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Art Van’s Furniture: From Powerhouse To Liquidation In Just Three Years

Less than three years ago, I was part of a consulting team that participated in a strategic planning retreat for Art Van Furniture’s senior management. At the time (mid 2017), the company was riding high: it was immensely profitable, growing fast, entering new markets and looked poised to double its growth and cement its standing as a regional powerhouse in the furniture industry. Last week, the company announced it is closing its doors forever.  It is now in the process of a full liquidation and becoming yet another footnote and cautionary tale for the retail industry.

So, what happened? While I hate to use the perfect storm analogy, a combination of poor decision making and bad timing took a once powerful company down.

  • Private Equity Ownership. Art Van was purchased by Thomas H. Lee Partners LP in 2017 for an estimated $550 million from the company’s founder Art Van Elslander. TH Lee saw opportunity to consolidate what has always been an historically fragmented industry. They also used a couple of widely copied pieces of the private equity playbook, including using debt to finance the transaction. Sale-leasebacks of the properties were used to fund the purchase price to the selling shareholders but did lead to higher rental rates on leased properties.
  • Management team turnover. It is always difficult to transition from a family owned business, but there was also significant turnover in the executive ranks by failing to secure the team (much of it non-family) that had achieved the prior success.
  • Rapid Growth Organically and Through Acquisition. The company then proceeded to grow quickly, as it tried to enter the Chicago market, grow its Pure Sleep mattress store brand and make bolt-on acquisitions of Levin Furniture in Pittsburgh and Wolf Furniture in Altoona, PA. Again, all likely strategically correct plays but poor sequencing and implementation of the plans above. My broken record of “too fast” growth (see Earth Fare, Lucky’s, etc.) spurred by outsized private equity expectations feels like a broken record.
  • E-commerce. Sure, let’s blame Amazon. Or, in this case, more specifically, the money sucking Wayfair business. In 2017, e-commerce was a relatively small factor in the furniture business. Today, it is roughly 20% of the market. Art Van tried, unsuccessfully, to quickly ramp up its e-commerce business. No doubt that e-commerce had an impact on the core brick and mortar business, but it cannot be the sole cause of blame.
  • Tariffs. For good measure, the furniture industry was also caught up in the U.S./China trade war. China was the top furniture exporter to the U.S. and initial tariffs of 10% were raised to 25% in May of 2019 after trade talks stalled. This undoubtedly had an impact on margins.

In total, both internal missteps and external factors took a once great company to the brink in an incredibly short period of time. Fellow Forbes contributor Steve Dennis likes to say, “Physical retail isn’t dead. Boring retail is”. In this case, Art Van didn’t deserve to die. Hopefully, we can learn lessons from another sad retail tale.

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Five Trends That Shaped A Decade

As the Holiday season of 2019 winds to an end, I am going to use this time to look back and to look ahead. The 2010’s were a transformative decade for retail. While Retailmageddon didn’t exactly come to pass, we saw a significant slowdown in physical brick and mortar retail growth and an unprecedented number of retail store closures. From a macro-standpoint, I can point to these five significant trends that shaped retail as we know it coming into a new decade.

  1. Overall strong economic and retail growth. After a crippling recession in 2008-09, retail sales rebounded and drove sustained growth through the decade. Overall sales grew as the overall US economy flourished, driven by positive consumer sentiment and historically low unemployment. As retail sales approach nearly $5 trillion, retail (and consumer spend) has been the engine of the US economy.
  2. The rise of Amazon and e-commerce. If we look at the changes in the top 10 retailers over the past decade, there is one company in particular that sticks out. Amazon is now the second largest retailer in the U.S. and remains one of the fastest growing as well. While the rest of the top 10 remained constant (Walmart was and most decidedly remains the big kid on the block), Amazon’s meteoric rise has changed the complexion of retail. And with Amazon comes the subsequent growth of e-commerce. While now accounting for around 10% of total retail sales, its double-digit growth rate and disproportionate impact on key categories (books, electronics, apparel) has altered the retail landscape. As e-commerce approaches 20% plus of sales within a category, the impact on retail has been profound.                                                                                                                       
  3. The collapse of the middle—the everlasting move to value. Retail success has been disproportionally weighted to the extremes. Those companies who have demonstrated that they can provide real value for the consumer have been winners over the past decade. Walmart and Costco, of course, are demonstrations of this trend. If we look beyond the top 10, three retailers in particular stick out. TJX, Aldi and Dollar General all show up in the top 20 in sales and all continue to be on growth trajectories. The move to value is nothing new in retail but this decade exacerbated the trend, even during strong economic times.
  4. Private equity and its impact on retail economics. Private equity played a meaningful role in the past decade in the world of retail. And not necessarily to its benefit. Most of the notable bankruptcies during the past decade have seen a private equity component associated with it. Toys R Us, Sports Authority and Gymboree are three examples of retail bankruptcies during the decade that had significant private equity ownership. While private equity alone is not responsible for the disappearance of these chains, high debt levels and leverage makes it difficult for retailers to maneuver during difficult times. Private equity played a prominent role (and likely will continue to do so) in the flexibility of retail firms to survive during difficult times.
  5. The power of the consumer. In the end, the biggest influence on the world of retail over the past decade is the increasing power of the consumer to efficiently vote with their wallets. The conversation with the consumer has moved from a one-way advertising model to a holistic feedback loop. Purchasing is now fluid, no longer tied to a particular geography. This means that anyone with a good idea can sell to any consumer around the world. Direct to consumer brands can bypass traditional supply chain, distribution routes and channels to appeal directly to the consumer. The biggest drivers of this change are both technologies that began in the 2000’s but took off in the past decade. Smartphone usage boomed this past decade, with 265 million users in the U.S., four times what it was in the beginning of the decade. Social media usage also nearly doubled as a percentage of the population using various platforms as well as the time spent online. This has given customers new ways to interact and communicate with brands and retailers.

In the next blog, I will look at the future of retail. Where will we head in the next decade and what retailers will need to do to be prepared.

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Celebrating Brand Heritage in Luxury Flagships

It’s no secret. Brick & mortar players must fight harder than ever to make it in the intensely competitive game that is physical retail. In addition to the challenge of delivering unique experiences to compete with the online channel, luxury retailers must also justify an ultra-premium price point.

Best in class luxury retailers are achieving this by operating their fleet of stores—particularly flagship stores—as a stage for inspiring an aspirational lifestyle.

Burberry is a clear winner. The brand’s flagship in the heart of Seoul’s elegant Cheongdam-dong district tells the brand’s story through a multi-level journey. On the first-floor, busts of famous British monarchs and famed literati flank the iconic Burberry plaid, paying tribute to the brand’s heritage. The upper levels are noticeably more contemporary in their integration of multimedia displays in product presentation.

Down the street is the Dior flagship store, designed by renowned French architect Christian de Portzamparc. The flagship’s interior celebrates the label’s French origins by merchandising product in front of images of Versailles. Sparkling high jewelry is brought to life in a case that mimics a fabulous French salon. One is left wondering when Marie Antoinette is due to arrive for her afternoon champagne and gâteau.

In another pocket of Seoul, K-beauty phenom Sulwhasoo exhibits limited edition compacts released each year along with descriptions of how Korean tradition and culture are woven into the creation of each piece. Talk about a curated, museum-like experience.

Approximately 6,868 miles away in New York City, the Cartier flagship on Fifth Avenue is a monument to the history of both Cartier and the mansion.

On the first floor of the four-story monolith a large portrait of Maisie Caldwell Plant keeps watch over what used to be her home. For those unfamiliar, her wealthy husband accepted $100 and a pearl necklace from the jewelry house in exchange for the high-street home.

The second-floor transports customers to a bygone era in the Grace Kelly Salon where important pieces once graced by the princess during her glamorous life are on full display.

Is drawing so much attention to the past smart? We think so. In today’s hyper-competitive environment, a storied heritage can only serve to help differentiate a brand that is rich in history from players with less historical ties.

And while a Burberry scarf or a Cartier engagement ring may not make you royalty, you may feel that way—if only for a second—at one of these experiential flagships.

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Amazon Go: A Game Changer For The Retail Industry

Amazon.com has been tip-toeing into the world of brick and mortar retailing for some time now. There have been small outposts at colleges and a few beautifully designed bookstores have been popping up in cities with rumors for several hundred more. As I have said before regarding these efforts, they appear to be sleight of hand experiments designed to distract the retail world from the game changing concepts that are to come. Amazon Go is one such idea, one that could drastically change not just food retailing, but every segment of retail.

The premise is simple and the video circulating on-line and produced by Amazon, will surely be among the most watched futuristic retail videos around. But, what should be scarier for retailers is that the future will appear in Seattle early next year in the form of an 1,800 square foot convenience store called Amazon Go. The deceptively simple premise of the proposition is that you simply scan your app upon entry, shop for whatever you like and walk out the door.  No checkouts, no card transactions, no bagging.

The proposition for the consumer is simple—save time and hassle. The proposition for retailers may be even more compelling—save labor on the biggest component of the store (the front end) as well as improve throughput.   In an era where labor costs are increasing and labor availability is scarce, this becomes an incredibly compelling one-two combination.

Amazon Go looks like an upscale convenience store in the initial video, showing a variety of prepared foods and convenience grocery items. The technology will allow this, presumably, to work with any type of retail item with an appropriate sensor. This could easily move to fashion, electronics, home products and any of the other millions of products sold through Amazon. They claim that the Just Walk Out technology utilizes computer vision, sensor fusion and deep learning algorithms to provide this seamless shopping experience.  One can envision a future of Amazon brick and mortar outposts: book stores, beauty stores, drive thru grocery stores and convenience locations all using this technology.

The big question: How far behind is the rest of the retail industry and what can they do in the interim to keep up?

I’ll end with the words of Jeff Bezos in the latest annual report. I think it provides great insight into the mindset of innovation that pervades Amazon and why competition seems to always be a step or two behind:

I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

Amazon Go may not work, but I like the odds on this one.  More importantly, the culture of innovation combined with deep pockets makes it clear why Amazon will be the retailer to watch in any category.

Neil Stern for Forbes

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