From Home Furnishing Business
As principal partner with Ariail & Associates, a retained executive search firm specializing in the procurement of senior management in the furnishings industry, he has a unique perspective on how management—and the criteria for it—has changed through the years. He recently shared his insights with Home Furnishings Business.
Home Furnishings Business: You have witnessed the transition from family to investment bankers to offshore owners and now to more investment bankers. The criteria for management changed as we moved through each transition; did we meet the challenge?
Randy Ariail: When I came into the business in the early ‘70s, there were a number of strong family-held companies: Thomasville, Broyhill, Henredon, Drexel Heritage, Lane, Berkline, Stratford, and Schnadig, just to name a few. Many of these companies became attractive targets for large non-furniture entities such as Armstrong, General Mills, Beatrice Foods, and later, Kohler and Masco.
In some cases, families continued to manage the companies but in other cases the purchasing companies brought in new management with mixed results. Armstrong brought in the best and brightest young managers from their Resilient flooring division with excellent results. Other companies had mixed results or were simply unsuccessful in transitioning non-furniture executives to the industry.
In most cases failure had very little to do with personal competency; rather, a lack of understanding of the relationship nature of the business. Secondly, they saw family owned companies making decent profits, and they assumed that they could bring in their Ivy League MBAs, financial experts, and process-oriented people to teach what they assumed to be rather unsophisticated managers how to make some real money. As we all know, that was not the case. However, there was a positive effect regarding the development of management. Many of the large corporations and family owned companies during the ‘70s had very defined management development programs. They would hire college graduates mainly from the N.C. State FM&M program, as well as graduates from schools such as Virginia Tech, UNC, Mississippi State, etc. and put them in structured management development programs geared toward manufacturing or sales/marketing. Thomasville, Broyhill, and Simmons Bedding were the top of the heap in this regard. Simmons developed a number of fine managers who moved from the bedding business into furniture companies.
HFB: As the large corporations, i.e. Armstrong, Masco, etc., acquired companies, corporate training programs were required to develop future talent. What has emerged to fill the vacuum?
Ariail: Unfortunately, in the early ‘80s many companies discontinued their management development programs and concentrated on beating each other’s brains out on price. This not only led to a deficit of talent but an aging demographic in terms of senior management that we still suffer from today.
In the ‘90s and up until the 2000s, due to a shortage of senior management, I actually saw a number of CEOs that failed numerous times still be able to get another assignment as a CEO. This was a low point. The industry was incestuous to a fault and as well all know incestuousness breeds idiocy.
While we still suffer from the aging demographic, I am seeing some light at the end of the tunnel. Progressive companies such as Four Hands, Mitchell Gold, Markor, Ashley, and even more traditional held companies such as Bernhardt and Hooker [Furniture] are bringing in young, fresh talent from the outside as well as developing managers to embrace the new paradigms of the business. Many of these companies have progressive CEOs that embrace both the traditional and digital marketplace. (I consider anyone under 55 years old young in this industry.)
It is interesting to note that we are seeing a much different phenomena occurring today as opposed to the ‘70s and ‘80s. The offshore companies who are doing roll-ups in the industry, Samson and Markor in particular, are choosing to attract senior managers with industry talent rather than bringing in executives from outside the industry. As a general rule, they are buying well-managed companies and leaving management in place. This is also true of many of the venture capital firms currently investing in the industry. They are doing their homework and not repeating past mistakes.
HFB: Have we lost the product maven and merchant lore that our industry put on a pedestal?
Ariail: I see another notable change regarding the formative experience of CEOs and senior management in the industry. For a number of years, CEOs normally came from the manufacturing, finance, or the sales side of the business. We are now seeing successful CEOs and senior management come from the merchandising and product development arena. Most of these are talented individuals who are capable of thinking out of both hemispheres of their brain. They are creative but they have the finite and people skills to run and motivate an organization. While the digital marketplace has taken some importance away from creative product, the furniture industry is still a creative business. Additionally, what many large corporate entities did not understand is despite the e-commerce phenomena, it is still and always will be a relationship-driven business. Senior managers, whether from inside or outside the industry, that fail to understand this will enjoy limited success at best.
While there is still somewhat of an aging demographic and a deficit of talent in the industry, I am very optimistic for the future regarding senior management talent. Women, who in the past have been relegated to creative positions, are starting to emerge as CEOs and senior management in the industry. I am also seeing a new breed of mid-management talent being developed by progressive, forward-thinking companies. Another talent pool that is being tapped is marketing and merchandising executives from the retail sector of the industry. I have seen a number of retail executives transition very successfully to the manufacturing/import side of the business.
HFB: A more analytical approach to managing is a necessity. Do we have management teams with the expertise?
Ariail: While I am optimistic and see light at the end of the tunnel, make no mistake, there is a war for talent. As part of fighting this battle on a daily basis, I can testify to the fact that companies need to be flexible in terms of compensation, benefits, and lifestyle considerations in order to attract top talent. It is our job to market the opportunity to individuals that are gainfully and successfully employed. Within reason, we need that flexibility to attract top talent.
I have been asked on occasion by other search firms as to why I deal exclusively with furniture manufacturers/importers. Simply put, while there are people with different degrees of competency, there are very few bad people in the industry.
HFB: Local universities were active in the industry: N.C. State (manufacturing), High Point University (management program), UNC–Chapel Hill (executive MBA). Why did they lose interest?
Ariail: In terms of schools and colleges educating younger people for the furniture industry, we have lost technical schools such as N.C. State, Kansas State, and others due to the offshoring effect. However, schools such as Appalachian State and Catawba Valley Technical College have taken up some of the slack regarding technical education, while High Point University has created innovative programs for furniture marketing and management. We still gave great design schools such as Kendall, Parson’s, and the Savannah School for Art and Design credit for educating our creative people.
Obviously the best asset on the balance sheet to sustain a company is cash or cash equivalents. Inventory does not fall into that asset category. Interestingly, as the performance of retailers has improved since the 2008 Great Recession, INVENTORY TURNS have declined. In 2017, the average inventory turn was 3.4x. In terms of financial performance (profit/loss) the only impact is interest expense. However, the return on investment is impacted. Currently RETURN ON INVESTMENT is at 10.4%, there are other investments that return more with less risk.
These discussions are what the owner is subjected to in the annual CPA review. More important is, “What do the performance metrics mean in managing the business going forward?”
The graphic illustrates an analysis of the impact of a net reduction in sales that would result in a breakeven performance. Currently, the average company can sustain an 11% loss in sales before moving into a loss category. From a performance perspective, what does that mean?
- A loss in traffic of 10-11%
- A reduction in close rate of 2-3 percentage points
- A loss of 10% in average ticket
What are the factors that are impacting these metrics? The major discussion at market was traffic or the lack thereof. The impact of shopping fewer stores is a reality. A loss of 10% traffic in 2017 was not a surprise but more of a norm.
A positive attitude is that the better researched consumer is ready to buy. However, close rates and average tickets are not making up for the differential for many retailers.
Meanwhile growth in the total furniture industry continued to be slow, but steady, hovering around 4 percent the last two years — 3.9 percent in 2017 and 4.0 percent in 2016 — according to Impact Consulting Services FurnitureCore.com Industry Model. First quarter 2018 has improved to 4.5 percent over the same quarter of 2017 (Figure A).
Figure A. Industry Sales 2009 to 2018 Q1
This is the fifth HFB 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 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 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 four retailer size segments for performance comparisons based on revenues – Under $5 million, $5 million to $25 million, $25 million to
$100 million, and $100 million and over. 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 $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 that are often driven by tax strategies.
The overall financial performance of All Participants is shown in Table 1. Each portion is further compared to the Top Quartile in each size segment with more in depth analysis.
Table 1. 2017 Financial Performance (All Participants)
Overview of Key Performance Indicators
With Net Operating Income falling from 6.6 percent in 2016 to 6.4 percent last year, traditional retailers felt the squeeze from higher operating costs. Table 2 gives an overview of key indicators – Gross Profit, Sales Expense, General & Administrative Expense, Net Operating Income, and Credit Expense. Most areas of the P&L among the traditional retailers that comprise the statistics in this report held steady with some improvement in Gross Profit due to
0.3 percent improvement in Cost of Goods Sold. General and Administrative Expense increased half a percent, which seems small, but is significant, and Credit Expense, up 0.3 percent.
The importance of controlling all facets of the business is reflected in the higher performance level of the Top Quartile retailers compared to All Participants. These top retailers did better at controlling Cost of Goods Sold, but were not significantly better as a group in controlling Sales Expense as salaries are going up in all industries. They did achieve success with their reduction in General and Administrative Expense compared to the group and also Credit Expense except for large retailers over $100 million in sales. 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.
Table 2. Key Performance Indicators (% of Revenue)
Each segment of financial performance is presented in more detail below. (Note: Historical 2016 data has been 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 (Figure B). Very little change was noted in any of these areas last year.
Returns: Merchandise Returns (Figure B) represent about 1.2 percent of total revenue for the group, an insignificant 0.1 percent improvement over last year. 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 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 higher performing very large retailers averaging 4.7 percent of sales.
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 slowly decline.
Cost of Goods Sold
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 only a
0.3 percent improvement in COGS, 51.3 percent of revenue in 2017 compared to 51.6 percent the previous year. Higher performing companies were able to best that percent usually performing in the 49 percent of revenue range. (Table C)
Table C. Cost of Goods Sold (% of Revenue)
With a small improvement in COGS, Gross Profit also saw small growth as well. For All Participants, Gross Profit grew only slightly from 48.4 percent of revenue in 2016 to 48.7 percent in 2017. Top Quartile performers among all sales ranges reached Gross Profits of 51 percent, except for the size range $25M to $100M who as a group struggled to keep up with the entire group at 48.7 percent GP. (Figure D)
Figure D. Gross Profit (% of Revenue)
One of the paradoxes of the furniture industry is its high gross margins and small profits. The gross margins among traditional furniture stores at 48 plus percent are the envy of many retail sectors. And some vertical furniture retailers enjoy even higher margins due to their direct sourcing models. But according to the Census Bureau, in 2016, gross margins for electronics and appliance stores averaged 31 percent; warehouse clubs and superstores, 23.5 percent; and pure electronic shopping retailers 40 percent. 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.
After the cost of the goods, Selling Expense is the highest cost segment of the business (Figure E), and this figure has remained constant for several years. 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 slightly costlier in 2017 with the exception of Advertising/Public Relations.
Figure E. Selling Expenses (% of Revenue)
Advertising Expense. The cost of promoting product has also remained constant at about 6 percent of revenue, although in 2017 that figure fell from 6.2 percent in 2016 to 5.7 percent, a drop of 0.4 percentage points (Figure E). In the Top Quartile companies the numbers did not vary significantly from the All Participants. Advertising channels may differ by size of retailer where larger retailers will use more broadcast/air channels while smaller retailers may rely heavily on print media, but the cost results are similar. 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. (Figure 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 (Figure E) is the sales associates’ commission, as well as sales management, bonuses/contests and similar activities. Overall, Sales Expense was up only slightly, which matched the pattern of increasing salaries across all industries. In 2017 Sales Expense totaled 9.3 percent of revenue up compared to 9.1 percent in 2016. Last year these costs were consistent across the sales ranges for the Top 25 percent of each group.
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 6.9 percent of revenue similar to the previous year (Figure 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 Quartile very small Mom and Pop retailers under $5 million in sales spent 5.6 percent of sales in 2017 compared to 8.4 percent for companies over $100 million. 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 1.8 percent of sales for the total group. For the most part, Top Quartile companies do a better job controlling these expenses. Larger companies over $25 million do the best job, spending under 1 percent of revenue on Store Sales Expenses (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
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 2017, G&A totaled 18.6 percent of revenue, up 0.5 percent from 2016, posting the largest increase of the broad operating segments. This is significant considering this is the one part of operations that does not touch the selling process. (Figure F)
Figure F. General & Administrative Expenses (% of Revenue)
Information Systems: Technology costs are still well under 1 percent for the total group as well as the Best Performing retailers (Figure 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 7.7 percent of revenue for the total group last year, only slightly higher than last year. The Best Performing companies enjoy Occupancy costs around 6 to 7 percent (Figure F). 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. Very large retailers over $100 million often have the upper hand with the ability to secure the best locations but real estate rents are escalating in prime areas. Nevertheless, 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 for all participants are up from 9.5 percent of revenue on average in 2016 to 9.7 percent in 2017. Top larger retailers over $25 million are keeping their salaries down to 7 to 8 percent of revenue (Figure F). The high cost of hiring 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 are disappearing and what was once a key area of profitability is now a crucial place to control costs. Net Credit Expense is up in 2017 to 3.3 percent of revenue compared to 3 percent in 2016. Top Quartile retailers, regardless of size, stay around
2.5 percent (Figure G). From our perspective, credit is a selling expense that has emerged as a perceived necessity to generate consumer traffic. But in our experience, well under a third of consumers opt for offered credit promotions.
Figure G. Credit Income & Expenses (Net % of Revenue)
Net Income (% of Revenue)
After deducting an average of less than 1 percent of revenue resulting from Other Income and Expenses, including Insurance and Taxes, Net Income finished at 3.4 percent of revenue last year, down from 3.7 percent in 2016 for the total group. For the Top Quartile in each size range, improvements in all areas of Cost of Goods Sold, Sales Expense and General and Administrative Expense added up to much higher Net Income for these top performers. Depending on company size, Net Income reached 7.3 percent to 8.3 percent among the top 25 percent. (Figure H)
Figure H. Net Income Before Interest and Taxes (% of Revenue)
The progress made collectively by the traditional retailers in our total group in 2017 was disappointing, but the Top Quartile performers, regardless of size, finished with double the Net Income of the combined group. Savvy retailers are make changes and more are coming.
Furniture is still one of the premier products the consumer still wants to reach out and touch before purchase, which would suggest a positive outlook for furniture stores. But e-commerce companies are getting that loud and clear and are on the edge of entering the storefront business. This threat is not just to furniture stores, but to all other local furniture channels. In this issue of HFB, Statistically Speaking updates the progress of these furniture e-commerce retailers and the lack of progress of traditional retailers in the Internet arena.
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 about the barriers to achieve certain objectives.
While the overall industry statistics show slow growth, 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.
The rise of e-commerce in the furniture industry continues its momentum as many brick and mortar stores search for strategies to compete with giant online retailers. And while many brick and mortar furniture retailers are strengthening their digital presence, their online furniture sales only account for 1 percent of e-commerce furniture totals. Meanwhile, furniture and home furnishings e-commerce retailers celebrate rapidly increasing sales, but struggle with how to become profitable.
It is estimated that 2017 Internet sales of furniture alone from both brick and mortar and pure e-commerce retailers totaled an estimated $19.7 billion or 18.8 percent of the total industry. This article picks up from Statistically Speaking’s August 2016 article The Rise of E-commerce in the Furniture Industry.
Sources: U.S. Census Bureau’s Annual Survey of Retail Trade (e-commerce) and Impact Consulting Services, Inc.’s proprietary FurnitureCore.com Industry Model.
Furniture Industry Sales
The retail furniture industry reached $105.2 billion last year, a growth of 3.9 percent over 2016 (Figure 1).
Of the $105.2 billion industry total, sales can be distributed between (1) brick and mortar stores, (2) e-commerce retailers plus e-commerce sales by brick and mortar companies, and (3) mail order houses. Pure e-commerce retailers are those that do not have physical store locations, like Amazon or Wayfair, or their e-commerce is operated as a separate business unit, like Walmart.com. Additional e-commerce sales from brick and mortar stores total only 1 percent of the total industry.
Last year furniture and bedding sales by brick and mortar stores (non Internet) totaled $83.1 billion compared to $19.7 billion e-commerce (all outlet types), and $2.3 billion from mail order houses (Table A).
As shown in Table B, e-commerce continues to gain a greater share of the furniture industry – jumping from 5.1 percent of sales in 2006 to 18.8 percent in 2017. Meanwhile, brick and mortar share of total sales fell from a 92.2 percent share to 79.0 percent – decreasing dramatically as the economy improved after 2009.
The total furniture and bedding industry grew 3.9 percent last year. It is estimated that brick and mortar store sales of furniture grew only 2 percent while e-commerce retailer sales grew 12.9 percent.
Over the course of seven years since the bottom of the recession in 2009 furniture sales through e-commerce have grown at an annual rate (CAGR) of 22.2 percent compared to brick and mortar retailers at 3.0 percent. Total industry sales have grown at an annual rate of 5.1 percent (Figure 2).
Table C shows the annual year-over-year growth of the three outlet types. Note that the rate of e-commerce sales peaked at 26 percent in 2015, but has slowed somewhat over the last two years to 12.9 percent in 2017. Meanwhile, brick and mortar sales have struggled to reach 2 percent growth over the last two years.
Along with furniture e-commerce sales, other home furnishing products – floor covering, window treatments and home accessories – have grown at an even faster pace and surpass furniture in online sales. Consumers are still finding it easier and less daunting to buy home furnishings online without seeing or touching them in a store. Table D shows that while furniture e-commerce sales have grown from over 300 percent since 2009 (bottom of the recession) totaling $19.7 billion last year, home furnishings have grown 489 percent to $27.7 billion in 2017.
Brick and Mortar Stores e-commerce
In many brick and mortar stores, consumers have the option of physically visiting the store and/or using the store’s website to shop and make purchases. The online capabilities and offerings vary by retailer. Although “showrooming,” the customer’s act of checking out an item at a mall, brick and mortar or big-box store, then heading out to buy it from an online retailer, has grown commonplace over the years, the reverse is also true. Many consumers still need to see, touch, and feel an item and will do online research before heading out to a store to make a final purchase. While the success of online retailing among brick and mortar merchants has increased over the years, the e-commerce sales comparison remains vast between brick and mortar stores and pure e-commerce retailers. E-commerce sales among combined furniture and home furnishings stores jumped 200 percent from $367 million to $1.1 billion 2006 to 2016 but furniture stores only held one percent of that volume. (Note: 2017 data has not yet been released.)
Comparing combined furniture and home furnishings stores to other retail brick and mortar companies, furniture and home furnishings stores lag behind in percent of e-commerce sales to total sales but has shown 25 percent growth from 2014 to 2016. Just reaching 3.0 percent in 2016, clothing and clothing accessories stores have the highest volume of e-commerce sales as a percent of total sales among brick and mortar retail store types (Table E).
Mail Order Retailers
Technically the mail order business is a small part of the furniture industry but the lines between mail order and e-commerce are blurring and print catalogs are making somewhat of a comeback as another medium to reach out and touch the consumer. Data from the Census Bureau and Impact Consulting’s FurnitureCore.com Industry Model estimates the furniture mail order business at $2.3 billion in 2017, only 2.2 percent of industry sales. These sales were flat compared to the previous year. And according to the U.S. Postal Service and research by Data & Marketing Assn., in 2016, consumers are getting fewer catalogs in the mail compared to the glory days. In 2016 9.8 billion catalogs of all types reached American mailboxes compared to double that amount in 2007 (Table F).
Despite the gloomy statistics, last year saw evidence that print catalogs are resurging but not in traditional mail order formats. For example, home furnishings e-commerce giant Wayfair produced its first print catalog at the end of 2016 and continues to roll them out. Wayfair claims its catalogs are meant to inspire a lifestyle as opposed to promoting a brand.
Research points to several reasons print catalogs are growing. First, consumers are getting less and less mail overall as the “paperless” movement has become popular and therefore catalogs now stand out in consumer mailboxes. Also, the advertising clutter in email boxes along with saturation in social media has driven companies to give the old fashioned catalog another look. Plus, software ad blockers are causing fewer marketing messages to actually reach the consumer. And finally, research by Data & Marketing Assn. suggests simply that Millennials really do like them.
E-commerce retailers are defined as companies without physical stores competing with brick and mortar establishments. Sales of combined furniture and home furnishings through e-commerce retailers have increased from $7.9 billion in 2006 to an estimated $46.3 billion in 11 years (2006 to 2017) – a growth of 486 percent (Table G).
Growing at an average annual rate (CAGR) of 17.4 percent a year, e-commerce furniture and home furnishings retailers show no signs of slowing down. The two giants in the industry, Amazon and Wayfair, are both looking at ways to incorporate brick and mortar stores into their portfolios. These companies see the desire held by a majority of consumers to see especially higher ticket furniture items in person before making the leap to buy. Along with Wayfair’s entry into the print catalog business, according to Boston Magazine, the company is looking to open its first showroom in an old Marshall’s storefront in downtown Boston. Rather than resist the looming presence of Amazon, mattress manufacturer Tuft & Needle has partnered with the online company to expand its brick and mortar stores using Amazon technology and selling various Amazon products in the stores. These moves could put more stress on traditional furniture retailers.
In addition to furniture and home furnishings, other consumer merchandise lines dramatically increased sales through e-commerce retailers. At $59.1 billion in sales, clothing/footwear leads e-commerce retailer sales in 2016 up from $12.9 billion in 2006 – skyrocketing 358 percent. Although not as high as clothing/footwear, furniture and home furnishings experienced the highest growth among e-commerce retailers over two years 2014 to 2016 – jumping 54 percent. Sporting goods sold through e-commerce retailers also continue a positive trajectory, increasing 44 percent in two years and passing the slower growing computer hardware merchandise line (Table H). Note that data for 2017 is not yet available.
Retail Trade Total
Internet sales of all consumer products from all retail types of outlets, whether brick and mortar or e-commerce companies, are estimated to have reached $437.5 billion in 2017 (Table I). It may be surprising to some, however, that these internet sales represent only 8.6 percent of all retail sales for all consumer products (Table J). But Internet purchases continue to make major inroads into many consumer products with no sign of slowing down.
The rapid growth of furniture industry sales by successful e-commerce retailers are challenging brick and mortar stores, but traditional store fronts still offer a customer experience that an e-commerce retailer cannot. But e-commerce companies are quickly moving into areas (for example, store fronts and print catalogs) to challenge the customer experience of traditional brick and mortar retailer.
Understanding the Role Geography Plays
Research is emerging to help both brick and mortar stores and online retailers better target customers. For example, the affluent urban customer has totally embraced the e-commerce experience.
However, in more rural areas where shipping costs are higher and delivery times longer, e-commerce has been slower to catch on. It also appears the less affluent consumer responds better to online sales events. Understanding these economic and geographical profiles will be a feature in a future Statistically Speaking article.
That got me thinking about my career, which leaders I followed and the impact they had on my growth. There were most certainly a lot of people that influenced my development, but I must say that the biggest factor was the amount of effort my direct supervisor put into training me and providing me with opportunities to learn even more through additional educational activities outside of the company itself. Sometimes it took a push or a challenge to get me motivated, but in hindsight I probably got more from those experiences than I did from all of the on-the-job training over the years.
The best boss I had in my career, totally believed in this. I have well over a dozen notebooks in my bookcase from AMA programs, various seminars and other business courses I took because he challenged all of his direct reports to constantly find ways to grow and improve. Sometimes it was a pain in the neck to fit these external events into a busy schedule, but it was always worth it, because I use things I learned from them every day.
Looking through my book case, I found a segment from one event that seems to be an appropriate preview for next month’s Forty Under 40 issue. It comes from probably the most memorable one day session I ever attended. Our leader took all of his direct reports to Cobo Hall in Detroit for the “Success 1993 Seminar” which featured the top motivational speakers of the era, including: Zig Ziglar, Peter Lowe, Mary Lou Retton, General Norman Schwarzkopf and others. All day long we sat transfixed while these famous, successful people gave us their insight into what it takes to be all you can be.
They were all excellent, but the one that really blew me away was General Schwarzkopf. Certainly, the fact that he had just retired as a hero of the first gulf war was a factor as his presence and presentation were both commanding to say the least. However, it was his message that struck me the most and has stayed with me ever since. His topic was “Picture a Leader” and he spoke with a clear passion that you could feel throughout the hall. Here are some notes I jotted down from what one of our great military leaders said about being a leader:
The secret to the 21st Century will be leadership.
Nearing the end of the last century, Schwarzkopf’s concern was that we were not developing enough strong leaders to take us into and through the next century. Others have expressed similar thoughts related to generational shifts in values and focus. Each generation has always seemed to have concerns about how the next one will carry on. As people change so too must their leaders. However, the basic points he made back in 1993 will always hold true.
Leadership does not equal managership – leaders lead people, managers manage processes and procedures that involve people. One is an art, the other is more of a science.
His meaning here is pretty clear - leaders lead and managers manage. In my experience many people can be trained to be good managers. However, leaders must be developed and not everyone has what it takes to be a leader. Social psychologists have often said that leadership qualities and skills show up very early in childhood, but I have seen good people evolve into great leaders as they gain experience and confidence. Of course, I have also seen it go the other way. The best is to have a true leader who can also manage, but these individuals are hard to find.
The Challenge is to get people to do willingly, that which they would not normally do willingly.
This is probably the best definition of the difference between a manager and a leader I have heard. Leaders find ways to get people on board, so they actually do the right things because they want to, not because they have to. Teams with leaders in charge are always the most motivated and successful at whatever tasks they perform or roles they play.
Mostly, being a leader takes character. Leadership is a potent combination of strategy and character. But if you must be without one, be without the strategy. Lead by example, because people hope that their leaders are better people than them. It’s nice to be liked, but you must be respected.
Webster defines character as “the mental and moral qualities distinctive to an individual”. In this usage, the word is intended to indicate a high level of mental and moral strength. Good Leaders must be dedicated to their principles and values in order to be affective, so they need to be strong in these areas. Often this is hard because not every decision is always the easy one. Being a leader is not a popularity contest and as he says, respect is necessary for success, but being liked is not. I have read several articles stating that “wanting to be liked” is the top reason that new managers and aspiring leaders often fail. By the way, my understanding is that General Schwarzkopf managed to be both respected and well liked throughout his career.
A leader cannot delegate responsibility – that is theirs alone. Leaders delegate authority, so others can get their jobs done.
Leaders that pass the blame for failure on to subordinates or other team members lose the respect discussed in the previous point. Not only do those below stop trusting the leader in this case, so too do those above. There have been several examples of sports coach’s blaming the players for losing a game and in most cases the resulting news articles and player quotes reflect a loss of respect for that individual. Train your people how to be successful, give them the proper tools, coach them to make them the best they can be, then let them do their job.
“Leadership has many peaks and valleys. A good leader does not live for the next promotion or tangible reward. He or she derives pleasure from leadership itself. It is almost a calling.
This was the general’s way of saying that there is a certain amount of passion and a whole lot of dedication that goes into being a true leader. The rewards and adulation will come if an individual stays focused on the act of leading and is motivated by doing it. When they lose that, they will begin to be less and less affective as a leader.
The Six Points of Leadership:
- Things will not improve until you admit that something is wrong
- Set Goals – Pick goals that everyone can understand and know their roles in achieving them
- Demand High Standards – Let people know what is expected from them. People will rise (or sink) to the standards you set.
- People work to succeed – Let them know how success will be measured.
- Recognize Success – Also accept mistakes, “Latitude to learn, NOT Freedom to fail”.
- Power Down! – Don’t tell people how to do their job. Give parameters – give standards – give authority – tell them WHAT to do, then let them do it! Weak leaders lack confidence in themselves and thus their people.
No comment necessary for this section since it is probably one of the best “To Do Lists” anyone interested in being a leader could have. Straight from one of our best military leaders!
General Schwarzkopf’s Secret to Success as a leader:
The general wrapped up his presentation by announcing that he was going to provide us with his “secret” to becoming a successful leader. He then told a humorous tale about when he arrived at the pentagon to take over as the person in charge of managing all military personnel – over three million people at the time.
The general he was replacing had been in the position for a long time and was beloved by everyone. Schwarzkopf expected to have three months of training at the side of his predecessor only to discover him walking out of his office to take three months leave before officially retiring.
He dramatically told us that he literally chased the old general down the hall, finally stopping him to ask how the heck was he going to be able to take over without proper training and guidance from him? The old man said, “Oh that’s easy. Just follow Rule #13,” and then he walked away. Schwarzkoph stopped him again and said, “I am sorry sir, but I do not recall a Rule #13.” As if reading it from a manual the older man said, “Rule #13… when placed in command, take charge, make something happen, don’t just sit there!” He then walked away again. Schwarzkopf yelled after him, “but how will I know what to do?” The old man paused and said, “Just follow Rule #14”. Schwarzkopf then asked, “What does Rule #14 say?” The old man didn’t stop, he just shouted over his shoulder and said, “Rule #14…do what’s right!”
General Schwarzkopf said he followed Rule #14 the rest of his career and it was the single biggest reason for all of his success as a leader. His last comment was, “The truth of the matter is that you always know the right thing to do. The hard part is doing it.”
It is this last point that I have tried to live by ever since hearing his presentation. It has served me well when I have been faced with tough decisions and I hope it will help you too.
The real message of this column is that all too often we keep our managers locked up in our stores and then wonder why they still do things the way they have always been done, instead of taking our businesses to another level with new ideas and knowledge. Take a lesson from my best boss and invest in your people so they can grow and move your business forward.