Operations Driving Deep Customer Value in Furniture Retail

Company Background

The Company (name withheld for confidentiality) is a regional furniture retailer in the United States.

Business Model

The Company is committed to providing unmatched value to furniture shoppers at the promotional and middle price points. In order to execute against this strategy, the Company has designed a highly effective and aligned operating model in which several critical functions – including pricing architecture, new product development, merchandising, store layout, and store footprint – support its ability to consistently provide consumers with high quality furniture at best-in-class prices. As a result of this alignment, the Company has exhibited robust revenue and new store growth and has attracted outside investment from two private equity firms in its history.

Operating Model

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Delivering value by simplifying pricing

Furniture pricing is notorious for being opaque and highly promotional, which requires customers to haggle and comparison shop in hopes of finding the retailer’s best price. This is a huge driver of consumer dissatisfaction. To combat these sentiments, the Company has adopted an “everyday low price” strategy (EDLP)¹, which means that the Company’s list price on each item is always its best and final price. The Company does not engage in promotions, discounting, or haggling which gives the consumer peace of mind and increases satisfaction. This simple and consistent pricing model is made possible by the Company’s rigorous approach to cost management, which is evident in new product development, merchandising, store layout, and new store expansion strategies.

Delivering value by managing costs: new product development

A strong, diverse network of suppliers throughout the US and Asia allows the Company to pursue a “fast fashion” approach to new product development. When the Company observes an established trend in the market, it will often launch a special project with a vendor to capitalize on that trend while opportunistically removing costs from the product. For example, a higher price point competitor may sell a popular dresser that has a curved wooden front and metal sliding track drawers. The Company will work with its supplier partners to produce a custom item with a nearly identical look, but perhaps with a flat front and wooden track drawers². This process has two key benefits for the Company. First, it drives production costs down significantly and allows the Company to consistently and profitably under-price competitors on what customers perceive as a comparable product. Secondly, since it waits for trends to be firmly established before moving, the Company mitigates some of the risks around fashion and volume forecasting that are common in design-driven organizations with frequent new product introductions.

Delivering value by managing costs: merchandising

To cater to its core customers’ preferences for value over selection³, the Company pursues a focused, narrow merchandising strategy. It consolidates purchasing at the enterprise level and does not tailor its merchandise mix for regional or seasonal preferences. This strategy is on display in the sofa section of the company’s website, which features only 69 distinct sofa models versus 90 and 181 offered at two direct competitors⁴. These decisions enable the Company to concentrate its purchases and generate long production runs for suppliers, driving their unit-level production costs down and, as a direct result, increasing the Company’s buying power. It also helps simplify the Company’s inventory management and fulfillment functions, both of which have historically been operational trouble spots in the industry given SKU size.⁵

In addition to being narrow, the Company’s assortment features 100% private label or own-branded products, many of which are custom projects as described above. This creates two advantages for the Company. First, by not paying a brand premium to manufacturers, the Company can offer a lower price to consumers and still make healthy gross margins. Second, from a competitive perspective, the Company’s proprietary products will not show up on a competitor’s showroom floor, which helps maintain uniqueness.²

Delivering value by managing costs: store layout

The Company’s stores are typically between 25k and 45k square feet in size⁷, which is smaller than traditional warehouse models. This is enabled by the Company’s narrow SKU assortment strategy and has the benefit of reducing upfront capital costs as well as fixed costs like occupancy and indirect labor expenses at the store level. Additionally, in select stores, the company dedicates square footage to space it calls the “outlet,” where it markets discontinued or slightly imperfect items at a reduced price. This decision facilitates effective inventory management and maximizes gross margin on these items, and does so in a way that does not compromise the EDLP strategy in the main store.⁶ Both of these choices support the company’s ability to consistently provide low prices to consumers and operate effectively in a low margin environment.

Delivering value by managing costs: store footprint

The Company is sizeable, delivering over 15,000 items per week out of 9 delivery hubs¹, and has been very thoughtful in its growth strategy to date. It has pursued a two-pronged approach: 1) maximize existing market penetration and 2) only enter new markets that are geographically adjacent, and do so at scale (often ~5+ new store openings at once). This enables the Company to maximize route density in fulfillment and leverage new market-level investments in advertising and distribution over a larger store base, both of which help it to operate profitably while accepting slim gross margins⁶.

Conclusion

The Company has made a series of strategic choices around pricing architecture, new product development, merchandising, store layout and store footprint that align very well with its core business model of providing customers with quality products at best-in-class prices. The Company’s track record of growth suggests that this model is profitable, sustainable, and highly scalable – between 2009 and 2014, the company grew revenue at a 10% CAGR, and has grown its store base by 64% since the end of 2009^7,8. In a highly competitive industry that has lacked a player of true national scale⁹, the Company has emerged as a regional winner, and all signs point to continued growth in the years to come.