margin.
For those who did not purchase online, the ease of shopping was perceived as the most positive aspect of using e-commerce, followed by wider product selection and price.
The inability to see and touch the product was cited as the most negative factor among those who didn’t purchase online, followed closely by inconvenience of product returns and concerns about delivery.
Interestingly, nearly half of those surveyed said they made their most recent purchase at either an independent retailer (26%) or regional furniture chain (19.7%). Only 8.9% made the purchase at a national chain such as J.C. Penney, while 7% each used a mass merchant such as Wal-Mart and a manufacturer’s branded store such as Ethan Allen.
The bed is not dead
Rumors of the death, or at least the critical illness of the bedroom furniture category were greatly exaggerated, it appears, although those reports might be more accurate for entertainment furniture. (More on that later.)
Bedroom furniture, in fact, was the category purchased by 24.2% of those surveyed. Second was upholstered sofas as 23.2%, and all other categories were named by less than 10%.
When broken down by age, bedroom was even more dominant in younger age groups, being purchased by 41.9% of consumers under 25; and 29.4% of those age 25-34; and 27.7% of those age 35-44. In those age brackets, no other category came close.
In older age brackets, however, upholstered sofas took the top spot and easily outdistanced bedroom as Baby Boomers and Gen Xers spruced up other areas of the house. In the 45-54 bracket, upholstered sofas were purchased 33.8% of those surveyed. For ages 55-64, it was 25%, and for those 65 and above, it was 29.1%.
As noted earlier, entertainment furniture – specifically walls and armoires -- barely hit the radar. Wall units were purchased by only 3% of those surveyed, and armoires were bought by just 1%.
Interestingly, the only segment of survey participants where entertainment furniture made an impact was those with incomes of $250,000 and above. In those households, entertainment walls were purchased by 15.8% of those surveyed.
That was second only to bedroom furniture, which was purchased by 21.1% of those high-income households. (Upholstered sofas also were purchased by 15.8%, the same as entertainment walls.)
Home office also was important to high-income households, being purchased by 10.5% of those surveyed.
However, low-income households (those earnings less than $25,000 annually) also appear to be fans of home office, being purchased by 13.3% of those surveyed. Overall, the category was purchased by only 4.8%, as other age and income groups showed little interest.
Another category that drew scant attention was formal dining, which was purchased by only 5.4% of those surveyed. Casual dining, on the other hand, was the third most-popular category, but at 9.7%, it was still well behind the bedroom and upholstered sofa categories.
When asked to rank the most important product features that led to the purchase (with 1 being the most important and 7 being the least important), quality was rated highest with an average ranking of 2.38. Design aesthetics and design comfort tied for second with an average ranking of 2.97 each.
One of the least important, according to the survey, was the product warranty. It received an average ranking of 5.01.
A glimpse into the future?
The furniture industry has been coming up on the short end of the disposable income stick for decades, and the survey showed little has changed. In fact, furniture beat only one of five categories when consumers ranked the importance of major purchase categories.
Listed as the most important category was a car, followed closely by leisure travel. Third was computer equipment, followed by furniture in fourth and communications equipment such as a smart phone coming in last.
But alas, the future – at least in the short term -- isn’t all gloom and doom. The survey showed that lots of people will soon begin shopping for furniture or already have begun to do so.
In fact, 38.4% said they were thinking about buying new furniture and have begun the shopping process. And another 11.1% said they were actively shopping and had made up their mind to buy. An additional 28% said they were interested in buying new furniture but had no immediate plans to buy.
Among those who said they were thinking about buying furniture and just started the shopping process, the trend was strongest among adults under age 45. In fact, more than 48% of those under 25 and ages 25-34 put themselves in that category, as did 44.6% of those age 35-44.
The only age group that didn’t show must interest in buying furniture was consumers over 65. Only 8.8% said they were actively shopping, and another 17.5% said they were thinking about buying furniture.
Retail sales people are (a) pushy jerks or (b) knowledgeable and professional
If you answered “pushy jerks,” conventional wisdom probably would agree with you. But the survey told quite the opposite story. Respondents said sales people generally were knowledgeable, professional, and made the customer feel special.
When asked to rank statements from 1 to 5, with 5 being “I agree completely” and 1 being “I do not agree at all,” respondents gave a strong 3.89 rating to “My sales consultant was very professional.”
And interestingly, the results showed younger consumers don’t shun traditional sales methods as widely as many believe. Respondents under 25 gave the above statement an average rating of 4, and ages 25-34 gave it a 3.75.
However, that statement drew strong agreement across all age groups and income levels, as did the statement, “My sales consultant was very knowledgeable about the furniture, its design and production processes.”
The latter drew an average rating of 3.83 among all survey participants, and was particularly high among those under 25 (4.0) and over 65 (4.05).
The only statement that didn’t get widespread agreement was “I can always remember the sales consultant’s name.” It had a rating of 2.63 among all respondents, and only 2.44 among consumers 55-64.
Also getting high marks was “I usually appreciate the help of a salesperson,” which drew a 3.57 among all participants. And once again, Millennials indicated they don’t automatically shun traditional sales methods. Those under 25 gave it a 3.55, and consumers 25-43 gave it a 3.32.
On a related note, more than 58% of those surveyed rated their shopping experience as a 6 or 7, on a scale of 1 to 7, with 7 classified as “excellent.” Another 26.7% rated it a 5, while less than 5% assigned a 1, 2 or 3 to the experience.
October 13,
2016 by Jane Chero in Business Strategy, Industry
Change is not innovation. External forces such as a new competitor or new distribution channel forces retailers to change. Change is reactive; innovation is proactive. In today’s business climate it is hard to find time to think of ways to innovate.
The starting point must always be the basic measures of the business, the profit and loss statement and the balance sheet. Ideas may be cool, but will they impact the reasons for being in business by generating income and providing long term stability? In Impact Consulting’s Performance Groups the mantra is that owners/management must constantly work on their business, not in their business. Even though it feels quite rewarding to go on the floor and sell a nice order or even jump on the delivery truck and execute the last mile of the sale, other than the occasional “reality check” that owners and managers should do, the focus should be to continue the pursuit of innovations. This applies not only for senior management, but also for all employees. Have we lost the “suggestion box” concept in our pursuit of the digital age?
Let’s play a game and remember past innovations many of which are accepted as “it was always that way.”
Innovation, it’s all about ingenuity – the ability to not only think outside the box, but to translate those thoughts into measurable actions that benefit both customers and the bottom line. This month, Home Furnishings Business focuses on retail innovation by presenting four case studies of innovations being implemented by home furnishings retailers that are improving the bottom line and increasing consumer satisfaction – all of which is leading to better store traffic and more repeat business.
None of these innovations were up and running the day after they were drawn up on the back of a dinner napkin. They took months, and in some cases years of development, tweaking, testing and more tweaking before being fully rolled out. And by the time it was ready to roll out, those involved in its development were already working on the next generation. That’s because innovation also is a process of continuous improvement.
Many innovations are easily visible to the consumer, but some – such as La-Z-Boy’s program that handles delivery and warehousing responsibilities for many of its retail store licensees – are not as noticeable. But they’re just as effective.
Midwest retail powerhouse Art Van Furniture, for example, has found that franchising is an effective way to expand the reach – and better utilize its Michigan distribution center. But the company isn’t handing out franchises like fast-food restaurants. Instead, it is partnering with existing independent furniture retailers who want to convert their stores to Art Van locations.
Pennsylvania-based Wolf Furniture, meanwhile, thinks it has found a seamless way to help consumers get rid of their old furniture – overcoming a major objection to buying new furniture. The retailer has opened consignment furniture stores adjacent to three of its full-line stores, and, in addition to helping overcome objections the company discovered that the consignment business itself can be rather profitable.
And then there’s Mattress Inn, a single-store bedding specialty retailer in Spring Hill, Tenn., who wanted to figure out a way to bring consumers into the store more frequently than once every eight to ten years. So owner Arthur Watkins developed the Fill Station Pillow Kiosk, an in-store innovation that gives the consumer a custom-made pillow in about five minutes. Of course, the consumer needs to test the pillow on one of the store’s many mattresses, and it’s not unusual for that consumer to buy a pillow and a mattress before leaving. Watkins has franchised the kiosk program to eight other retailers, but he recently added a director of business development and is hoping to have 100 kiosks in place in the next 12 months. And soon, he will have the next-generation kiosk ready to go. Just like all of the other innovators out there.
July 18,
2016 by in Business Strategy, Industry
Many conversations start with furniture retailers bemoaning the absence of traffic in their stores. Even though many are experiencing increases in sales driven by higher close rates and average tickets, they still remember the days of more customers coming through the door. We will not address the reasons, pre-shopping research on the Web and the time-starved consumer, because this area has been covered in previous issues (May, 2016). Our focus is on how to get consumers, while diminished in number, through the front door.
Compared to other retail categories, marketers consider furniture as blessed with universal desire. In no study since the 90’s has the consumer, when asked if his or her home needs redecorating and would that redecorating involve the purchase of furniture, at a minimum 87% of consumers responded with a positive Yes. This finding was according to ongoing research by FurnitureCore, our market research group.
Then what is the problem? What are the barriers that are preventing the consumer from acting on this need? On the horizon we see one of the greatest waves of household formations since the Baby Boomers. This is the emergence of the much-discussed Millennials.
That, however, is the future. Let’s not forget the household formations that haven’t occurred in the last decade as the economy and student debt force a delay in marriage, child birth, and household formations. However, at some point, the youth must emerge from the parents’ basement.
What is the current barometer? According to a just-completed survey, consumers are at various stages of shopping. The following graphic illustrates.
First the bad news: Even though they have an interest in furniture, 52% have no immediate plans to purchase. How can we change their minds? If you watch many of the decorating televisions channels’ “before and after” programs, you would come to the conclusion that someone needs to change their minds.
Unfortunately, according to recent research, only 22.3% of consumers indicate that an advertisement had prompted them to purchase a furniture item if they were not in the market for it. Regrettably, with two-income families and consumers spending less time physically in their homes coupled with the lack of home entertaining, the need to improve the decor is not high on the consumer’s “importance” meter.
One of the major factors in this loss has been obsolesce. With the economic downturn, car buyers kept a new car 71 months as compared to 38 months in 2002. This has created a pent-up demand for cars that has resulted in record sales for cars in the past two years.
What do we need to say about cell phones? Each quarter brings the latest from Apple followed shortly by the latest from its competition. These ongoing modifications distract the consumer from other large expenditures.
The appliance sector has built-in obsolescence with the average life expectancy of a refrigerator at 13 years and a washer/dryer at 10 years. One cannot ignore the non-functioning refrigerator as one would the threadbare arm of a chair.
Nevertheless, we cannot reconcile ourselves to waiting for our turn. However, advertising can be a powerful tool to encourage the consumer to postpone the purchase that car or that cell phone in order to create a great environment for escaping the demands of living.
And now for the action. Those who are finally actively shopping for furniture have made up their minds and will buy furniture. Currently, approximately 15% are in that frame of mind. The obvious advertising activity that is associated with the furniture industry is in place to bring them into the store. That is the infamous promise of substantial discounts with financing so generous that it seems you will NEVER have to pay. And then there is the ultimate, the “going out of business” deal. Unfortunately, according to research, the consumer does not believe this.
Now for the second stage – These include those who are thinking about buying furniture because they need furniture or just want to buy furniture. These consumers should be our target for advertising. Currently, 26.4% of consumers are at this stage. Unfortunately, over half of these consumers will be at this stage next year if furniture dealers do not spur them to action.
What causes this lack of action? The first is the other consumer durables. In the past decade home furnishings has lost 1.8% indexed point of its share of expenditures. Being distracted by that new car, new phone, new appliance, or new entertainment device is a fact
Another approach starts when the consumer was just thinking about a purchase. This involves exposing the consumer to decorating ideas and new products that may pre-sell them on your store.
Finally, the consumer that has just purchased furniture. Currently, this represents 15.5% of the households. Traditional thinking has been that these consumers are out of the market. This is not so. With significant credit lines on credit cards, the consumer can be in the market anytime. According to research, the best performing retailers have consumer purchases from those consumers who have bought in the last 18 months at a 30% level. Yes, these are your best customers, those who have already decided that your combination of merchandise and service are their best decision.
June 7,
2016 by in Financial Reports, Industry
Last year the furniture industry finally exceeded the volume experienced in the pre-Recession years of 2006 and 2007 growing 5.2 percent to $92.1 million in furniture and bedding sales (Figure A).
Lacking new marketing strategies, the furniture industry has had to rely in part on sheer pent up demand to clear the hurdles in the past two years. Overall financial performance has improved among furniture retailers with much of it attributed to improved Cost of Goods Sold as a percent of Revenue.
This is the third HFB report 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 HFB’s 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 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 five-fold. Results are provided for All Participants and reflect the performance of the entire sample compared to last year. Two additional retailer segments are featured for performance comparisons based on revenues – Under $5 million and $5 million to $25 million. For the two larger retailer segments -- $25 million to $100 million and over $100 million –only trend comments are provided due to the proprietary nature of their data. 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 $25 to $100 retailers may also reflect similar ownership, but have also developed more tiered management operations adding professional managers, for example in warehousing/delivery functions. The largest sales group, the Over $100 million retailers have accounting practices are often driven by tax strategies.
For the two revenue segments featured for comparison, high performing groups selected by net income as a percent of revenue 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
With the furniture industry showing ever-increasing signs of recovery, profitability among retailers is also up. The retailers as a group improved performance over last year in all key areas, except Store Sales Expense. These improvements resulted in Net Operating Income almost doubling over the previous year to 5.8 percent of revenue. Table 2 gives an overview of key indicators – Gross Profit, Sales Expense, General & 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/delivery expense. What does vary are General and Administrative expenses. 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.
Above the Line Income
Total Revenue encompasses merchandise sales as well as returns, sales of fabric/leather protection, and delivery income (Figure B).
Returns: Merchandise Returns (Figure B) continue to represent about 3 percent to 4 percent of revenue. Smaller retailers tend to handle many of 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 often an important profitability component to 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 and is down slightly from the previous year among All Participants.
Delivery Income: Free delivery (Figure B) has become the expectation of consumers in all retail outlets, and this is especially true for smaller retailers. The best performing companies have still been able to offset this expense as Delivery Income as a percent of revenue continues to decline. Larger retailers are able to offset this expense at nearly double the rate of smaller companies.
Cost of Goods Sold
The big improvement in the bottom line appears to be in the cost of goods relative to revenue. Either the retail is “buying better” or simply not having to discount its merchandise so heavily. For the total group, COGS was down 2.3 percentage point over the previous year to 52.1 percent of revenues with larger retailers outperforming their smaller counterparts. (Figure C)
Gross Profit
Alongside improved COGS, comes higher Gross Profit. For All Participants, Gross Profit increased 2.3 percentage points over last year to 47.9 percent of revenue. Best Performers among all sales ranges reached Gross Profits over 50 percent.
The furniture industry’s Gross Margin (Figure D) is the envy of many retail sectors. Some vertical furniture retailers enjoy higher margins due to their direct sourcing models while electronics and appliance margins can run in the teens. With such healthy margins, why does the furniture industry make so little profit? Tracking how much it the industry spends on selling the product and running the business brings these low profits into focus.
Selling Expense
A significant 23 percent to 24 percent of revenue is spent on Selling Expenses (Figure E), and this figure has remained constant last year over the previous. 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).
Advertising Expense. The cost of promoting product is a significant percentage of revenue. Last year the industry as a whole spent 6 percent of revenue on Advertising, similar to the year before (Figure E). Best Performing retailers over $100 million spent the most on advertising as a percent of revenue, but not significantly more than other groups. While advertising channels may differ by size of retailer, the total percent of revenue varies only one or two percentage points. Larger retailers will use more broadcast/air channels while smaller retailers rely heavily on print mediums, but the cost results are similar. 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 cost of the sales associates, along with the cost of managing and motivating of them. Included in Sales Expense (Figure E) is the sales associates’ commission, as well as sales management, bonuses/contests and similar activities. Overall, Sales Expenses run about 9.1 percent of sales. However, over the last year it appears the smaller the company, the more the cost of Sales as a percent of revenue.
Warehouse/Delivery/Service: The “after the sale” cost of Warehouse/Delivery/Service is also a significant cost to the retailer. Last year these expenses totaled 7 percent of revenue, which was down over one percentage point from last year (Figure E). Often a retailer’s upfront performance is negated by the backend if the retailer is unable to manage it correctly. As reported earlier, merchandise returns can total over 3 percent of sales. Warehouse and Delivery must be managed intelligently and if not, outsourcing should be considered.
Store Sales Expense: A small but important selling cost, Store Sales Expense, averages 0.5 percent to 2 percent of sales. The Best Performers in the largest companies do outperform their smaller counterparts, but not significantly (Figure 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
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 and generally vary significantly by the size of the retailer. (Figure F).
Information Systems: Technology costs are staying around 1 percent, and for the Best Performing retailers, is down to 0.5 percent to 0.6 percent, regardless of size (Figure F). 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 companies enjoy Occupancy costs around 6 percent, compared to 7 percent to 8 percent for All Participants (Figure F). Often these larger retailers have the upper hand with the ability to secure the best locations. Consumers are increasingly 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 is management salaries along with bonuses, professional fees, and insurance. Overall Administrative fees can total 8 percent to 10 percent of revenue on average for all retailers. Larger retailers over $100 million saw significant increases in these expenses last year. 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 2 percent to 4 percent of revenue for the Best Performers regardless of size and 2.8 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 Before Interest and Taxes (% of Revenue)
Last year saw a big improvement in Net Income Before Interest and Taxes. While the average participant saw Net Income increase to 3.4 percent of revenue from zero percent, Best Performers experienced double that at 7 to over 8 percent, regardless of size.
Summary
The growth in the furniture industry is reflected this year in the improved financial performance by furniture retailers. 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.
While the overall industry statistics are improving, 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.