HGO Merchandiser Summer 2014 by MediaEdge

Michael Knell’s

HGO merchandiser HomeGoodsOnline.ca

SUMMER 2014

Volume Three, Issue 3

LIFE AT THE TOP A look at Canada’s three biggest furniture retailers Part 1: Succession Planning Cooper on the simple math of improving profitability The mattress warranty revolution

CRITELLI’S FURNITURE:

Celebrating a Century

CONTENTS

EDITOR’S LETTER CHANGE AT THE TOP

Over the past decade, the Canadian furniture, mattress and major appliance scene has come to be dominated by just three players, but the good news for the independent retailers is this: they are the ones with the momentum for growth.

8 26

PROFILE AHEAD BY A CENTURY

Few businesses, regardless of the industry they belong to, last 20 years let alone 100! That said, after being helmed by four successive generations of its namesake family, Critelli’s Furniture will reach that milestone this year and it’s still going strong, growing bigger and rapidly evolving with the ever-changing market. A profile by regular contributor Ashley Newport.

8 14

4 HGO merchandiser

BY THE NUMBERS LIFE AT THE TOP

Canada’s furniture retailing community is dominated by three merchants who operated a total of 358 stores under 14 different banners in 2013. Two are publically owned Canadian companies while the other is a global powerhouse that industry insiders rarely, if ever, talk about or consider in their competitive and strategic planning.

MANAGEMENT SUCCESSION PLANNING: PART 1

Most people get into business to leave something behind for their families. If what’s to be left behind is the business itself, it’s too important to leave to chance. It seems no more than 14% of all family businesses have a viable, documented succession plan in place. Michael J. Knell writes a primer on how to get the process started.

MATTRESSES THE WARRANTY REVOLUTION

It’s no secret mattress warranties are unique in their generosity. Unfortunately, extra-long warranties sometimes lead to confusion, misunderstandings and unrealistic expectations on the part of the consumer. Fortunately, a shift towards shorter and less complex warranties is on the horizon.

ON RETAIL THE SIMPLE MATH OF IMPROVING PROFITABILITY

Raising prices 5%, increasing sales 5% or cutting expenses by 5% can have an enormous impact on profitability. Our resident business coach, Donald Cooper, explains.

INDUSTRY CALENDAR & ADVERTISERS’ INDEX

Michael Knell’s

HGO merchandiser HomeGoodsOnline.ca

SUMMER 2014

Volume Three, Issue 3

LIFE AT THE TOP A look at Canada’s three biggest furniture retailers Part 1: Succession Planning Cooper on the simple math of improving profitability The mattress warranty revolution

CRITELLI’S FURNITURE:

Celebrating a Century

ON OUR COVER: Joe Critelli, the fourth generation president and owner of Critelli’s Furniture, which will celebrate its centennial in 2014. Located in downtown St. Catharines, Ontario, Critelli’s prides itself on being a ‘lifetime furniture store’ with a product mix that’s solidly in the upper-middle to high-end price points.

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EDITOR’S LETTER

Change at the top

MICHAEL J. KNELL

The last decade has brought out enormous change throughout this industry, which is somewhat staggering as most of us who have made our livelihoods working in it often remark about how stable it is.

N 2003, LEON’S FURNITURE WAS A SOLID MEMBER OF TOP FIVE

furniture retailers in Canada and Sears continued to hold the post position. Today, Leon’s is the largest furniture, mattress and major appliance retailer in the country – a position that no other Canadian retailer is likely to challenge over the next ten years. Looking over HGO’s report on Life at the Top (beginning on page 14), there are some interesting conclusions to be made. The first being, not one member of 2013’s Top Three Canadian furniture retailers has much room to expand their physical store count. Leon’s with 300-plus stores and nine banners doesn’t have many more places in this country to go. Granted, IKEA Canada only has 12 stores, but there aren’t many big cities (Halifax, maybe?) left with populations large enough to support another. And unless Groupe BMTC decides to expand beyond the borders of Quebec, they don’t have many places to go either. This means their future growth will come in other ways and I don’t think acquisition is one of them. With the exception of BMTC’s launch of the cheap-chic Economax banner, the Top Three are going to focus on what analysts and consultants refer to as ‘organic’ growth. Leon’s recent deal with Furniture.com suggests e-commerce is going to be key component of their growth strategy and since IKEA is already e-commerce savvy, as their momentum in this area gains speed, other retailers are going to get into the game seriously as well. This is the first time in almost a decade that I’ve written an overview of life at the top of our industry. I’m glad I did. This report is designed give insight into (and don’t worry, I haven’t forgotten about Sears) the strengths of Canada’s most dominant furniture, mattress and major appliances retailers. They are forces to be reckoned with, but there’s still room for everyone else.

Michael J. Knell Publisher & Editor mknell@homegoodsonline.ca

6 HGO merchandiser

HGO merchandiser SUMMER 2014 • VOLUME THREE, ISSUE 3 ISSN 2291-4765

www.HomeGoodsOnline.ca PUBLISHER & EDITOR Michael J. Knell mknell@homegoodsonline.ca MANAGING EDITOR Anthony E. Bengel tony@homegoodsonline.ca CONTRIBUTORS Donald Cooper Ashley Newman ART DIRECTOR Samantha Edwards Sam I Am Creative samiamcreative@bell.net IT DIRECTOR Jayme Cousins In House Logic websmith@inhouselogic.com PUBLISHED BY Windsor Bay Communications Inc. P.O. Box 3023, 120 Ontario Street Brighton, Ontario K0K 1H0 T: 613.475.4704 F: 613.475.0829 Michael J. Knell, Managing Partner PUBLISHERS OF

HGO This Week Home Goods Online.ca

© 2014 Windsor Bay Communications Inc. All rights reserved. Windsor Bay Communications does not accept any responsibility or liability for any mistakes or misprints herein, regardless of whether such errors are the result of negligence, accident or any other cause whatsoever. Reproduction, in whole or in part, of this magazine is strictly forbidden without the prior written permission of the publisher.

AFFILIATE MEMBER

For TCHFM’s National Advisory Committee, furniture is serious business. Composed of highly-regarded industry leaders, the Committee will shape the future of TCHFM. It’s simple: the status quo will not do… We need to work together to make TCHFM the best it can be! Visit www.TCHFM.com to learn more and to follow the Committee’s work as we build towards the new TCHFM in June 2015!

June 4 - 7, 2015 HomeGoodsOnline.ca

PROFILE

AHEAD by a

CENTURY Few businesses regardless of the industry they belong to last 20 years, let alone 100! That said, after being helmed by four successive generations of its namesake family, Critelli’s Furniture will reach that milestone this year and it’s still going strong, growing bigger and rapidly evolving with the ever-changing market. BY ASHLEY NEWPORT

HIS YEAR WILL SEE CRITELLI’S

Furniture mark its centennial, an awe-inspiring milestone few independent small business founders can only dream of. While family-owned operations are not at all unusual in the home goods industry, one spanning four generations while thriving for 100 years after inception is indeed rare. There are perhaps a dozen or so belonging to this particular club across the country, including James Reid Furniture in Kingston, Ontario, and believe it or not, Canadian industry giant Leon’s Furniture. But while reaching your centennial is indeed a precious milestone, Joe Critelli, fourth generation owner of his family’s namesake operation, is humble about his store’s staggering accomplishment. “Due to recent developments, such as consumers using the internet to research a furniture purchase there are fewer multi-generation companies are left in the industry,” Critelli observes. “So we’re happy to not have just survived, but flourished.”

8 HGO merchandiser

A medium-high to high-end furniture store that has long been a fixture in the Niagara Region city of St. Catharines – although it serves communities all over the Greater Toronto and Hamilton Area (GTHA) – Critelli’s Furniture began as a grocery, hardware and furniture store in the nearby village of Thorold in July of 1914. The once-humble variety store, then operated by Thomas H. Critelli (with the support and assistance of his father, the current president’s namesake and great-grandfather, Joseph Critelli) began focusing on fine furniture, the category which drove its growth in the early years. In 1936, Thomas opened another store with his brother Frank before the opening of its first St. Catharine’s location three years later. In 1946, Thomas’ son Thomas J. Critelli joined the company. In 1961, the decision was made to close the Niagara location to focus on what had become the flagship St. Catharines King Street store, which began to truly take shape in 1963, when it grew to include four showrooms and a warehouse. In 1979, current president Joe Critelli }

Joe Critelli (bottom), the fourth generation president and owner of Critelli’s Furniture, which will celebrate its centennial in 2014. Critelli’s Furniture (top) has been located in downtown St. Catherines since 1939, having been founded 25 years earlier in the nearby village of Thurold. This is how the store looks today. The exterior of Critelli’s Furniture as seen in the early 1960s (inset).

HomeGoodsOnline.ca

Here is one view of the sales floor at Critelli’s Furniture (left), whose merchandise mix focuses on ‘lifetime’ furniture in contemporary transitional to traditional styles at medium-high to high-end price points. Critelli’s is an authorized Stressless/ Ekornes dealer. This is a view of their in-store gallery (right).

joined the company, a position he assumed upon his father’s retirement in 1990. Under Joe Critelli’s supervision the company has continued to grow. Critelli’s – which its current president refers to as a ‘lifetime furniture’ store – is now a 25,000 square foot space offering higher-end brands such as American Leather, Barrymore, Jessica Charles and more. In 2002, the company launched Transitions, a store focused more on modern and contemporary pieces that, in Critelli’s words, “cater to a sharper entry level price point.” Transitions, which is located nearby on St. Paul Street in St. Catharines offers such brands as Precedent, Vanguard, Brown Jordan and more. Critelli’s and Transitions work in tandem, occupying two niche markets – fine, traditional furniture for more mature, higher-income shopper and modern and stylish pieces for a younger, slightly more budget-conscious clientele. But while the Critelli clan deserves accolades for keeping the family-owned operation afloat through the original Great Depression and all of the following recessions and other economic upheavals as well as the enormous changes in consumer culture, it can’t just be perseverance that keeps a business thriving. So what else sets them apart? “You need to have a passion [for the business], and I love furniture,” Critelli enthuses.

Critelli’s and Transitions work in tandem, occupying two niche markets – fine, traditional furniture for more mature, higher-income shopper and modern and stylish pieces for a younger, slightly more budget-conscious clientele. 10 HGO merchandiser

“It takes constant focus and continual improvements to keep things pointed in the right direction in this industry. Going to market and missing vacations, I love all of it. I love spending three or four days shopping the market. It’s not a job when you love it that much.” Loving furniture is vital to remaining a top player in a challenging industry, but it’s just one of several keys. While it’s extremely important to never allow boredom or complacency to set it, it’s equally important not to rest on your laurels or stick to the same old sales tactics. As the consumer becomes more educated and tech-savvy, so does the team at Critelli’s. “The store is a brand and I understand the lifecycle of a brand,” says Critelli. “The new stage is growth, the middle stage is plateau, and when you’re old, you’re in jeopardy of decline. So how do we never get to the ‘old’ stage? Doing new things within our four walls kept me engaged in the 80s and 90s, and I enjoy being creative, so we started Transitions and it made the company feel younger. We also added a third building to Critelli’s in 2012.” In terms of adjusting to rapid technological advances, Critelli’s has stayed on trend by embracing social media, curating a strong online presence and posting frequent blogs penned by Joe Critelli himself. He also recognizes it’s not just the purchasing landscape that’s changed — buyers are fundamentally different. “In the first 15 or 20 years of my being in the business, it seemed that the younger generation aspired to have lovely traditional fine furniture like their parents,” he says. “Now, the younger generation, exposed as they are to furniture from all over the world via the internet, see their parent’s furniture and say ‘that’s nice, but we want something different’. “In the 80s and 90s, we could easily anticipate wants and desires,” he continues, “and }

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Thomas H. Critelli (left), grandfather of current company president Joe Critelli, opened the first Critelli’s Furniture store in 1914 in the village of Thurold, Ontario. Tom Critelli (middle) was the third generation president of the company. His son reports that at age 87, he still takes an active interest in the business while working on his golf game. Misette Critelli (right), sister of company president Joe Critelli, is the manager of Transitions.

THOMAS H. CRITELLI

TOM CRITELLI

now determining what are the most sought after style trends is a moving target. The internet means you’re not just competing against local operators, but on a national or even international stage. People used to go to only department stores, furniture stores or designers for their furniture. Now there are so many ways people can make a purchase for their home. The channels of distribution for furniture are expanding rapidly and it seems to me as though competition in our industry from outside our markets is only going to increase.” To adapt to the new, tech-savvier consumer, Critelli’s focuses on round-the-clock accessibility and undivided attention to each and every inquiry she makes. “We’re trying to be easily engaged with every client and perspective client,” he explains. “We’re very aware of the fact that our web sites are our storefronts 24/7. We’ve stayed with the times by being accessible whether the cus-

WHAT’S ON TAP FOR CRITELLI’S CENTENNIAL? This past May, Critelli’s Furniture sponsored the University Women’s Club 40th Annual House Tour. The tour took guests through four historical homes, and Critelli’s hosted an after-party in the main store. Over 300 people came out for wine, appetizers and education on interior design and trends. All the funds from the tour went towards furthering young women’s post-secondary education in the Niagara region. This coming September, Joe Critelli, the store’s fourth generation president, plans to hold a 100- year anniversary sale. While the details of the sale are not available at this time, he says it “will be a sale like no other.” Then, on November 5, Critelli’s will host and participate in the Niagara Chamber of Commerce’s Business after Five. Held in partnership with the Niagara Community Foundation, this event helps local businesses connect with one another. It will be held in the Critelli’s store from 5 to 7pm.

12 HGO merchandiser

MISETTE CRITELLI

tomer is around the corner or, in one situation, ordering from Switzerland. We don’t just meet the customer on the store floor anymore. Our results are predicated on people shopping on the internet, and we’re always ready to reply in a professional manner.” Critelli’s embraced the internet relatively early on, first posting its catalogue online in 2008. That tactic proved successful and the store enjoyed a great year before facing decreasing traffic – much like everyone else in retail – in the wake of the Great Recession which landed with a thud about a year later. Critelli’s has also embraced social media wholeheartedly, even though Critelli acknowledges it’s difficult to gauge how a strong Facebook or Twitter presence translates into an uptick in sales. “We’re on Facebook, Pinterest, YouTube, Houzz, Twitter and LinkedIn,” he says. “We’re always trying to drive traffic to the web site and store. It is hard to determine if our social media presence increases sales, but I see some activity. I guess it’s one of a number of different ways for people to come across our brand. There are, generally, seven points of contact a customer usually makes before they establish a comfortable level of confidence and trust to make a purchase from your company. If some of those points are from social media, it makes sense that it’s becoming more important to participate in.” As for driving traffic to the store, Critelli says while costumer activity levels have been lower over the last few years, his team – which currently consists of himself, his sister Misette Critelli, who manages Transitions, and seven designers – has to take on a disproportionate amount of responsibility to stay ahead of the curve. “In-store client activity arrives bunched into tightly packed time-frames more frequently now; phone and e-mail enquiries also reach our sales team in bunched periods,” he observes.

Opened in 2002, Transitions gives the consumer an alternative style and price point from Critelli’s main store. It offers more contemporary and urban styles in sharper price points than does the main store, which is only a few steps away.

“For this reason there are periods during the week and month when we have to act like a company twice our size to meet demand. Some customers might communicate just through email,” he continues, “but if you provide the right attention, you might be rewarded with a purchase.” Critelli also understands consumers have not only significantly altered their purchasing habits, retailers have the added challenge of selling goods frequently deemed non-essential, especially during difficult financial periods. “Purchasing furniture can be postponed,” he says. “We have to understand that when we’re faced with uncertainty. But if you care enough to present well online, you usually have a good showroom as well. We want to present well online, making our follow-through is so important. If someone is willing to make a trip and spend time with our staff, we should have something for them, whether it’s just an idea or more information to help them in their search.” Since Critelli offers the consumer two distinct retail profiles, they also have to ensure the customer isn’t simply sent to a sister store with no guidance. “Transitions is a complement to the main store, and we like to let customers know it’s only a few steps away,” he says. “Often, we’ll

AT A GLANCE CRITELLI’S FURNITURE

TRANSITIONS

ESTABLISHED: 1914

ESTABLISHED: 2002

ADDRESS: 126 King Street, St. Catharines, Ontario

ADDRESS: 169 St. Paul Street, St. Catharines, Ontario

WEB SITE: www.critellifurniture.com

WEB SITE: www.transitionsfurniture.com

LEADERSHIP TEAM: Joe Critelli, president; Misette Critelli, manager of Transitions SOCIAL MEDIA SITES: Facebook, Pinterest, YouTube, Houzz, Twitter and LinkedIn KEY CANADIAN SUPPLIERS: Barrymore Furniture, Bermex, Dinec, West Brothers, Palliser OTHER KEY SUPPLIERS: Stickley, American Leather, Hancock & Moore, Harden, Theodore Alexandra, Henredon, Jessica Charles, Stressless/ Ekornes, Stanley, Calligaris, Christopher Guy, Precedent MATTRESS SUPPLIER: Magniflex (Italy) MEMBER OF: Greater Niagara Chamber of Commerce, Canadian Federation of Independent Business (CFIB) – Founding Member

Continued on page 34 HomeGoodsOnline.ca

BY THE NUMBERS

LIFE

TOP

AT THE

The simple truth is Canada’s furniture retailing community is dominated by three merchants who operated a total of 358 stores under 14 different banners in 2013. Two are publically owned Canadian companies while the other is a global powerhouse that industry insiders rarely, if ever, talk about or consider in their competitive and strategic planning. BY MICHAEL J. KNELL

14 HGO merchandiser

ANADA’S FURNITURE STORE SEGMENT IS

currently dominated by just three players: Leon’s Furniture, IKEA Canada and Groupe BMTC. In 2013, they accounted for 47.2% of all furniture store sales in this country and enjoyed a collective yearover-year growth rate of 4.8%, which is far greater than that enjoyed by any other furniture store in Canada. Their combined sales totalled $4.58 billion. To understand their influence in – and perhaps even over – the marketplace, consider these three facts: first, in 2003 the Top Ten furniture stores in Canada accounted for about 53% of the market (all three were members of this group that year). Second, total furniture store sales were $9.70 billion in 2013 – after the top three players took their share, the rest was divided among the remaining 3,000-plus stores fronts from coast-to-coast-to-cast. Three, the Top Three conventional furniture stores in the United States – as determined by Furniture Today – only accounted for about 14% of the market south of the border in 2013. Granted there are significant differences between the Canadian and U.S. furniture store segments (for example, both Leon’s and BMTC are major players in the major appliance market and there are very few large American furniture retailers flooring a comparable product mix). Setting those differences aside, it is not unreasonable to suggest these

three players have considerably greater influence in the Canadian market that the Top Three do in the U.S. market. In the overall retail marketplace, Canada shares many of the same names as can be found in the U.S. The best examples are probably Walmart, Costco, Target, Home Depot, and Lowes – all of which have become retail powerhouses on both sides of the border and all of whom are relatively large players in the furniture, mattress and major appliance markets. However, the differences between the big ticket retailing scene in Canada and the United States can be quite startling. For example, the largest furniture retailer south of the border is Ashley Furniture Home Stores. In Canada, they are a relatively minor player with about 34 stores in seven provinces and the Yukon. Looking down Furniture Today’s Top 100 list, there is only a handful operating stores in Canada. In addition to Ashley, the most notable names are La-Z-Boy Furniture Galleries, Pier One and Crate & Barrel. And, there is only one retailer who is a major big ticket home goods power on both sides of the border: IKEA. Collectively, the Top Three saw a sales increase of 4.8% in 2013 over the estimated $4.37 billion in revenue generated in 2012. Market share jumped from 45.8% to the aforementioned 47.2%. Between them, they operated some 358 stores in every province of Canada under 14 different banners. }

Its acquisition of archrival The Brick made the Toronto-based Leon’s Furniture the single largest retailer of furniture, mattresses and major appliances in Canada in 2013. The store seen here is in Kitchener, Ontario.

The Brick continues to operate as a separate and independent company, despite its common ownership with its main competitor, Leon’s Furniture.

HomeGoodsOnline.ca

In September 2013, IKEA Canada opened the Swedish home furnishings giant’s largest store in North America in Montreal (seen here). A year-long renovation project saw the store expanded to cover almost 470,000 square feet of selling space.

LEON’S BECOMES NO. 1

With the acquisition of arch-rival The Brick at the end of March 2013, the publicly-held and family managed Leon’s Furniture secured its undisputed position as this country’s largest full-line furniture, mattress and major appliance retailer. A position it is not likely to lose in the foreseeable future. The Toronto-based Leon’s announced in November 2012 its intentions to buy the Edmonton-headquartered arch-rival for $5.40 a share and $4.40 per common share purchase warrant in a deal valued at about $700 million. At the time, Leon’s management said the acquisition was made in response to the rising American presence in the Canadian retail landscape while shoring up their respective positions in a sluggish economy and a weakening housing market. It also said it was going to operate The Brick as a separate division that would compete in the marketplace with Leon’s. The goal was exploit backroom efficiencies and best practises. “This transaction brings together two great Canadian companies with complementary geographic footprints to strengthen our position in the home furnishings marketplace. We will apply the best practices of both companies to offer even greater value to our customers and create more opportunity for our associates,” Terry Leon, the company’s long-time president and chief executive officer, said in a statement when the bid was announced. “Our combined team will have access to national buying opportunities in merchandising and marketing, and a

national distribution network that will enable us to greatly enhance our online shopping capabilities,” he continued. For 2013, the new company had total revenue of $2.34 billion (including $302.2 million generated by the Brick during the period before March 28, 2013, when the deal closed and not included in Leon’s financial statements for the year). This was a 5.4% advance over the combined revenue of $2.22 billion generated by Leon’s and The Brick as separate companies in 2012. However, net earnings fell 13.8% from $80.8 million to $69.0 million – understandable when considering the cost of the acquisition and the other factors. But the really big jump was in market share. Leon’s went from 9.2% as a stand-alone company in 2012 to 24.1% by the time 2013 was ended. As a comparative, it should be noted the largest furniture retailer in the U.S. – Ashley Furniture Home Stores – has an estimated market share of 7%. In addition to making Leon’s this country’s largest retailer of furniture and mattresses – with an estimated market share of 18%, based on Statistics Canada’s Retail Commodity Study – it is now the second largest purveyor of major appliances in the country, jumping ahead of Home Depot Canada (with Sears Canada remaining in the number one position in this category). Its share of the white goods market is estimated at 15.4% for 2013 – or $651.4 million. Investors also rewarded Leon’s decision to acquire The Brick. On the Toronto Stock Exchange, Leon’s shares ended 2013 at $14.03 per common share, compared to $12.99 at the end of 2012 and $12.30 when the acquisition closed on March 28, 2013. The store count more than tripled from 76 to 311. The company now operates a total of nine banners: Leon’s corporate stores; Leon’s franchise stores; Appliance Canada; The Brick Corp. (including Midnorthern Appliance); The Brick franchises; Urban Brick; Brick Clearance Centres; Brick Mattress Store; and, United Furniture Warehouse. }

“Our combined team will have access to national buying opportunities in merchandising and marketing, and a national distribution network that will enable us to greatly enhance our online shopping capabilities.” 16 HGO merchandiser

SEARS CANADA: STILL A MAJOR PLAYER

ne cannot have a complete discussion about the furniture, mattress and major appliance business in Canada without talking about Sears. For much of the past 60 years, the publicly-held Canadian multi-channel retailer has been a continuing and dominant force in big ticket home goods, much more Sears Home was launched by Sears Canada over a decade ago as part of strategy to reassert so in many ways than Sears Holdings its dominance as a furniture, mattress and major appliance retailer. This recently refurbished Corporation, its parent company and store is located in Whitby, Ontario. operator of Sears and Kmart in the United States. furniture and mattresses is believed to be the largest In the U.S., Sears is a major player in white goods and category in the segment. mattresses but relatively minor player when it comes to This suggests 2013 sales for the ‘home and hardlines’ furniture, particularly over the past few years. segment totalled $798.4 million, as same stores sales for In 2003, Sears Canada was acknowledged as the single the segment fell 10.8%. This down 9.1% from the $869.3 largest retailer of furniture and mattresses in Canada, a million sold in the prior fiscal year. position it found difficult to defend over the ensuing decade. Furniture and mattress sales are estimated at $520 For its 2013 fiscal year, Sears Canada reported total million for Sears Canada’s latest fiscal year. This would give revenue of $3.99 billion, an 8.1% drop from the $4.35 billion the company a national market share, based on Statistics for the prior year. Same store sales fell 2.7%. Canada’s Retail Commodity Survey, of approximately 6.3%. However, earnings for the year shot up to $446.5 million For the prior year, sales are estimated at $565 million with a or $4.38 per share – thanks solely to a number of real estate market share of 6.9%. deals which saw it return a number of high profile downtown Sears Canada treats major appliances as its own locations back to the their landlords. It has been some time segment and reports it also accounts for 20% of its revenue since Sears Canada’s profit were driven by its core business on an annual basis. The segment also includes Corbeil, – retailing. the stand-alone appliance specialist launched by Cantrex Just over a decade ago, Sears Canada launched a major about 15 years and acquired by Sears when it took over the push to reassert its leadership in big ticket home with the Montreal-headquartered buying group in 2005. unveiling of Sears Home, a chain of 40 or so large format This suggests Sears Canada’s major appliance business stores scattered across the country dedicated to furniture, accounted for about $798 million in revenue for its 2013 mattress, major appliances as well as floor covering and fiscal year. This would make Canada’s largest white goods other installed home products. While many of these units retailer with a national market share of 18.9%. are seen as solid performers, it has not been enough to However, the company also admitted same store sales for reverse the set-backs that have plagued the company in this segment fell 4.2% in the last fiscal year. recent years. Sales for the 2012 year are estimated at $869 million with Indeed, when Calvin McDonald began his stint as chief a national market share of 20.9%. executive officer in mid-2011, he designated mattresses There is no doubt that Sears Canada has been losing and major appliances as ‘hero categories’ that would drive ground as a furniture, mattress and major appliance Sears Canada’s growth moving forward. He left the post in retailer for the past few years. In May 2014, Sears September 2013. Holdings announced it was looking to sell off its interest Traditionally, furniture and mattresses have been part in its Canadian subsidiary. Many analysts in the financial of Sears Canada’s ‘home and hardlines’ segment, which community are not optimistic about the future of Sears in also includes other consumer durables such as home either Canada or the United States. décor products, consumer electronics, lawn and garden But one thing is clear: Sears Canada remains a dominant equipment, outdoor furniture, and tools. This segment player in this country’s furniture, mattress and major accounts for about 20% of total revenue annually, although appliance markets. The question is, for how much longer.

HomeGoodsOnline.ca

IKEA doesn’t compete with other retailers for product. Instead, they design their own product lines and then shop for manufacturing capacity. This gives them unique strengths other retailers can’t match.

IKEA: CATCHING UP ON THE INSIDE

IKEA Canada is fastest growing furniture and mattress retailer in Canada, outpacing not only the other members of the Top Three but also all other furniture retailers in the country. In 2012, and with no fanfare, Statistics Canada reclassified IKEA Canada as a furniture store, meaning 51% or more of its annual revenue came from the sale of furniture and mattresses each year. Previously it had been classified as a general merchandise store, along with Sears Canada, Walmart Canada and other big box department stores. According to documents published by its parent company, the Canadian arm accounts for about 4% of the Swedish global home furnishings giant’s revenue annually. For fiscal year ending August 31, 2013, IKEA Canada had revenue of about $1.54 billion – up 7.7% over the prior fiscal year. This would give them a 16.2% share of the market and fortify their position as the second largest furniture store in the country. Home Goods Online estimates IKEA Canada’s furniture and mattress sales at $847.0 million for their 2013 fiscal year. Based on Statistics Canada’s Retail Commodity Study, this would suggest IKEA Canada is responsible for 9.8% of all furniture and mattresses sold in Canada. This is also a larger market share than that possessed by Sears Canada, which is believed to account for 8.4% of all furniture and mattresses sold in this country, but is half that of the now super-sized Leon’s Furniture. Whether at industry conferences or events, IKEA isn’t often the subject of discussion and analysis among industry insiders and, therefore, isn’t often considered a competitive threat when other retailers draw up their business plans. In the author’s view, this can be attributed to IKEA’s unique product acquisition strategy. They don’t compete with other retailers for product. Instead, they design their own product lines and then shop for manufacturing capacity. This gives them unique strengths other retailers can’t match. IKEA Canada operates just 12 stores across the country. In 2013, they opened the largest IKEA store in North America with the completion of their renovated store in the Montreal suburb of Ville St. Laurent and its 470,000 square feet of selling space. The company is also acknowledged to be the finest e-commerce merchant in the furniture industry with a presence on all of the major social media platforms. Unlike its confreres in the Top Three, IKEA Canada isn’t considered a significant player in the major appliance category, although it does sell white goods, which

18 HGO merchandiser

are procured in the same way as its furniture and mattress offerings. It should also be noted Furniture Today ranks IKEA second on its Top 100 list of U.S. furniture stores with furniture sales of US$2.67 billion.

BMTC DOMINATES QUEBEC MARKET

Even though times have been tough over the past few years, so broad and deep is Groupe BMTC’s dominance in the Province of Quebec that it continues to rank as the third member of Canada’s Top Three furniture, mattress and major retailers. Sales for the publicly-held merchant to the end of 2013 were $694.7 million, down 3.1% from the $716.9 million recorded for 2012. However, under the leadership of Yves Des Groseillers, BMTC’s long-serving chairman, president and chief executive officer, net earnings grew last year to $57.2 million of $1.24 per share – compared to $48.7 million or $1.02 per share a year earlier. But it lost a little market share, which was rated nationally at 7.1% last year, compared to 7.5% for 2012. But in the Province of Quebec – the only Canadian jurisdiction in which it operates – it had a market share of 27.4% in 2013, down slightly from 28.0% in the previous year. In 2012, as part of a new strategy to drive sales, BMTC launch Economax, a promotional and entry price level specialist. The banner accounted for seven of its 35 stores by the end of 2013, when the company announced it plans to open at least another five locations in 2014 (for a total of 12). All are centred on the Greater Montreal Area. The company also operated 10 stores under the Brault & Martineau banner and another 10 under the Ameublements Tanguay banner. Tanquay stores can be found mainly in Quebec City. It also operated six Brault & Martineau Sleep Gallery stores and two liquidation centres. Even since selling off the now defunct, Ottawa-based Colonial Furniture some 15 years ago, BMTC has shown little interest in expanding outside Quebec. BMTC is also considered to be the largest white goods retailer in Quebec, with a national market share of an estimated 5.4%. If accurate, this would give the company sales in this category of about $228 million last – fully one-third of revenue and a much higher percentage than that of the two other members of the Top Three or Canadian furniture retailers in general. HGO MICHAEL J. KNELL is the publisher and editor of Home Goods

Online.

Ameublements Tanguay is the second of three banners operated by Groupe BMTC. This banner found mostly in Quebec City and the surrounding area. This store is in Levis.

Brault & Martineau is one of three banners operated by Groupe BMTC, the largest furniture, mattress and major appliance retailer in Quebec and the third largest in Canada. This store is located in Montreal.

Groupe BMTC launched Economax as a bit to drive sales growth in 2012. This entry-level, promotional price specialist is centred in the Greater Montreal Area.

HomeGoodsOnline.ca

20 HGO merchandiser

Smarter. Cooler. Better. Together. Two Brands, One Focus: Helping you grow your business.

www.sertacanada.com

. PART ONE /

SUCCESSION PLANNING Most people get into business to leave something behind for their families. If what’s to left behind is the business itself, it’s too important to leave to chance. But embarking on the process, while vital, is often plagued by the frailties of human nature. BY MICHAEL J. KNELL

“G

ETTING OUT ALIVE” IS A TONGUE-IN-CHEEK

phrase often heard throughout this country’s furniture, mattress and major appliance industry. It refers, usually, to retirement and passing the business to the next generation of ownership. For the typical independent furniture, mattress and major appliance retailer – as well as the small to mid-sized family operated manufacturer (of which Canada has plenty) – this usually means handing over the keys to the front door to his or her children. There are a great number of family-owned companies that have successfully handed over the business from one generation to the next (we’ll be highlighting some of their stories in an upcoming issue of the Merchandiser). Some of

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the best examples include Tepperman’s Furniture in Windsor, Ontario; Bennett’s Home Furnishings in Campbellford, Ontario; Critelli’s Furniture in St. Catharines and James Reid Furniture in Kingston. Don’t forget Leon’s Furniture. This country’s largest furniture and appliance retailer has been passing its leadership from one generation to the next for over a century. And they’re publicly held. When it comes to succession planning, the statistics aren’t heartwarming. A recent study of his own clients conducted by Donald Cooper, business coach, speaker and frequent contributor to Home Goods Online, showed that only 14% has a documented succession plan. And even then, most are not regularly updated to account for changing business conditions.

MANAGEMENT grow effectively?” This is followed by: “What’s your ‘eventual’ plan for the business?” Kriszenfeld says situations are often made worse than they need be because the business owner fails to consider a few simple things. “For example, are the children prepared to take over the business? Has that notion ever been communicated to anyone?” he asks, adding, “I like to make sure all of my clients have a ‘crash test’ – what should happen if they suddenly fall ill or pass away? Who has those instructions? Where does the successor go for answers or who does he or she call first? People don’t like to talk about their own mortality but it will happen at some point.”

THE PATHS TO RETIREMENT

Most experts agree there are five different paths to retirement for the typical independent furniture and major appliance retailer – indeed, any small business owner. They are:

1 Transfer the business to another family member, most often one’s son or daughter;

2 Sell the business to a key employee; 3 Sell the business to your employees (ESOP); 4 Sell the business to an outside investor; and, 5 Liquidate and close the business.

“Most independent furniture, mattress and appliance retailers do not have a good succession plan if they have one at all,” adds Phil Kriszenfeld, principal of the Burlington, Ontario-based Transitions Mediation & Consulting Group. “In their minds they have a plan perhaps but very few have ever shared it with those who would be most affected. They may have a son or daughter in the business and just ‘assume’ that if something happened to them, their child would take over.” Cooper also points out that succession planning isn’t an event. “It’s the process of preparing the people and the organisation, over time, for changes in responsibility and, eventually, changes in ownership,” he says. Cooper also makes one critical observation. Before launching a succession planning process, there is one critical question to answer: are you creating a saleable business? “If you think there’s strong competition when you’re running your business, wait till you try selling it.” Once that question is answered, the next one to be answered is: “When will you want to get out, or when will the business need you to step aside so that it can continue to

Kriszenfeld specialises in advising family businesses on a wide range of issues, including succession planning and points out the last option also includes putting the business into bankruptcy – but only under very specific conditions. There is merit to most of these options. “Transferring the business within the family allows the owner to still be involved during and often after the transition has taken place (‘Hey, it’s my mom and dad,’ the new owners can assert) and continue to add value well past transition as long as they don’t wear out their welcome,” he says. “Selling the business to a key employee is also a great option,” he continues, noting such a person has likely been involved in the business for a long time, knows it well but often doesn’t have the capital available for an immediate acquisition. This allows the owner to stay involved with the business – perhaps under different terms – while the employee works to pay off an ‘earn-out’ over a predetermined number of years. Selling to a group of employees is the least common option and the trickiest. If the group is small – say no more than three key employees – this can be a successful option. “Beyond that, managing the ‘group’ of owners becomes more onerous than running the business itself,” Kriszenfeld says. Selling to an outside investor is often the simplest way out “especially if the owner wants a complete exit in the shortest period of time,” he notes. Putting the business into bankruptcy and liquidating its assets is the option most family business operators struggle with, but this option has its place. “Often this option is exercised,” Kriszenfeld explains, “when the business owner also } HomeGoodsOnline.ca

owns the real estate and can lease out the space to create future income without having to run the business in it.”

“I know I’m generalising, but these are often the unspoken messages being sent out,” Kriszenfeld says. At that first meeting to draw up the plan, Kriszenfeld suggests the following have a seat at STARTING THE PROCESS the table: the owner; his or her spouse; those chilBoth Cooper and Kriszenfeld point out succesdren working in the business and their spouses; sion planning is a process while selling the busithose children not working in the business and ness to an outside is a transaction. their spouses; and, key employees and managers. “I often tell clients that a sale is a sprint, but PHIL KRISZENFELD “Each person’s involvement will be slightly differtrue succession planning – which can take from ent and on different levels but I have found in my one to five years – is a marathon and requires much stronpractice that I get tremendously varying perspectives from ger endurance,” Kriszenfeld says, who counts a number of ‘in-laws’; children not in the business; and those key managers furniture and appliance retailers among his client base. He who are managing the ‘heir apparent’,” Kriszenfeld said. has also spoken on the subject in front of various organisaKriszenfeld believes the process also needs a small group tions including the Saskatoon-based Mega Group, the largof outside advisors such as accountants and lawyers. “Havest co-operatively owned furniture and appliance buying ing a family business advisor like me help guide the family group in the country. through the often turbulent waters is invaluable,” he says. If Kriszenfeld’s name seems familiar, it should be. Prior “I have not only been through this myself, but taken many to becoming a qualified mediator (Q.Med) and family enfamilies along the journey.” terprise advisor (FEA), he was the second-generation presiOne of the first tasks should be to have an accounting dent of his own family business – Royal Mattress, a six-unit firm conduct a business valuation – oftentimes, family enchain of factory-direct sleep shops that operated in Hamilterprises don’t know what the business is worth and that’s ton and the surrounding area before going out of business one of things that must be agreed upon. in 2009. The company was started by his father in 1967 and Another necessary early step is to have the business’ sowas a victim of the Great Recession that hit Canada’s econlicitor draw up new shareholder agreements to reflect the omy in late 2008. changes being made in the business and to address all of Succession planning is also a journey fraught with anxithe outstanding issues. ety, ego, fear and anger – the dangerous underbelly of huOnce all of those things are done, the successor or sucman nature. cessors need to purchase a life insurance policy to cover the “People do not always prepare for things they feel will not value of the shares he or she is acquiring from the prior genbe an issue for them,” Kriszenfeld observes. These are the eration. This will minimise the damage should something people who think planning to die is for others. “They asuntoward happen. sume the business will just get sold for top dollar if they don’t have kids in the business at that point.” AN EVOLVING PROCESS They don’t realize that if there’s no plan, what will actuEvery successful succession plan includes up-to-date wills ally happen is the business they’ve spent a lifetime building for all shareholders in the family business – and their spouswill be liquidated by the estate and sold for far less than its es. And everything in the plan should be updated and adtrue value just to put closure to it. “Or worse, someone very dressed after every important life cycle event such as births, unqualified (perhaps a spouse or average manager) will deaths, marriages, divorces, and, coming of age. take over and reduce the value of the business to nil in very Kriszenfeld also insists that all shareholder agreements short period of time,” he says, “and all because no plan was contain dispute resolution mechanisms as well as naming laid out and communication to those close to the owner.” a trusted advisor who the family can turn to as issues arise. Cooper and Kriszenfeld agree the time to start the suc“And the family should meet at least once a year together, cession planning process is on the day the owner realizes off site and formally with a clear agenda and an open mind,” the business is beginning to have value. It’s at this point he says, adding, “It’s also better to meet more often in the wealth is being created and with it, the need to preserve it. first couple of years just to create good habits.” Believe it or not, some of the first steps in creating a sucFinally, it does cost money to create a viable, successful cession plan are pretty simple: making sure both the owner succession plan. For example, an entry-level project – where and the business has adequate insurance coverage – somethere are no conflicts – resulting in a comprehensive sharething the local broker should be able to provide advice holder agreement could cost $7,500 or more. If the enterprise about. Next, the owner needs to ensure both his personal including more than one holding company as well as real esand business wills are up-to-date. Now the fun begins. tate, not to mention conflict issues, the price will be higher. “But at the end of the day, it’s a wise investment for every SEATS AT THE TABLE family business to begin planning early and continue planPerhaps the toughest, most gut-wrenching question a busining often,” Kriszenfeld believes. HGO ness owner needs to answer concerns his children. Do they know the business? Have they worked in it? Do they think MICHAEL J. KNELL is the publisher and editor of Home Goods it’s easy and that they can just step in and take over? Online.

24 HGO merchandiser

HomeGoodsOnline.ca

MATTRESSES

HEN IT COMES TO COMMODITIES,

mattresses are warranty kings. Any other necessity typically comes with a warranty under the five-year mark, and a warranty approaching 10 years — let alone 20 or 25 — is almost unheard of. In a way, it makes some sense. Consumers expect cars to falter, refrigerators to malfunction and electronic devices to crumble. A mattress, a somewhat out of sight and out of mind product that hides under sheets, duvets and pillows, might not be top of mind when it comes to wear and tear concerns. The reality is that most shoppers simply don’t get as excited over the prospect of replacing a mattress as they do a dated cell phone, and most hope their crucially important but oft neglected sleeping surface will last as long as possible. That said excessive warranties, while reassuring, tend to inadvertently overpromise longevity in a commodity that should be changed much more frequently than every 25 years. They also, especially the prorated ones, tend to confuse consumers and frustrate retailers. “We have varying warranties from one year to 25 years,” says Les Channell, national sales manager with Serta Canada. “These are a mix of full coverage and prorated warranties. We know our beds last at least as long as 25 years, but customers would like shorter warranties.” Serta is keeping in line with a shift in the industry towards shorter warranties, and will

26 HGO merchandiser

THE

Warran be enacting its new policy on January 1, 2015. Once the ball drops, Serta will ring in the New Year with five-year warranties on promotional and lower price point models and full coverage, non-prorated 10-year warranties on luxury and premium products. What specifically drove Serta to make this change? “The extensive input from our customers prompted us to change this,” Channell says, pointing out that as time passes by, the body changes and sleep patterns also change. “If you don’t sleep, you die. Sleep is important and people understand this. Your body will change over a 10-year period. What matters is if you can fall asleep quickly or if you wake up with a backache. There are things that make you want to change your bed that has nothing to do with

nty REVOLUTION quality, so changing warranties to fit that is the right thing to do.” Other major manufacturers are also onboard, with Sealy also shortening their warranty periods to remain in step with the evolution of the North American market. “Our warranty policy is going to change,” says Simon Jervis, vice president of marketing for Sealy Canada. “Our U.S. counterpart for Tempur-Pedic and Sealy changed to a more uniform policy and we’re in the midst of a launch and are looking to align with them.” Sealy’s new warranty policy, which will offer a 10-year non-prorated warranty on such premium brands as Posturepedic, Sterns & Foster and Tempur-Pedic, is much simpler for the retailer to explain and the consumer to understand. “We used to have different policies for dif-

ferent products,” Jervis says. “On higher-end products, we offered complex 20 to 25-year warranties where the first 10 years were not prorated. Proration is complicated and that’s one reason for the change. It’s confusing and the consumer doesn’t have clarity. Warranties also don’t determine how long the sleep set should last. We want to prioritize clarity and not overstate the life of a product.” While it might seem like scaling back on overstatement is a confession that products aren’t built to last, it’s quite the opposite. Most manufacturers are confident that their products will (and do) last for two decades. Most also know lifestyle and body changes as well as everyday spills and stains occur, suggested hygiene concerns alone should prompt buyers to switch mattresses more rather than less often. }

Seen here is one of Sealy Canada’s recently introduced hybrid mattress models, which features a marriage of tried and true innerspring technology with the latest in gels and foams on an adjustable foundation. Like most other major mattress producers, Sealy is making adjustments to its warranty program, including a 10-year non-prorated term for its premium brand models.

HomeGoodsOnline.ca

Rev Sleep is one of the few leading Canadian mattress makers not planning to change its mattress warranty program beginning in 2015. The producers of Natura, NexGel, ObusForme and Sommex say their warranties are already in line with the new thinking. Seen here sitting on one of the latest Natura models is Valerie Stranix, chief marking officer.

“I don’t like the word ‘oversells’,” says Laurie Dubrovac director of marketing at Simmons Canada. “When it comes to quality, it’s a core association with our brand. [A long warranty] doesn’t oversell for us, but sometimes the consumer’s body does change. A mattress can be soiled. You might move or downsize and need a different bed.” Simmons is also shifting their warranties to reflect changes in the industry. But, like other

How mattress warranties compare Until recently, it wasn’t abnormal for a mattress manufacturer in North America to offer consumers a 20-or 25-year warranty regardless of the quality of the product purchased by the consumer. Here’s a look at how those gargantuan warranties stack up against other commodities and luxury products: VEHICLES: basic warranties are typically three to five years WHIRLPOOL REFRIGERATORS: one year warranty APPLE MACBOOK PRO: Up to three years with AppleCare Protection Plan SAMSUNG GALAXY S4 SMART PHONE: one year SAMSUNG WASHING MACHINE: one year LG 49-INCH LED SMART TELEVISION: one year (parts and labour)

28 HGO merchandiser

major manufacturers, their higher-end products will maintain the longest warranty periods. “Consumers expect that the length [of the warranty] will increase with the price point,” she says. “Our higher-end products, such as Beauty Rest Black, will get a 15-year warranty.” But while you might think consumers – who are more savvy, educated and health-conscious than ever before – might want shorter warranties because they plan to replace their bed more often, Dubrovac finds, long warranty or not, people don’t change their mattresses hastily. “People don’t tend to prioritize changing a mattress over, say, a computer. If your fridge goes, you have to replace it as soon as possible. People think a mattress can wait a month or two,” she points out, adding, “Some consumers replace things more often because they can, but mattresses seem to be the exception.” So while a shift in consumer awareness hasn’t necessarily driven this change, people are more likely to keep health in mind when it comes choosing to stay with or leave a longtime bed. “It’s really about health,” says Serta’s Les Channell. “I’m not a doctor, but I know a lot about sleep. A mattress is an important purchase }

The OrthoGel™ Solution OrthoGel™ provides thousands of relief points to respond to each body’s personal sleep posture. By relaxing beneath areas of high pressure and re-distributing weight to the surrounding mattress surface, these relief points eliminate the painful pressure dynamic that exists in other sleep surfaces. Pressure on hips, shoulders and other ‘hot spots’is reduced while support to low pressure zones such as lumbar and neck is increased.

Call us today for an appointment with your local representative and for details on how you can become an authorized NEXGEL dealer. (800) 567-7933 • nexgel.com

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“We value sleep because it drives performance during the day. The more you value sleep, the more you’ll spend on and change a sleep product.”

Simmons Canada is also adjusting its warranty programs to reflect current industry thinking – the higher the price, the longer the coverage. For example, the highend Beauty Rest Black (seen here) will be sold with a 15-year warranty.

30 HGO merchandiser

and people need to understand that it’s about a good sleep.” Sealy’s Jervis agrees that even though a product might last a long time, it shouldn’t necessarily be overused. “We do our due diligence with research and development to ensure [the product] has a long life,” Jervis says. “Mattresses should be changed every eight to 10 years. People change and their bodies change and mattresses wear out. To overstate a warranty is to overpromise to the consumer. Hygiene is a major factor in replacing mattresses on a more frequent basis. We value sleep because it drives performance during the day. The more you value sleep, the more you’ll spend on and change a sleep product.” It might seem like a shift in warranty policy is a good way to push the consumer to change their sleep set more frequently. It might also make sense to assume consumers who have more money to spend on a high-end mattress might be more apt to change their mattress more frequently because, as Simmon’s Dubrovac says, they can. Others, however, find the beds changed most frequently are the ones not meant to function as forever furniture. “[We find people shop more to replace] the sleep sets that are supposed to changed frequently,” says Valerie Stranix, chief marketing officer with Rev Sleep, the Toronto-based producers of the NexGel, Natura, ObusForme and Sommex mattress brands. Rev Sleep is unique in the sense that it won’t be altering its warranty policies in 2015. According to Stranix, no change is needed at this point.

“We haven’t changed anything because we produce different brands with difference warranties. We have lower-price point products with lower warranties and higher price point goods with higher ones. Our lowest warranty is a year and our highest is a 20-year limited where the first 10 years are full and non-prorated and the second ten are prorated.” One thing most manufacturers have in common and what is, therefore, not a driving force behind this change is low return rates. “Our return rate has been steady and we haven’t changed our quality,” says Stranix. “We have good warranty cards that explain how to care for the bed and we have well-educated associates who teach people who to take care of the mattress.” Serta’s Channell says while there’s no hard data on return rates, he knows its low and can even boast a 0% return rate on his brand’s iComfort bed. “With iComfort, we’ve never had a defective bed,” he says. “Returns are zero. Beds have changed a lot from the high warranty beds sold 10 to 15 years ago. We’re better at making beds. Our processes and materials are better. Our goal is 100% perfect quality and that is attainable.” Sealy’s Jervis says while the return rate is low, most returns occur in the first year – not the 19th or 20th. “The further you get [from purchase], the less claims you see. A warranty is typically used very soon after purchase,” he says. Since excessive warranties tend to be confusing, some might wonder if sales associates are good at explaining them. Just like anything else, some sales people explain them expertly, some explain them to the best of their ability but still leave consumers confused as to whether or not eventual dislike of the product – as opposed to an actual manufacturing defect – is covered, some use the warranties as a selling point and some rarely feel the need to talk warranties at all. “We rarely ever have warranty discussion,” says Channell. “Consumers rarely inquire and associates don’t really focus on that. I don’t remember talking to a customer about a warranty during a sale, but all the info is there if the customer wants it.” Jervis believes some people sell them well and others do not. “I believe some do and some don’t,” he says. “In many cases they use it as a selling point, but it should just be a promise of manufacturer quality. It was a competitive thing [between brands], but that’s changing. Long warranties should

not be necessary to sell more mattresses. There needs to be a discussion about how to prolong the life of a mattress, such as a proper bedframe and mattress cover. We sweat when we sleep and that breaks down the cushioning materials, and a good mattress pad can help you escape that. Some retailers need to make sure they and the consumer understand what the warranty covers and the promises it makes. They are not satisfaction or comfort guaranteed.” Rev Sleep’s Stranix also agrees the warranty can’t be the only reassurance the consumer has – sales people need to emphasize maintenance and care. “It’s important for our sales people to tell the consumer how to rotate the mattress and to purchase a mattress protector to protect it from food, kids and pets,” she points out, adding, “We don’t cover comfort, we strictly cover manufacturing defects. The average consumer does understand that for the most part.” Ultimately, warranties – such as Simmon’s upcoming three-tier warranty that will set warranty lengths according to product quality – should aim to be clear, understandable and confidence building.

“Complex, long-term prorated warranties are confusing on all levels. The math can be difficult for the consumer to understand,” says Simmon’s Dubrovac. “These changes will make warranties easier to understand. Warranties give the consumer confidence.” Sealy’s Jervis also believes mattress quality is always getting better, so 20-year warranties simply aren’t necessary to inspire confidence. “The industry is making better products than ever,” he says. “Major manufacturers are spending more time bringing products to market and conducting various tests. We need to provide better clarity and lowering the warranty makes sure consumer expectations are validated. Ten years is a long time. Home goods, cars and electronics have much shorter warranties and that doesn’t mean they are poorer quality.” HGO

Serta Canada’s iComfort sleep system has become a mattress industry leader since it debuted on Canadian retail floors in August 2011. The company says not one unit has been returned because of a manufacturing defect in that time.

A frequent contributor to HGO Merchandiser, ASHLEY NEWPORT is a Toronto-based freelance journalist who writes primarily for trade and business publications. Her specialties include food, hospitality and emerging social/business trends. HomeGoodsOnline.ca

ON RETAIL

BY DONALD COOPER

THE SIMPLE MATH OF IMPROVING YOUR PROFITABILITY M OST BUSINESS OWNERS AND

managers believe they must either make big improvements in sales or deep cuts in their costs to have real impact their bottom line. This is simply not true. In fact, very small improvements will dramatically improve your profitability. Here’s the scoop: • Increasing prices by just 5% could increase your bottom line by as much as 50% to 80%; • Increasing sales by just 5% could increase your bottom line by as much as 30% to 45%; • Reducing expenses by just 5% could increase profits by 20% to 28%. These numbers will vary somewhat depending on the type and size of business but you get the idea. The impact is huge! Sit down with your accountant – call him or her today and make the appointment for tomorrow or

INCOME STATEMENT XYZ FURNITURE & APPLIANCES INCREASE PRICES BY 5 %

Sales

$1,000,000

$1,050,000

Cost of goods

(65%) $650,000

(62%) $650,000

Gross margin

(35%) $350,000

(38%) $400,000

Operating Expenses

$300,000

Pretax profit

$50,000

$100,000

After-tax profit*

$40,000

$80,000

*assumes a 20% small business tax rate.

Note: Profit has doubled by increasing prices by 5%.

32 HGO merchandiser

the next day – and determine what the actual numbers are for your business. If you don’t have this information, how can you make any business decision wisely? How can just raising prices 5%, growing sales 5% or lowering expenses 5% make such a dramatic difference? It’s called ‘leverage’ and it’s about the most powerful thing we have going for us in any business.

THE INCREDIBLE BOTTOM-LINE MATH OF INCREASING PRICES BY JUST 5%

No other single action has the power to grow your bottom line as much as a very small increase in prices. Are you so good at what you do that nobody would even notice, or care if you increased prices by just 5%? In this example (left) the XYZ Furniture & Appliances increased prices by 5% and the improved results show in the right column. After-tax profit doubles from $40,000 to $80,000. But here’s the real magic! By increasing their after-tax bottom line by $40,000, in just one year they’ve also increased the eventual selling price of their business by $120,000 to $240,000. How can this be? Because privately-owned businesses typically sell for a multiple of three to six times previous after-tax earnings. So, in this example, increasing prices by just 5% puts and extra $40,000 in the owner’s pocket right away and adds between $120,000 and $240,000 to the eventual selling price of the business. This is huge (think happy exit strategy here).

The key question is how many customers might you lose if you increase prices by 5% and, if you lose customers is a price increase still a profitable decision? It depends on how many customers you they lose and how profitable those customers were in the first place. If you increase prices by 5% and lose 5% of you customers, you’d still be $23,000 (after tax), or about 58% better off immediately and would add between $70,000 and $140,000 to the eventual value of the business. If the customers you lose were unprofitable in the first place, you’re even better off. If you increase prices up by 5% and lose 10% of your customers you’d still be $7,000, or about 18% better off on the bottom line and you’d add $20,000 to $40,000 more to the eventual value of the business. So, clearly, if you would lose much more than 10% of your customers by increasing prices by 5%, it would be a bad idea, unless most of those lost customers were unprofitable. It’s difficult to know how a price increase will affect sales volume, but you can see that there’s a lot at stake here. This is one of the most important judgment calls that any business owner can make.

THE AMAZING BOTTOM-LINE MATH OF INCREASING SALES BY JUST 5%

In this example (top right), the XYZ Company increases sales by 5% and the improved results show in the right column. After-tax profit increases 35% from $40,000 to $54,000. But here’s the magic again! By increasing their after-tax bottom line by $14,000, they’ve also increased the eventual selling price of their business by $42,000 to $84,000 in just one year. If they could increase sales by 5% for 5 years in a row, at the end of that time the business will be worth an additional $210,000 to $420,000. Not bad.

THE AMAZING BOTTOM-LINE MATH OF REDUCING EXPENSES BY JUST 5%

What could you do to operate 5% more efficiently, without diluting the customer experience or the employment experience for your team? How could you, as a team, work just 5% smarter? How could you improve systems and processes to get it right the first time, every time? In this example (bottom right), reducing expenses by 5% improves the bottom line by $15,000, or 30%. Now, back to the magic! By reducing oper-

INCOME STATEMENT XYZ FURNITURE & APPLIANCES INCREASE SALES BY 5 %

Sales

$1,000,000

$1,050,000

Cost of goods

(65%) $650,000

(65%) $682,500

Gross margin

(35%) $350,000

(35%) $367,500

Operating Expenses

$300,000

Pretax profit

$50,000

$67,500

After-tax profit*

$40,000

$54,000

*assumes a 20% small business tax rate.

Note: Profit has increased 35% by increasing sales by just 5%. ating expenses just 5%, not only have they improved their bottom line by 30%, they’ve also increased the eventual selling price of their business by $45,000 to $70,000. So, there you have it. The amazing math of profitability. The exact profit improvement numbers will be somewhat different for each specific business, so you’ll need do the ‘math of improving profitability’ for your business. It’s very important that you work with your accountant to develop these numbers that will guide you in making more effective pricing, marketing and operating decisions. There is a lot at stake here. HGO A regular contributor to Home Goods Online, DONALD COOPER has been both a world-class manufacturer and an award-winning retailer. Now, as a business speaker and coach he helps business owners and managers throughout the world to rethink, refocus and re-energize their business to create compelling customer value, clarity of purpose and long-term profitability. For more information, or to subscribe to his thought-provoking free business e-newsletter, go to www.donaldcooper.com

INCOME STATEMENT XYZ FURNITURE & APPLIANCES REDUCE EXPENSES BY 5 %

Sales

$1,000,000

Cost of goods

(65%) $650,000

Gross margin

(35%) $350,000

35%) $350,000

Operating Expenses

$300,000

$285,000

Pretax profit

$50,000

$65,000

After-tax profit*

$40,000

$52,000

*assumes a 20% small business tax rate.

Note: Profit has improved 30% by reducing costs by 5%.

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High-end furniture producer Handcock and Moore is one of Critelli’s featured vendor partners.

Continued from page 13

spend an hour with them at Critelli’s and then take them to Transitions for alternative price and style. It’s nice to see customers buy both traditional and contemporary.” The style range for Critelli’s Furniture runs from transitional contemporary to classic traditional while Transitions runs from classic contemporary to European and urban modern. In terms of vendors, a store that’s been around as long as Critelli’s has seen lots of shifts and changes over the years. “As far as suppliers, we’ve lost a few Canadian manufactures over the years,” he says. “I would say the majority of our brands were acquired more recently – say over the last 10 or 20 years. We don’t add a lot of brands, but as we’ve evolved, we’ve gone from having half Canadian and half American-made products to 20% Canadian, 50% American and 30% international.” As for international brands, most of which come from Europe and Asia, Critelli sings the praises of Vietnamesemade products, especially those created by Stickley and Theodore Alexander. “We’ve made a conscious effort to buy Vietnamese furniture, as the quality has been more consistent,” he explains. “They’re very creative, almost artisanal. Good Vietnamese made furniture is like a German automobile. They’re often family operations with access to materials that are unique, such as stone tops, wood species, veneers, leather, etc. They’re meticulous in their details and their finished pieces are cost-effective and beautiful.” As for what the future holds for the brand, Critelli says growth is on the horizon.

34 HGO merchandiser

“We’re planning and creating a proper mattress shop,” he says, adding the store is working on creating a new mattress shop featuring product from Magniflex, the Italian producer of ‘better’ and ‘best’ quality foam and latex sleep products. The new shop, which will be located right in Critelli’s current showroom, is set for a soft open this summer and is expected to be operating in full swing just in time for the company’s centennial celebrations. But another burning question remains: will future generations of Critelli’s be ready to take the long-held torch when Joe Critelli is ready to hand over the reins? “We’re hoping there’s a fifth generation taking over,” he says. “I have three daughters and I hope one will come to enjoy the business as much as I have. It’s too early to tell, as two (Marisa, 18 and Julia, 20) are still in school. My oldest daughter Cristina, 28, is a medical doctor.” The loyalty of the surrounding community – as well as the stores close proximity to Hamilton and Toronto – also helps keep the company thriving. “It’s a familiar name and I like to think it goes hand-inhand with people trusting we’re going to meet and exceed their expectations,” Joe Critelli believes. “Sometimes people drive to us because their family members bought furniture from us in the past.” HGO A frequent contributor to HGO Merchandiser, ASHLEY NEWPORT is a Toronto-based freelance journalist who writes primarily for trade and business publications. Her specialties include food, hospitality and emerging social/ business trends.

ADVERTISERS’ INDEX Pages 2-3 Phoenix AMD International 41 Butler Court Bowmanville, ON L1C 4P8 T: 800.661.7313 F: 905.427.2166 www.phoenixamd.com

INDUSTRY CALENDAR July 27 to 31, 2014 LAS VEGAS MARKET World Market Center Las Vegas, Nevada www.lasvegasmarket.com

August 17 to 20 ALBERTA GIFT FAIR Edmonton Expo Centre Edmonton, Alberta www.cangift.org

August 9 to 11, 2014 TORONTO SUMMER FURNITURE SHOW Toronto www.chfaweb.ca

August 24 to 27, 2014 QUEBEC GIFT SHOW Place Bonaventure Montreal www.cangift.org

August 12, 2014 CHFA GOLF CLASSIC Caledon Woods Golf Club Bolton, Ontario www.chfaweb.ca

September 7 to 9, 2014 ABC KIDS EXPO Las Vegas Convention Center Las Vegas www.theabcshow.com

August 10 to 13, 2014 TORONTO GIFT FAIR Toronto International Centre Mississauga, Ontario www.cangift.org August 10 to 13, 2014 PRIMETIME Gaylord Opryland Resort Nashville, Tennessee nationwideprimetime.com August 14 to 17, 2014 TUPELO FURNITURE MARKET Tupelo, Mississippi www.tupelofurniture market.com

September 10 to 14, 2014 CHINA INTERNATIONAL FURNITURE FAIR Shanghai World Exposition & Conference Center Shanghai, China www.furniture-china.cn September 15 & 16, 2014 HIGH POINT PRE-MARKET High Point, North Carolina www.highpointmarket.org October 18 to 23, 2014 HIGH POINT MARKET High Point, North Carolina www.highpointmarket.org

December 3 & 4, 2014 IIDEX CANADA Metro Toronto Convention Centre North Toronto www.iidexcanada.com January 18 to 22, 2014 LAS VEGAS MARKET World Market Center Las Vegas, Nevada www.lasvegasmarket.com January 22 to 25, 2015 INTERIOR DESIGN SHOW Metro Toronto Convention Centre North Toronto www.interiordesignshow.com January 24 to 27, 2015 TORONTO WINTER FURNITURE SHOW Toronto www.chfaweb.ca

Page 5 Natura World c/o Rev Sleep Corporation 53 Bakersfield Street Toronto, ON M3J 1Z4 T: 800.567.7933 F: 888.567.7934 www.naturaworld.com Page 7 Canadian Home Furnishings Market 101-1111 Saint-Urbain Montreal QC H2Z 1Y6 T: 514.866.3631 F: 514.871.9900 www.tchfm.com/en Page 11 Magniflex 1000 5th St., Suite 220 Miami Beach, FL 33139 T: 905.481.0940 www.magniflex.com Pages 18-19 Serta Canada/Star Bedding Products 40 Graniteridge Road, Unit #2 Concord, ON L4K 5M8 T: 800.663.8540 www.sertacanada.com Page 25 Protect-A-Bed 1500 S. Wolf Road Wheeling, IL 60090 T: 519.822.4022 www.protectabed.com Page 29 Obusforme c/o Rev Sleep Corporation 53 Bakersfield Street Toronto, ON M3J 1Z4 T: 800.567.7933 F: 888.567.7934 www.naturaworld.com HomeGoodsOnline.ca

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