The casual furnishings specialty channel just had its annual checkup and the findings aren’t encouraging. Right there on page 77, in the September issue of this magazine, in black-and-white and color, a chart notes five straight years of flat retail sales.

Flat specialty store sales, despite the housing market’s resuscitation.

Flat sales, while Macy’s and other full-line home furnishings stores are churning through outdoor furniture.

Flat sales, even though economic reports tell us that affluent households – the target market for fine casual furniture – keep accumulating wealth and disposable income.

Flat sales, while catalog and Internet sellers such as Frontgate, Restoration Hardware and Wayfair are rapidly growing their outdoor furnishings business.

Flat specialty store sales, even though most casual furniture manufacturers rebounded from the Great Recession years ago.

What gives? If consumers are buying outdoor furniture, why aren’t more casual furniture stores getting some of the action and seeing revenues increase?

The automatic response is to point fingers at the usual suspects.

“Catalog merchants – Restoration Hardware and the others – are siphoning off patio furniture sales and profits.”

“It’s the *!#%^*% Internet retailers!”

“It’s the factories, such as Brown Jordan and Summer Classics, opening their own stores and turning their backs on loyal retailers.”

“It’s those doggone Box stores; they finally figured out how to make decent-looking stuff.”

“People don’t shop the way they used to. It’s all about price.”

“The national economy might be improving, but the regional economy – the market around my store – still stinks.”

There’s no doubt that each one of those statements would be admissible in economic court. A case can be made that flat sales at specialty retailers result from myriad reasons and not from one overwhelming culprit.

Bew White, president and CEO of Summer Classics, offers one more explanation for why so many specialty retail stores are in the doldrums. He outlined the scenario in a memo to Hearth & Home.

White argues that a growing number of specialty retailers – certainly not every patio dealer, but a troubling number – bear responsibility for their lackluster numbers.

Those most at fault – the ones who might conclusively prove White’s theory – are not present to defend themselves; their businesses are among the casualties. Flat and declining sales eventually didn’t produce the profits necessary to sustain their businesses, and those retailers now are history.

The problem, according to White’s scenario, isn’t necessarily that those merchants wrote fewer tickets and sold fewer sets of furniture year after year. The issue, he suggests, is that those merchants embraced a strategy focused on less-expensive goods with smaller margins. Those merchants simultaneously de-emphasized higher-end, higher-profit lines. Eventually they squeezed themselves out of business.

White calls this scenario “The China Effect,” a situation in which imported container merchandise, often unbranded, gains overwhelming importance on the retail floor. Retail prices commanded by these lower-margin goods undercut those of higher-end merchandise. The merchant may be turning sets, but profits get trampled.

Casual furniture retailers, White notes, are not the only victims of this phenomenon. “The indoor furniture business,” White wrote, “has literally been decimated by The China Effect – most recently by the bankruptcy of Furniture Brands.”

(Furniture Brands International’s properties included high-end casual furniture maker Lane Venture, which survives under new ownership).

Bew White, President & CEO, Summer Classics

Summer Classics’ Bew White raises an issue that may be contributing to the demise of specialty patio retailers.

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Casual furniture specialty retailers who choose to concentrate on lower-priced container merchandise in hopes of boosting sales may actually be cannibalizing their own profits.

Ultimately, says Summer Classics president and CEO Bew White, this strategy, and the businesses that employ it, are destined to fail.

White calls this phenomenon “The China Effect.”

Here’s how it works:

1. Stores with good selections of brand-name merchandise (i.e., Brown Jordan, Tropitone, Woodard, Summer Classics, Gloster, Lloyd Flanders and others) start offering container products at much lower prices. Generally these products are focused on simple lines, with only a few fabric choices. The furniture is usually resin wicker, but not exclusively.

2. Dealers take advantage of this “cheaper market” partially out of fear that other nearby dealers will do the same and steal market share. Many specialty retailers think they can use this to compete with the mass market.

3. Pretty soon the store is at least half-filled with this cheaper merchandise. The shop is now selling many more $2,000 orders rather than $4,000 orders – and, yes, to the customers who are able to pay the $4,000. But the store no longer has confidence in the branded merchandise because it's “too expensive. My customers don't want it.”

   Perhaps customers are gravitating to the lower-priced merchandise because the sales staff is showing them much-cheaper product and is not prepared to sell the difference.

4. Part of this is happening because the dealer is scared he or she may get shopped online. The store owner is fearful that if a quote on high-end, branded merchandise leaves the store, it will be compared with prices from Internet retailers and they will be forced to match the price or lose the sale.

   (Retailers don't believe they can win that game. What they really need is un–shoppable product. And there's plenty of it out there.)

5. Now the store that was doing $2 million in sales is doing $1.5 million with the same number of tickets and possibly more deliveries. They’ve taken their good clients with disposable income and traded them down, selling them goods of lesser quality that cost less. The result is that they are turning more product for less money.

   When this happens, the retailer is not making money, because the break-even point for the business is $1.5 million. It was in that other $500,000 that the store made its $200,000 in pretax profits. The fact is, sales of higher-end goods drove the profitability of the store.

6. The store has also reduced its “early-buy” from $500,000 in annual purchases to $200,000, and most of that goes to buy import containers. So when the season opens, the maximum immediate delivery of gross sales in the May-to-June crucial period is $400,000 instead of $1 million.

   Talk about a self-fulfilling prophecy!

What's the solution?

As I see it, a specialty retailer may have to choose between becoming a 100-percent, medium-to-high-end branded merchandise store or an outdoor furniture store stocked exclusively with lower-priced container goods.

The market is going to figure it out for us if we don't do it first.

Are we ready?

Dudley Flanders, president and CEO of Lloyd Flanders, says a growing emphasis on container purchases affects makers of higher-end goods by altering the established cycle of orders and production. High-end furniture makers who depend on early-buy orders to keep factories operating in the fall see those orders decline when specialty retailers invest more in containers.

“Granted,” Flanders says, “our primary product is special order, but we still have to keep those factories running in the fall.”

White offers two alternatives as to how The China Effect ultimately will play out. He suggests that casual furniture retail stores will either concentrate on higher-end lines or go exclusively with container goods. Stores that choose the latter route will face even sharper competition from mass merchants, home improvement stores and Internet sellers.

 “The market is going to figure it out for us if we don’t do it first,” he writes. “Are we ready?”

Paths of Success

Tom Murray, president NorthCape International

The impact of The China Effect has been tsunami-like, quick and devastating to furniture retailers of all stripes. Fortunately, there are specialty merchants who never retreated from the higher ground. They remain true to the specialty concept and continue to thrive, providing lessons and encouragement for merchants who hang on while experiencing shrinking profits.

White is not a lone voice in the wilderness. Other furniture manufacturers are just as adamant. They understand the concept that to survive, casual furniture stores must remain committed to high-end goods, and that the margin provided by those goods often is the difference that sustains them.

Tom Murray, president of NorthCape International, underscored that thinking in his “Sitting Pretty” interview published in these pages last month.

“I think we as a company, and the industry as a whole, do best when we cater to multiple levels,” he said.

Erwin Gremmer, president of Domus Ventures and a former Tropitone sales representative working the tumultuous California market, says the temptations of focusing on lower-price, volume merchandise is “the biggest threat to the specialty store business.”

Products that do not fulfill expectations in the “medium to long run turn people off,” Gremmer says. Those customers don’t give positive word-of-mouth recommendations to friends, nor are they likely to be repeat customers.

Erwin Gremmer, president Domus Ventures

Retailers who create shopping experiences that consumers cannot get from a catalog or website will be rewarded, according to Gremmer. Making a sale “is not always about low price.

“In every part of this country, there’s still concentrated wealth. You’ve got to figure out how to connect with that. You’ve got to go fish where the fish are. Pamper your customer. Make them feel that their well-being is your survival.”

That line of thinking pervades Outdoor Décor Store, which opened in Naples, Florida, just a year ago. Its why Todd Galler, who previously owned five full-line furniture stores in Illinois and Florida, installed a full-service coffee bar in his store.

“We want it to be a good experience,” he says. The customers he desires aren’t shopping for price; they make buying decisions are based on “I want it.”’

Good will rules. “I give 100 percent service to every one of my customers,” he says. “Even if I have to give them their money back, what’s the worst they can say? He gave me my money back.” Of course, those situations rarely arise with higher-end merchandise.

Mary Levy, vice president of merchandising and marketing for Into the Garden in Dallas and Fort Worth, says those shops have a similar philosophy.

“We’ve tried not to be everything to everybody,” she says. “We have discerning customers who don’t shop for sales. Everybody likes a value in these economic times and wants to be sure they are getting a fair price. But just because something is on sale doesn’t make people want it more.”

The good-better-best concept doesn’t mean that prices must start at promotional levels.

“We want to feel good about whatever we’re selling,” says Laura Hopkins of Seasons Four in Lexington, Massachusetts. “Whatever we have, we know it will last and is made by a reputable company.

“We still want to have a starter set for a family,” Hopkins says. “I don’t like to be too exclusive. We don’t want to be so elite that regular folks like us won’t come into the store.

“We have our own niche, where we feel we’re giving good value,” she says. “We try to make everyone’s experience that much more worthwhile and richer, yet still be competitive.”

Better-designed outdoor furniture at Big Box stores and intense price competition has driven Garden Cottage, with two stores in New Jersey, to focus on better-quality merchandise and the accompanying higher margins.

“Every year, we trend more and more toward the high-end customer,” says Sarah Conine, an owner. “The key is education,” she explains.

Walk-in customers must be educated about furniture quality and performance. Designers must be educated about the options and opportunities in casual furniture. Staff must be educated about the realities of customer service in the information age and how to quickly respond to e-mail inquiries from off-site shoppers. Staff also must be confident in their abilities to convey the value and benefits of better-quality goods.

Dudley Flanders, president & CEO Lloyd Flanders

“The ability of floor sales staff to sell up, instead of sell down, has always been a significant concern,” says Dudley Flanders.

Conine, whose brother Steve Conine co-founded the giant Internet retailer Wayfair, says her main competitors are the lavish catalogs that present home furnishings in such an appealing manner. Her strategic response includes offering private label goods (woven and teak) that give Garden Cottage price-protected exclusivity.

Another angle is to offer branded product that stands apart thanks to design and quality. The shop added TUUCI umbrellas three years ago. “They have done extremely well for us,” Conine says. “I wish I’d picked up the line sooner.”

Garden Cottage shoppers in 2015 will find another high-end line added to the floor. Mamagreen is a brand distinguished by design and the use of recycled teak, which adds a Green component to the sales story.

Foot traffic at Garden Cottage, as at many casual retailers, is down. Sales are not.

By choosing not to succumb to the lure of unbranded goods and their lower prices, Garden Cottage, Outdoor Decor Store, Into the Garden and other retailers protect themselves from The China Effect.

What’s your strategy – not just to survive, but to thrive?