Monthly Issue
From Home Furnishing Business
June 19,
2017 by HFBusiness Staff in Business Strategy, Industry 
In 1917, A. Leon Capel got his first look at a mechanical tractor, and quickly realized there wasn’t much future for his tiny business making rope plow lines that farmers tied to their mules while working their fields.
The forward-thinking Capel was undeterred, however, and decided to buy a sewing machine so his ropes could be braided instead of twisted. The braids were then sewn together to form the first-ever reversible braided rug.
Two years later, Sears Roebuck bought 5,000 of them and included a picture of Capel’s creation in its famous catalog.
And the rest, as they say, is history.
One hundred years later, those braided rugs (and woven rugs, as well) are still produced in the small town of Troy, N.C., where the company’s founder fashioned that first rug. About 150 of the company’s 200 employees work at facilities in Troy, and its domestically-made product accounts for roughly half the company’s annual sales.
The founder’s three sons, A. Leon Capel Jr., Jesse Capel and Arron Capel ran the company after their father retired, and when the trio retired a decade ago, four of the founder’s grandchildren took the helm.
Today, Leon Capel Jr.’s daughter, Cameron Capel, who is vice president of national accounts, and her cousins Ron (managing director of the company’s eight retail stores), Richard (director of manufacturing), and Mary Clara Capel (director of marketing and administration) are leading the company into its second century. But they’re taking time to celebrate the first 100 years with a year-long series of events that have included a cake-cutting ceremony at the High Point Market and a festive catered lunch for employees, where each worker received a $100 gift card.
Recently, Cameron Capel spoke with Larry Thomas, senior business editor of Home Furnishings Business, about the challenges of running a 100-year-old family business and the growth prospects for the rug category.
Home Furnishings Business: As you know, a very small percentage of family-owned companies remain in the hands of the founding family in the third generation and beyond. What have been the keys to keeping the business strong – and family members happy – for such a long time?
Cameron Capel: It can be challenging, and not even because it’s family. In any work environment, you’re going to have disagreements, but when you’re family, it obviously brings other challenges. There are four of us from the third generation who are involved, and we each have our own strengths. We all handle different areas of the business, so we’re not stepping on each other’s toes. It just kind of worked out that way.
When we come together for board meetings or management meetings, sometimes there are disagreements, but we’ve found that the four of us are very open to listening to other points of view. We keep an open mind. It’s not just ‘my way or the highway.’ You can’t have that in a family business.
Plus, we’re able to leave (problems) at work and not bring them home. We don’t let it get in the way of birthdays, anniversaries, holidays and other family events.
HFB: What are your earliest memories of the company?
Capel: I remember going to visit my Dad in his office when I was a little girl. Just being a little kid, I didn’t really understand what was going on. But I also remember going to the outlet store (in Troy) and climbing on piles and piles of rugs. It was like a jungle gym (laughs). That was before we had display racks.
All four of us started working here in our teens. Some of us worked in the outlet store, learning to sell rugs. I worked in the office -- answering phones or filing. The boys did a little harder labor. They got to drive forklifts and stuff like that.
After college, the other three came back to Troy and started working for the company. I went straight to New York and worked in the Garment District in the fashion industry for two years. I always say I went from rags to rugs, but it was an easy transition.
HFB: In addition to parties earlier this year in your Las Vegas, Atlanta and High Point showrooms, what other anniversary celebrations are being planned?
Capel: We’ll continue to celebrate all year. We’ll be doing a big party in High Point on Oct. 14, the first day of the October market. One thing that we did in April that everybody seemed to like was ‘pop a balloon for cash.’ When you placed an order, you got to pop your balloon. Inside was anywhere from $20 to $100 in cash. Some people who got $20 were just as excited as the people who got $50. We’ll continue to do that, because I think that was a big hit.
Recently, we had a big employee celebration here in Troy. We had lunch brought in for all of our employees. They didn’t have to work for a couple of hours, and everybody got a $100 gift card to celebrate our 100th year. I think they really appreciated that. We wouldn’t be where we are without all of our loyal employees.
HFB: What challenges and opportunities do you see for the rug category?
Capel: The market has shifted so dramatically over the past decade. The price points have had a major drop. It’s such a different animal now, and it’s constantly changing. For years, our sweet spot was $499 wholesale for a five-by-eight. Now, with machine-made rugs, you can get down to $99 or $199 for that five-by-eight. But I feel like we were able to respond to that change the past two markets with some great-looking products.
We have really worked hard on revamping our line and listening to our customers’ needs. We have had a lot of introductions (in the past year), and we’ve had a great reaction to them. I think it’s because we’re listening to our customers and giving them what they want.
The Millennials are the ones driving these lower price points. They’re buying rugs at $199 or $299 retail. They move around, and since they didn’t spend much money on their rug, they’ll just leave it and go buy another one. As they grow and settle down and become more prosperous, I think they’ll spend more money on rugs and home furnishings in general. But they’re buying them more often because their tastes change, or they move. We’re not specifically marketing to them (Millennials), but we’re responding with product lines at those lower price points. That was a huge focus for us at the April market. There was a time when we really didn’t have a product that was applicable to that generation.
HFB: Does is present any special challenges being a domestic producer in this pricing environment?
Capel: It does. We have thought about going offshore to complement our braided rugs with a less expensive line. We’ve toyed with that, and even brought in some samples and some proprietary items for (specific customers.) But we’ve found, frankly, that the quality is just not there. Yes, it’s less expensive, but there are a lot of reasons why it is less expensive. We’re completely vertical, and there’s a lot of labor involved. But we feel like we make the best braided rug out there. People appreciate the quality. They appreciate that it’s American-made. And they will pay more for an American-made product. And they will pay more for quality.
June 19,
2017 by HFBusiness Staff in Business Strategy, Industry
The ultimate sales performance metric is total sales. Everything else rolls up into it. If life was simple, this would be all we need, since it is the main end result we all want to maximize. However, as with any result, in order to understand how we got it we have to look at its main ingredients and analyze them. That is because you cannot teach, train or coach a result, you must work instead on the individual elements that go into making it happen. Only when the right things are being done in the right order and at the right time, do we generate the consistent high-performance results we desire.
Each of these main factors has its own elements that go into making it happen and so do the individual elements down the line. Over the past few years, we have dissected and discussed many of these individual performance measurements and how to use them as you work to improve sales performance. I think this time we should step back a bit and look at the process of analyzing our sales performance metrics. Perhaps in doing so it will make more sense to anyone that has struggled to put a sales management process in place.
It is really a process of digging down through the numbers until you find something that needs to be either corrected or congratulated. This is a similar method to what you would go through to analyze your P & L. First you would review each of the major expense categories against your target for it and if it is not where you want it to be, you would drill down to the line items that roll up into it and try to determine where you went south. Once you find a line item problem, you would look into all the things that affect it and see what might need to be fixed.
Using sales performance metrics to help drive improvement in that important part of your business is roughly the same. You look at each of your sales people’s individual sales results, then look deeper into the ones that did not perform to your target for them or at least to the store’s average. As with your financials, you would be searching for the specific performance area that is holding back or dragging down that person’s results. Having zeroed in on the specific number that is hurting performance the most, you then need to determine what they are doing wrong or not doing at all that is causing it. In essence, the sales metrics numbers are the objective measurements you use to point you towards a problem area. Once you have that, you will often use more subjective processes and information to fix the situation.
We need to note here that we are not always looking for those metrics that are low. It is very possible to be super high in any single measurement (even total sales) and actually be hurting the overall store effort. For the most part though, there is more to gain by bringing under performers up to an acceptable level. Therefore that will be our main focus.
First, you must establish a target for where each number needs to be in order to be at least acceptable. It is not fair to expect everyone to be a super star. So looking at your top writers and comparing the rest to them is not a good idea and will lead to jealousy and failure. The best approach with all of these metrics is to use the store average as your “line in the sand”. Certainly, if you have more than one type of sales effort in your organization, such as a design or in-home team, you can separate each type of selling process and use separate averages to establish your targets.
Total Sales
As stated earlier, the main metric we are all concerned with is total sales, which if you read this column regularly, you most certainly know is the result of the following equation: Ups X Close Rate X Average Sale. The more you can get your sales staff to understand that their success is the product of how many people they work with times the percentage of those they actually sell something to, times how much on average they sell each one, the more important these sales metrics numbers will be to them.
UPS
Once you have determined which total sales performances fall below where you want them to be, the first thing to look at is the number of Ups that the individual took. The number of Ups that a sales person goes through each month is very indicative of how they sell. If someone consistently needs more opportunities in order to hit your total sales target, they could be hurting you more than you realize. It is what I call the “double whammy”, because people that take less time with each customer will wait on more customers and they most often sell less than the store average to each one (see Revenue per Up), which means that the more customers you let them wait on, the more they hurt your business!
You also need to be aware that those who wait on too few customers may be taking too long with each one. Generally, their total sales will be lower because they are so inefficient with the Ups you give them, but it might not put them below your target. So, you need to be aware that this is happening since it hurts you by causing you to need more staff to handle your traffic.
The Ups you allow each of your staff members to interact with are truly the most valuable asset you have as a retailer. Therefore, how they handle them from both an efficiency and effectiveness standpoint is extremely important to your business. Traffic per sales person is one of the very first things I review when asked to help improve a client’s sales. It is at the core of the store’s staffing needs, it lets me know how each person shares the workload and when compared to sales results it says a lot about their value to the company. Don’t forget its importance. And, when you do see a possible issue, then go on to the next metric which is revenue per Up, to see if there really is a problem and how bad it might be.
Revenue Per Up (Performance Index or PI)
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 the next critical metric used by management to understand the true effectiveness and efficiency of each salesperson. It is valuable because it takes into account the effects of both close rate and average sale by combining their effects into one comparative index that indicates how many dollars of revenue are generated each time an individual salesperson greets a customer. This is the best way to determine how much of an issue you have with an individual. As an example; if the store average PI is $600 and your lowest person is delivering under $300, then every time they take an Up it is costing you over $300. If they are seeing 120 customers/month, there is nearly $40,000 walking out the door that you had a chance of getting, if virtually anyone else had waited on those people. If you rank your staff by PI, you will know where you need to spend your coaching time and effort!
Keep in mind though, that revenue per Up, like total sales, is a result that can’t be directly coached, it is mainly a “Red Flag” that makes you aware of how staff members are contributing to your business. Since Rev/Up = Close Rate X Average Sale, you must drill down to those numbers to find the driving factor for the performance.
Close Ratio
Defined as: Number of sales divided by number of Ups and expressed as a percentage, this metric really tells you how well your people are connecting to their Ups. It also gives you direct indications of the quality of their selling skills, since understanding and consistently using the right steps in an effective selling process is key to higher closing rates.
If this number is below the target you establish, there may be several reasons. It could be Ups related, such as having to take too many Ups because the store is short staffed, so they rush each one. Or, perhaps they burn through too many Ups because they can’t connect to most of the people they approach on the floor, so they keep getting back into the rotation. A big part of connecting is people skills related, which is the toughest thing to fix - you just can’t train “personality”. Often though, the problem lies in a failure to establish trust with the customers, which also can be caused by a lack of product knowledge, poor needs analysis and/or bad listening skills.
Lastly, many people can do all of the selling steps but just can’t or don’t ask for the order. Closing is just as important a step as it has always been, but with today’s customers we see that opening the sale properly and gaining the customer’s trust is the biggest issue we face. If they can’t open they can’t close and that is what a low closing rate tells you to look for.
Average Sale
Defined as: Total sales volume divided by the number of sales made, expressed in dollars. Average sale tells you if your people are maximizing their opportunity with each Up. When measuring individual performance and comparing one person to the store average, the conclusion to be drawn regarding higher performers is that they have the ability to recognize the greater needs of some customers. In other words, higher performers have and consistently apply selling skills that lower performers do not possess or do not apply. Therefore, we must look for ways to improve how low average sale performers use the needs analysis process and whether they have the product knowledge they need to step customers up to better goods. Some people struggle to understand and use a store’s established good, better, best story to make sure their customers get exactly the product they want, short circuiting the process by just selling the low priced or advertised goods.
Ways to improve this include: training and coaching the sketching process to slow down/focus needs analysis, checking category and vendor performance reports to see if they avoid selling case goods or better vendors, and adding design skills or in-home abilities to their toolbox.
Finding the Answers
As stated, these numbers are the objective measurement of performance within your selling team. They tell you a great deal about what is happening, but they only give limited insight into why it is happening. They are indicators that should be used to point you in the right direction so you can find the answer the only way possible, through getting out on the floor and actually seeing what your people are doing with the customers you let them wait on. Observation, joining sales and giving feedback for improvement during the game is the best thing your sales manager can do to create a winning team by improving the performance of those that lag behind the rest.
June 19,
2017 by HFBusiness Staff in Economic News, Industry
With Mobility in America at an all-time historical low and only 11.2 percent of people moving from 2015 to 2016, what drives the current movers and leads them to change residence? Picking up from the “who” of last month’s article, we now dive into “why” people have moved since 2000 and take note of both the growing and declining trends. Two major reasons to move, jobs and a desire or need for new or different housing, took hits during the recession. Since the end of the recession, jobs and housing have gained traction again as reasons for mobility. However, as shown in the previous month’s article, Americans need more than a healthy economy and a recovering housing industry to propel them to move.
Table A shows that for 42.2 percent of the 35.1 million movers from 2015 to 2016, the biggest reason to move continues to be a desire for new or different housing. Recovering from the recession, job related moves are back up to just over 20 percent of movers since 2006-2007. Meanwhile, over a quarter of American movers (27.4 percent) changed residence last year due to a change in family status.
Moving Reasons Vary by Age
The propensity to move varies by age group as does the reason (Table B). But one thing is certain, the older one gets the less likely he or she is to change residence for any reason. (See Statistically Speaking, April 2017 issue for additional age related moving data.)
Young adults ages 20 to 29 dominated all categories for reasons to move in terms of numbers of adult movers -- the principle reason for moving being housing-related (3.7 million movers). These young movers are starting new households, moving into their own apartments or homes or changing residences for various reasons. Job-related moves also dominated this age group more than any other with 3.0 million moving for employment reasons.
For adults 30 to 44 (a 15-year age span), housing-related moves were by far more important than any other category (3.6 million movers) and almost double employment reasons.
Adults 45 to 64 (20 year span) are a large part of the U.S. population and contain a chunk of baby boomers on the back end. However these older adults were most likely to stay put with 2.4 million movers citing housing-related reasons for moves and only 1.1 million moving because of jobs.
The broad category reasons for moving – Family, Job, and Housing can be further segmented into more specific moving motivators.
Family
Both Divorce and Marriage rates have been on a steady decline since 2000 – lowering a “change in marital status” as a key reason for moving (Table C). Down from a divorce rate of 4.0 in 2000 (rate per 1,000 total population) to 3.2 in 2014, more people are staying married. On the flip side, less people are getting married – decreasing from a marriage rate of 8.2 in 2000 to 6.9 in 2014.
Luckily more people moved to establish their own households from 2015 to 2016 – up to 12.2 percent of all movers from 10.4 percent in 2016 (Table D). Although slow to leave Mom and Dad’s home, more Millennials are venturing out on their own and forming households. This increase should continue steadily over next five years as Millennials age.
According to the National Association of Realtors, between 2008 and 2016 America added an average of 835,000 new households per year. For 50 years prior, it was 1.3 million per year.
Job Employment
Slow job growth this decade coupled with more conservative corporate transfer policies during recessionary times have kept people from moving for a new job or job transfer. However that trend is improving as only 7.8 percent of movers from 2009 to 2010 cited new jobs or transfers as reasons for moves, now up to 10.8 percent in 2016. Also on the rise is a desire to be closer to work and have an easier commute – up to 6.0 percent of movers from 2015 to 2016, almost double that of 2001. Other job related reasons for moves impacting less than 2 percent of movers included moving to look for work or after a lost job or retirement (Table E).
A person was more likely to make an employment-related move based on the type of job (Table F). Professional and Service jobs are geared toward mobility more than any other type of employment, representing 23.3 percent and 21 percent of job-related movers respectively.
Housing
Continuing the historical trend, the strongest reason for a household move for any reason is simply the desire to upgrade to a nicer apartment or home (Table G). These movers represented 17.4 percent of the total in 2015/2016, up from 14.8 percent of movers between 2009 and 2010.
After a slowdown during the Great Recession, the desire for renters to own their own homes is trending up. Bottoming out at 4.6 percent of movers from 2009 to 2010, changing residence in order to stop renting and purchase a home grew to 5.9 percent of movers from 2015 to 2016. Other housing-related reasons for moves 2015 to 2016 included wanting cheaper housing (8.2 percent of movers) and a desire for a less crime ridden neighborhood (3.1 percent).
Other Reasons to Move
Although minor, from 2015 to 2016, both health reasons and a desire for a better climate were listed as reasons for a move, slightly more than previous years, reflecting most likely our aging population (Table H). Attending or leaving college also increased as a reason as Millennials filled universities – jumping from 1.9 percent of movers in 2006/2007 to 3.2 percent in 2015/2016.
While the percentage of Americans moving has been on a steady decline since the mid – 20th century, both the job market and housing industry are on the upswing and Millennials are entering full adulthood. More opportunity and more young adults could give way to higher mobility in years to come.
June 19,
2017 by HFBusiness Staff in Industry
This letter is addressed to those retailers who work on their business instead of those who work in their business. That is not to say that the former retailers do not work, but their focus is on how to improve their performance.
The constant drive for fractional improvement leads to the bottom line, thus achieving the statistics illustrated by the top quartile performance in the feature of this issue. The drive to achieve this level of performance involves every week comparing historical week-over-week as well as that of the previous week. Unlike other non-durable consumer retail, each week it’s “game on” to entice the reluctant consumers into the store. It is like a bicycle – if you stop peddling, it falls over.
As a backdrop to this focus is the noise. The current environment of the economy that is causing consumers to postpone the purchase and other retail models that threaten to capture some of the market share are two of the nagging doubts. There is nothing that will eliminate those nagging concerns. However, having a contingency plan to handle those things that can happen is a beginning. The starting point is a detailed breakeven analysis dividing your expenses into fixed and variable or a combination of both. This is a good exercise. Illustrated to the side is a breakeven analysis for the all-industry model. The result is that an average furniture retailer would withstand a 13% decline and still break even.
What is your breakeven? Commit yourself to improving every variable line item to accepted performance. Consider every fixed expense item for potential cuts. Make your contingency plan to address. If your top line decreases by 5%, 10%, 15%, put it in a sealed envelope. Now relax and return to your daily focus of improving performance, knowing that you have a plan. If necessary, executing a plan will be tough enough without having to develop the plan in crisis.
June 19,
2017 by HFBusiness Staff in Furniture Retailing, Industry
Not a month goes by that another retail concept announces an assault on the traditional furniture supply model. The recent announcement is that Amazon is planning four major distribution centers to serve its anticipated expansion into furniture in order to increase its retail presence. This move on top of the major discount retailers of Target and Big Lots indicate their future stores will have a focus on home furnishings.
This constant evolution of the furniture supply model is not new. In 1886 the upstarts, Richard Sears and Alvah Roebuck, created a mail order company to compete with the general stores in the hinterlands whose model was limited selection and significantly higher prices. While less of a presence today, it has lasted for 131 years.
Innovative concepts have always been part of the landscape. For example in Lebanon, Pennsylvania Richard Levitz introduced a concept that evolved into a national chain that pioneered the “furniture warehouse” concept. This concept expanded for nearly 100 years before liquidation because the consumers wanted to see furniture displayed in “vignettes” in order for them to envision how the furniture would look in their homes.
While there are tantalizing announcements, such as furniture on demand produced from 3-D printers, there are two considerations required when exploring changes to the furniture distribution model. The first is the cost to conceive and deliver to the consumer a product that meets their demands. The second is the ever-changing demands of the consumer – and this is the most important. The fickle consumers are fast to embrace a new concept that they believe will address their perceived shortfall in the current model, only to abandon when the new model doesn’t address another need.
Top quartile retailers are continuously analyzing their financial performance in order to discover ways to increase the bottom line. However, as can be seen from the following article, these improvements are incremental. Major profit improvement can only occur with changes in the total business model. The accompanying table presents the major cost components comparing the traditional model to those that are currently challenges to the status quo.
Furniture Brands International, using the manufacturing vertical concept, was poised to capitalize on its consumer brands by opening, with retail partners, focused stores under distribution agreements. Financial difficulties halted that strategy. However, Ashley Home Store, founded in 1997, had prospered with this concept. It now has over 450 locations in North America with over $3 billion in sales.
This model has the potential for changing the traditional industry model. Financially, it reduces the expense of selling/marketing to retailers since the dealers are captive to the manufacturers. Interestingly, the manufacturing direct concept challenges the perception that the consumer will not wait for delivery. The dealer maintains little inventory at its warehouse. It is only a cross dock transferring to delivery trucks for the consumer. The major challenge is the percentage of consumers who will wait the 20-30 days for delivery when competition is offering same-day delivery.
The manufacturing vertical model relies on the local dealer to execute a local advertising plan supported by a national advertising campaign. This approach, in total, is a more efficient expenditure executed at a higher level of professionalism.
The store footprint of around 30,000 square feet reduces the occupancy cost of display. At this point the lack of selection is not a negative to the younger consumer who prefers a more curated presentation that supports their busy lifestyle.
The challenge is that this model must conform to the perceived retail experience of the consumer, an experience that is constantly changing based upon research from Impact Consulting Services, parent company of Home Furnishings Business. These are the major factors.
While the potential exists to reduce costs which can translate into higher profits or lower prices, the increased risk of relying on a single manufacturer to consistently satisfy the consumer’s perceived needs.
The emerging etailers, using ecommerce as the way to distribute furniture, are challenging the retail sector of the traditional furniture model. Eliminating the brick and mortar of the traditional furniture retailers and utilizing their web presence to entice the consumer to purchase is still a challenge. The need for the consumer to experience the product before making a major purchase is important to most consumers. However, they have still captured 15-17% of total furniture sold.
The need to provide white glove delivery has been a significant expenditure when compared to local delivery by the brick and mortar retailer. To overcome this factor etailers, such as Wayfair, are establishing their own warehousing/delivery infrastructure. While more cost competitive, can it provide the service levels expected by the consumer?
The discount chains are just developing their furniture strategy. Their major opportunity for cost reduction is in the sales process. Relying on consumer-to-self sell will be an interesting experience. While acceptable for bar stools and less expensive product categories, will it translate to more expensive products? It has worked in apparel for all except the premium price points. The integration of the furniture product category into the already-established warehousing/distribution system is the next opportunity for cost reduction.
While new concepts are always exciting, what about the existing traditional model? We have discussed several over the last decade, but have failed to execute. For example:
Suppliers’ prices include delivery, not just the containers, but also small lots.
Delivery directly to the consumer, competing with the etailers.
Suppliers assuming responsibility for communicating to the consumer the uniqueness of their products and relying on retailers to communicate price/value and service.
I could go on, but why don’t we “whiteboard it.” Let’s make existing models
better.
Traditional furniture stores, feeling the relentless pressure from online retailers as well as local competition from vertical manufacturers, warehouse price clubs, and discount superstores, are scrambling to maintain market share. As the furniture industry in total experienced slow growth last year, traditional furniture stores subscribing to an online performance application developed by Impact Consulting Services, parent company of Home Furnishings Business, took baby steps to improve their profitability, eking out minor improvements wherever possible. These are retailers actively involved in managing their businesses. Net income for this group increased only slightly from 3.7 percent in 2015 to 4.0 percent in 2016. Meanwhile, the total furniture and bedding industry slowed growing 3.0 percent 2015 to 2016. (Figure A)
This is the fourth report on Performance 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, parent company of Home Furnishings Business. 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 million 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.
Overview of Key Performance Indicators
After a hefty improvement in financial performance in 2015 among the traditional retailers that comprise the statistics in this report, retailers showed only a slight improvement in net income in 2016, up from 6.4 percent to 6.8 percent total. Lacking a clear strategy going forward to combat the pressures from the e-tailers and alternative distribution channels, all areas of the P&L held steady with the only slight improvement being a 0.4 percent improvement in cost of goods sold.
Table 2 gives an overview of key indicators – gross profit, sales expense, general & administrative expense, net operating Income, and credit expense. Last year produced very little improvement in any of these areas. However, 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. And while these top retailers did slightly better at controlling cost of goods sold, significant to their success was their reduction in sales expense and general and administrative expense compared to the group. 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 below.
Above the Line Income
Total revenue encompasses merchandise sales as well as returns, sales of fabric/leather protection, and delivery income (Figure B). The needle moved very little last year compared to 2015 in all of these areas.
Returns: Merchandise returns (Figure B) represent about 1.3 percent of total revenue for the group, about the same as last year. (Note: Historical 2015 data has been revised from previous reports.) 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, regardless of retailer size, and was essentially flat in sales growth over last year.
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. Larger retailers are able to offset this expense at nearly double the rate of smaller companies.
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 did neither last year seeing less than 0.5 percent improvement – 51.5 percent COGS in 2016 compared to 51.9 percent the previous year. Larger companies over $100 million outperformed their smaller counterparts; however, no size segment saw much change from the previous year. (Figure C)
Gross Profit
With little improvement in COGS, gross profit also saw only minor growth as well. For all participants, gross profit grew only slightly from 48.1 percent of revenue in 2015 to 48.5 percent in 2016. 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 48.2 percent GP. (Figure D)
The furniture industry’s gross margin is the envy of many retail sectors. Some vertical furniture retailers enjoy higher margins due to their direct sourcing models while electronics and appliance margins can run in the teens. With such healthy margins, why does the furniture industry make so little profit? Tracking how much of it the industry spends on selling the product and running the business brings these low profits into focus.
Selling Expense
A significant 23 percent to 24 percent of revenue is spent on selling expenses (Figure E), and this figure has remained constant last year over the previous 2015. This is the cost of attracting the consumer to the store (advertising), converting that consumer to a purchaser by trained personnel (sales) and successfully delivering that product to the consumer’s home (warehouse/delivery).
Advertising Expense: The cost of promoting product has also remained constant at about 6 percent of revenue (Figure E). Except for very small firms under $5 million in sales, the top quartile companies in profitability held their advertising costs to about 4.3 to 4.5 percent. Advertising channels may differ by size of retailer where larger retailers will use more broadcast/air channels while smaller retailers 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 with the top quartile of these small dealers spending around 7 percent of revenue. 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 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 runs about 9.2 percent of revenue. 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). Often a retailer’s upfront performance is negated by the backend if the retailer is unable to manage it correctly. Many midsize traditional 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
While not directly touching the selling process, the final piece to profitability is the control of general and administrative expenses. General and administrative expenses are, for the most part, fixed expenses and must be controlled relative to the potential volume. Primary components include occupancy costs – the place to conduct business and the costs to keep it open, the cost of the management team that develops and executes a strategy, and finally the technology and information systems that are essential in controlling the process. These expenses can be as much as the selling expense in some cases and generally vary significantly by the size of the retailer. (Figure F).
Information Systems: Technology costs are staying 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 5 to 6 percent (Figure F). And while very large retailers over $100 million often have the upper hand with the ability to secure the best locations, real estate rents are escalating in prime areas with the top quartile of these high volume companies averaging 9.1 percent in occupancy. Consumers are increasingly placing a priority on location wanting to shop closer to home or visit retailers along their normal shopping routes.
Administrative Expense: The largest chunk of administrative expense is management salaries along with bonuses, professional fees, and insurance. Overall administrative fees can total 8 percent to 10 percent of revenue on average for all retailers. Top quartile small Mom and Pop stores run higher at over 10 percent. Larger retailers over $25 are keeping their salaries down to 7 to 8 percent (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 totals 2 percent to 4 percent of revenue for the top quartile regardless of size and 3 percent for all participants (Figure G). From our perspective, credit is a selling expense that has emerged as a perceived necessity to generate consumer traffic. But in our experience, less than 30 percent of consumers opt for offered credit promotions.
Net Income (Percent of Revenue)
After deducting an average of 0.3% of revenue resulting from other income and expenses, including insurance and taxes, net income crept up to 4.0 percent in 2016 for the total group, up from 3.7 percent in 2015. For the top quartile in each size range, small 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 8 percent to 12.4 percent among the top 25 percent. (Figure H)
Summary
The slow growth in the furniture industry this year is reflected in the flat financial performance of traditional furniture retailers. And lacking any new strategic direction to combat the onslaught from online retailers and other local distribution channels, management in these active and performance-focused companies realize they have their work cut out for them. Keep in mind our numbers are only guidelines to stimulate thought and discussion of how to profitably run a retail operation. We caution any specific retail figures, to be comparable, must be compiled to conform to these classifications.
We believe an ongoing focus on a company’s statistics is the path to high performance. It is not achieved in a month, but is part of a continuing process. Such a process is greatly enhanced with membership in a retail performance group that allows for open and frank discussion with peers of the barriers to achieve certain objectives.
While the overall industry statistics indicate slow but steady 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.