Coach's Corner: “Leaving a Legacy of Leadership in Your Company”

July 12, 2018   by HFBusiness Staff in Business Strategy, Industry   

Since then it has been announced that the Property Brothers, Drew and Jonathon Scott, are being inducted as honorary members of the class of 2018. There is no question that over the past few years they have grown to become two of the most visible leaders in the home furnishings industry because of their amazing talents and wonderful personalities. We made it clear last month that being well liked is not as critical for a leader as being respected. However, if your business is centered on entertaining people while providing answers and educating individuals about creating the home of their dreams, then I think being well liked is just as important as being respected for Jonathan and Drew.

My plan had been to follow up on that article with some ideas about what a successful leader must do in their business, in order to leave a legacy of leadership that will help the next generation of owners/management continue the company’s success after they depart. The recognition of the Scott Brothers as future leaders in our industry gave me an idea to help drive home this month’s message. You see, being an avid fan of their shows, I realize that a key reason for their success is the way they perform every week as the leaders of the various individual projects they tackle. Indeed, it is their ability to create a plan and execute it that provides the happy endings we all want to see. This is what leaders do and all we need to do is watch a few of their shows to help us understand how they apply many of the points I want to make about being a leader in your business.

With that in mind, below is my list of some important things a leader must do to be successful in their business and leave a legacy of leadership for future generations to follow.

Establish Guiding Values and Principles

It is fundamental to continued success and building a high-performance team that all members of the organization share the same values.  A strong belief system of principles that reflect these values should be in place to serve as the basis for the work done by all employees. Everyone knows what is expected, and employee behavior can be measured against the stated beliefs. Every decision made in a project or plan must be constantly compared to and measured against these principles. Without this basic belief structure, the organization will struggle to find consistency of effort and often find individuals working at odds against each other within the company. Think about what would happen if Drew went looking for homes that didn’t have what the client wanted or that Jonathon could not renovate within budget. They both value what the client tells them and their guiding principles are aimed at providing the client with the end result they desire. As a result, everyone is focused on the same outcome or ultimate goal.

Set the Vision and Create the Plan

Setting a vision is basically establishing where the company needs to be in the future. It is determined by understanding the opportunities available and matching them to the organization’s ability to move forward. Creating the plan involves setting goals that are tied to a timeline that puts the company at its targeted result in the most efficient and effective manner. First, leadership must know where they are, then they must determine where it is feasible for them to go, given the resources and timeframe with which they are working. Last, goals for completion of each step in the plan—that are time sensitive— need to be established. It is like using a map. Find where you are on it, then mark the destination you want to go to and determine the best route for you to take, given the time, vehicle, fuel, etc. you have. Each city or stop along the way would be a goal. Drew and Jonathon do this for every project by interviewing the clients and creating a vision of what they want. Drew shows them examples of existing houses they can’t afford that fit the vision and then Jonathon provides a digital image of what could be done to one they could buy, that would fulfill their dream. Without the vision being set at the beginning and with no solid plan in place to create it for the client, their subsequent efforts would have little chance of success.

Instill Discipline and Execute Plan

The next step is to execute the plan, however unless leadership has instilled the discipline to follow a plan within the organization, chances of success are greatly reduced. The desired result of having a disciplined team, is that people do what you want them to do. As General Schwarzkopf said, leaders get people to do things “willingly” that they would not normally do “willingly”. A major reason this happens is that strong leaders radiate confidence and a positive energy. People naturally want to follow them and do whatever they did because they believe in them and trust their direction. Leaders are also proactive and listen to the input they receive from others, no matter what level they are on in the organization. There is no better way to get buy-in from people than to listen and react thoughtfully and honestly to what they say. The goal is to get people to do things because they want to, not because they have to. Next time you watch Property Brothers, take note of the energy they exude and the positive way they deal with a problem, issue or negative situation they encounter. Their team is always onboard, and you will also see that having a great sense of humor serves any leader well!

Build Confidence

One of the results of being a positive person and strong leader is that you will build confidence in the people you work with, both above and below you. There is no quicker way to reduce productivity or lessen the chance for a project or company to succeed than to allow negativity to permeate the organization. This is one of the hardest tests for a leader because it requires great dedication and self-discipline to make sure it never creeps into their outlook or their actions. It also mandates that people who spread negativity must be stopped and the quicker the better. Communication and including everyone in the planning process is another way to build confidence in a team’s efforts. There is nothing worse than the infamous “mushroom treatment”, which keeps people in the dark. It breeds negativity and discontent. Keep people informed, even when things are not going the way you want, and you will have a much better chance of keeping them on board for the whole journey. Obviously, building confidence in the plan and the process is key to Drew and Jonathan’s success in each of their projects. While I am sure there are problems and issues we don’t see in the final cut, I am equally sure that they communicate with the clients, the team and each other to keep things moving in the right direction.

Pass on a Passion for the Business

This is probably the toughest thing to do, but it is extremely critical for the success of the next generation of leaders within any business. Many of our businesses started as family operations and were driven by the zest for the business that the founders had. Often when the next generation of management takes over, whether they are related to the founders or not, some of that passion for the business is lost. It is quite possible that this is a key reason why more than half of family businesses fail in the second generation and many more fall by the wayside as subsequent transitions fail. It sure helps to love what you do in any situation. However, given the growing competition furniture stores have faced over the last two decades and the fact that their share of customers is dwindling, it is getting tough for some to carry on without a deep passion for the business. Therefore, I believe strongly that any leader worth their salt in our industry must dedicate themselves to radiating and nurturing in their staff, a deep, lasting passion for creating beautiful homes where our customers truly want to live and enjoy life. The same passion and energy we see every week from the Property Brothers.

By leaving a legacy of positive experiences, goals achieved, and customers thrilled, we can develop our next generation of leaders. Cheers to the Forty Under 40 Class of 2018 and our future industry leaders - may you live long and prosper.

Beam me up, Scott Brothers!

What Sells: The Room of Youth

July 12, 2018   by HFBusiness Staff in Business Strategy, Industry   

In generations past, parents might have been reluctant to spend a lot of money for something their children would outgrow in a few years; manufacturers have taken notice, and are designing and producing youth furniture that’s versatile and sophisticated, and can grow with a child into adulthood or be used later on in a guest room.

“Consumers are shopping for pieces, not complete room sets. With social media, DIY shows, and Pinterest, customers have more confidence in mixing and matching pieces and styles,” says Scott Sullens, vice president of sales and marketing, Legacy Classic Furniture.

“Because of this trend, we focus on every piece we make. Can this piece stand alone? Will a customer buy just this bed? From our customers and retail salespeople, we hear consumers asking for more queen beds in the youth bedroom,” he adds. “If a customer has the room, they prefer to buy a queen bed because they are looking down the road for the room to be used as a guest room. The adult case pieces may not fit, but if the queen fits, they are buying it.”

Looking beyond age and gender

One key to success is being gender-neutral, says Barbara Rogers, director of marketing, Bivona & Company.

“Our bestselling collection by far is the Dolce Kids + Teens/Dolce Babi Lucca collection, which was the first set to introduce the farmhouse chic look to youth and baby. The youth furniture is available in Weathered Grey and Seashell White, and we just introduced Weathered Brown for Baby. What is unique about this set is that it is suitable for either gender,” she says. “Most youth furniture is either boy- or girl-specific; by designing a set that is gender neutral, it provides longevity.”

Crystal Nguyen, vice president of merchandising at Coaster Fine Furniture, has seen different finishes, such as grey and metallic, becoming popular. Looking ahead, she sees “earth-tone colors, and outdoor and nature-inspired” palettes. Designs targeting teens have also grown in popularity, she adds.

Safety and function, notes Neil MacKenzie, director of marketing at Universal, are also important components of today’s youth furniture.

“We believe [consumers] are looking for something that’s safe and functional and neutral, meaning it’s not overly gender-specific, so it can be used a number of ways for a longer period of time,” he says.

“From a product standpoint for Smartstuff, we are continuing to focus on safety and function,” MacKenzie adds. “Our recent introductions are a commitment to function with looks that can be more appealing to a wider audience. We believe this provides more flexibility for the parents and the child, as the product can transition between ages seamlessly with the benefit of accessories and soft goods.”

‘A bridge to the next generation’

How—and where—people shop for youth furniture is changing as well.

“Unfortunately, we are seeing youth departments shrink, as there is a misconception about people not shopping for youth furniture. People are and will shop where they can see it, and if they can’t find it, they will go online,” says Sullens. “Retailers supporting a good youth assortment are doing well in the category and they recognize the importance of bringing that customer in the store.”

“We are always working to improve our website experience and we’ve expanded our efforts in social media to better connect the consumer to our website, where they can find a local retail partner to see, feel, and touch the product firsthand. We also have invested in marketing kits for retail partners to leverage our assets at the local level as part of their own social/digital plans,” says MacKenzie.

“It is an interesting thought to think that a customer in their 30s could be walking into a traditional furniture store for the first time in their adult life,” says Sullens. “Think about it … they may have had hand-me-downs, gone to Ikea, bought RTA, shopped online, etc. They don’t go to a furniture store until their child needs a ‘grown-up’ bed. This category is a bridge to acquiring their next generation of shoppers.”

Standing out

Consumers are looking to stay on-trend with their home furnishings, and that extends to the youth category. And the youth themselves are helping to make those decisions.

“Youth furniture has changed in that children are very involved in helping make purchase decisions. They are connected and do research online as well as watch the home shows with their parents, and therefore want to be on-trend with the latest styles in furniture,” says Rogers.

“We have noticed that a great deal of youth furniture is a sea of sameness. It is entry-level stuff that doesn’t have a lot of style or it is very expensive and trendy,” she adds. “We offer the consumer style and quality at a moderate price, which is good value.”

Customers are becoming more sophisticated, and buying youth furniture is no exception, says Sullens. “That means on-trend styles, better finishes, functionality, and unique hardware,” he says. “The challenge is that the customers want all these features at a price. Youth as a category is challenging. We have positioned ourselves well with a good-better-best strategy within the category.”

Value is always in style with the consumer, and one way to provide added value is offering storage space.

“Storage options are vital for today’s living,” says Rogers. “We offer many different storage options in [the Dolce Kids + Teens/Dolce Babi Lucca] collection as well as utilitarian items like a simple desk and chair and a hutch that can be used as a hutch or a bookcase.”

At Universal, says MacKenzie, “we see continued focus on solving the needs of safety and function in a package that addresses space challenges, and provides flexibility and options for the consumer to have a style that works for their child and home.”

Another factor for success in the youth category? Quick delivery. “Being able to offer 15-plus youth collections that mix with our entire adult line is just one of our points of differentiation,” says Sullens. “Having a domestic warehouse is another.”

Ingredients for bestsellers

Clean lines, versatility, longevity, and value seem to be the watchwords for bestsellers in the youth category.

“Serendipity’s gray-white finish and its clean lines give it breadth and longevity, because you can’t assign a gender to this collection, or an age,” says MacKenzie. “It gives both the retailer and consumer the power to create multiple styles using soft goods and accessories.”

Coaster’s bestsellers, says Nguyen, offer “affordable value, versatility, and durability,” adding that consumers are looking for value-added amenities such as USB charging ports and storage, as well as “designs that are more mature.”

Style, function, and value are what Sullens sees in Legacy Classic’s bestseller. “We are not the lowest cost provider of youth furniture in the industry, we know that,” he says. “That being said, one of our bestsellers is Chelsea by Rachael Ray, a sophisticated moderately priced collection. What makes this group? It’s modern, has clean lines, and a beautiful custom knob hardware finished in soft gold. Our bestsellers consist of all the key factors mentioned above—they have great style, great finishes, can ship quickly, and represent a strong value to the customer.”

“We believe Lucca is popular because it is on-trend without being trendy, which gives it longevity and it’s well-made furniture at a good value,” says Rogers. “We offer the collection in the top finishes and provide features such as soft-close drawer glides, five-piece wooden drawer boxes with dovetailed joints and corner blocks, as well as dust covers. Offering variety in on-trend styles is important to being successful, as well as a good value.”

Looking at the data

Data from Impact Consulting, parent company of Home Furnishings Business, shows that the majority of youth furniture was purchased when the child was 13 years or older, said 33.33% of respondents. Tying at 20.83% were age groups 3-5 years and 6-9 years. Ages 10-13 saw 16.67%, and under 3 years was 8.33%.

When asked “What specific youth furniture pieces did you buy?”, 29.17% said a full/queen headboard; a bunk/loft bed and a dresser both received 25%; a nightstand, 12.5%; a twin headboard and a desk with computer accommodation, 8.33% each; and a theme bed/headboard, 4.17%. The largest response, 33.33% was for “other” furniture.

The majority of respondents, when asked, “Which of the following statements best reflects your thinking at the time of purchase regarding an alternative future use for this furniture?”, said it was purchased for use during childhood only—37.5%. Responding that it was purchased with the idea the child could use it in their first apartment or at school was 29.17%, while 25% said the furniture was purchased in hopes of using it in a spare bedroom one day. Just 8.33% responded that it would have “other” use.

Take 5: Randy Ariail

July 12, 2018   by HFBusiness Staff in Business Strategy, Industry   

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. 

Editor's Letter: What Does This Mean to Me?

June 14, 2018   by HFBusiness Staff in Business Strategy, Industry   

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.

Cover Story: Retail Metrics for Furniture Retailing

June 14, 2018   by HFBusiness Staff in Business Strategy, Industry   

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 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)

Gross Profit

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.

 

Selling Expense

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)

Summary

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.