Healthy profit margins are a sign of a buoyant business – but are they the best metric when determining success in the furniture sector? This article explores the concept of furniture profit margins, strategies to improve them, and how they compare to other business metrics.
What are furniture profit margins?
Furniture profit margins are the net gains made from furniture sales after factoring in total expenses. They are calculated in two ways: gross profit margins and net profit margins.
1. Gross profit margin
Gross profit margin shows a company’s ability to generate profit from its core operations. They are easy to determine and are often used to compare the success of two furniture businesses. They are calculated according to a simple formula:
Gross profit margin = (gross profit ÷ revenue) x 100
Here, gross profit = revenue earned – cost of furniture sold.
2. Net profit margin
Net profit margins are calculated to understand the underlying financial viability of a business:
Net profit margin = (net profit ÷ revenue) x 100
Where net profit = revenue earned – the cost of furniture sold – operating expenses – interest – taxes.
There are huge variations in net profit margin in the furniture space, owing to how net revenue, sales, and operational costs differ between businesses, along with interest and taxes.
Nonetheless, net profit margins give an insight into the stability of a furniture business, while also pointing to how earnings are being spent or invested.
3 factors influencing net profit margins
These are three of the factors that can impact profit margins:
1. Overhead costs
Running a successful furniture business involves more than just putting products on display and waiting for a sale. Today, retailers must ensure they provide an enjoyable and effective customer experience in order to drive conversions. This gives rise to overhead expenses.
Some furniture retailers spend large sums of money on decor, lighting, and entertainment, while others might invest in in-store staff to ensure quality sales and customer support.
All of this increases business expenses and lowers the net profit margin.
2. Shipping costs
Furniture products are high-value items that take up a lot of space, with considerable shipping costs attached to them.
"Shipping rates are now equal to 100% of furniture prices," -Ryan Petersen, Flexport CEO
Retailers, direct-to-consumer (DTC) brands, and online stores pay for packaging, labor, and shipping. These expenses are determined by the supply chain and transportation costs. Naturally, the higher the shipping costs, the lower the profits.
Many brands have devised entire strategies to save on shipping costs. For example, brands like Article handle the process themselves end-to-end, and IKEA famously pioneered flat pack furniture to decrease transportation costs.
3. Low markup
Most furniture businesses, regardless of platform, attach a low product markup, on account of the fierce competition in the sector and increased customer willingness to shop around for quality products at the lowest price. Furthermore, the array of retailers in the marketplace means there is no shortage of options for consumers.
While the low markup doesn't impact on furniture profit margins directly, they do not buffer against the significant shipping and overhead expenses. This reduces profits.
For the unaware, the average gross profit margin for a retail furniture business is over 40%. But that figure drops between 3% to 6% after accounting for marketplace fluctuations pre-tax. Even so, there are ways to increase furniture profit margins.
3 strategies to increase furniture profit margins (with examples)
Here are three ways retailers can boost profit margins:
1. Provide an omnichannel experience to buyers
An omnichannel experience allows buyers to have a consistent experience with a brand through different channels. A buyer can research potential purchases via the web, visit a store to check out dimensions and quality in person, then place an order online and have it delivered to their home, or collect in-store.
This tactic has improved inventory management for many retailers. After all, online buyers can only buy products if they’re available. And retailers can conduct flash sales when the inventory is full.
An omnichannel approach also provides another key benefit to retailers: reduced returns.
Buyers can make more confident buying decisions online since they can check product quality in-store, reducing the likelihood of returns.
Bed Bath and Beyond, an American domestic merchandise retail chain, deployed an omni-always shopping experience in 2020. Its customers could buy online and pick up the product in-store. Alternatively, they could opt for same-day delivery as well.
The online and offline experience was consistent, speedy, and convenient. The result? The brand saw dramatic growth in digital sales across several key categories. By February 2021, the brand saw an increase in its gross profit margin by 20 bps thanks to this approach.
2. Reduce labor costs
Today, tech enables businesses to automate a variety of daily tasks. Functions that previously needed employee oversight can now be performed with software. This reduces labor costs and, therefore, operating expenses. And all of this increases net profits.
Many companies have also downsized their operations to improve profit margins quickly during financial difficulties.
Furniture manufacturer RC2 did this in 2009, lowering its operating costs by $4 million to overcome underperformance in its international sales.
The company reduced variable costs and improved its working capital too. As a result, RC2's net income grew by 3.5%, offsetting slower sales.
3. Invest in brand loyalty
According to research, even a 5% uplift in customer retention rate could increase profits by as much as 95%. This is especially true in furniture, where customers tend to make higher-value purchases.
Older buyers are more likely to buy products from retail stores with which they’ve previously had a positive experience. But even prospective shoppers buy products from a store with many reviews.
This is why furniture stores that produce loyal customers are often more profitable. A case in point is IKEA.
The furniture giant has enormous showrooms packed with well-organized furniture to wow its shoppers. Customers can try the furniture, check the material and buy products immediately.
But that’s not all. They can drop their kids at the play area to shop conveniently. And if they feel hungry, they can even grab a bite to eat at the restaurant. Such minor considerations make the IKEA shopping experience a memorable one.
Shoppers come back repeatedly, and even make a day out of it. This builds loyalty and helps boost IKEA’s sales and profits in the process.
Challenges to increasing furniture profit margins
Examining two of the major barriers to increasing profit margins:
1. Changing customer preferences
The key to increasing net profit margins is catering to customer preferences. If their customers are active on TikTok, brands should consider marketing their products on that platform. Or, if buyers are demanding heart-shaped lamps, companies should ensure their inventory includes them.
Brands that recognize such customer preferences and act on them will more likely be recognized. Additionally, they will also see greater profits.
But customer preferences change quickly, and as a result, meeting these expectations can be challenging. Fortunately, brands can track customer trends in a variety of ways.
They can conduct surveys or monitor the feedback on their social channels to recognize customer demands, and they can use customer reviews to understand common concerns.
All types of furniture business compete for the attention of the same broad target group. And these consumers prefer the tactility of an in-store experience and the convenience of online shopping.
Naturally, bricks-and-mortar and online retailers have to integrate aspects of the ideal shopping experience into their customer journeys. The good news is that technologies like augmented reality (AR) can help with this.
Bricks-and-mortar stores can integrate AR to create memorable shopping experiences in-store, for example by including AR booths or AR product catalogs in their showrooms.
Furthermore, online stores can integrate augmented reality furniture models on their product pages, enabling customers to virtually inspect and visualize the products in their homes.
Businesses can partner with 3D and AR companies like Enhance to create exciting and effective customer journeys, bolstering customer engagement. They will also enjoy greater brand recognition and observe lower returns, contributing to an increase in their net profit margins.
While net profit margins paint a realistic view of the success of a furniture business, they do not reveal all the details. Companies must therefore rely on other financial metrics to get a clearer view of business success.
Other financial metrics to consider for furniture businesses
A number of additional metrics warrant consideration:
1. Gross margin return on inventory
This metric shows the gross profit margin the brand earns for every dollar of its inventory. Simply put, it measures the profitability of the brand’s inventory. It is calculated as follows:
Gross margin return on inventory (GMROI) = (Total sales – Total cost of goods sold) ÷ Amount of inventory
2. Furniture sales per square foot
As the term suggests, this metric shows the total number of furniture sales per square foot of the store. It reveals if the rent paid is worth the sales made in-store. Naturally, higher furniture sales per square foot indicate a successful retail store.
3. Cash flow
This metric indicates the cash that can be used for business activities. It is calculated using the formula:
Cash flow = Cash used for operating activities + ( – ) Cash earned from investing activities + Cash earned from financing activities
Conclusion on challenges for furniture businesses
Furniture profit margins are known to be an indicator of business success, and companies employ a host of tactics aimed at maximizing them. But they provide an incomplete picture; for example, they offer no insight into the profitability of different types of spending.
As such, businesses aiming for profitability must not rely solely on furniture profit margins, instead considering a wider range of financial metrics to gain a full understanding of the company’s outlook.