Minding the Store

September 30, 2008  by in UnCategorized   

By Home Furnishings Business in on October 2008 Giff Gates isn’t used to losing money, but like many furniture retailers these days, it’s becoming a habit he’d like to break.

“My first 400 months in business, I lost money two months,” said Gates, owner of Grants Pass, Ore.-based Gates Home Furnishings. “In the last 10 months, I’ve lost money eight out of 10. I’ve never seen it like this before.”

Gates isn’t alone. It’s a tough slog for even the sharpest operators in furnitureland, and it’s more important than ever to measure and manage costs, sales productivity and cash flow during business doldrums.

To that end, Home Furnishings Business contacted a range of retailers large and small to discuss the key metrics they use to keep tabs on their operation. In addition to the basics, many are using new measurements, or re-evaluating the way they look at others. And in some cases, retailers are examining qualitative as well as quantitative ways to rate their business.

BREAD AND BUTTER NUMBERS Metrics such as gross margin return on investment (GMROI), inventory turns, inventory to sales, traffic count, sales close ratios and average ticket remain basics, but more and more retailers are tracking those on a more frequent basis.

Also, retailers contacted are keeping closer tabs on “money holes” that drain profits—things such as returns, bad debt and problem deliveries.

Every week, for example, managers at Williston, Vt.-based PK Management—which operates Vermont Furniture Galleries, and Superstore Furniture in Williston and Total Home Center in St. Alban’s—sit down to discuss key metrics.

Those include total inventory, GMROI, inventory on hand awaiting delivery;, inventory aging in 60 day increments, gross margin on both written and delivered and by category and vendor, sales by salesperson, sales and GMROI by vendor, damaged or returned goods on hand, payables, warehouse and delivery year-over-year and as a percentage of sales, and overtime hours worked monthly. Advertising budget versus actual compared to written sales is measured monthly.

“We try to maintain an inventory-to-sales ratio of 15 percent or less,” said Stephen Kidder, PK Management principal. “We budget advertising at 7 percent of sales.”

PK uses sales staff measures to build incentive for profitable transaction, too.

“Salespeople are on a variable commission relative to the margin they write,” Kidder said. Also, daily written sales have emerged as an increasingly important metric.

Steve Forberg, CEO of Decorium, a middle-upper to low-high end store in Toronto, takes aim at what he calls a “sweet spot” for regular break-even analysis based on margin and expenses.

“I know at what margin and what level of volume we need each month in order to break even—a sweet spot approach,” he said.

In addition to basics such as sales per square foot and GMROI, Decorium also generates a daily cash report to maintain good credit status and stay on top of payables. Sales reports include average sales, close ratio, performance index, and traffic counts.

Once a month, Decorium generates a “dashboard report” with important information on sales, inventory levels, service performance, and more.

“I can see a snapshot of the business on one page—very effective,” Forberg said.

Freedom Furniture & Electronics is 10-store chain based in Norfolk, Va.

As a credit-oriented retailer, Freedom is especially observant these days with numbers for payment delinquency and bad debt reserves.

“Particularly when your banks are nervous, you want your cash flow steady,” said Link Melley, president and CEO. With a large portion of customers in the military, he added that Freedom’s delinquent accounts are flat or down, but that’s not true for a lot of his credit-oriented colleagues.

“Across the country, delinquency and charge-offs are up,” he said. “The average credit customer works jobs like construction and home building, and a lot of those guys are getting laid off or working one or two days a week.”

Woody Whichard at Midtown Furniture Superstore & Mattress Center in Madison, N.C., takes a different approach to tracking and managing sales.

“I do not have a sales manager,” he said. “Thus I do not have all of the elephant toilet paper that can be created by one. I have a self-managing staff that works as a team. They have management in the form of the power of three. Three salespeople can get together on any situation, if I am not available, and make a decision as if they were a manager, majority rules.”

If Whichard doesn’t like a decision, he explains how to handle the situation next time, and he doesn’t penalize sales staff for it.

Close ratio is an important metric at Midtown.

“We do not have a door counter, nor a sales manager taking count—this is the responsibility of the entire sales staff,” he said. “This is done through their contact cards.”

Individual and store gross margin on sales gets reviewed every Saturday morning at Midtown during a sales meeting, and is shared with all staff. Whichard also is a stickler for sticking to budget.

“This is very important for us to create and stick to as a course of action throughout the year,” he said. “The budget is watched daily also.”

Advertising is a must to drive traffic, and it’s important to make it a true investment, not just a cost, said Bill Castleberry, owner of Castelberry’s Home Interiors, an Ethan Allen dealer in Tulsa, Okla., and Oklahoma City.

“How that traffic is brought into our store is how you answer the questions of media balance: direct mail if you have an up-to-date store or bought list,” he said. “Television in our industry is a must since we are a visual product, but remember to increase the gross rating points to the 120–150 level just to get your message above the clutter. Otherwise the money used will be an expenditure instead of an investment.”

WHAT’S SELLING? Inventory is a particular area where Freedom looks to maintain profitability in a tough retail climate—“almost micromanaging” inventory, Melley said.

“On the furniture side, the consumer is nervous, and you have to maintain inventory at appropriate levels,” he said. “We’re dealing with more vendors who ship smaller amounts quickly. We’re ordering on a weekly basis to be more responsive to inventory needs.”

And if they haven’t done so already, retailers need to take a realistic look at what they’re carrying. Just because “the store’s always had it” or the owner has an emotional attachment to a line or item doesn’t cut it any more.

Carol Edgington, co-owner of Uncle Grumpy’s Furniture in Bay Minette, Ala., thinks keeping an eye on the movement of individual products or categories is the the fun part of bookkeeping, “which I hate doing otherwise.

“We find out how few curio cabinets we actually sell and wonder why do I order these things,” she said. “We’ve stopped selling gun cabinets, and we’re in an area where everybody hunts, but they apparently already have their gun cabinets, because I’ve had one sit here through hunting season, Christmas and spring until I finally donated it to a fundraising event for sportsmen.”

What if, say, mattress sales are down?

“What is the competition doing?,” she asked. “How are we missing the boat? Do we have the wrong type of stuff? Do we need to be in a different price range or do we need to get better or cheaper or whatever? I keep the finger on the pulse and adjust accordingly.”

That doesn’t necessarily mean switching brands.

“But, within the brand, I was using one only for the promotional stuff and another for the better stuff, and that’s not necessarily the way it ought to be,” Edgington said.

NEW NUMBERS TO WATCH Some retailers are using new metrics, and some old standbys have grown in importance or are measured differently.

Morris Home Furnishings in Fairborn, Ohio, for example has begun surveying all customers after any delivery or merchandise pickup at the stores.

“The key question is, ‘How likely would you be to recommend the store to a friend or relative?’” said Larry Klaben, CEO. “Say you’re asking them on a scale of one to five, how many fours and fives do you get?”

The one, twos and threes are not going to be your dedicated customers, he said, adding:

“That’s a metric we use on every order in every store.”

Morris also started tracking the time it takes for customers coming to the store to pick up their order to get their merchandise. When the retailer began measuring that metric, the average time was 30 to 40 minutes. Now it’s 10 minutes or less.

“I believe our customer service level is better than ever,” Klaben said. “Every sale and every potential referral is more valuable today than ever before.”

A key figure Gates Home Furnishings watches closely of late is sales per “non-handling” employee—that is, those employees who aren’t salespeople. It’s an idea he got from his performance group with Impact Consulting.

“Say you have 50 (non-handling) people, and your sales are $5 million,” Gates said. “You do $100,000 per non-handling employee. My group average is $700,000, and I’m $500,000. That number glares right at me and tells me I’m overstaffed.”

The store had written its own financing for years, but Gates noticed none of his other group members did. He eliminated the credit department and contracted out his financing, but kept looking for more overhead to trim.

“I had closers who’d be sitting and waiting for a salesperson to bring a customer over,” he said.

The store now has gone from $450,000 to its current $500,000 in sales per non-handling employee. Gates has dropped his break-even point by 25 percent, even with sales down 15 percent the past three years.

“We’re moving in the right direction—we went from 39 to 33 employees,” Gates said. “You can use those numbers to explain to staff about the changes you need to make.”

While not new measures, Gates examines close ratio and average ticket are very closely.

“We’ve had to decrease sales staff, and those numbers help you make the decision,” he said.

A salesperson might have a great close rate, but if he or she isn’t building the ticket with add-ons such as accessories and fabric protection, the retailer is losing revenue.

Decorium’s break-even analysis carries extra weight in tough times, Forberg said.

“I also make sure we are in touch with all financial institutes and credit departments to ensure good relations and make sure we do not get lumped in with many issues manufactures have with other accounts,” he said. “Also the importance of vendors’ speed to deliver is important. We need to make sure we are getting the product from our vendors in a timely fashion as to be able to deliver what we are selling. This is very critical in a slowing trend—nothing worse than selling and not being able to get the goods.”

The increasing role of the Internet in furniture retailing has added another set of metrics.

Andy Bernstein is founder and president of Eagan, Minn.-based FurnitureDealer.net, which builds Web sites for retailers, suggested that retailers not only track the number of users on their site, but also the percentage that access the pages through search engines.

“That way, you find out whether people are using the Web to find your store,” he said.

Other ways to keep tabs on your Internet presence: Track the number of entry pages into the sight, time on site and number of page views per visit.

Get conversion information—both as a number and percentage of the whole—by examining how many shoppers contacted the store through the Web site, added product to a wish list, signed up for e-mail marketing blasts or signed up for credit online.

“Gallery Furniture put a credit application on every page of its Web site,” Bernstein noted, referring to the big Houston furniture retailer.

In a period of slow sales, Gates concentrates on percentages rather than dollar figures when measuring line items.

“Some are impossible to maintain at the percentage you want,” he said. “We’ve frozen wages, but unless you cut staff, it’s still a larger percentage of sales. ... You have to pick the across-the-board percentage (of costs) you need.”

QUALITATIVE VS. QUANTITATIVE For all the numbers he tracks, Whichard at Midtown says his most important metric is qualitative.

“The main measure that I look for is a good attitude every day from every employee company-wide ... we are a team and we must work as a team,” he said.

Several retailers mentioned positive attitude and high levels of customer service as important aspects of surviving a slow consumer market for furniture.

While it may sound trite, Castleberry at Castelberry’s Home Interiors said the maxim “retail is detail” holds true in tough times.

“All of a sudden each potential customer contact must be dissected to ensure that whatever was accomplished or not accomplished can be improved,” he said. “What can be done to deepen that relationship so the contact/customer will return to our store, or refer us to another contact, allow us to do more design work for them that will increase the sale?”

Now more than ever, Castleberry believes, retailers need to closely examine the image and atmosphere they project.

“We as owners must follow up and follow-through to ensure that what we are doing is accomplishing how we want our store presented to our prospective, past and current customers,” he said. “Step back and look in the mirror: Does your personal appearance, your associates’ appearance and attitude, your store’s physical and merchandising appearance all reflect how you want the buying public to remember your store?”

Watch what’s going on not only at furniture stores, but other retail sectors.

“Take a look at the department stores’ use of lighting and the color selections they use to make their merchandise look so seductive,” he said. “Hey, don’t laugh. All of us use rational arguments to justify emotional purchases.”

Hosting a community event or fund raiser can enhance a store’s image, and spread terrific word of mouth, Castelberry said.

“Now’s the time to put on a new face, inside or out or both, to freshen up,” he said. “Now you can dissect your p&l to plug those ever-present expense holes that escape your notice when times are better.”

In the end, though, the numbers have to match the image.

“We either have to increase revenue or decrease expenses,” Gates said. “I’m a pretty good promoter, and it’s been about impossible to increase sales the past couple of years.

“We have good cash reserves, we have no debt, and we own all our own buildings. If I didn’t have that, I don’t know where we’d be. You can’t lose money eight of 10 months and go forward.” HFB