Go big or go home: Restoration Hardware’s radical approach is paying off

Restoration Hardware’s stock has been under pressure despite since last week’s earnings report. Whether this is because of Wall Street’s tendency to not let any good deed go unpunished or perhaps because the company tried to tamp down future growth assumptions is anyone’s guess. But I continue to be impressed by the home furnishing chain’s progress.

A few years ago, I happened to be speaking at the same conference as Gary Friedman, the CEO of Restoration Hardware. In his talk, Gary outlined his vision for building radically re-designed new and dramatically larger stores under the label RH Gallery. The new flagships would be beautifully decorated, with dramatic spaces and vignettes. They would feature signature restaurants, rooftop bars, extensive interior design services and more. As he shared visuals with the audience and gave a sense of the massive size of the new concept, I tried to do some math on the potential cost of this bold new strategy. Yikes, I thought.

For context, it is important to bear in mind that, only a few years earlier, Restoration Hardware was seen as a likely candidate for the retail graveyard. But after managing to dodge the grim reaper, the company accelerated the shift of its product strategy to be more expensive and fashionable. It also abandoned the increasingly incongruous “Restoration Hardware” name and moved away from a promotional model to one that is membership-based.

But most notably, when the majority of retailers were closing stores in droves—and trying to make the ones they were keeping smaller—here was a guy deciding to go bigger and badder. As I listened to Friedman’s vision unfold, I found myself going back and forth between thinking that he was brilliant and thinking that he might well be out of his mind.

Based on RH’s earnings report last Friday, in which Friedman writes one of the best investor letters I’ve read in some time, the strategy seems to be paying off. The company reported record sales, earnings and margins and 7% comparable store sales growth and achieved what it believes is an “industry-leading ROIC of 27.8%.” Not bad.

For retailers to fight and win in the age of Amazon and digital disruption, many things are becoming table-stakes, like harmonizing the customer experience across channels and using data and insights to personalize marketing. To avoid what I call the “collapse of the middle,” brands must eschew the sea of sameness that is pervasive in so many sectors. So one of the reasons I love the RH story—and now include the RH Gallery in most of my keynotes—is that it is a great case study of what I call the Eight Essentials of Remarkable Retail, most notably the last two: Memorable and Radical. 

To be meaningfully “memorable,” brands must be unique, intensely customer-relevant, authentic and amplify the wow, all in a way that is economically feasible and scalable. The RH galleries do all of this extremely well and give the target customers a compelling reason to make RH a “must-visit” store (or website). The experience is not only immersive, distinctive and fun; it delivers strong utility for the customer.

The Eighth Essential of Remarkable Retail is “radical.” Being radical is the willingness to adopt a culture of experimentation, to accept that a slightly better version of mediocre won’t command the customer’s attention and that it is actually riskier to maintain the status quo than to forge out into bold new directions. Of course, there is no guarantee that being radically innovative will work, but as Seth Godin reminds us, “if failure is not an option, then neither is success.”

It certainly is an open and valid question of how much future growth is possible through these big and bold new stores. Clearly, this is not a strategy that will support hundreds of locations. So time will tell how much more runway there might be. Apparently, the market remains dubious.

Regardless, from where I sit, leadership should be commended for taking a brand that was stuck in the boring middle and, in rather little time, turning it into one of the most interesting and remarkable stories in retail.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

 

Gee, I thought you were in the mattress business?

In my current keynote, I make the observation that many retailers have gotten themselves into trouble watching the last decade or so happen to them. Primarily for this reason, No. 8 in my “Essentials of Remarkable Retail” is the need to be “Radical” and to embrace a culture of experimentation.

Clay ChristiensenGary Hamel and many others have highlighted how legacy brands often struggle to keep pace with innovation. While there are some examples of industry incumbents responding well to disruption, it is far more typical (at least in retail) for companies to get this wrong. Having been a Sears executive when, arguably, there was still a chance for a meaningful turnaround, I often point out that we did not lack the knowledge that Home Depot and Lowe’s were on a trajectory to destroy our primary competitive advantage. What we lacked was the willingness to act. Some of this was clearly linked to culture, process, risk aversion and the like. But a lot of it was tied to how we defined what business we were in. This faulty line of thinking is a mistake oft repeated.

The latest example of this phenomenon is what’s transpiring in the $29 billion mattress category. Drive around any major city and you’re likely to encounter quite a few mattress specialty stores, the most prominent being Mattress Firm with over 3,000 locations in the U.S. Department stores like Macy’s and JC Penney also have significant mattress businesses. Mattresses are sold through traditional furniture stores like Ashley or Haverty’s as well. Given the size and profitability of the industry, the pace of digital disruption and competitive intensity, you might think that a few of these players would be aggressively pursuing innovative new formats. You’d be wrong.

In a rather ironic twist, Casper, which launched as an online only brand in 2014 and has raised $240 million in venture capital funding, is set to open 200 stores while industry leader Mattress Firm appears about to file bankruptcy to facilitate mass store closings. Casper is far from the only industry insurgent. Purple, Saatva and others are all trying to carve out sizable and sustainable positions. Most will not be around in 5 years time, but they will wreak havoc in the meantime and one or two might get acquired for what is likely to be stupid money. In fact, Tuft & Needle, Casper’s primary direct competitor, just merged with mattress manufacturing behemoth Serta Simmons.

casper_stores_1.0

Given the accelerating pace of change and the investment community’s tendency to value growth over profit, it’s not easy to be certain which disruptive model will take hold and which will be exercises in setting a big pile of cash on fire. Nevertheless, if you are Folger’s and you limit the way you see your business, you miss the value created by Starbucks. If you are Blockbuster and decide you are in the business of distributing videos through physical locations, you miss Netflix. If you are Sears and you decide you are a multi-category retailer selling a whole bunch of stuff mostly through mall-based department stores, you miss the home improvement warehouse opportunity. Oh yeah, and you also miss Amazon.

Many things in life are defined (and obscured) by our lens and filters. We need not look beyond the partisan hackery of America’s current political climate to see the truth of this. Yet in the context of how we manage our brands, respond to disruption and stay one step ahead of the consumer, we should take a lesson from the world of psychology. There are three fundamental steps to unlocking the opportunity that lays beyond our fears. First, is awareness. We must deeply understand our customers, their journey and how it is evolving, as well as the competitive dynamics that are at play. Second, is acceptance. We can see something but not truly own the truth of it and all the potential implications. The third is, of course, the most important: action.

Until we find ourselves in the arena, trying stuffseeing failure as an option, we are likely to have the next decade happen to us as well.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

On October 16th I’ll be in San Antonio delivering the opening keynote at X/SPECS . November 8th I’ll kick of the eRetailerSummit in Chicago.

For more info on my speaking and workshops go here.