Ethan Allen Design Center

Ethan Allen Turns the Tables and Goes Back To Design That Made It Great

Times have been tough for legacy American furniture brands since the recession. After Furniture Brands International went belly-up in 2013, its premier brands, including Broyhill, Lane, Thomasville, Drexel Heritage, Henredon and Hickory Chair, have been caught up in a wave of new owners, followed by subsequent bankruptcies. The brand names may still remain, but they are mere shells of what they once were.

Vertically integrated legacy furniture retailer Ethan Allen Interiors, founded in 1932, has been caught up in the industry’s turmoil, too. Next-generation consumers have largely abandoned the furniture brands of their parents and grandparents in favor of brands considered less traditional and turned to retailers that serve up more lifestyle experiences than traditional furniture stores.

Ethan Allen, which targets the same luxury-leaning customers that Thomasville and Henredon did, has been unseated as the retail leader in the premium home space by RH (formerly Restoration Hardware).

Consider this: In fiscal year 2019 Ethan Allen’s sales, generated from its 300 design centers, were $746.7 million compared to $2.5 billion for RH out of fewer than 90 retail galleries and 39 outlet stores. Even more alarming, since 2016 Ethan Allen’s sales have dropped from $794 million, while RH’s have advanced nearly 20% from $2.1 billion.

Ethan Allen CEO Farooq Kathwari is the first to admit that his company may have missed a beat. “Retail is in a crisis,” he shared with me. “The question is how to turn that crisis into an opportunity. It is no longer viable that the only reason customers come in to us is because we are having a blowout sale. We have to give them a great reason to come in, more than just a sale.”

Kathwari regrets succumbing to the addictive high that repeated promotional sales gave. But those discount-driven jolts came with devastating consequences. Consumers didn’t know what Ethan Allen stood for anymore. What’s worse, the company may have also lost that understanding.

“Before the Great Recession, we used to offer customers everyday best prices, no sales,” he says. “Then comes the recession, business was down so we tried 10% off, then it went up to 15% and 20% with sales every month. But we found our customers were trying to figure out how to decorate their homes with whatever products were on sale that month.”

This dependence on monthly sales also created inefficiencies throughout the company’s vertically integrated supply chain. Retail staff were pressed because about 30% of monthly sales were made in the last couple of days each month and its manufacturing arm had to ramp up rapidly to meet demand. “The race at the end of the month was most inefficient,” Kathwari explains.

The company had to break out from its reliance on promotional monthly sales. Kathwari returned to the company’s roots to put interior design services out front and recommit to its everyday best price promise, but with a contemporary twist.

Designers take center stage

“We have 1,500 interior designers and our stores are Design Centers,” Kathwari continues. “When a customer walks in, they see our designers working right in front, not like in traditional stores where you are faced with a bunch of sofas or tables. Our Design Centers are workshops, rather than just retail stores, where we have the tools at hand for our designers and customers to create beautiful homes.”

“Our people are professionals who studied interior design, so we have the highest caliber designers,” Farooq Kathwari, Ethan Allen CEO, says, referring to the company’s 1,500 interior design staff. COURTESY OF ETHAN ALLEN

Providing this kind of custom design services is at the heart of the company. Virtually 100% of its upholstered furniture is custom made, and nearly 70% of all products sold are custom selected in terms of color and finishes.

In today’s market, plenty of independent furniture stores and major home furnishings retailers offer design services as well. But what those retailers called “designers” are often only furniture sales people in disguise.

At Ethan Allen its designers come with credentials. “I personally review all of their backgrounds,” Kathwari shares. “Our people are professionals who studied interior design, so we have the highest caliber designers. And 90% of our management comes from the ranks of interior design. If you have a manager that doesn’t understand interior design, they aren’t going to appreciate it or get the right talent.”

Luxury for a new generation

With the interior designers taking center stage at the front of the store, they will have an expanded range of more modern, casual furniture styles to choose from, including designs scaled for smaller spaces as well as the classics it has long offered.

Luxury is still a word that means something to Ethan Allen and its customers, but Kathwari explains they are defining luxury in a new way in line with what the younger generation wants.

“So-called luxury could be a $10,000 sofa, but to me that is just a high price,” he believes. “Our customers want luxury, but it is luxury than combines great design with great quality and is more affordable. You can find that here for $3,000. If you add value, then you have a good combination. That is how I define luxury.”

And he is proud to say that 75% of its products are made in its North American factories that uphold the American Home Furnishings Alliance’s environmental management system, called EFEC (Enhancing Furniture’s Environmental Culture).

Membership has its privileges

Perhaps the most sweeping change that Ethan Allen is making is a new membership program designed to add additional value to its customers. With it Ethan Allen is returning to its everyday best price promise from before the recession, but with a membership twist.

The membership program was announced in October and is now ramping up. It will be supported by direct mail, television and digital advertising. The “We Make the American Home” themed-campaign will also highlight Ethan Allen’s design heritage and build its American brand identity.

“It’s going to be a huge change, but we need it,” he says. “No more sales, but with membership, customers can enjoy a 20% savings from our everyday best price. Plus they will have complimentary interior design service and free shipping with white-glove home delivery at no cost. We’ve also added access to 24-month financing for those qualified.”

But membership comes with a $100 catch. “The membership fee isn’t the main part or most critical thing. Rather, we are treating people to a tremendous value,” he says.

Basically, the $100 membership fee will be a swap for the company’s home-delivery service charge. But it will require an accounting change since the delivery fees were recognized upon delivery and the membership fees will be booked after a year.

“We expect the deferral of the membership fees to create a 3% to 4% headwind on net sales during the first year until we anniversary the membership program,” said CFO Corey Whitely during Ethan Allen’s first quarter 2020 earnings call.

On the plus side, this new membership program could help Ethan Allen go deeper with its customers, since the monthly sales program tended to encourage one-time, single item purchases. The annual fee isn’t exorbitant, and since home decorating projects typically extend over a longer time span, it could encourage more repeat purchases over the course of a year. 

At the same time, it may discourage first-time guests who may be confused by the offer. That $100 fee may be perceived as an extra hoop they might not be willing to jump through, especially if they are “just looking,” as so many home furnishings customers are.

Time will tell. Kathwari said in the latest earnings call that his team members are both excited, and slightly nervous, about the change. “I spent six months going all over the country making sure this is something that our team members were ready for because they’re also taking the risk.”

Its ultimate success, or failure, is going to rest squarely on the 1,500 interior designers’ shoulders, who Kathwari describes as entrepreneurs who make their living developing their clientele.

In closing, Kathwari said that the first six months of the program will be the hardest as everyone, including the customers, must adapt and change is never easy. At the same time, he believes wholeheartedly in his team and their ability to get their customers to trade up to membership because of the meaningful value it represents.

For the future, he remains committed to helping people design beautiful rooms through professional design services built on high-quality, well-designed furnishings that fit customers’ lifestyles, all the while delivering excellent value to them.

“It will take tremendous amount of effort and courage and long term investment from everyone in the company,” Kathwari concludes. “But then sometimes you have to take a step back in order to go forward. We are public company, but I don’t want to run a business based on trying to please Wall Street.”