Furniture World Magazine
Volume 150 NO 3 May/June

By David McMahon on 6/6/2020

The source and the management of every door to your operation, both virtual and physical, are critical elements for retail business success going forward.

The transition to the new front door is complete. From here on, brick and mortar have become a component of retail in some business models, but it cannot be THE definition of retail. The new “front door” for retail home furnishings business has become the place where shoppers first engage.

Over the past three months, retailers all over North America, have observed a huge shift in consumer behavior. This two-part article will discuss this shift and make suggestions regarding how Furniture World readers can and should adapt their business models.

Retail Never Shut Down

Retail sales never shut down over the past few months even though the buildings operated by “non-essential” businesses such as furniture stores closed.

Many brick and mortar retailers reading this may find it hard to believe that shuttered furniture stores generated significant sales volume during this period. In fact, some omni-channel ready retailers that previously generated a majority of sales based on walk-in traffic managed to generate sales volumes approaching normal levels. This was only possible for operations that were already functioning effectively before COVID-19. These retailers had the ability to ratchet up the digital aspects of their business to adapt and compete with e-commerce retail giants like Wayfair, whose sales exploded during this period.

By contrast, I believe that too many furniture and bedding retailers made the worst possible decision in recent months by posting “we are closed” messages on their websites and putting similar communications on their automated email replies and telephone recordings.

The Biggest Mistake

Retail should NEVER be closed, provided that there remains some capacity for communicating with customers and vendors, ordering product and delivering goods. Businesses that decided to shut down their entire lead funnel, saw sales go to zero.

Business operations are machines that run best while warm. Even those that kept operations going with minimal delivery, sales and service are getting back up to speed with greater efficiency. We can all learn from those who managed to stay running during the darkest time of the pandemic. Those retailers that went “dark” are having more trouble restarting.

Lessons Learned

  1. Customers still wanted to connect with retailers during dark times.The challenges people experienced while sheltering in place, including homeschooling and working from home, created new needs for home furnishings. That’s a big reason why customers continued to reach out to retailers who communicated that they remained ready and able to help people improve their home environments.
  2. Retailers benefited by aligning with the right suppliers.Throughout this period vendors and retailers faced similar challenges. Both were forced to change business processes overnight and supply chains were disrupted. Retailers who anticipated this issue, and expanded their inventory of bestsellers, were and are better positioned to adapt to supply chain shortages. Likewise, retailers that aligned with fewer, more reliable vendors are now better able to return to profitability. Good vendor relationships have proven to enable the extension of credit during times of physical retail closure. When reconsidering suppliers to adapt to your current situation you may want to refer to a previous article in this series, “How to Choose the Right Supplier” from the January/February 2019 issue of furniture World found at
  3. Keeping key employees was a smart idea.Businesses that maintained their key managers and top performing sales and operations staff without a lay-off mostly managed to deliver and sell through this period. For a variety of reasons, at the time of this writing, many retailers are also in need of additional talent. Those that were not forced to furlough have fewer issues in talent acquisition. Some have chosen to give their people a bonus using forgivable PPP loan funds they have received.
  4. Doing the right thing was the right thing to do.During the current health crisis, many furniture retailers have extended support to front-line healthcare workers, leading to a heightened sense of community. Furniture and mattress businesses have donated product, time, even health supplies and equipment. They’ve also given gift cards to other local retailers hard hit by the pandemic. This created local goodwill for retailers who stayed engaged and involved locally, positioning them for a quicker rebound.
  5. Business process improvements made during the pandemic will yield big results.The pandemic accelerated the need for modifications to selling engagement systems, checkout processes, delivery, pick-up and service procedures. As well, owners and managers who kept their retail messaging current, plus accomplished tasks such as repricing, merchandising, training, and general organization, will be glad that they did.
  6. Retailers realized the benefits of peer support.Peer support has been critical to helping many companies navigate these challenging times. Our performance groups, for example, have met virtually, weekly, since the crisis emerged. The sharing of information about what has been working and how to deal with common challenges has drawn members closer together and, I believe, rescued several businesses.
  7. Appointment selling has become a powerful tool.“Appointment Selling” is the silver lining in this whole miserable experience. It is the one big competitive advantage that has emerged giving retailers with physical showrooms an advantage over the likes of Wayfair and Amazon. Retailers with both a physical and digital presence can let customers “test drive it before they buy it.” Sure, online-only retailers can provide 3D imaging and the ability to digitally insert items into photos of customer rooms, but that’s not the same experience. Appointment selling saves everyone time by matching a motivated buyer with a skilled salesperson or designer. Done well it helps shoppers make their purchase today — and remain satisfied tomorrow.Home living and sleep products are an essential product/service, especially in today’s stay-at-home economy, which is unlikely to return to pre-pandemic ways of living, business and travel any time soon. Appointment selling has allowed many retailers to safely do business with serious customers who need the essential service that home retail enables. Motivated buyers interacting with professional sellers of home goods have caused close rates to increase to between 60 and 100 percent. Along with this increase, average sales have grown, probably due a greater focus on helping consumers solve their needs in fewer visits.I see this trend continuing and I believe it should be tracked and marketed accordingly.
  8. Increased reliance on social networking.Facebook has become more powerful as retailers continue to rely on its unmatched social platform. Those retailers that cultivated an established following prior to the crisis have been able to successfully introduce appointments, auctions, and videos to generate business.
  9. Digital marketing has taken over.Digital marketing has taken over from traditional media as the dominant consumer-facing media in retail. Over the years, I have joked with retailers that if they ever wanted to know which media really works, they could shut everything off except for one media type and see what happens. During this crisis, this is exactly what many operations did. They shut down all but select digital media. The result for many was that the returns on ad spend went up considerably. In some markets, however, for retailers with a history of broadcasting niche-style messages over traditional media, increased impact was achieved among people who were stuck at home in front of the TV.
  10. Lead management should be tracked from the source.Portals such as PodiumPerq, Chat, and the good-ole telephone are now being described as “the new front door.” This is where the journey or first connection between customers and retailers occurs. This first contact is where retailers should register their “up.” Prior to the crisis, and even now, “traffic” meant shoppers entering through a physical doorway. Retailers are pretty good at measuring physical door (last door) swings, The “first door” most actually enter through (website engagement, chat, telephone) has been haphazardly monitored by most. The revelation here about the “new front door” is that the source and management of all doors, virtual and physical, has become a critical element for businesses going forward. Furnishings retailers must, therefore, develop systems processes for shoppers who enter through any door by using “Customer Journey Management.” This is the term I use for walking the customer through the various stages of a purchasing system. For retail home furnishings, this encompasses more than CRM (customer relationship management) due to the unique characteristics of buying and delivering home furnishings.

Next Issue

The next article in this series will explore the connections between “Customer Journey Management,” “Appointment Selling” and “The New Front Door” to look at how you can take advantage of a paradigm shift that has occurred in retail. Until then, remember that an omnichannel retailer, a truly essential retailer, is never closed. Don’t go dark, ever.

The below article is based on a study I did a couple of years ago. It is mostly valid today.

By David McMahon

Improvement starts with awareness and desire.  The awareness of how you are performing against standards allows you to understand your strengths and weaknesses.  It is through the measurement against these standards, or metrics, that you can find your gaps.  Knowing your gaps and then having the desire to create a strategy and act upon an improvement plan is what separates average and top business managers.

For the good of the industry and to assist home furnishing retailers in improving their individual operations, we are publishing the financial portion of our performance observations during 2017.   

During the course of 2017, I reviewed a wide-range of operations through our consulting and performance groups activities.  In doing so, I established a set of metrics that I consider to be an excellent source for use in benchmarking against average and high-performers. 

Below I am releasing the Profit and Loss (P&L) percentages observed.  Following this I’ll give my interpretation.   These numbers are broken down by what is the commonly accepted P&L format amongst industry retailers.  The observations are expressed in 3 columns.  The first 2 columns produce P&L’s averages.  The 3rd column is used to show the top percentages in select metrics.  These are the 3 column groupings:

  1. Average performers
  2. Average of Double Digit Profit Club (Net-income before tax) performers
  3. Average of Top-tier performer for each metric (Top 10%er suggestion)

The observations are expressed in terms of percentages of total retail sales volume.  This allows for operations of different sizes to compare themselves using a “common-size” format.  For the purposes of compatibility as well, we excluded electronics and appliances merchandise from the metrics.

Financial Metric Observations:

Financial Metric Interpretation:

Here are my comments on the above numbers:

  1. Sales
    1. Separating the percent of warranty and protection sales with respect to merchandise sales is now the accepted way of producing an industry P&L.  This is due to the massive importance of increasing the proportion of warranty sales.  They are typically the highest gross margin product that a retailer sells.
    1. The range of average and double-digit operations in % of warranty sales to total sales 3.73 % and 3.43 %. 
    1. Top-tier operations in warranty sales almost double these averages.  Their customers spend 6% of their dollars on warranty and product protection.
  2. Cost of Sales
    1. This is a prime area where the double-digit profit club outpaces average performers. 
    1. With respect to cost of merchandise, double-digit profit operations had a 3% lower cost of goods % than an average operation. 
    1. The top-tier performers actually even had almost another 3% cost advantage over the double-digit profit operations at 47%.
    1. A similar pattern occurred with cost of warranties.  Better operations are trained and follow systems to sell on value rather than sell on price in my opinion. 
  3. Gross Margin (GM)
    1. Gross margin percent of sales is just the inverse of cost of goods.  So, the operations with the lower cost have the highest margin. 
    1. This data supports the prior 2 years of formal studies we conducted with the HFA (Home Furnishings Association).  Average performers show a 48.18% GM.   The double-digit club gets almost 51% GM.  While top-tier performers achieve 55%. 
    1. These numbers are real! And, wherever you are with GM, believe that you can improve.  I’ve personally helped move this number with clients many times by over 10% while simultaneously growing sales volume.  
  4. Gross Realized Margin
    1. The generally accepted way of producing an industry P&L is by showing a second gross margin line called Gross Realized Margin.  This first lists the reduction of costs by vendor rebates and discounts incurred.  Then, it increases cost of sales by finance and credit card fees.
    1. It gives an alternate gross margin number as non-employee direct costs with purchasing the merchandise and making the sale are considered.
    1. There is a similar step-up in GM % with the 3 groups observed.  So before any operating costs are considered, an average operation has 45.91% of sales dollars left to produce a profit.  The double-digit profit club has almost a 3% lead already in the race for net-income.
  5. Administrative Costs
    1. Admin costs include general overhead expenses such as: Office and owner payroll, training, legal, accounting, travel, meals and entertainment, markets, software, and all other items that do not fall under occupancy, advertising, selling, distribution, and service. 
    1. We find that on average operations spend around 12% of these sales volume on administration of their business. 
    1. We see a ride range with this metric.  It often is effected by the number of locations, the number of family members in the business, and of course with how lean an operator runs.  The top-tier in this metric came to a very low 7%.  In fact this may even be a bit too low for some.  I feel that if an operation is under 10% here and can manage their work properly they are doing exceptionally well.
    1. Some operations here, in fact do not want to be too low as they feel they cannot provide properly for their employees. Certain owners feel that it is important have a proper amount of spend in admin areas such as health care, training, and technology to remain relevant to in the marketplace.
  6. Occupancy Costs
    1. These include all brick and mortar showroom facility costs such as rent, loan expenses, real estate charges, maintenance, and utilities.
    1. This is typically one of the most fixed costs a brick and mortar retailer incurs.  It does not change that much from month to month.  Whether sales go up or down, the rent, maintenance and utilities are pretty similar dollar-wise.  However, as a percentage, as sales grow these cost fall and result in a positive impact to the bottom-line net income. This is one of the reasons why high performing sales floors produce so much more profit than average performers.
    1. Average occupancy is 8.15% of sales.  The double-digit profit club is 7.64% and the select top-tier performers in this metric are as low as 4%.
  7. Advertising Expense
    1. An average operation runs 5-6% of sales.  Depending on the location however a profitable business is possible up to even 10%.  I’ve seen higher of course, but not too many that actually made much money above that.  
    1. Oftentimes, it is good to consider occupancy and advertising expenses together percentage-wise.  Whatever your mix, it is highly advisable to keep the combined percentage under 15% of sales.
  8. Selling Expenses
    1. Selling expenses cover sales managers and sales people’s wages, bonuses, commissions and other payroll costs.  Sales training, outside design contactors, point-of-sale material may all be included here as well.
    1. I commonly see operations in the 5% – 10% range.  This data is consistent.  Average stores are at 9.21%, the double-digit club is at 7.84% while the top-tier in this metric is at 5%. 
    1. This cost should be mostly a variable cost.  That means that when sales go up or down selling costs should go up or down as a dollar amount and remain constant as a percentage.  I do not mind if this cost is on the high side for any one client as long as their GM % is also on the high side.
  9.   Customer Service Expense
    1. This is actually a net percentage.  It represents all customer service costs that are related to solving issues with damaged and defective merchandise.  It includes any dedicated employees and the costs of repair.  Costs are reduced by any income or amounts in credit that are received back as compensation from vendors. 
    1. A highly functional operation has very low service costs as a net percentage.
  10. Delivery Income
    1. This P&L breaks out delivery income as a separate line item from warehouse and delivery activities.  It should be the goal of an operations to collect an appropriate amount that covers the direct delivery related expenses.  Otherwise, delivery costs come straight out of gross margin dollars.
    1. On average operations seem to collect around 1.9% of sales in delivery income.  However, the top-tier performers in this metric collect double that.
  11. Warehouse and Delivery Expense
    1. These costs include all physical merchandise handling and logistics employees, their operating facilities, their equipment and any other resources they use.
    1. On average operations spend 6.15% of sales here.  The double-digit profit club uses 1.6% of sales less cash resources at 4.55% of sales.  Top-tier performers are as low as 4% of sales.
  12. Total Operating Expenses
    1. Total Operating Expenses add up all expenses that are reduced from Gross Realized Margin.  It is total of Admin, Occupancy, Advertising, Selling, Service, Delivery, and Warehousing.
    1. Whenever I see an in-control operation that is running smoothly, without chaos, with a total operating expense ratio of under 40% of sales, I think: Potential Goldmine.
    1. Average performers are at 40.14% while the double-digit profit club is very lean at 36.2%.  I don’t get alarmed when I encounter an operation at 42% or 43% provided they are spending in areas that add value to their business and employees.  Operations who are close to 50% in this metric are usually pulling out profit early or are running a broken business model.
  13. Net Operating Income
    1. This is the percent of every sales dollar that remains after all costs of goods and regular operating expenses are deducted. 
    1. Average operations show 5.88% Net Operating Income. The double-digit profit club has more than 100% more profit at 12.63 % Net Operating Income.  And, the select top-tier operations for this metric have 14%.
  14. Net Income before Tax
    1. This is the bottom-line.  Other non-operating income, non-operating expenses and interest expenses are added and deducted.  Typically, there is little in either category with the exception of those operations that rent out part of their facilities or who are carrying a large debt and paying significant interest.
    1. Overall the bottom-line is not significantly different from Net Operating Income.   Average operations show 5.67% Net Income before tax. The double-digit profit club has 12.54 %.  And, the select top-tier operations for this metric still have a 14% bottom-line.

When I discuss improvement possibilities with business people, they are sometimes skeptical.  Sometimes they don’t believe me when I say, you can grow gross margins by 8% of sales. Or that they can increase sales volume by 25%.  Or, they can grow profits by 7% of sales.  Or, they can double their cash position.  Not everyone believe me — at first.  It is true for many that vast improvement opportunity exists.  I’ve seen it happen time and time again.  I’ve been a part of it.  I hope that these metrics inspire you to look at your business analytically.  I hope you are motivated to seek action to reach new heights.

In our 2017 Retail Observations we also looked at several selling and inventory metrics.  These will be published in another well respected industry publication: Furniture World and made available along with these Financial Metrics to the members of the HFA.  

Finally, for a limited time, we will be offering retailers an Opportunity Analyzer. You can get a customized side-by-side comparison report with all these metrics.  Plus you can get a one-one web-meeting.  In the web-meeting we will present and discuss our observations and your opportunity.  Just contact me if interested in getting some guidance with improving your profitability and cash flow.