Furnishing profits Featured

8:00pm EDT October 25, 2006
 When Don Marks took the reigns of W.S. Badcock Corp. in 1998, it appeared he was taking over a successful company with a bright future.

The furniture retailer was approaching its 100th anniversary and had a strong brand with good products, and there were ambitions to expand operations into additional states.

But brimming just below the surface were several issues that threatened to stall growth and disrupt the flow the company had experienced since after the Great Depression.

“It was kind of floundering a little bit, mainly because it hadn’t really defined its strategic objectives,” says Marks, president and CEO. “It had had a number of years of flat sales. We built a number of new stores. A lot of them were company-operated, and it really wasn’t what we were all about - we added a lot of costs.”

Prior to Marks’ arrival, the company had made efforts to keep those costs in line, but those efforts restricted growth by inhibiting investment into technology. Equipment had gotten old, and it would be expensive to modernize the company.

Then there were issues with the dealers.

“There hadn’t been particularly strong standards of who could become a dealer and who couldn’t,” says Marks. “There were also some dealers who didn’t invest in their buildings, and their buildings looked old and tired. In today’s retail market, the consumer is not going to give you an opportunity to show them how fabulous your service is and how warm and friendly your ... people are if they won’t walk through the door.”

Kickstarting growth
While the company was certainly far from crisis, Marks had to do something to reverse sliding same-store sales growth and thwart the potential for unhappy store dealers.

“Rather than just do accrued maintenance, we said, ‘Look, let’s change our image and let’s make it a little more modern, a little more 21st century,’” says Marks.

He began by instituting a round of strategic planning - something the company had never done before.

“We got all of our management team and owners together and decided what it is we wanted to be,” he says.

They decided they wanted to find a way to continue to service their current client base — the middle-class working citizen who typically needs credit — while reaching out to other demographics. They came up with an idea to launch a new store concept called “Badcock Home Furniture & more” that would include a brighter, more spacious store display, a new logo and an expanded product line that would now also offer patio furniture, appliances, electronics, floor coverings and accessories.

“The Badcock & more concept was intended to make it a little more modern, bring in a younger consumer, bring in a little more affluent consumer without sending or telegraphing a message that we’d raised prices, because we never did,” says Marks. “We would like ... to attract that other customer without losing the core folks that brought us to the dance.”

The new image was also a potential way to solve issues with inflation and decreasing profit margins.

“The most difficult strategic challenge for the company is the fact that furniture has had no inflation in it in the last 10 or 20 years,” says Marks. “A $400 sofa 10 years ago is a $400 sofa today, while gasoline is up from 80 cents to $3.

“For our dealers ... their labor’s increasing, their insurance, their health costs, all of that. ... So our job has been to get customers to buy, instead of a $400 sofa, to buy a $500 sofa — or to take business from our competitors.”

But Marks hadn’t forgotten about the lack of technology. The previous management had tried to keep profit and losses in line by reducing selling, general and administrative expenses.

“If you keep trying to cut money out of general and administrative expenses, eventually you start cutting through the fat and into the muscle,” says Marks. “We had 20-year-old IT systems, for example. The connectivity to our stores was very poor.”

Marks made the necessary investments to consolidate IT systems, as well as inventory, which had previously involved seven different systems. The result is better communication with stores and better functionality with dealers. Now, he’s focusing on supply chain issues.

“Eight years ago, 80 percent of our product was domestic and 20 percent was imported,” says Marks. “Today, 80 percent is imported and 20 percent is domestic. ... What it does is it takes our supply chain from three weeks to four months. So we have to plan out four months in advance, and if we get it wrong, we’re not going to get it fixed for weeks. So we can disappoint customers, which again, according to our business model, is the worst thing in the world that we can possibly do.

“The real strategic focus and the upside for us is being able to be better than anybody else at having the right product in the right place at the right time. I don’t think that the industry does that very well.”

But while Marks saw what was needed to keep the company from slipping further, coming up with a concept to revitalize its operations was only half the battle. Marks also needed a plan to get management and employees on board with the significant changes.

Achieving buy-in
Getting people on board first meant getting them involved, and Marks used the strategic planning sessions as an important first step.

“We developed an action plan that had 14 key initiatives and 376 action steps in it,” says Marks. “What that did is it involved all of the management folks in the company. They each had a role. They each had a piece of those 376 things to do. So they had things that they could see immediate and direct results from, and that enthuses people.”

The next challenge was getting the rest of the employees to buy in. He realized that if the company was going to ask so much of employees, it should give a little something back as well.

“For example, we have a third week of vacation at five years here,” he says. “It used to be 10. It was a hot button with everybody, and when the company was successful and made more money, we had the dollars to be able to go out and offer that to our employees. It’s that kind of thing that keeps everybody engaged, when they know that there’s something that benefits them personally in addition to the company.”

He also started a profit-sharing plan, and in the years that Badcock beats its profit plan, the company gives an extra check to every employee.

“We just say, ‘Hey, look, we did better than we thought we were going to do, so we’re going to share it with you,’” he says.

But Marks still had to address issues with those who had perhaps the biggest stake in all this — the dealers. Badcock’s dealer-owned stores operate similarly to franchises, but instead of the company collecting money from the dealer, the dealer receives a check for 25 percent of everything the store sells each month. The dealer pays for the store — including maintenance and construction costs — the labor and expenses, while Badcock pays for the furniture, inbound and outbound freight costs and warehousing.

Dealers who wanted to upgrade to the new “Badcock Home Furniture & more” concept were going to spend $150,000 on average to revamp their stores. With such a hefty price, Marks thought the dealers deserved a little incentive.

The company’s previous contract with dealers included a 30-day-out clause, with which either party could change their mind about doing business with the other after 30 days.

“If you’re a dealer and spent $150,000 on your building imaging it as a Badcock & more store, there’s no safety in that,” says Marks. “We felt that it was much better for the dealer and for us to have a term-limited contract. We set 10 years as the term, but it also has two five-year options. So as long as the dealer is in compliance, they ... have 20 years to recoup that cost that they put into that building.”

The increased level of commitment and enhanced growth opportunities provide a great incentive for dealers to convert to the new concept and also builds a stronger relationship between them and the company.

When Badcock was developing the new contract, it had a panel of dealers help write it.

“When we changed our whole contractual relationship with the implementation of Badcock & more, we actually had 12 or 14 dealers sit down with us and hammer that contract out,” says Marks. “So then when we rolled it out to the rest of the dealers, they were quite comfortable with it because they had had representation.”

So far, approximately 225 of Badcock’s 319 stores have converted to the new Badcock & more concept, and it hasn’t been in vain. Converted stores are seeing average sales increases of 20 percent to 25 percent their first year.

And the piece that ties the whole thing together is communication.

“You can’t communicate too much,” says Marks. “It’s just like advertising. Just when you think that you’re sick and tired of seeing your ad on television, it’s just beginning to break through to the consumer. The same thing goes with communication, particularly with regard to strategy.

“Does the average guy on our loading dock really care about a speech about strategy? Maybe, maybe not. But if you say, ‘Look, here’s what’s in it for you. We’re going to grow positions. You might get promoted. You’re going to get an extra week’s vacation in five years because the company made more money. I need you to help me do these jobs in order to continue this progress so that we can provide you other things that help you and your family,’ that works.”

The company also makes a committed effort to keep everybody updated on the company’s progress. Three times a year, Badcock holds a lunch for 300 to 400 of its employees, reiterating strategy and highlighting where the company is headed.

Twice a year, the management team jumps on a bus and travels to meet with dealers throughout the eight-state region that Badcock operates in, and twice a year, dealers are brought to headquarters for business review meetings.

The changes, as well as Marks’ strategies for implementing them, have allowed Badcock to return to an above-industry performance, with revenue increasing from $515 million in 2005 to $537 million in 2006.

While sales had started to decrease in the 1990s, there has been eight straight years of increases since Marks became president and CEO. Sales rose 8 percent in fiscal 2005 and 5 percent as of the fiscal year ended June 30, 2006, while the industry tends to average only 2 percent or 3 percent annually.

In July, the company opened its first store in Virginia and has plans to continue expansion in current states while keeping an eye on locations including Kentucky, Missouri and the southern regions of Ohio, Illinois and Indiana.

“There’s so much business out there in towns with 10,000, 15,000, 20,000 people that are not adequately covered,” says Marks. “We have a lot of opportunity. ... I believe this business can do a billion dollars with the business model that it has now.”

HOW TO REACH: W.S. Badcock Corp., www.badcock.com