Image: Restoration Hardware
Is Restoration Hardware’s membership program flawed?
Although Restoration Hardware officials have asserted that its new membership program is working fine, a six percent same-stores sales drop in its third quarter has concerned some investors.
In March, the RH card was introduced to replace seasonal sales events. Card holders pay $100 annually to get 25 percent off merchandise. Other benefits include 10 percent off clearance items, complimentary interior design services, early access to clearance events and lower interest rates on the card.
Management attributed the sales shortfall in the quarter largely to delays in the mailing of one of the chain’s massive print catalogs as well as distractions caused by the election. Markdowns to right-size inventories led the company to sharply lower its profit and sales targets for the year.
Yet with membership programs at retail largely confined to Amazon and warehouse clubs, many question whether such programs can work for a niche retailer.
The $100 annual fee may be too much for low or middle income shoppers, according to Retail Dive. Reports indicate that the program pays off for members spending more than $400. Buying furniture is also sometimes more of an infrequent “event” rather than a steady yearly purchase that drives a membership model.
Finally, while the chain has seen average order size grow larger with the shift to the membership model, “the time to transact is longer,” said Gary Friedman, CEO, on a conference call with analysts. Promotions create “urgency dates” while membership allows shoppers to work “through their interior design cycle, and it’s taking longer to close an order,” he said.
Regardless, Karen Boone, co-president, contends management is “extremely pleased” with the program. More than 90 percent of sales are coming from members since its launch. As it anniversaries the program in 2017, the company expects margins to expand due to both deferred membership and renewal of current members. And because of home buying cycles, new members are expected to join year after year.
Mr. Friedman insists that the store’s eventual non-promotional cadence will be a differentiator. He said, “Make no mistake, many retailers find themselves in a race to the bottom, a race we at RH have chosen not to join.”
- Rh Reports Third Quarter Fiscal 2016 Financial Results – Restoration Hardware
- Restoration Hardware’s Q3 Conference Call – Seeking Alpha
- RH The Members Program – Restoration Hardware
- Restoration Hardware’s Sales Stall as Membership Program Fails to Catch On – Wall Street Journal
- Restoration Hardware launches paid membership program, ends sales – Retail Dive
- Restoration Hardware joins trend of charging customers for loyalty program – Minneapollis Star Tribune
- Restoration Hardware plunges on loyalty program woes, catalog delay – Retail Dive
- 7 Game-Changing Tips For Shopping at Restoration Hardware, Straight From an Employee – Popsugar
Discussion Questions
Discussion questions: What’s your assessment of Restoration Hardware’s membership program? Can retailers successfully use membership programs to wean their customers off promotions?
Poll
BrainTrust
Lee Kent
Principal, Your Retail Authority, LLC
Tom Dougherty
President and CEO, Stealing Share
Yes, I think Restoration Hardware’s membership program is a great idea. The customers who only buy during promotions are likely not the same demographic who would become members. Restoration Hardware’s membership program caters to customers who probably already shop for furniture frequently and are able to spend a significant amount of money. What the membership does is increase brand loyalty and ensures those customers are almost exclusively shopping from Restoration Hardware.
In general shoppers, particularly Millennials, have little sense of brand loyalty. Membership programs, if done right, are a smart way for retailers to increase shopper loyalty and maintain their prices and brand worth while still offering customers a great value.
Restoration Hardware, meet J.C. Penney. Consumers love promotions. Restoration Hardware should fine tune its promotional calendar rather than move to a membership model. Consumers will do the math and, if their purchase is not above $400, will opt to shop elsewhere.
Same-store sales vs. a year ago tells only part of the story. Retail NEEDS to wean consumers from promotions because promotions are a drug-induced coma for long-term retail health.
The price point is too high and needs adjustment. But Restoration Hardware needs to stay the course. They need to spend more on brand preference with the cash they divert from promotions.
This takes an investment in time and cash to work. Will they get those two co-requisites? Probably not. Investors care too much about the present while ignoring the future.
It reminds me of what Steve Jobs’ predecessor said at Apple before Steve stepped back in — “The ship is sinking and it’s my job to get it facing in the right direction.”
I’m scratching my head a little at the very premise of the second question. It seems to me memberships not only do NOT wean customers off promotions, they guarantee access to promotions, or deals, or a superior value equation. The whole point is that the membership fee is an investment that will be paid back many times over with guaranteed access to great pricing. For Restoration Hardware the customer could just wait for a sale, especially based on the “infrequent” purchase nature of the business.
At Costco, you want access today and on an as-needed basis, because in the grocery aisle you need it today. In the non-grocery aisle, it will be gone in a couple of weeks and probably never go on sale. At Amazon Prime, you want it now and you love the free shipping. I might be missing something, but I just don’t see the same purchase decision drivers in place at Restoration Hardware.
For Restoration Hardware’s membership program to work as a replacement for promotions its members would have to increase their purchases to offset as much or more than their casual promotion-oriented customers did before. The numbers would indicate that is not happening.
As Max indicated, the math is simple. Customers can quickly determine if they are not going to spend at least $400 per year, in which case it’s a losing proposition.
Restoration Hardware is not a brand that caters to a lot of repeat purchases so right off the bat I question this type of membership program. Also, with membership programs of this type, it’s putting the horse before the cart. Typically a consumer would only be willing to part with a $100 fee if they are already loyal to the brand. Not the other way around. They need to already have bought in to the idea that they will be buying from this brand more than once during the year.
As to the promotion question — is this model actually weaning them off of discounts, or guaranteeing discounts?
And that’s my 2 cents.
I didn’t like this concept for Restoration Hardware when it was first announced and I don’t like it now. Furniture at Restoration Hardware is not a case of Gatorade at Costco. Only certain retailers can use a membership program to wean customers off promotions. Which retailers can and which cannot depends on what they sell.
To quote the introduction to the discussion: “Buying furniture is also sometimes more of an infrequent ‘event’.” For that reason alone, a membership program is a misapplication at Restoration Hardware.
Low- or middle-income shoppers get more bang for their buck at Home Depot. Why would low-income people shop a high-income targeted store? It’s smart to leave the promos to clear out merchandise.
The article points out that mid- and low-income shoppers won’t buy the membership. I don’t see that as Restoration Hardware’s market. And anyone that is buying over $400 will gladly pay the $100 for the 25 percent discount. The key is that once someone becomes a member, Restoration Hardware keeps them as a member. If the only reason that they are a member is to get a discount on merchandise, that is a promotional program, not a membership program. However, if Restoration Hardware can somehow engage the member after their purchase and give them an incentive to stay on, then they have something. I don’t know what that incentive is, but there has to be a compelling reason to remain a member. Otherwise the member will only become a member again when they are ready to make another large purchase — proving my point that this is a promotional program.
Let’s remember that Restoration Hardware is going after a specific high-end customer. The membership program’s lack of appeal to moderate-income shoppers is irrelevant.
Along with the membership strategy, Restoration Hardware is making a huge investment in a build-out of mansion-like stores in Chicago, New York, Seattle and other cities. In order to help both investments pay off, there needs to be an experiential aspect to the membership program to pull the customer into the store more often than they would otherwise visit. Member-only cocktail parties or design talks at the store would increase engagement with the brand and could help drive purchases of soft goods and small accessories that would fill the spending gaps between major home refurnishings.
Before every retailer abandons their membership program, let’s look at what may be making Restoration Hardware’s a challenge: 1) Infrequent purchases – why become a member for something not needed on an ongoing basis? 2) Client base – is the “ideal” customer really one who will value membership and see return on that investment? 3) Differentiation – unless the membership delivers more value and preference to the members, what’s the draw?
Perhaps before RH throws this baby out with the bathwater, they need to ask those that have become members what’s missing, if anything, as well as review the per customer profitability — even if top line sales are down there may be reason to protect loyalty and increase profit per patron.
If RH’s plan is that the card will replace sales and other (price) promos, then I think it won’t work, for all of the reasons stated (except for the “low and middle income” remark … they’re hardly a major component of the store’s customer base, I would think). OTOH, if they’re trying to sell benefits, then maybe there’s some logic to it.
At any rate, 8 months in is too short a time to draw any conclusions.
The long term of success for a membership program should also be tied to the value of the rich customer preference and behavior data that can be leveraged for improving performance over anonymous transactional shopping without it. Promotions tie retailers to simple consumption, but membership ties retailers to deeper customer engagement.