The Vertical Environment

March 14, 2007  by in UnCategorized   

By Home Furnishings Business in Furniture Retailing on March 2007 Some 20 years ago, not a few in the furniture industry thought Ethan Allen CEO Farooq Kathwari made a huge mistake after the company committed to selling all its own product as well as making it.

The common word then was that manufacturers didn’t have the merchandising chops to cut it at retail. Ethan Allen’s conversion to what remains the furniture industry’s only true fully vertical company—from manufacturing and sourcing to retail—wasn’t easy, but today nobody doubts that if Ethan Allen didn’t know retail then, it surely does now.

And a lot of manufacturers appear to be aspiring to Ethan Allen’s model, if not in full at least in direction. Whether corporate stores or licensed to independent retailers, the growth of dedicated furniture distribution shows no signs of slowing.

The model is hitting all price points, as well: Long confined to higher-end stores such as Ethan Allen, Drexel-Heritage and Thomasville, the move toward single-line stores hit middle price points with La-Z-Boy’s La-Z-Boy Furniture Galleries store program (340 locations as of February, 72 company-owned) and Bassett’s Bassett Furniture Direct (134 stores at the end of fiscal 2006 representing 72 percent of shipments, up from 67 percent the prior year). Ashley’s Ashley Furniture HomeStores is set this year to perhaps emerge as the largest network of retailers in the business after upping the ante for merchandising at promotional to middle price points.

While none of those models claim to hit the needs of every consumer, they do offer manufacturers a lot more control over the merchandising, SKU counts and price points of their product lines, and in the cases of companies like Ashley, bring logistical capabilities developed from sourcing activities to bear on the complexities of delivery to retail.

What’s Your Strength?

For independent retailers who want to operate under their own name, branded stores offer obvious and particular challenges, especially since now there are dedicated locations to match any price point.

Jerome’s, for example, has five stores and a clearance center, all in greater San Diego, and the promotional to mid-price retailer faces stiff vertical competition from Ashley stores in the area.

“They are at our price points, the ones we hit hard on, and they’re right in our market,” said Lee Goodman, chief operating officer at Jerome’s.

Competition from Ashley stores in his market is tough, but Goodman said Jerome’s has some inherent strengths it uses to maintain and build business.

“First, we’re 90 percent in-stock, ready for next-day delivery—when we win a sale, it’s often because we’re in-stock,” he said. “Second, there are specifics to a region that need specific types of management, whether that’s merchandise mix, operational or logistics decisions, any number of things where you just can’t make decisions on a national basis. For any independent, your head’s down and focused on your region only. That’s an advantage I see for not only when it comes to vertical (players), but any furniture store that’s going national or into various markets.”

Goodman also would be reluctant to tie Jerome to a single manufacturer.

“I suppose this is debatable, but you’re stuck with one name and a company might not stay hot over a long period of time in style direction or performance,” he said. “My financial adviser tells me it’s always best to diversify my investments, and I’m hesitant to put all my eggs in one basket when it comes to our business.”

Its own brand in its own market couple with strong in-stock positions are keys to Jerome’s success relative to vertical competition.

“We bring to light the fact that we’ve been in business three generations, since the ‘50s, and that we’re family owned and operated,” Goodman said. “There’s some equity with our name, and we can break through as the local hero in a lot of ways.”

A Mixed Model

Hendricks Furniture Group is a strong believer in its own store brands, Boyles and Norris Furniture. The company also has a firm commitment to a vertical model through its 17 Thomasville stores.

Hendricks had operated six Drexel Heritage stores as well, but converted Raleigh, N.C., and Greenville, S.C., locations to Boyles storefronts recently; and a Fort Myers, Fla., store to a Norris Furniture location. The other three stores will become Drexel Heritage corporate stores, said Eric Easter, executive vice president for the Hickory, N.C.-based company.

“We still carry Drexel, but they wanted more control over their North Carolina distribution, and we had plenty on our plate from a focus standpoint,” Easter said.

Offering a strong brand name such as Thomasville as well as the Boyles and Norris brands, both well-established in their respective mid-Atlantic and Florida markets, broadens Hendricks’ net when it comes to casting for customers.

“There are different customers out there,” Easter said. “Some prefer to shop big stores with a broad selection of lines, and are willing to sacrifice that inherent consistency that a vertical operation offers. Others find that overwhelming and prefer a smaller store format where everything’s edited down in terms of quality and style.”

As a company, Hendricks wants a model that appeals to those differing customer bases while applying high standards of quality and service across the board.

Ethan Allen is the biggest vertical competitor for Hendricks’ Boyles and Norris stores.

“That’s especially true because of the fact that they offer design services and in-home services, something we also do,” Easter said. Strengths Hendricks brings to bear?

“First, we like to think we have the very best folks working with us, and we really believe that,” he said. “We spend a lot of time finding great people to work in our stores, and work hard to keep them on board. Second, it’s the variety of product and selection we’re able to offer those consumers who prefer that approach.”

“We position our brands very carefully. Both Boyles and Norris have very high quality standards for furniture. We spend a lot of money promoting that. And it all really goes back to the level of our people and our variety of price points and styles.”

Decision Time

When it comes to vertical players, retailers have a couple of decisions to make, said Alan Cole. Cole, former head of Lifestyle International, and more recently president and CEO of Schnadig, has lately focused on consulting with retailers on the whole issue of verticality.

“The first decision is do I go head to head, or do I develop a niche that focuses on other value propositions?,” he said. “Those could include particular categories or special services. The vertical model in large part is a value proposition.”

Second, a retailer’s reaction to single-brand competition depends on exactly who that competition is.

“If an Ashley store comes to your market, that’s one direction—Ethan Allen, Thomasville and Drexel Heritage is another direction,” Cole said. “Am I emphasizing high value-added services such as interior design, high quality branded goods; or am I going for a total value proposition to consumers? If you are a promotional store, and Ashley comes into your market, you’ll have to seek out the best and most current promotional manufacturers to play in that arena.”

Whatever the price point, furniture is always a major purchase for consumers, he added.

“If you’re mid-market or up, the best thing to do is solidify that price point, or even move up slightly—offer more services and an impeccable consumer experience,” Cole continued. “The problem is that if you move up, you still maybe haven’t changed your image in the mind of the consumer. If I were a mid-market store, the last thing I’d do is try to go down and meet them on price. Sharpen and hone the things you do well.”

The Vertical Advantage

A major advantage to dedicated stores is name recognition.

“I would say a (vertical player’s) name brand is a powerful tool in our industry, especially with customer recognition, comfort level,” Jerome’s Goodman noted. “While I don’t know their accounting structure, it seems, too, that the inventory amount that they carry in the stores is lower so there’s a cash benefit. It’s easier to get better turns, but that can be a customer negative if it means slower delivery. And carrying in-stock goods in the mid-90s (percentage-wise), we’re able to turn our complete inventory six times a year, and that’s pretty good. It’s all about processes and procedures, and the technology we use to keep it in-stock.”

Operationally, dedicated stores are a simpler proposition, said Easter at Hendricks.

“Obviously, their salespeople and design associates have one line to learn, a line they know inside and out, so there’s a certain confidence engendered among consumers. Second, if it’s a strong branded program, there’s usually national advertising to back it up.”

Retailers who decide to go the dedicated route cite to those advantages, and in Lael Thompson’s case, brand recognition was key.

Thompson is chief operating officer of Broyhill Home Collections in the Denver, Col., suburb of Aurora. Several years ago, his family ran Sonshine Furniture, a retailer specializing in unfinished furniture (Sonshine Furniture Today remains the still family-owned store’s corporate name.) He said the arrangement with Broyhill combines the advantages of a name brand with the ability to run an independent operation.

The Thompsons decided to convert their 54,000-square-foot store with 40,000-square-feet of display area into a full-line furniture store. Before opening as a dedicated Broyhill store almost two years ago, they examined a number of options, including operation as a multi-line storefront and checking out just about every branded-store option available.

“We kicked around a lot of ideas,” Thompson said. “We had to weigh the positives of going with a branded store with the cons. We looked at every program out there, but we ended up going with Broyhill due to two main factors: the size of our market and the existing players in our market.”

The Denver metropolitan area has around 2.6 million people spread over a very large geographical area. That in itself would have posed problems for a new one-location mid-price furniture store. And while they had been in business for more than 20 years as an unfinished furniture retailer, as a full-line store, the Thompsons were essentially brand new to the market.

“While we have a large store, without multiple locations, it’s difficult to communicate your message in a market this size,” Thompson said. “If you’re in a town of 30,000 people, it’s different. Half the people in town are likely to drive past your storefront every day.”

The Denver area also had powerful existing retailers, including American Furniture Warehouse, Kacey Fine Furniture and Furniture Row—a tough lineup for a new independent.

Thompson said committing to Broyhill helped offset both those issues.

“With Broyhill, we got what I’d call instant credibility,” he said. “People might not have known us, but they see that name and instantly think back that, ‘Hey, my grandmother had a Broyhill set.’ People started looking for us. Now instead of being on the defensive fighting to get (our store’s) message out, we’re in a position where people are seeking us out.”

The Broyhill name recognition also gave the Thompson’s their own niche relative to the region’s powerful retail competition.

“Entering this market is like going to a park to play pick-up basketball, but the guys in the middle of the game are NBA players,” Thompson said.

He did identify potential problems involved in a dedicated operation.

“These factories don’t necessarily know every single market. If you sign up for the entire package you might miss certain parts of your consumers’ needs,” he said. “People in a major market want instant gratification, so you need to know what their delivery schedule’s like.” HFB