Before we get going with this discussion about gross margin, I think it will be useful to present FURNITURE WORLD contributor and retail consultant David McMahon's equations for calculating Realized Gross Margin and GMROI. These are:
The direct ways to increase gross margin and GMROI are to find ways to increase sales, decrease cost of goods sold and reduce inventory. Ed and Bill debate these and other more nuanced ways to increase profitability.
There’s been much ballyhoo about GMROI. My buddy Bill, who you will hear from later is a disciple of Ashley and probably swears by their methods. It definitely makes sense if you have an extremely broad assortment, good tracking systems, a sophisticated way of allocating overhead and you know how to analyze your numbers. But it is not a panacea for a lot of retailers, and I’ll explain why.
I’m a data geek and I encourage my customers to measure everything. But if you have the soul of a merchant – something that has existed for thousands of years — listen to your inner voice. I’ve known plenty of retailers who have made more money out of a cigar box than a hi-tech retail point-of-sale system by following these eight commonsense principles. On the other hand, I’ve witnessed many retailers and manufacturers who practically went out of business in the process of implementing a new ERP system.
Teach your sales team how to reconcile a premium price point. Discounting is the biggest controllable margin-killer. Most of the time these are too large and amount to literally giving money away. You should never apologize for the prices you charge because furniture is a better value than just about anything else consumers can buy. Our industry does a poor job of explaining this value. Your customers would be hard-pressed to buy the materials that go into most of the furniture items you carry for less than the retail price of the product. Furniture is an investment of enduring value that your customers enjoy and live with.
Up-sell. Almost everyone would prefer to have something nicer for a little more money. Unlike most things, what you pay for in premium furniture is hidden in the bones. One of the biggest cons is over covering a piece of upholstery. What you should be paying for is the design, the frame, the tailoring and the cushions. Fabric is nice, but if it is covering a mediocre frame or cushions that bottom out, it is a terrible investment. In casegoods, consumers pay for construction. The easiest way to sell against buying online is to explain to shoppers that they don’t know what they’re buying. Sales meetings with manufacturer’s representative should be more about understanding why the products are different and better than a chance to get free doughnuts. Vendor’s sales reps are usually knowledgeable about the nuances of their products. Pull out the drawers, show the dovetailing, corner blocks and dust covers. If you are selling customized furniture items, your customers can be encouraged to feel a sense of ownership of a design that cannot be easily cross-shopped.
Don't confuse percentages with dollars. It is always tempting to focus on allocating floor space to something with a high gross margin percent. But you can’t take percentages to the bank. At the end of the day, you want to focus on selling items that have high gross margin dollars, even if you don’t make the same percent of profit. Part of this is inventory turns. But the best use of space is showing an item that can be customized, because it will always turn more times.
The domino effect. Every time someone buys a new piece of furniture, it makes the other pieces in their home look shabby. Find an excuse to visit customers in their homes. It costs a lot more to acquire new customers than to sell more to the existing ones.
Kill the dead space. Every store has it. This often has to do with lighting. Experiment with different things and, if nothing works, turn dead space into a bargain bin to sell off discontinued items.
Use Vertical Space. Build or invest in fixtures that allow you to showcase a variety of dining or occasional chairs on different levels. This not only creates magnetic sight lines, it also increases your square footage.
Reduce the number of vendors and be important to the ones you buy from. No matter what business you’re in, when you’re an important customer you get better service and discounts and win the jump balls. You get better credit terms, dating, faster deliveries and special favors.
Increase your closing ratios. This is the maximum lever to improve floor salesperson performance. Selling furniture is a people business. And though it seems counterintuitive, the best way to increase gross margins on your products is to invest in your people.
Throughout my long career as a furniture marketer and consultant there have been many conversations with retailers whose primary marketing and branding tool is, "50 percent off everything!"
Unfortunately, that still holds true with the majority of furniture retailers. With that said, I’ll talk about Ed’s points.
Teach your sales team how to reconcile a premium price point. I agree with Ed, with one caveat – the 50 percent off everything dilemma! Consumers aren’t dumb, they know most sales/prices get artificially marked up, in order to mark them down trying to create a feeding frenzy based on price instead of value.
Let’s talk about value. How many retailers promote their vendors using P.O.S. items to educate the consumer about their product and its value? I’d say very few. The rationale for this is that the store wants to be “the brand.” I think that's a load of nonsense.
Amazon is probably the most powerful retail brand store in the world, and they primarily sell other people’s stuff, with great explanations, imagery, reviews and more. I call it P.O.S on the web.
Amazon sells everything without salespeople, but more than compensates with a ton of great content that educates people about the products/brands they’re selling.
If I remember correctly, they have over 1.5 million indexed pages just for furniture! And they sell over $4 billion worth of home furnishings products making them #2 behind Ashley.
With that said, how many indexed pages does your store’s website have? Most I’ve tracked have a few hundred, maybe a few thousand. Jake Jabs' American Furniture Warehouse has over 26,000 indexed pages and so should you.
Do you have everything on your website that you are open-to-buy? Most sites just show what’s on the floor or in inventory. I mention this frequently because it’s easy to do and will impact your site and store traffic dramatically. Virtually any product search places Amazon on the first page of results. They focus on content. If your store doesn't, the following business-killing factors will impact your operation.
- You won't get found.
- You won't be able to educate potential customers about the "what" and "why" of your products. This is a lost opportunity for shoppers to learn about the brands you carry. And, it's a lost opportunity for you to up-sell and avoid too much discounting as Ed suggests. This can be done online as well as in-store.
- You won't be able to explain that your store is THE place to shop for everything for the home.
What about the in-store training Ed discussed? Yes, reps are well educated, but what do reps and manufacturers really do to support these training sessions? I know firsthand that most retail salespeople know very little about the history of furniture styles and about the brands they are selling. This, coupled with turnover rates approximating 34 percent per year, makes it difficult to keep salespeople trained and informed.
I've mentioned this research performed at the University of Pittsburgh, Learning and Development Center on other occasions, but I think it bears repeating. We remember...
- 10 percent of what we read
- 20 percent of what we hear
- 30 percent of what we see
- 50 percent of what we see and hear
- 70 percent of what we discuss with others
- 80 percent of what we personally experience
- 95 percent or what we teach others
With that said, how do manufacturers and their reps keep consumers and retail salespeople informed about the what and why? Figuring that out should be your first objective. (see #9 at the end of this article).
Up-sell. I agree with Ed, always up-sell. It can be done online as well as in-store. Check out David Benbow's article on up-selling in this issue. His focus is on mattress sales, but the techniques he presents are applicable to any product category.
Don’t confuse percentages with dollars. Yes, Ed is right, I’m an Ex-Ashley guy. One thing they taught me was how GMROI can dramatically impact a retailer’s business.
While at Ashley (in 2005) I produced a tutorial video about GMROI, which is a topic both manufacturer's sales reps and retailers need to understand. Furniture World readers can find it online at https://www.youtube.com/watch?v=GS7D7TkEvnI.
Gross Margin Return On Investment is an essential retail performance indicator.
The key to the successful management of GMROI is a focus on retailers' largest investment – inventory. By keeping stock tight and lean, turn rates are higher and profitability increases.
Many retailers work off profit percentage instead of “product turns.” Yes, Ed is right about working with reliable vendors that can “quick ship.” This is critical to GMROI, because it decreases dollars tied up in inventory as well as carrying costs such as warehouse space, lighting, heat and, most of all, “parts,” those left-over nightstands, foot boards, loveseats, chairs, etc., that must be sold at clearance to the detriment of GMROI.
I'd like to point to some great articles about GMROI by David McMahon on Furniture World's website. Check out "Improve Merchandise Performance Using GMROI" and "Expanding GMROI" at furninfo.com/Authors/David_McMahon/6
Also, consider American Furniture Warehouse's margins, which are around 34 percent, blowing out the competition. They have perfected the use of GMROI. Their products are priced to sell with high velocity.
The domino effect. Every retailer should offer free design consulting, in store or at home. This is proven to generate leads and store visits and dramatically increase close rates. For increasing engagement online, there's a lot of buzz in the industry about a company/platform known as PERQ that generates retail leads and, ultimately, sales.
Kill the dead space. Yep, Ed is right here, too.
Use Vertical Space. Virtually every successful retailer has the “rack 'em and stack 'em” mentality and so should you. More product on the floor/shelves increases your selling square footage percentage too, equaling more profits. For some practical tips, check out Martin Roberts' Furniture World article, "The Merchandising Matrix" at furninfo.com/Authors/Martin_Roberts/60
Reduce the number of vendors, and be important to the ones you buy from. Focus on those vendors with quality/stylish products that can quick ship. This will improve your turns and GMROI dramatically, making you much more profitable.
Manufacturers need to invest in their logistics to make this happen. If they do, their GMROI will improve dramatically, allowing them to use those profits to lower costs and introduce more new products. Those that don’t will continue to disappear.
Work to Increase your closing ratios. Yes, to Ed’s point about investing in your people, but remember you also must invest in your web presence. The web offers a two-sided educational platform, both for online browsers and your salespeople, who can quickly reference information about products that interest shoppers in your stores.
Other Tips For Increasing GMROI: Before we address the in-store selling experience, let’s look at the potential to increase sales by focusing on the out-of-store shopping experience – the Internet, where over 84 percent of shoppers start their buying journey.
This is where you get to tell your story and the stories about the brands you sell. That's something few furniture retailers do. Tell consumers “the what and why.” That means tell why you carry the brands you sell, and relate the stories that explain why they are of interest to shoppers and also great values. Just showing a simple picture with dimensions and a one-sentence description is insufficient to explain "what" you carry. You must romance the product to your potential customers with detailed descriptions and more. That will certainly increase the "sales of retail goods" element in the GMROI equation!
Does your website allow users to sort by item, sort by price, sort by in-stock, sort by on the floor, sort by special order, etc., or do you just show pictures and price? Without these website capabilities, you will lose traffic and sales. And, you MUST show prices on your website, period!
Do you have everything on your website that you are “open to buy?” Most sites just show what’s on the floor or in inventory.
Think accessories. You could sell a ton online and have them direct shipped from your suppliers, another quick idea to reduce inventory and boost GMROI. Think other products that are similar, Mattress in a Box, bar stools, etc.
Overall I agree with Ed regarding ways to increase profitability, but disagree with his emphasis. For most furniture retailers, increasing profitability is not about how much you can get for an item, but how many sales/turns you get on that item. To increase velocity retailers must do what Ed suggests with regard to up-selling in the store to compete with online-only retailers. However, brick and mortar retailers must also do whats necessary to make their online presence more effective. That's because online is a hugely important funnel to produce store traffic and sales volume.