In a recent conversation with fellow Forbes.com contributor Steve Dennis, our wide-ranging discussion turned to RH, the company formerly known as Restoration Hardware.
“I was at a conference where Gary Friedman talked about these new gallery stores that hadn’t opened yet. And I thought he was crazy,” Dennis said.
I had much the same feeling when I saw the news that Friedman plans to climb the heights to join the ranks of the world’s most exclusive luxury brands.
“Hermès, Chanel, Louis Vuitton, Gucci, Cartier, Tiffany, and the rest of the finest luxury brands in the world were all born on the top of the luxury mountain. Never has a brand started near the base and made the climb to the peak. We believe RH can be the first to make the climb,” he wrote in a shareholders letter released in advance of the company’s first-quarter earnings report.
But then, Friedman proved there was method to his madness when he opened RH’s first gallery store in San Francisco in 2010.
“So what do I know? Years later, I’m singing his praises,” Dennis continued. And I may be saying the same thing down the road if Friedman can turn his luxury vision into a reality that luxury consumers will buy.
Friedman’s set for a Mt. Everest-scale journey for RH. Question is whether he will conquer it in Edmund Hillary fashion or fail as George Mallory and others did before.
Friedman defines luxury for RH
As with beauty, luxury is in the eye of the beholder, which is my stock answer when people ask me to define the term. What’s luxury to one person may be ordinary to another and vice versa.
Here’s how Friedman defines luxury for RH. It is an ecosystem of taste that becomes an RH lifestyle:
“Our vision 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 elevate and establish the RH brand as a global thought leader, taste, and placemaker.”
Elevating each building block of the RH ecosystem is the strategy. It starts with the Galleries, the brand’s dream palaces for the aspirational consumer, anchored by dining and hospitality experiences intended to bring customers into the spaces more frequently than they are likely to shop for furnishings.
From there, it moves deeper into hospitality with RH Guesthouses, described as creating “a new market for travelers seeking privacy and luxury in the $200 billion hotel industry,” which includes not just resorts, but the RH3 yacht for charter in the Caribbean and Mediterranean. Then it continues to RH Residences for turnkey, fully furnished homes and condominiums.
All are intended to demonstrate the brand’s “evolving authority in interior design, architecture, landscape architecture, and hospitality,” which then circles back to the Galleries where interior design, architectural, and landscape services will be offered.
Long a hold out against digitizing the RH experience, Friedman also announced the RH ecosystem “will come to life digitally as we transform our website into The World of RH, a portal presentation our Products, Places, Services, and Spaces.”
This grand vision for RH is intended to take the brand from its existing $5-$6 billion level in the U.S. to a $20 billion global brand, as he plans to move across borders.
Friedman concludes his letter congratulating himself on taking the road less traveled by turning left when everybody else in the industry is turning right.
“We also understand the strategies we are pursuing – opening the largest specialty retail experiences in our industry, while most are shrinking the size of their retail footprint or closing stores; moving from a promotional to a membership model, while others are increasing promotions, positioning their brands around price versus product; continuing to mail inspiring Source Books, while many are eliminating catalogs; and refusing to follow the herd in self-promotion on social media, instead allowing our brand to be defined by the taste, design, and quality of the products and experiences we are creating – are all in direct conflict with conventional wisdom and the plans being pursued by many in our industry,” he wrote.
RH did not provide any additional comments upon my request.
Luxury dreams or delusions?
It all sounds magnificent. It all sounds grand, but is it realistic or achievable?
Christopher P. Ramey doesn’t think so, from his perspective as founder of the Home Trust International, an invitation-only network of luxury home products and services. The HTI covers the gamut of “connoisseurs, artisans, and trusted advisors,” which Friedman intends to disrupt.
“It strikes me as great PR,” Ramey says. “It’s easy to make something look good, but the fact is there’s less business at the height of luxury and most companies don’t find a balance there.”
Ramey sees Friedman’s grand, or more accurately grandiose, vision as largely a margin play, which is confirmed in the letter where he quotes LVMH’s Bernard Arnault saying, “Luxury goods are the only area it is possible to make luxury margins.”
Protecting RH’s margins is necessary now as the company has committed to sourcing more products in the U.S. “So his costs are going up, and he’s got to balance his margins. Moving to luxury is an attempt to increase his margins, but it’s unlikely his current customer will want to go along with it,” Ramey relates.
Ramey also warns that while RH has been successful in getting customers to spend 15% more for a meal or 10% more for a sofa in its galleries, it is a huge jump to move them from a $10,000 sofa to a true luxury one at $20,000 and above.
“The RH customer base already has their own value calculus indicating they feel comfortable where they are right now. Moving price points up to luxury generally means moving your existing customers out the door,” he shares.
What a customer gets going from a $10,000 to a $20,000+ sofa isn’t so much better design or fabrication, but exquisite comfort.
In research I’ve heard interior designers say their clients request RH style, so they take them to the store to sit down. Invariably, they pass on the brand because comfort is lacking.
“RH value engineers its products, so they look great on the outside, but the general consensus is the comfort isn’t there,” Ramey says. “If there is a trend today in home, it’s comfort. Everyone wants to be comfortable. Even good design doesn’t trump comfort.”
Luxury is a business model built on brand
As Kapferer and Bastien’s seminal book, The Luxury Strategy: Break the Rules of Marketing to Build Luxury Brands, makes clear, at its heart luxury is a business model where marketing and brand building come first.
“Marketing and building desire and aspiration for the brand is so fundamental to the luxury business model,” Ramey shares. “Friedman’s done a good job with marketing through its Galleries and catalogs to build desire for the brand.”
But in marketing, Friedman has had a gigantic fail: he has not been able to establish RH as the brand in consumers’ minds.
He was forced to address it in the company’s most recent earnings call. “The conference call operator introduced us and said, welcome to the Restoration Hardware conference call. It’s not the name of our company anymore. We’re RH but it’s hard to shed old perceptions. [It’s] no different than every analyst on this call,” Friedman said.
If even the small group of analysts that cover RH can’t get the brand name right, how can the consumers be expected to? And they don’t.
Google Trends finds that over the last year, people search for “Restoration Hardware” more than “RH,” with “Restoration Hardware” having an average value of 83 points to “RH” at 69. Google Trends explains the averages measure relative interest calculated on the peak popularity of the search term, so 83 is more popular than 69.
For customers searching in the shopping category, the difference is even more stark. “Restoration Hardware” has a relative average of 60 points compared with “RH” at 15.
Since Ramey doesn’t see RH existing customers’ value calculus going along with the elevated program, he believes the challenge for RH is to draw new clients.
“He will have to advertise to a new market in a new way,” Ramey says. “And in that market, there is a much higher percentage of gatekeepers,” otherwise known as interior designers.
“To execute his strategy in interior design, architecture and landscape, Friedman has to have the highest level designers on his team and supporting his brand. I don’t believe they are,” Ramey says.
“Friedman is taking on the entire design industry. It’s reasonable to believe that the membership group, which has been successful, will walk away when they see RH becoming a competitor rather than a resource,” he adds.
Taste can’t be scaled
Which brings us to the fundamental flaw in Friedman’s vision. He writes, “There are those with taste and no scale and those with scale and no taste. RH at its core is about taste, and we believe the idea of scaling taste is large and far reaching.”
Luxury consumers who hire interior designers to make a vision come to life in their spaces don’t want or expect a home that is copied from a page out of a catalog. Good designers shop the world to bring discreet elements into the home that create a single, unified vision: that of their clients.
Essentially, Friedman intends to present a cookie-cutter image of taste at scale so that customers will fit into the RH mold, not the other way around. “There is no one single taste, except good taste and bad taste,” Ramey says.
For some, and maybe for many, RH may not taste right. “Luxury is so subjective,” Ramey continues. “Who is going to believe that a company based in Marin County, CA is the judge of great taste everywhere? Taste is not replicable in every market.”
And that is also where Friedman’s comparison of RH to Hermès, Chanel, Louis Vuitton, Gucci, Cartier, and Tiffany goes awry.
Buying this season’s Louis Vuitton handbag is very different than buying a suite of furniture to live with for years. That handbag can be retired or replaced on a whim. It is not so easy to do the same with a whole roomful of furniture.
“Luxury purchases are passion purchases,” Ramey concludes. “But buying a sofa is generally not driven by passion. It is a considered purchase that can be postponed.”
Furnishing a home doesn’t provide the instant gratification like that from buying a new purse or pair of shoes. And it’s a decision that people have to live with for a long time.
Visiting an RH Gallery for a couple of hours or staying in an RH Guesthouse for a few days is far different than living in a top-to-bottom RH decorated and designed home.
It’s a long shot that Friedman or anyone else can ever hope to scale taste.