June 9,
2019 by HFBusiness Staff in Business Strategy, Industry 
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.
June 9,
2019 by HFBusiness Staff in Business Strategy, Industry
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.
June 9,
2019 by HFBusiness Staff in Business Strategy, Industry
“When critical Measurements and tracking/reporting systems are not in place or are not properly maintained, the entire coaching effort is at risk. If your numbers are not accurate and consistently reported in a way the coach can use to drive performance improvement, all the training and other efforts are wasted. Knowing how they are doing and believing in the numbers, is key to getting your people to buy into training and any other help offered to them by the sales manager!”
While tracking and properly reporting all the important measurements is certainly a major element of every successful performance-oriented team effort, just having the numbers is not what gets the job done. Certainly, what the coach does with the information and how he or she uses it to drive sales growth is very critical, but I have encountered an obstacle that gets in the way of even a very solid coaching effort. In fact, I might even say that this is the most common impediment to sales management success in stores today.
I am talking about the fact that many, if not most, sales associates on our retail floors do not understand the importance of the metrics we use, and as a result, they do not put the faith or belief in them that makes them the most powerful tool in the sales manager’s box. Without this “buy in”, they see the numbers as being there only for management’s use in finding things to complain to them about. As a result, this valuable performance data is looked at by the very people that need it the most, as being a negative element in their business life instead of the positive, success driving instrument it should be. Therefore, something that they should use to help them grow and prosper in their chosen field of endeavor, becomes worthless as both a performance driver and motivational tool. Worse than that, it can become a negative force that actually inhibits progress and reduces or eliminates the sales manager’s ability to help staff members succeed.
Does this sound familiar? Do you have salespeople that resent the fact that you track their performance and have the audacity to discuss it with them or worse yet post it for all to see? If the answer is yes, then this is a cancer that must be eliminated, or your store will never achieve its potential. With all the competition in most markets today, eventually it could become difficult for it to even survive. In many cases it only takes one negative person on a staff to bring the entire group down. If that is the case, a simple “amputation” of the infected limb can solve the problem. But what if that person is your top writer? Will the body live on long enough to grow back the missing part and prosper? Perhaps this is a bit of a dramatic way to look at the situation, but getting your people to buy into the performance data you track and then use it to drive the growth of their individual businesses, is the only way most retail businesses who rely on their staff members sales efforts, will win the battle for consumer dollars in their markets. So, let’s look at some thoughts about ways we can turn this situation around and get our people onboard with using sales performance metrics to help them develop into highly motivated professionals, who wake up each morning eager and excited to find new ways to please more customers in order to grow their individual businesses.
The key is to get salespeople to understand that in a very real way, they are actually in business for themselves with the help and support of the store. The store provides people for them to work with and products to sell, plus an office and after the sale support. Basically, two of the main ingredients in each salesperson’s personal business, opportunities to sell (Ups) and product to sell, come from the store.
Since Total Sales Revenue = Ups X Close Rate X Average Sale, it is obviously that how they do with the people they see is what separates the successful sales professionals from the also rans. Because of this, it is really our sales metrics that provide insight into each person’s ability to perform. Keep in mind that all the staff performs in the same arena, selling the same customers the same products, so comparatives to store averages are very valid as a performance benchmark. Therefore, in order to really know how they are doing and where they can improve, each staff member needs to have access to this information.
This means that a key aspect of your sales management program, and your entire management effort, must be dedicated to making certain that each of your sales staff members understand how important these numbers are and how to use them to be as successful as they can be, thus maximizing their rewards from their job, both in money and personal achievement. Let’s look at some ways we may better define the main metrics we use in language a salesperson might better understand and as a result take more personal ownership of the numbers.
Total Sales Volume is one metric that we all understand. Whether we value the impact it has on our financial success or use it as a motivational goal, this is where much of the story begins and ends for many of us. However, the major problem with only focusing on total revenue is that it is the end result of all our efforts in so many areas within our business. Unfortunately, it is virtually impossible to improve a result if that is all we focus on. We need to break it down into all of the individual factors that deliver what we want, then improve those that are deficient and maintain/maximize those that are sufficient. Selling has a number of facets that greatly influence our end results. Breaking our individual performance down to the basic metrics that contribute to the sale, is the best way to know where to focus our attention. Here are the prime numbers:
Traffic is defined as the number of the store’s potential customers (or family groups) with whom the salesperson works and is singularly the main driver of your business. Most retailers call these “Ups”, which derives from the colloquial use meaning that a salesperson is up to bat for this customer opportunity. All opportunities must be counted because each one requires that you make personal contact with the customer or prospect. Traffic counts also provide the base measurement for determining close ratios and revenue per Up, two important indicators of salesperson effectiveness discussed below.
Close Ratio is defined as: Number of sales made divided by number of Ups taken, expressed as a percentage. It is a huge number because it indicates if you are connecting with the people you see. If you cannot connect, then it is impossible to help people find what they are looking for in your store. Your performance in this area is mainly driven by your selling skills, which can be trained and coached, plus your interpersonal or “people skills”, which are harder to train and coach, but can be improved over time. Knowing if you are not connecting as well as others on the staff is a critical factor in helping you find ways to be more successful on the floor.
Average Sale is defined as: Total sales volume divided by the number of sales made, expressed in dollars. Are you maximizing your opportunity with each Up? A lot goes into creating high average sales, including; selling skills, product knowledge, design skills and relationship building skills. All of these can be improved with training, coaching and mentoring. This number is normally provided by the store’s business system and is one of the most accurate metrics we track. It also normally contributes the most to your sales volume and ability to build a client base. It is extremely helpful for you to know where you stand on the team so you can watch and learn from others how to drive this critical metric higher.
Revenue per Up is defined as: Total sales volume divided by the number of customers seen (UPs), however it can also be calculated by multiplying Close Rate X Average Sale. Revenue per Up is a critical measurement you can use to understand your true effectiveness and efficiency with the potential customers you see. This measurement takes into account the effects of both close rate and average sale by combining their effects into one comparative number that indicates how many dollars of revenue are generated each time you greet a customer. This is a key metric in your business.
The above four measurements are the most important numbers you should use to analyze your sales performance and thus the success of your personal business. In the simplest sense, closing rate is how many customers you gained a commitment from and average sale is how much of a commitment you gained from each one. If you don’t pay attention to and understand the metrics involved in measuring how you are performing, then your business will fail. As I have said before, the best salespeople we see, working for the best managers, always understand that these numbers are key to their success. Without this understanding, most people resist being coached and therefore do not improve their numbers. As a result they fail to grow.
June 9,
2019 by HFBusiness Staff in Business Strategy, Industry
“The updated styling of our Costner Luxury Motion sofa demonstrates that motion furniture can be as fashionable as stationary furniture,” said Cheryl Sigmon, director of merchandising at Bradington-Young. “Luxury Motion has grown to be a significant portion of our overall business and our attention to detail on the perfect ‘style and comfort’ balance is what makes Bradington-Young a key player in this product category.”
Other manufacturers are honing in on offering premium quality with a made in the USA guarantee, like Jackson Catnapper. Says Anthony A. Teague, senior vice president of sales and merchandising, “Offering our customers a domestic alternative in the leather motion category with “American scale” and an Italian Leather story has been a great formula for success for Catnapper. We have a dozen top grain leather frames with sofas ranging from the ‘import-busting’ $999 retail to the more feature-laden at $1,499 retail. When compared to much smaller-sized import products and cheap Chinese leathers, our leather motion category simply out-performs others on retail floors. Couple that with the ability to offer our customers an alternative to the pain of flowing containers, and it’s easy to understand why this category is booming for us.”
As manufacturers continue to integrate motion and technology in more product designs, retailers want to know what consumers expect for their future motion category purchases to optimize their product assortment on the sales floor. Based on a FurnitureCore, Inc. industry model developed by Impact Consulting Services, parent company to Home Furnishings Business, when asked to rank their top four feature preferences in reclining furniture products, the clear leader of feature options at 55% was ‘automated adjustable headrest and lumbar support’. For a tie in second at 45% were ‘heat and massage’ and ‘docking station for a mobile device’ features. Closely behind at 35% was a ‘storage drawer’ and ‘hidden tabletop’ at 32.5%. Other comfort and convenience features rated are shown in the graph below.
More important, the same study polled consumers on their satisfaction rate of their most recent reclining furniture on a scale of 1-7. With all the added features to the category, it was no surprise that 87.5% of consumers rated their satisfaction with a 5+ rating (average response 5.58%). It is worth noting that the same survey polled consumers on their most recent upholstery purchases. Only 35.29% of consumers reported that the retail sales associate made them aware of reclining and power options available in upholstered products! This leaves a chance to increase average ticket behind as the same study indicated that 15% of consumers are willing to pay upwards of $200 more for power recliners. The motion products tell their own stories and practically sell themselves as long as the consumer is aware of the expanded options and customization that manufactures offer their retail partners.
This category will continue to evolve with new, exciting features to keep up with consumer expectations by incorporating comfort features and technology without surrendering style for many years to come.
May 13,
2019 by HFBusiness Staff in Business Strategy, Industry
Having spent almost fifty years trying to understand trends and how they will impact the Home Furnishing Industry, I have watched many changes that have impacted the industry, both positive and negative. This will not be a nostalgic trip down memory lane with commentary on the good old days however it will be a cautious commentary on the speed of change.
We are in a “disruptor” economy, whatever that means. But that has always been true in business. Entrepreneurs seize upon a concept and push forward to satisfy the perceived needs of the consumer. The industry has experienced “category killers,” blockbuster retailers that through volume reduced prices along with services, captured significant market share. The remnant of these retailers, such as Babies-R-Us, a division of Toys-R-Us, have been liquidated, leaving in its wake thousands of small independent retailers that help expectant parents create that special nursery. But beneath that disruption are the lives of many individuals who built those businesses over a lifetime. Disruption, but at what cost?
I know the reaction of many at this point is, “But that is ‘capitalism’.” Don’t take this wrong, I am not saying change is bad. Do the math. I am a product of the sixties (the ultimate disruptors) and an early business career in the heady days of the LBOs (Leverage Buy Out). In our industry, the cry to put that capital required on the balance sheet to work to create shareholder value resulted in the industry manufacturing sector, losing the capital to automating manufacturing. The consequence was the loss of production to offshore. Yes, this was disruption, but at what cost?
As a young business school graduate, it was hammered into my mind that the capitalist system was efficient and would “punish” new ideas with failure. However, it was always with the caveat that a company has to contend with a competitor’s bad strategy until they went out of business. Today, the environment is slow to correct. Weekly, retailers question how etailers continue to increase market share by continuing to accumulate substantial losses. When will there be a correction? In the interim, independent retailers will fail. The latest projection is that we will lose a third of the stores in the next downturn.
The pace of change is increasing. A test by Ikea to rent furniture has become the buzz that will be a disruptor. At times, I believe change is attempted just because we can. Give the consumer their “Big Mac” at any hour, delivered at any hour by Uber Eats at twice the price. Should we? When the cost of the service exceeds the cost of the product, should we take caution?
Venture capital should be a positive contributor to improving society. But with cash pursuing ideas (good or bad) what is the result? I realize I will get incoming flack on this article saying that I am negative on capitalism, but maybe we need an adjustment to more positive, not disruptive, capitalism. The graph below is real. I have experienced each of these cycles. Even though the consumer is confident, should we be cautious?
