My first core memory of the concept of “furniture” is pretty humble.
As a toddler, my family immigrated to a small town in Massachusetts from Kenya. This was in the 1980s, and though I didn’t know it at the time, being not yet three years old, we arrived with little financial resources by the American standard. As my parents saved money to purchase furniture for their growing family, I shared a queen-sized bed at night with my two older brothers, ages 4 and 8. I had to sleep in the middle because I would occasionally wet the bed, and my brothers needed a margin of safety such that if my bladder failed me in the middle of the night, they could leap to safety.
When my parents finally scrounged up the money to purchase each of their children their own beds, I distinctly remember the joy. It felt as though I were really going places in the world despite still being in my toddlerhood. Henceforth when I had an accident, I wouldn’t hear gripes about it.
Though I would learn the term formally many years later, intuitively, I grasped a central concept of the idea of “luxury:” Something exclusively your own.
Times have changed. Or have they?
I share this as I reflect on a recent fascinating earnings call I listened to. Sitting in my New York apartment decades later, I have access to more “luxury” products and services that are my own than I could have ever imagined. But that hasn’t stopped entrepreneurs from introducing new ones.
Of the dozens of corporate earnings calls I listen to each month, I happened upon one that was unlike anything in recent memory and sent me down this path of reflection. It was from RH, the company formally known as Restoration Hardware. RH is a luxury American home-furnishing company providing various high-end products, including furniture, textiles, and rugs. The call was led by their long-time Chief Executive Officer, Gary Friedman. While most corporate quarterly earnings calls made public are between 30 to 60 minutes in length, this RH call was nearly two hours. It was fascinating throughout for its unexpectedness.
While I invest in luxury companies through personal and investment vehicles, I don’t currently have a financial position in RH. I was more interested in listening to the sorts of questions analysts were asking Friedman so I could understand more about the company and its likely direction. I found myself compelled by what he was saying. It was part visionary bombast, part market strategy session, and part locker-room motivational speech. It was as though you had asked a generative AI to impersonate Gordon Bombay addressing the Mighty Ducks in the style of a Richard Branson lecture on innovation. In setting the ambition for RH, Friedman also used an analogy about mountain climbing, which I’m partial to as an avid hiker. From Friedman’s remarks:
Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive and, by doing so, elevating and rendering our way of life more valuable.
Climbing the Luxury Mountain and Building a Brand with No Peer: Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermès, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top, nor do the other brands want you to. We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart, and as we continue our ascent the air gets thin, and the odds become slim. We believe the level of work we plan to introduce this year inclusive of our new Collections, new Source Book design, new Gallery design and the introduction of RH to the UK in an immersive and unforgettable fashion, will continue to demonstrate the imagination, determination, creativity and courage of this team, and the relentless pursuit of our dream.
Over 20 years ago we began the journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxydol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations. Lessons that can’t be learned in a classroom, or by managing a business, lessons that must be earned by building one, or, by reaching the top of the mountain.
Onward Team RH.
Carpe diem, Gary.
Ducks Fly Together.
There’s much worth unpacking from this and the rest of the call. A lot of the bravado and ambition seem borne from fact, while some seem too hopeful and unmoored from reality. Let’s reflect on both sides of the coin.
First, some facts about the origin of RH. Friedman joined the company in 2001 when it was struggling and almost bankrupt. The brand, founded in 1979 in California, had established itself as a niche seller of period hardware, but over the next twenty years, had overweighted itself unprofitably through selling novelty items. When Friedman joined, he began offering more upscale and unique furnishings and reduced sales of tchotchkes. Additionally, Friedman built out impressive, massive “Galleries” as store fronts and started offering comprehensive interior design services to customers, creating an end-to-end luxury home furnishing experience. This was a key part of the company's transformation from a simple retailer to a luxury lifestyle brand and helped grow its operating margins from single digit percentages to the low 20s.
That said, some things seem untrue about its ambitions. When Friedman says, “Never before has a brand attempted to make the climb to the top, nor do the other brands want you to;” that statement is only accurate if one ignores American luxury companies such as Esteé Lauder, Tesla, and Apple, which all started from the bottom and rose to the top of their industries globally. We can perhaps let this slide, though, as CEO-pattern-overselling. More fascinating, though, is Friedman’s claim that the company “makes taste inclusive.”
Was 3-year-old Godfrey wrong? Is luxury not exclusive? Elsewhere in the call, Friedman provides more perspective on this thought:
RH Business Vision & Ecosystem - The Long View: We believe, “There are those with taste and no scale, and those with scale and no taste,” and the idea of scaling taste is large and far reaching.
Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative, as we continue our quest to build the most admired brand in the world.
Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.
Friedman believes RH can scale taste and serve as a network hub that attracts both designers and consumers. And he claims this is disruptive. Because PSG provides innovation consulting services, whenever I read the word “disruptive,” my ears tingle. Who or what is being disrupted?
On a recent episode of the Colossus podcast “Business Breakdowns,” Drew Cohen of Speedwell Research provides some perspective on RH:
I think to understand the business model, we need to understand the context of the industry. Most people who are refurbishing their home, especially at the high end, the first thing they do is they hire an interior designer. And so then that interior designer is responsible for showing on different furniture retailers, different styles that are out there. If you think about the customer journey in purchasing, say a sofa, the first thing most people do is they're already outsourcing that decision to an interior designer right off the bat.
The interior designers themselves, they make money not just off of hourly fees, but they actually mark up the items themselves. So they're almost resellers for the manufacturer. And to make this work, the manufacturer gives them a discount if they have a trade license as it's called. So it's this weird setup where you can actually access the showrooms. You're not allowed in. Even if you were allowed in, all of the price tags are coded, so you can't read them.
And then the interior designer gets this big discount, it's usually -- it could be as much as 50%, but you don't know that. And then they're marking it up. There's a lot of price opacity. So you're not really sure how much you're really paying your interior designer. So that's the backdrop. And Gary said about changing this, maybe not initially, but this is where they ended up. So this is how he improved on this experience and really tried to move to being able to do luxury at scale.
Strategic kudos to RH. Their disruptive strategy is classic disintermediation. And it doesn’t stop there.
In 2015 they started a membership model where for $175 a year, their customers received a flat 25% discount across their entire product portfolio. Their 2015 Annual Report explained that this had the added benefit of moving “our primary business away from its traditional reliance on promotions and discounts.” Essentially RH took the furtive interior designer discount that had been standard across the industry and re-gifted it to their consumers. But using a membership model, they made that incentive conditional to ensure the consumers who benefited from it also funded it. Smart.
This seems disruptive to an analog market built on relationships and obfuscation, even if it’s for the benefit of people who spend $30,000 on ottomans. But is it genuinely inclusive and at scale? Friedman explains the strategy:
Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces, by building an ecosystem of Products, Places, Services and Spaces that establishes the RH brand as a global thought leader, taste and place maker.
Our products are elevated and rendered more valuable by our architecturally inspiring Galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.
Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our Galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley, RH1 and RH2, our private jets, and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture.
This leads to our long-term strategy of building the world’s first consumer-facing architecture, interior design and landscape architecture services platform inside our Galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries.
Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums and apartments with integrated services that deliver taste and time value to discerning time-starved consumers.
The entirety of our strategy comes to life digitally with The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.
Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.
Seven. I counted seven new business ventures in Friedman’s remarks. The future is unwritten, and it's possible RH will succeed in scaling its taste in these various areas. Today, I’m doubtful. Even when companies decide to build new products and services in adjacent or white space markets that address unmet consumer needs, focus is still necessary. Particularly to do the necessary grunt work to overcome the profitable value chains of entrenched competitors. Today, 70% of RH’s revenue comes from furniture sales. Managing a media platform, an online portal, fully furnished luxury home sales, multiple jets, a yacht, a Napa Valley retreat, and a hotel offering seems a lot for any company to do. Unless, of course, RH sees these seven as purely customer acquisition channels. Then, sure, it can form partnerships and a toehold in all seven, without this being quixotic or innovation theater. But if they expect to compete, their efforts would be better spent focused on fewer directions.
PSG is known for tackling some of the hardest future market sizing problems; so when Friedman describes the potential size of this ambition, I grew more doubtful about the true extent of this scale and inclusivity:
Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion to $10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion to $100 billion opportunity.
In 2022, RH had revenues of $3.6 billion, down 4.5% from 2021. They are expanding to Europe but today focus primarily on the United States. It is number 802 on the Fortune 1000. Growing revenue to between $70 billion to $100 billion would put RH in line with revenue at companies such as Walt Disney, Goldman Sachs, and PSG partner PepsiCo. This is possible but unlikely. Firstly, from the lack of disruptive focus mentioned earlier, but secondly, when Friedman explains how they plan to expand internationally:
So, we look at the world differently than I think most people before us and historically have looked at a global expansion. I mean, we kind of look at countries in Europe like states in the United States, suppose, except there's -- the borders are different. There's some uniqueness there. But we've run our business very well in North America. And from our view, we're building really a global leadership team and kind of a global organization that will lead and oversee the business in an identical way that we do in North America, except that there is some unique differences within the countries.
While I remain open-minded to any corporate entrepreneurship story, this raises some flags. New York is twice as far away from Cincinnati as Paris is from London but has far more similarities to the midwestern city in terms of currency, language, and culture than the two European capitals. A human-centric approach where you first try to understand the problem at a local level and cater to specific needs would be better than copying and pasting between international markets.
That aside, we should leave our analysis of RH on a positive note. While they may have a steep climb ahead in conquering the luxury mountain through disruptive innovation, they seem to be conducting their sustaining innovation well. From the Q&A:
Yes. In a lot of ways, it represents an aesthetic change and a freshening, you'll see us begin to evolve away from gray and create really the platform for where the goods are going. We've kind of ridden the gray wave for the last, I don't know, 14 years or so. And there's big cycles in product. People ask me a lot, "Hey, what's next? And how do you know what's next? And where do the trends come from?" And I like to say the trends in our business come from the dead. Generations pass away, their belongings go into estate sales, which feed the high end, which feed the antique markets—the antique market really is what drives the high-end interior design market, then that goes into the high-end reproduction market and then it starts to trickle down from there.
It's hard to argue that RH's innovation engine and product development hasn’t worked. And it has many factors in its favor going forward. The 65-year-old Friedman is the company's largest individual shareholder and can align his vision with the company's strategic decisions and the trade-offs it chooses. That said, time will tell. In the interim, their core—while dealing with the same headwinds facing many companies selling durable goods to consumers in a high-interest rate environment—seems strong enough for them to continue to place innovative bets while competitors either stand still or fall away. Moreover, the history of luxury in America and abroad suggests companies that start high-end and then introduce products more accessible to the masses later do better than companies that start with mass products and try to move upscale. This will be a situation worth watching.
Godfrey M. Bakuli is the Founder of Pioneer Strategy Group (PSG), which offers expert strategic advice and actionable execution plans to R&D and marketing leaders looking to identify, de-risk, and launch innovative business ventures. He is also the Founder and Managing Partner of The Mutoro Group, an investment firm employing a patient, disciplined, and rational approach to fundamental value investing. If you’d like to learn more about Pioneer Strategy Group, please email us at info@pioneerstrategy.co or through the link below.
