Despite what that pesky groundhog had to share last month, spring is just around the corner. With its return, spring will usher in the urge for consumers to shed winter coats, buds to push through warmer earth and garden parties filled with brightly colored tulips. Just one or two (let’s hope) residual snow storms left before dining al fresco under a pergola or relaxing by an outdoor fire pit makes their long-awaited return.
One sure sign of spring’s arrival—retail floors are filling with outdoor furnishings. Sofas with plush cushions; tables with brightly colored umbrellas and plenty of space for friends.
According to a Home Furnishings Business survey conducted in late January, consumers continue to spruce up their outdoor living spaces and make them true extensions of their homes’ interiors. Consumers participating in the survey had purchased outdoor furniture within the last year or so. More than 80 percent of those surveyed said they made their purchase to either replace an old outdoor furniture collection (50.8 percent) or to add to an existing collection (29.5 percent). Those purchases weren’t made without a bit of due diligence and Internet research by the consumers. Nearly 43 percent spent between two and seven hours digging into outdoor furnishings prior to making their purchase. Once the online research was completed, our panel took a bit of time to find just the right thing for their homes. More than 60 percent of our shoppers took between one and four weeks to close the deal.
Shopping Versus Buying
In the research stage, consumers shopped a variety of channels in their hunt for outdoor furnishings. More than 57 percent shopped the home improvement chains, like The Home Depot or Lowe’s, while only 21 percent shopped traditional furniture stores. That was the lowest score falling behind outdoor furniture specialty stores (36.1 percent), the Internet (37.7 percent) and mass merchants, like Walmart and Target (49.2 percent).
When it came to the buying, traditional furniture retailers fell farther behind. Only 6.6 percent of our consumers—the lowest percentage—bought their outdoor furniture from a traditional furniture retailer. Instead, they bought from home improvement stores (37.7 percent), mass merchants (23 percent), outdoor furniture specialty stores (19.7 percent) and the Internet (13.1 percent). Perhaps the reason for the high purchasing rates at mass merchants and home improvement stores is the fact that they stock what they sell. The immediacy factor allows consumers to shop in the morning, take it home and host a backyard barbecue all in the same day. More than 80 percent of our consumers purchased store stock for their outdoor areas, while the remaining ones opted to custom order their selections.
What Retailers Say
Northcape International’s Charleston Woven Sofa
This is a great value with domestic Sunbrella fabric cushions made in Chicago. It features an Aluminum frame with high-quality poly-resin. Sofa retails at $1199.99.
Coon Rapids, Michigan
Tropitone’s Montreux Collection
“This group has a great Tropitone story and offers
special orders in three weeks. It’s a great style.”
$2499.99 for a five-piece sling dining set with stone-works table.
Coon Rapids, Michigan
Woodsource’s Sunset Cliffs Collection
This group is cast aluminum and powder coated. The group is in ‘safe’ color cover, brown and tan striped, and has a variety of pieces. We offer four different dining table options – a 52 inch round, rectangular, counter height and a dining table with a fire pit in the middle. We offer a standard cast aluminum chair with a seat cushion as well as a sling chair. Our seating options in the collection are expansive.” $999.99 for a five-piece grouping with a round table and four chairs.
What Suppliers Say
The Cloud by Gloster
Reminiscent of contemporary interior upholstery, Gloster’s Cloud group continues to be a winner. Cloud is the epitome of functionality with its modular pieces based on five different style base frames. The collection gives consumers an endless amount of options and configurations to fit any available space.
Homecrest’s Lana with Lunar Fire Table
The Lana spring base chaise is the perfect fit conversation around a fire pit, paired up on a porch or as a dining option. The Lana spring base chaise is proportioned and positioned for relaxation. Designed with support to easily enter and exit the piece, and the chairs are perfect for a relaxing nap or a good book. The Lunar Fire Table offers an embossed leather aluminum top and can be customized in one or two color combinations on the top, frame and side panels.
Tropitone’s Montreux Urcomfort Collection
The Montreux collection with its adaptable design has been a winner for Tropitone. Here the company has paired it with its URComfort seating that moves with the body. “Whether you are sitting at a table in a dining chair or relaxing in a swivel action lounger with your feet on an ottoman, URconfort finds the most comfortable position for you,” said Mark Gorr, vice president of product managemen and consumer sales. “And it stays in that position unless you want to move. Then it moves with you. URComfort is an elegant fusion of design and engineering.”
English Garden Collection by Pride Family Brands
The collection offers lasting leisure in cast aluminum. The crescent share of the collection provides ease of conversation and also eliminates the appearance of straight lines. The Castelle fire pit coordinates with a number of Pride Family Brand collections, including English Garden. Cast aluminum top and leg elements, hand-woven base and a propane fire mechanism and warmth to outdoor rooms.
Century Furniture’s Andalusia Group
The Andalusia Collection designer by Richard Frinier reimagines what an outdoor space can be. The collection gives consumers the ability to create a casual, beautiful retreat in their own backyards.
Janus Et Cie’s Janus Living Collection
Available in multiple finishes and as a stocking program for quick delivery, the collection continues to be a winner for Janus et Cie and its retail partners. The Joe armchair shown here with a teak table, offers a classic bucket-style seating atop chrome polished, steel legs. The collection offers 21 items, eight finishes and four fabrics to offer a customized approach to living.
Staying on touch with retail metrics can turn a mediocre operation into a High Performance Company.
Finding financial prowess in the furniture retailing business can be a tricky proposition. What numbers are key performance indicators? What components of the business can add to the bottom line, and which ones will have a detrimental effect? It has been several years since a comprehensive survey of retail financial performance has been published. In fact, the National American Home Furnishings Association report was last issued in 2009 based on data from fiscal year 2008. This is the first time Home Furnishings Business has published such a comprehensive look at financial performance in the home furnishings industry. Impact Consulting, parent company of HFB, compiled the survey for the NAHFA and has continued to maintain the data since that time using the same methodology. Currently, the information is available in the company’s Best Practices application of FurnitureCore.com via subscription basis. The online information allows retailers to compare themselves to other home furnishings retailers and devise a plan on how to better manager store operations. Participating retailers submit financial information that is then matched to a standard chart of accounts to insure all expense categories are comparable. The study has been confined to traditional furniture retailers. Excluded are mass merchants, e-tailers, and vertical manufacturers, like Ashley HomeStores or La-Z-Boy Furniture Galleries, and vertical retailers like Crate and Barrel. To insure a comparable evaluation a balanced sample was selected to reflect a geographic mix, volume range, and merchandise price points.
Graphic A presents this breakdown.
Table 1 on the following page presents financial ratios for 2013. As can be seen in Graphic B (page 19), while the industry has recovered from the Great Recession kicked off in 2008, the financial performance of the furniture retail sector has not completely regained its footing. In fact, compared to 2008, the bottom line is a mere third (1.4 percent net income, 2008).
However, a significant difference arises when we analyze using different parameters like retail volume or price points. For example, let’s examine using sales volume. From the analysis in Graphic C (page 19) it can be said that it is all about volume. However, it appears there is a no-man’s land between $5 million and $25 million—operations too big to be run by an owner-manager, but without enough volume to justify a much larger organization. The following will explore the reason by each major operating rationale.
Furniture retailing has a number of elements that can contribute to or detract from revenue. Things like delivery, income and fabric protection are all considered above the line items. Smart management of these elements often defines a retailer’s success, or in some cases, failure.
Returns: Smaller retailers tend to handle many of their returns outside of their tracking systems by simply voiding the ticket or making even exchanges. The retailer at $25 million and above is more likely to record the transaction and feel the brunt of this major issue for the industry. However, retailers above the $100 million level show a significant difference. Is this an indication of tighter procedures or the introduction of a restocking fee?
Merchandise Protection: Merchandise protection, like fabric protection, is often considered to be a gold mine with the exception of those retailers in the upper to premium tier who often consider it a negative. For the midsize retailer—those with sells between $5 million and $100 million—merchandise protection is an important profitability component.
Delivery Income: Delivery income is beginning to become part of the consumer’s ire along the same lines as airlines’ charging passengers for checked baggage. However, for now, it is an important part of offsetting the delivery expense and can impact it by as much as 60 percent to 75 percent. Many high performance furniture retailers are able to offset the cost of deliveries.
The ongoing confrontation between manufacturers and retailers is to arrive at a selling price to maximize the volume sold to consumers. While this is a point of significant research in other retail sectors, the furniture industry is still playing a game of dare.
Retailers remain in the power position for now because few suppliers have managed to create and maintain brand names that resonate with the consumer.
Nevertheless, for many retail sectors, such as electronics and appliances with margins in the teens, the furniture industry’s gross margins are envied. The table in Graphic E (page 20) explores our current position. The information presented in Graphic E kills the myth that big retailers buy better and have better margins. However, those dealers may have a strategy of low price that consistently drives revenue at reduced gross profit levels. It’s important to point out that many vertical retailers, like
Restoration Hardware and the like, enjoy margins of 12 percent to 15 percent higher because of their direct sourcing model. Now let’s discuss how the industry makes so little profit beginning with what appears to be such a healthy margin.
The cost to motivate consumers to put home furnishings at the top of his or her discretionary spending and, more specifically, at your store through advertising is the first step in the process.
After arriving at the store, sales management takes over converting prospective buyers, and keeping the sale is the task of the backend. As we discussed earlier, between four percent and six percent of revenue can be lost through merchandise returns. Such returns can be attributed to the back-end operations, as well as to the front-end floor staff.
Advertising remains a function of volume with the foundation for smaller retailers pushing their expense up ¬about two percent. However, it is important to manage advertising expenses. It’s imperative to control costs while measuring the advertising’s effectiveness on a weekly basis. The only measure is number of visits—or ups—to the store or the Web site. With such scrutiny, advertising effectiveness will improve. Weekly sales are secondary results influenced by a number of other factors.
Sales Expense includes not only the sales associates’ commission, but also sales management, bonuses/contests and similar activities. The January/February 2014 issue of Home Furnishings Business provided some significant perspective. Warehousing/Delivery completes the cycle of selling expenses, and it must be managed intelligently. Often a retailer’s upfront performance is negated by the backend if the retailer is unable to manage it effectively. If that’s the case, management should seriously consider outsourcing warehousing and delivery functions.
Hidden in the other factors is Sales Office. Retail technologies exist to eliminate the sales counter which can cost one percent or more, but can zap consumers’ excitement for the furniture purchase. Graphic F (to the left) presents this information graphically.
GENERAL AND ADMINISTRATIVE EXPENSE
To complete the selling process requires a place to conduct business (Occupancy), a management team to develop and execute a strategy, and, technology, which is becoming more and essential in controlling the overall process. In total, this expense is almost equal to the selling expense. See Graphic G on page 21. Do the larger retailers have an advantage over the smaller retailers because of volume? Not proportionately. However, the ability to attract top talent and secure the best locations is often the case. The focus is not to reduce the expense, but to make the most effective decision. We believe the expenditure for information for both systems and data will expand. Of course, we are invested in this area via our portal FurnitureCore.com, which offers business intelligence to our clients.
The importance of location which impacts occupancy cost has always been key, but it’s stepping up to be a major factor today as time-starved consumers want to find furniture retailers adjacent to their Saturday shopping routes The management team (Administrative) is a major decision and can be the difference between a $50 million retailer and a $100 million retailer. It is a matter of management talent. The decision for a $10 million retailer to hire a sales manager is excruciating, but the increase in close rates and average ticket can increase sales by 20 percent if properly managed. This is true in all areas—delivery, warehousing, and advertising. Results can be produced when someone is focused on the task. If a retailer cannot execute the administrative tasks, it makes more sense financially to hire an outside supplier. This is especially true with delivery functions where costs can be reduced and customer service improved.
CREDIT INCOME AND EXPENSE
This area of expense was, at one time, a key area of profitability for retailers when many carried their own paper. Some still operate as credit houses; however, the likes of the former Heilig-Meyers are only in the memories of the seniors of us still in the industry. Today, credit is a crucial place to control cost. Graphic H (to the left) provides the statistics.
From our perspective, credit is a selling expense that has emerged as a perceived necessity to generate consumer traffic. In our experience, less than 30 percent of consumers opt for offered credit promotions.
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 companies. It is not achieved in a month, but is part of a continuing process. Such a process is greatly enhanced with a membership in a retail performance group that allows for an open and frank discussion of the barriers to achieve certain objectives occurs with retail peers.
While the overall industry statistics are discouraging, there are individual retailers who achieve 10 to 20 times this performance level. We challenge you to be one of those. Home Furnishings Business is committed to providing input to your process. HFB
FurnitureCore’s application, Best Practices, provides an ongoing monthly measure of a retailer’s performance. No individual retailers’ numbers are shared, only composite percentage results are provided. Contact firstname.lastname@example.org for more information.
A more detailed Operating Performance Report—2013 is being prepared and will be available in April. The report will detail further each expense category as well as segments by price point and region. Contact email@example.com to reserve a copy.
Let’s talk about ways to keep furniture stores out of Red.
“Lowest price” might appeal to consumers shopping for furniture, but the competition among home furnishings retailers to meet that goal is killing bottom lines at a lot of stores. Particularly in case goods, our product essentially has seen price deflation over the past two decades. Over that time, furniture’s consumer price index is flat, while other consumer goods sectors’ have risen. This article takes a look at ways retailers can add to the top of the line—and maybe plug a few cracks where money is leaking and shaving already slim margins—with a particular focus on merchandise protection sales, delivery and returned product.
A dirty little secret about furniture retailing: Some stores’ margins are so slim that the only way they make money is through the sale of product protection plans. We’ll spend some time here, since even if your store isn’t desperate, those plans can give you a little more breathing room on the bottom line. Protection is a concept with which other sectors are doing pretty well.
“I purchased a television from Best Buy a few weeks ago,” said Joe Milevsky, CEO of Acworth, Ga.-based consultancy JRM Sales & Management. “I asked about the percentage of customers who buy warranties.
They said it was 12 percent of most big-ticket purchases—not even big-ticket, anything over $50.
“To me, it’s providing a high level of service, and it’s necessary addition to profit for any retailer. I don’t believe it should be forced on somebody, but it should always be presented in a positive light.” John Egger, CEO of Profitability Consulting Group, is blunt with his clients about protection sales.
“If your team isn’t averaging closing on protection for 4 percent of sales, you have a problem,” he said. “It’s a profit center that takes extreme discipline. It can’t be an add-on, it needs to be presented in an educational way.”
Egger’s last point is of particular importance, and one naturally shared by providers of product protection. We asked a few about how retailers can get more out of their protection sales. They agreed that slapping a plan on the table at the end of the sales process is not the best strategy.
That makes it a hard sell, and consumers shy away.
“Where many store associates fall short is they try to make the protection sale an add-on,” said Chris Taylor, director of sales for the furniture and rent-to-own channels at Protect-A-Bed, whose mattress and bedding protection products are in more than 7,000 storefronts nationwide. “To me, the way to do is that the same questions you use on educating the customer to buy furniture are the same ones you use to sell protection. ‘What don’t you like about your existing mattress? Part of the reason you’re here looking for a new mattress is that you didn’t have a protector on the old one.’ It’s about getting more life out of your mattress.
“The cardinal sin—you make the sale and then ask, ‘Oh, did you want to add a protector to that?’ Use the questions you’re asking to encompass all the consumer’s needs. It’s all one sale.” Bringing up protection at the end of the sale rarely succeeds, agreed, Tim Vaughan, national accounts sales director at Guardian Products. He suggests incorporating protection when a salesperson is pre-qualifying a customer’s needs and/or describing what the store offers—in home design, next day delivery, etc.
“A savvy salesperson is proud of their store’s offerings and basically assumes the protection sale while asking questions whose answers help the customer realize the need for protecting their investment,” Vaughan said. Alan Salmon, president of Montage Furniture Services believes sales associates must focus on the true value of the protection plan.
“Do not oversell it—‘don’t worry, it covers everything,’” he said. “No, it doesn’t.
Everyone loses in that scenario, except the RSA. There is coverage in there that will be of value to the vast majority of people at some time during the term of the plan. If RSA’s do their discovery effectively they should tailor the value to the needs of the consumer.”
CLOSING ON PROTECTION
We asked protection vendors if they have a sense of the close rate on protection sales as a percentage of total sales for their clients.
“We have some ways of ball-parking performance based on a dealer’s sales, or estimated sales, and most dealers are pretty open about their performance,” Salmon said. “The most common way this is measured is as a percentage of total sales rather than an attachment rate, i.e. five plans sold on 10 furniture sales equals a 50 percent attachment rate.
“As a percentage of total sales, 5 percent is considered good performance, and 7 percent is leaderboard. Our best guess at an industrywide level is 3 percent of sales.” Guardian’s Vaughan gave a similar number for a likely average nationally—2 to 3 percent—for gross sales of furniture protection sold on sales of all furniture, including upholstery, case goods, area rugs.
He added that mattress accessories/pads are a higher percentage relative to the mattresses sold—especially when in a specialty mattress.
“All retailers value and therefore promote protection differently,” Vaughan said. “Some stores sell 6 percent to 9 percent of total furniture sold, and some are 1 percent or under.”
Taylor at Protect-A-Bed said the answer varies widely, and on a number of issues: whether the retailer’s measuring the performance of the category; and the compensation model that is or is not in place to encourage protection sales. He added that Protect-A-Bed’s offerings don’t vary from the traditional protection model.
“Our approach is that (bedding protection) is a product driven sale, and it’s good for mattresses the customer already owns,” he said. “As a product-focused provider, we’re looking to give a tangible benefit. We give the consumer a lot of options to choose from. There’s no if in what we do— here’s what happens when a human body sleeps on a mattress.”
How can retail sales associates handle objections to adding protection to the consumer’s purchase?
“That’s where the training, and the retailer’s commitment to the category, comes in,” Taylor said. “If you don’t set expectations, it gives salespeople little incentive to overcome objections.”
He also believes attachment rates don’t tell the whole story. “There are two key factors: average unit selling price and attachment rates,” Taylor said. “The one metric that captures both those factors is the percentage of retail sales. Divide Protect-A-Bed sales by the value of overall business, the sales of the category that it was designed to protect.
“Why that’s important, generally speaking, is that the margin on protection business us higher than many other categories on the floor,” he said. “If you put importance on it, you’ll get performance out of it.”
Customer objections to buying a protection plan generally go back to the core issue of not incorporating the idea early on in the sale of the product to be protected— or not mentioned at all.
“Sometimes customers have objections, but most of the time, when it’s not sold, it’s because it was never brought up,” he said. “That’s the number one reason protection doesn’t get sold.”
He believes its important to acknowledge objections along the lines of “Yes, we have heard about other negative experiences but we here at …”
Break down the cost in little bites: Point out that protecting the sofa for five years is $1 per month; and that furniture is frequently the shoppers third or fourth largest investment—they insure their house and car don’t they?
“Reemphasize the biggest features for that particular customer, which should have been discovered through successful pre-qualifying,” Vaughan said. “And again, the protection concept cannot be introduced at the end of the sale—customers are turned off.”
Salmon said if sales associates have done the discovery properly they ought to be able to handle much of what comes up in the way of objections. It also helps to find some success stories previous shoppers have had.
GO YOUR OWN WAY?
Some retailers are exploring the possibility of formulating their own protection plans.
“The advantages are that they may save money up front, and they can treat their customers differently if they’d like,” said Vaughan. For example, “Mrs. Smith has been buying from them for 20 years and she spills bleach on her sofa (no one covers) but she wants it taken care of—they can.”
There are challenges there, he added. Does the retailer have the customer service staff there to handle all claims? Will they have to say “Yes” more often—when they say “No,” the retailer gets the blame, not Guardian or a similar third-party provider. “Maybe most important is, do the states they sell in require the programs sold to be underwritten by an insurance company, if the retailer should go out of business?” Vaughan said. “This is an increasing mandate from state commissioners. Is the retailer aware of and capitalized for this?
“We’ve been around since 1977, and just in the last 18 to 24 months we’ve gotten underwritten. There are 16 states where you can’t do business if you’re not underwritten.”
Montage’s Salmon believes the topic of formulating their own protection plans rates a separate article.
“Suffice it to say that there are pros and cons to a self-insured strategy—you own the profits, but you also own the losses,” he said. “From what I have seen and heard, the concept is being sold by some as a no-lose option, but this business is not as simple as some would have dealers believe.”
DELIVERY: TO CHARGE OR NOT
With retail margins what they are, is “free delivery” a concept that’s outlived its time?
Charging for delivery is a scary step for some retailers, but they might take heart from airlines—with few exceptions, you won’t check a bag on an airplane without paying a fee. There was a lot of grumbling, but now its par for the course. If you offer free delivery, make sure you can afford it.
Third-party delivery services “are not running a company for charity, and if you farm it, they’re going to charge enough to cover their expenses,” noted JRM’s Milevsky. “A lot of retailers don’t treat delivery that way. What I see, and that’s from 100 financial statements I look at, is that the percentage (of furniture retailers) that charge anything is low. I’d say the percentage that charge enough to cover the direct expenses of delivery and the indirect cost of things like management’s time is lower.”
There are real costs involved that the retailer has to recoup in some way: fuel, truck maintenance, time for two delivery people, the list goes on.
“We’ve shifted 78 clients to charging for delivery, and not one has gone back,” said Egger at PCG. “Delivery should be a profit center, not a break-even.” Milevsky also believes delivery can be a profit center. Retailers need to break down those costs and develop a charge formula. “That includes accounting for any revenue from delivery charges, payroll for delivery personnel, expenses for running a truck to the customer’s home, and management costs in terms of time,” he said.
“Look at it as a separate P&L statement. A lot of (retailers) rationalize that they can’t charge for delivery because their competition doesn’t do it.
“For my clients, if their margins are inadequate, I’m going to tell them to charge enough for the product to make a decent margin, and then charge for delivery to cover what they’re spending there.” Retailers need to get the full picture of delivery costs, and that includes reading some fine print, said Dan Schneider, CEO of SIB Development, Charleston, S.C.
“They have to really understand their truck leasing, what’s in the lease, what’s not and the extra costs involved,” he said. Also, beware accepting your current arrangements out of force of habit.
“Say a retailer got their first and second trucks from so-and-so, and they’re getting their 100th from the same guy,” Schneider said. “The furniture business is such a legacy business—multiple generations working for the store.
“They’ve formed the same type of relationship with some of their vendors. They’ve been working together so long that they assume they’re getting the best deal, and that’s not always the case.”
Merchandise returns leach money out of retail operations in several ways—time, labor and fuel to pick the item up from the customer; a piece of furniture that will only go at a damaged-goods price if it can be sold at all; plus the more intangible aspect of customer goodwill.
Egger believes minimizing return goods starts at the back end. “If 10 percent of your deliveries require a trip back to the house, that’s huge overhead,” he said. “As independent retailers we have to be more than gracious—we have to be quick and decisive. And you can’t get better advertising than a customer who’s satisfied the first time around.”
Egger suggests 98 percent as a perfect delivery goal: “If you fall below 95 percent, you’re not getting it right.” It’s not all on the back end. Be mindful of overselling on the sales staff’s part.
“What are they telling people you can actually do and not do?” Egger said.
Milevsky said his clients understand the importance of taking the time up front to get it right the first time. Inefficient delivery operations, last-second add-ons add to cost. Are you “selling on approval”?
He also believes that what happens on the sales floor can impact the level of returns. Beware sales associates creating unreasonable expectations on the customer’s part.
“The salesperson says, ‘If you’re not happy, we’ll pick it up,’” he said. “It makes the sales process easier, but adds a lot of stress to the rest of the operation. … A lot of the issues on the delivery side of the business are created by over-selling by the salesperson.”
There’s an educational aspect to selling furniture, especially wood furniture that can prevent returns. “For sure it’s something we have to watch and have to understand how to deal with,” Milevsky said. “If wood looks different than it did in the showroom, that’s nature’s fault.” HFB
Margin on Merchandise
There’s margin, then there’s margin. Operating margin for the entire operation? That’s easy. Determining margin down to each vendor, product category and individual item? Today’s operating systems have the ability to sort that data, but there’s a lot of fine print to read. Read it anyway. JRM Sales & Management CEO Joe Milevsky said furniture retailers should set margin goals for overall business, by category, and by individual product from each vendor, based on what the market will bear.
The number of vendors even a small furniture store might carry can make for a lot of homework on management’s part. “I look at the appliance experience, where you have a handful of manufacturers, and they own everything,” Milevsky said. “You buy a Kitchenaid or Jenn-Air? Guess who owns that—Whirlpool. “A furniture dealer has thousands of resources to choose from, and one problem is we tend to make it more complicated than we need to when we’re putting a package together,” he said. “With the exception of a handful of names, the ‘brand’ is not very important to consumers. She wants something that looks good and will last.”
The good news is that once you know which products are making money on you floor and which are not, there are a lot of choices from which to choose in finding new vendors who might offer more margin-friendly pricing and terms.
“I believe in allegiance to vendors, but if I can’t get the margin I need out of a product, I’m going to look for what I need until I find it somewhere else,” Milevsky said.
John Egger, CEO of Profitability Consulting Group, tries to get retail clients to carry as much private label merchandise as possible.
The idea is that exclusivity allows a margin bump since the product is unique to the store—or at least in the market it serves. When it comes to making more money on each sale, though, it’s
“Retailer, Heal Thyself.”
“The worst person about getting margin is often the store owner—90 percent of the time, he wants to be the cheapest guy in the market,” Egger said. “Owners and salespeople have to realize that if you’re the cheapest on every item in the store, you’re likely to go broke.”
PARTNERING WITH VENDORS
Dan Schneider, CEO of SIB Development, suggests looking for a landed price on goods from vendors to make sure retailers know how much they’re paying for freight. “Can you negotiate terms to get a discount for paying in 10 days or COD?” he said. “There might be manufacturers who need the money right now who would be willing to give up a few points.”
Retailers also can improve margin by honing in on their sales processes—and some vendors are looking to speed that along. Take mattress vendor Kingsdown. Bedding is the most profitable, quickest-turning category overall in the home furnishings sector, but there’s always room for improvement.
The vendor’s “Bed Match” point-of-sale program, in conjunction with a detailed sales process, analyzes a shopper’s size, sleeping habits, particular aches and pains, and preferences to suggest specific mattresses that fit their needs. “The consumer can get fitted to the right bed with measurements based on real science,” said Kevin Damewood, Kingsdown’s executive vice president of sales and marketing. “We’ve found that approximately 60 percent of the people who try this process buy the bed; and the average sale is around $2,700 for a queen size. “At wholesale, the average cost of the product we’re selling for Bed Match is $600 to $625 a piece, so we’re aiming for higher tickets at higher margins.”
When the process is followed, Damewood said the conversation with the consumer doesn’t mention price until a specific mattress and alternatives are found.
In addition, retailers participating in the program can bring a competitor’s mattress to Kingsdown for analysis—with the competitor present at the test—and put that information into the Bed Match system for use at retail.
“We don’t want consumers to think this is contrived science,” Damewood said. “The consumer typically hates shopping for mattresses because they worry about pressure from commissioned salespeople, and so much of the product looks the same.” He identified several types of consumers for bedding: 35 percent to 38 percent of consumers are value shoppers that don’t really care what they sleep on; 15 percent are a luxury brand buyer that will always buy the best; and another 35 percent are buying a new mattress for a health issue, a category that continues to grow.
“To build margin, what you want to do is sell the highest quality bed you can within those categories,” he said. “If retailers continue to improve their sales process, they’ll sell more and have happier consumers. With the Internet and blogs the way they are today, having a happier consumer is a very important thing.”
Plugging the Leaks
There are more ways money can drain from a retail operation than Dan Schneider can count. In most cases, the remedy boils down to paying attention.
Schneider is CEO of SIB Development, a Charleston, S.C. - based consultancy specializing in fixed-expense auditing and cost reduction consulting.
Furniture retailers are in the business of selling furniture, and top management always pays attention to aspects of that business such as buying goods and merchandising those goods on the floor. Schneider said to beware letting money trickle away by ignoring such “non-core” costs as phone bills, trash bills or monthly maintenance contracts on, say, copy machines.
“Owners often put things like that in the hands of a middle manager with no fiduciary responsibility,” he said. “When you add these spends up it can be tens of thousands of dollars.” Say that person actually does a good job negotiating contracts and payments for services. “You have cases where they never communicate that to accounts payable,” Schneider said. “They have to tell the person cutting the check to be aware of new pricing.”
NICKELS AND DIMES
Schneider said bank fees are something many retailers pay little attention to; or if they do, they might be scared of riling the bank if they think they’re too high.
“Sometimes you get a great rate or line of credit,” he said. “To get that rate you’re required to bank with them, but you might be getting nickeled-and-dimed on ‘treasury fees’ like transaction processing charges.”
How well do you understand the ad rates for you print and billboard advertising?
“You might have a marketing person doing that buying, but they might not have fiduciary responsibility,” Schneider said. “You want a finance person involved in the process. Also, marketing people are creative, they aren’t numbers people.”
And while everyone wants to trust their employees, make sure they’re always working for your business’ benefit, not the benefits sometimes offered by service providers wanting to maintain the account: “Maybe they’re enjoying free tickets to sporting events in town,” Schneider said.
Flipping that coin, Schneider’s seen situations where a service vendor also was a customer at the store. Don’t feel too beholden.
“You might have gotten $1,000 from that sale, but over the years you might be saving $10,000 working with someone else,” he said.
“A lot of retailers leave money on the table by not offering a secondary financing option,” Schneider said. Say a person doesn’t qualify under your regular financing package. “There are plenty of financing alternatives to explore that will handle that business,” he said. “The customer gets the furniture— even if at a higher rate—and you get the sale. You’ve already spent time and money on your marketing and advertising to get them in the door.
If your margins are down 10 percent and you’re letting 30 percent of your customers walk because they don’t qualify, you can offset that right there with a secondary option,” Schneider said Plugging a store’s money leaks can involve very basic things. Take utilities.
“Put Wi-Fi thermostats in all your stores to make sure the heat’s not running all night,” Schneider said. “That cost is about $100 a thermostat—the technology has decreased in price so much. That alone can save thousands of dollars.”
More on Delivery
Making the call on whether to perform your own delivery or employ the services of a third party to get the customer orders to their homes depends on two things.
The first—your target for the percentage of sales delivery should cost (in Impact Consulting’s Best Practices survey that is 3.56 percent). The second is whether your own delivery operation makes that goal on a consistent basis. If the answer is “no,” a third-party carrier could well be worth looking into.
“The driving factor is cost,” said Charles Johnson, president of Diakon Logistics, Manassas, Va., whose home-delivery customers include a number of top 100 U.S. furniture retailers. “Is it cheaper to outsource or have your own in-home delivery?” Johnson believes retailers have to look at both “hard” and “soft” costs when making the call whether to keep deliveries in house, or outsource them.
Hard costs include trucks and maintenance, labor, workers compensation, damages to product and insurance. “If an employee drops a $2,000 sofa and it cracks, the retailer eats that,” Johnson said. “If we do it, we pay for it,” adding that an exception would be if there’s a problem with a product that’s contracted for delivery “in the box.”
“Soft” costs aren’t as apparent, but retailers should consider them, especially if they want to manage delivery in house.
“If you have a warehouse general manager who has 40 home delivery people running 20 trucks a day, that takes up a lot of that manager’s time,” Johnson said.
Retailers need to factor that time as a portion of that manager’s salary in gauging the true cost of delivery. The same holds true if someone is doing double duty on delivery and other functions in the business.
Control over the delivery process is another issue to consider. “Are you willing to give up control for a third party to be the last person to touch the furniture?” Johnson said. “That’s when choosing the right prospective partner is important.”
A good third party partner’s delivery personnel work for the retailer, as far as the consumer is concerned; and adopt the customer’s delivery process and standards as its own.
“If retailers create a true partnership, that control issue shouldn’t be such a concern,” Johnson said. “Their requirements are our requirements.
They set the standards, and we live by them.”
Johnson had suggestions for retailers looking to hone their delivery operation.
“The best measurement of your delivery expense is to look at it as a percentage of delivered retail sales,” Johnson said. If you’re looking at delivery cost as a percentage of overall revenue, which might include product protection, warranties and interest on private paper, you aren’t getting a true picture.
Taking delivered sales, say your goal is to keep delivery cost at 5 percent of those sales. If you’re going over your target, that’s when you look for problems, and if you consistently can’t meet that figure, it might be time to consider working with a third party.
Watch for how other numbers can impact delivery cost, as well, Johnson suggested. Take average ticket. For hypothetical purposes, say one year you had $100 million in delivered sales with an average ticket of $2,000; and the next year you had the same sales with an average ticket of $1,800. That equals more deliveries, with a corresponding increase in your delivery cost percentage.
Multiple deliveries on the same order are a no-brainer when it comes to driving up delivery cost. Maybe the product was out of stock or there was damage; perhaps the sales associate wrote up the wrong box spring for a mattress.
“Some retailers say they’ll eat that cost, but they need to recognize it,” Johnson said, adding that retailers should choose their battles on this topic. “When you make a decision to make a multiple delivery, is it a $600 order or a $4,000 order?” Do you deliver product before taking it out of the carton?
“If the retailer isn’t doing a robust quality control check when a container comes in, say opening one in 10 boxes before authorizing the load for delivery, they can see some return trips,” Johnson said.
Delivery is all about productivity, and if you’re not routing efficiently, you’ll make more trips, or need more trucks.” Johnson suggested that retailers considering one-day delivery perform a ZIP code analysis of where they’re taking 90 to 95 percent of their deliveries.
“You might find that in ZIP code X, you made 10 deliveries last year,” he said. “Your salespeople need to explain if someone lives outside that area, then they’re looking at next-day or five days depending on your operation.”
And, if you offer same-day delivery, actively promoting that service can save money. It might seem counterintuitive, but Johnson said getting the word out on the service increases delivery efficiency by increasing the density of orders going out for same-day delivery. If one customer a day wants it that day, the retailer might have to send a truck out for just a single stop.
Another factor Johnson said to consider with delivery is the number of days in the week when service is offered. “Let’s say you have 50,000 deliveries a year and your offer sevenday delivery,” he said. “If you scale back to six days, you might need more trucks, but they’ll have more density; and instead of going 10 miles per stop, you might be going seven. “You also don’t have warehouse operations, product inspections and other related functions seven days a week,” Johnson said. “You reduce your overhead because you don’t have that staffing seven days a week.”