One hundred years ago marked the start of the Roaring Twenties. This decade saw the U.S. economy expand by 40 percent, fueled by consumers purchasing high-ticket items for the first time. Automobiles, appliances, and furniture were bought en masse and on installment.
This was also the founding year of the Home Furnishings Association. In the spirit of recognizing the HFA’s centennial milestone, I want to reflect on the successful practices of others that have been around for a century. Organizations that have the resilience to survive the ups and downs and live past 100 years have been referred to as “Phoenix companies” by Reid Hoffman in the popular podcast, Masters of Scale. As applied to home furnishing retailers, I will give you some strategies and considerations for those who want to stay in business for generations to come and become, like the HFA, a Phoenix.
Maximize profitability in the good years
The one guarantee that we have is that the current economic and geopolitical environment will change. Waves of recession and expansion will always occur. These waves are uncontrollable. For this reason, it is important for businesses to act on what they can control – profitability. When sales decline, it’s very difficult to maintain profit levels, and most companies lose between $30,000 and $40,000 in net income for every $100,000 drop in sales volume. Since profit is much easier to achieve in times of growth, that’s when it’s important to capture industry top-performing numbers. I define those top numbers as: double-digit net income before tax and depreciation. Ten percent and above would be at the elite levels. Seven percent to 9 percent should be expected of a healthy business’ bottom line for long-term sustainability.
Don’t let inventory grow over the years
Inventory is a short-term strategy. One of the challenges I have seen with businesses that have been around for many years is that they accumulate too much unproductive merchandise. Several things eventually will result. Warehouses fill up and showroom floors become cluttered. Ultimately, cash flow is hurt. It is important to establish an inventory dollar cap for the showroom size and a percentage of sales cap for the annual volume. Note that these thresholds will vary depending on the type of merchandise a business sells. Also, processes to reduce slow inventory before purchasing new merchandise is an important long-term strategy.
Keep a healthy cash reserve just in case
Reserves help businesses get through unforeseen events, and not only during the owner’s lifetime if keeping the business going for 100 years is desired. It takes generations to reach a century, and taking too much out of a business could weaken the next generation. Cash reserve comes mostly from conducting business in the first two practices successfully: decent profits and stable inventories. The amount of operating cash and securities that the strongest furniture retailers I work with can be figured by the cash ratio. This is cash and securities, divided by current liabilities. Current liabilities are typically accounts payable, debt due in under a year, and customer deposits. I think 0.5 is a strong position. This means if a business had $1 million in liabilities, it would have $500,000 in cash.
Develop a successor
A primary job of any CEO or owner is to plan for transition. If the goal is to continue the business far into the future, choosing and developing a successor should be done early on. The longer an owner waits, the less time there is to find the right person.
Failing to do this is one of the main reasons that many businesses won’t reach 100. The next leader of a small business is often chosen because of a family relationship. It is obvious that a parent would like to pass on the family business to an heir or heirs. That’s not always the best decision. The family member must have the desire, work ethic and the ability to lead. If the successor lacks the “right stuff,” regardless of bloodline, perhaps other alternatives should be pursued.
One majority owner is usually best
At their founding, businesses often have more than one owner, whether they’re siblings, a married couple or some or other combination of family members. Provided the owners work well together and have compatible and useful skills, those businesses can get off to a great start. Later is when things can get dicey. I’ve seen that the most successful next-business generations are ones with one person at the head. Too much dilution can lead to business disruption if the visions of ownership team members are not aligned. It’s usually best if a business has one leader.
Keep a healthy mix of new & experienced talent
Ultimately, people produce results. At times, these results are great. At other times, they are terrible. Most teams produce average results compared to others in the industry. To outperform industry average in terms of profitability in the long run, it generally takes an effective mix of talent. This can come from people with experience and wisdom, mixed with people who are energetic, driven and innovative. Interesting organizational mixes include people who have different backgrounds and complementary skill sets.
Embrace & be cautious of legacy employees
In companies that have been around for many years, there will likely be legacy employees, who have been around for several leadership transitions. These employees deserve the highest respect for their tenacity and service over the years. If they show leadership to and mentor junior employees, they probably have a place indefinitely. However, there are other types of legacy employees – those who produce diminishing returns. They may have met minimum requirements over the years, hanging on for the security of their paycheck. They generally don’t push the business forward and eventually may become obsolete. The most important thing to watch out for with legacy employees is that they do not hold the business back.
Expand, but only when the time is right
Phoenix companies don’t grow as fast as businesses with aggressive short-term growth strategies. An organization with a longer outlook can have the upper hand in terms of timing. A business that must grow in the shorter term cannot wait for the right time to expand and does so during decent economic cycles when costs are higher. The best time to grow is when the time is right, which could be determined by the price of real estate, the openness of a market, the availability of funding and the strength of the organizational team. Some of the most successful businesses that I am involved with trace their growth initiative back to the Great Recession, after competitors went out of business and property prices fell.
Seek to control a niche in your region
In retail home furnishings, there are national chains or chains seeking to become national players, and there are regional players. With regional players, it is important that they know their place with respect to what types of products, services, and experience they deliver. It is important that they protect their niche and expand it within their region. An objective should be to understand the competitive environment, and then to discourage future competitors from moving into the region. Some strategies:
Ensuring that distribution facilities are appropriate to enable regional dominance.
Expanding the showroom presence to capture the total area audience.
Keeping past customers loyal and continually adding new customers.
Keeping product and service offerings relevant to the local market.
I should mention there is an alternative to growing within the region: Businesses can prosper in the long term if they are narrow in their niche. For example, offering a high-end, specific type of design product, of enough demand, that no one else in the region has.
Businesses that survive the test of time are either moving with the changes around them or inventing the changes. However, surviving the last century far from guarantees survival into the next. The speed and availability of information and communication have changed everything. “New ways” must be embraced, not fought. Here are a few innovation considerations to seek and watch for:
New ways to source product: merchandising and inventory management.
New ways to deliver to customers faster, with fewer service issues.
New ways to hire and retain quality employees.
New ways to partner with others.
Give back to the community
In this final strategy, I am confident that those standing the test of time participate. They give back to the community. Two critical resources for any organization are customers and employees. These people both come from the communities where businesses conduct themselves. Organizations that continue to grow as a positive part of their local cultures will earn a lasting and growing share of their communities’ collective social awareness.
Congratulations to the Home Furnishings Association for reaching 100 and becoming a Phoenix! I hope your store will, too!
This article originally appeared in the January issue of the HFA’s Insights magazine.