{"id":3028,"date":"2015-12-08T18:31:34","date_gmt":"2015-12-08T23:31:34","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/operations-driving-deep-value-in-furniture\/"},"modified":"2015-12-08T18:31:34","modified_gmt":"2015-12-08T23:31:34","slug":"operations-driving-deep-customer-value-in-furniture-retail","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/operations-driving-deep-customer-value-in-furniture-retail\/","title":{"rendered":"Operations Driving Deep Customer Value in Furniture Retail"},"content":{"rendered":"

Company Background<\/u><\/strong><\/p>\n

The Company (name withheld for confidentiality) is a regional furniture retailer in the United States.<\/p>\n

Business Model<\/u><\/strong><\/p>\n

The Company is committed to\u00a0providing 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 \u2013 including pricing architecture, new product development, merchandising, store layout, and store footprint \u2013 support its ability to consistently provide consumers with high quality furniture\u00a0at 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.<\/p>\n

Operating Model<\/u><\/strong><\/p>\n

Delivering value by simplifying pricing<\/em><\/p>\n

Furniture pricing is notorious for being opaque and highly promotional, which requires customers to haggle and comparison shop in hopes of finding the retailer\u2019s 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<\/sup>, which means that the Company\u2019s 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\u00a0simple and consistent pricing model is made possible by the Company’s\u00a0rigorous approach to cost management, which is evident in\u00a0new product development,\u00a0merchandising,\u00a0store layout, and new store expansion strategies.<\/p>\n

Delivering value by managing costs: new product development<\/em><\/p>\n

A strong, diverse network of suppliers throughout\u00a0the US and Asia allows the Company to pursue a \u201cfast fashion\u201d 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<\/sup>. This process has two key benefits for\u00a0the Company. First, it\u00a0drives production costs down significantly and\u00a0allows\u00a0the Company to\u00a0consistently and profitably under-price competitors on what customers perceive as a comparable product. Secondly, since\u00a0it waits for trends to be firmly established before moving, the Company\u00a0mitigates some of the risks around fashion and volume forecasting\u00a0that\u00a0are common in design-driven organizations with frequent\u00a0new product introductions.<\/p>\n

Delivering value by managing costs: merchandising<\/em><\/p>\n

To cater to its core customers’ preferences for value over selection3<\/sup>,\u00a0the Company\u00a0pursues a focused, narrow\u00a0merchandising\u00a0strategy. It consolidates\u00a0purchasing\u00a0at the enterprise level and does not tailor its merchandise mix for regional or seasonal preferences.\u00a0This strategy is on display in the sofa section of the company\u2019s website, which features only 69 distinct sofa models\u00a0versus\u00a090 and 181 offered at two direct competitors4<\/sup>. 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\u00a0Company\u2019s buying power. It also helps simplify the Company’s\u00a0inventory management and fulfillment functions, both of which have historically been operational trouble spots in the industry given SKU size.5<\/sup><\/p>\n

In addition to being narrow, the Company\u2019s 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,\u00a0by\u00a0not paying a brand premium to manufacturers, the Company can\u00a0offer a lower price to consumers and still make healthy gross margins. Second,\u00a0from a competitive perspective, the Company’s\u00a0proprietary products will not show up on a competitor’s showroom floor, which helps maintain\u00a0uniqueness.2<\/sup><\/p>\n

Delivering value by managing costs: store layout<\/em><\/p>\n

The Company\u2019s stores are typically between 25k and 45k square feet in size7<\/sup>, which\u00a0is smaller than traditional warehouse models. This is enabled by the Company\u2019s 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 \u201coutlet,\u201d 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<\/sup> Both of these choices support the company\u2019s ability to consistently provide low prices to consumers and operate effectively in a low margin environment.<\/p>\n

Delivering value by managing costs: store footprint <\/em><\/p>\n

The Company is sizeable, delivering over 15,000 items per week out of 9 delivery hubs1<\/sup>, and\u00a0has been very thoughtful\u00a0in its growth strategy to date. It has pursued\u00a0a two-pronged approach: 1) maximize existing market penetration and 2) only enter new markets that are geographically adjacent, and\u00a0do so\u00a0at scale (often ~5+ new store openings at once). This enables\u00a0the Company to maximize route density in fulfillment and leverage new market-level\u00a0investments in\u00a0advertising and distribution over a larger store base, both of which\u00a0help it to\u00a0operate profitably\u00a0while accepting\u00a0slim gross\u00a0margins6<\/sup>.<\/p>\n

Conclusion<\/u><\/strong><\/p>\n

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\u2019s track record of growth suggests that this model is profitable, sustainable, and highly scalable \u2013 between 2009 and 2014, the company grew revenue at a 10% CAGR, and has grown its store base by 64% since the end of 20097,8<\/sup>. In a highly competitive industry that has lacked\u00a0a player of true national scale9<\/sup>, the Company has emerged as a regional winner, and all signs point to continued growth in the years to come.<\/p>\n","protected":false},"excerpt":{"rendered":"

The desire to consistently and sustainably provide value to the consumer governs all critical strategic decisions at this US furniture retailer. The result could be the development of the first truly national player the US market has ever seen. <\/p>\n","protected":false},"author":406,"featured_media":3235,"comment_status":"open","ping_status":"closed","template":"","categories":[234,110,16,17,620],"class_list":["post-3028","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-furniture","category-low-cost-uncategorized","category-retail","category-supply-chain","category-value"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/the-tom-challenge-tom-winners-and-losers-assignment\/","yoast_head":"\nOperations Driving Deep Customer Value in Furniture Retail - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/operations-driving-deep-customer-value-in-furniture-retail\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Operations Driving Deep Customer Value in Furniture Retail - Technology and Operations Management\" \/>\n<meta property=\"og:description\" content=\"The desire to consistently and sustainably provide value to the consumer governs all critical strategic decisions at this US furniture retailer. 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