High Performance Retailing Brought to You by Hardware Retailing and The Farnsworth Group
SUMMER 2020 V3 | H1
Giant Leap
Commending Industry Innovation Page H3
Knowledge Is Power
Cost of Doing Business Study Gives You the Edge
Page H4
Facing the Future
Understand the Months Ahead for Home Improvement Page H6
ONLINE
Connect With Us CONTENTS
SUMMER 2020 | VOLUME 2 | ISSUE 2
Website HPRmag.com
Features H6
ANALYSIS
The Way Forward
The effects of COVID-19 have been inescapable for every player in the home improvement industry. High Performance Retailing speaks to experts in human resources, home construction and the global economy to discover what the coming months—and years—hold for retail.
93%
of U.S. homebuilders say the virus has impacted homeowners’ willingness to remodel Source: National Association of Home Builders
High Performance Retailing is a collaboration between the North American Retail Hardware Association and The Farnsworth Group. Both organizations are committed to helping the home improvement industry prosper with relevant, informative and timely data. Executive Vice President and Executive Editor, NRHA Dan Tratensek, dant@nrha.org Senior Partner, The Farnsworth Group Jim Robisch, jrobisch@thefarnsworthgroup.com Market Research Analyst, The Farnsworth Group Amy Theophilus, atheophilus@thefarnsworthgroup.com
Editorial, Design + Production Managing Editor Melanie Moul, mmoul@nrha.org Trends Editor Todd Taber, ttaber@nrha.org Copy Editors Kate Klein Hans Cummings Director of Communications Whitney Daulton Production Manager Nancy Vondersaar
Sponsorship Opportunities
Departments H3 Foundations Jim Robisch, senior partner of The Farnsworth Group, recaps retail’s turbulent months and highlights industry innovation. H4 In Conversation Dave Gowan, vice president of finance and business services for the North American Retail Hardware Association, details the value of the annual Cost of Doing Business Study.
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Online Exclusive The Farnsworth Group is hosting regular webinars analyzing COVID-19’s extensive impact on the home improvement, construction and housing markets. Read a summary of the recent session with Kermit Baker of Harvard University’s Joint Center for Housing Studies by visiting HPRMag.com/tfg-webinar.
High Performance Retailing Summer 2020
Vice President of Sales and Publisher Kevin Hohman, khohman@nrha.org 317-275-9430 Northern Region Sales Director Brad Lyons, blyons@nrha.org 317-275-9424 Business Development Representative Matt Caruso, mcaruso@nrha.org 317-275-9409 Southern Region Sales Director Scott Gilcrest, sgilcrest@nrha.org 317-275-9414 Business Development Representative Jordan Rice, jriceo@nrha.org 317-275-9443
LEARN MORE
Connect With Jim Email jrobisch@thefarnsworthgroup.com
FOUNDATIONS
LinkedIn Jim Robisch
What We’ve Learned High-performance operators are expected to rise to any challenge. Once again, we’ve seen this made clear as independent home improvement stores across North America contend with the COVID-19 pandemic. While being deemed essential businesses certainly helped galvanize the industry, there was no go-to guidebook for dealing with the numerous unexpected challenges thrust upon the industry. The last few months have been totally uncharted territory. A fundamental change in retail took place in a matter of days. Home improvement operators quickly had to learn to offer stellar customer service from a distance, shuffle their staffing to balance physical and emotional health and develop new ways to deliver products to customers. High-performance retailers had to figure out a new set of retail rules under fire. In reflecting over the past three months, there are some vital takeaways every home improvement operator can learn and use to benefit their business. Customers have changed forever. It doesn’t matter if they’re DIYers or pros—they’ve changed the way they shop for home improvement products. We used to only see curbside pickup at grocery stores and some mass merchants, but now it’s part of the new business model, not only for home improvement, but retail as a whole. Customers who live in areas with shelter-at-home restrictions quickly adapted to utilizing technology to shop for home improvement products. For some customers who have used the internet for items from other retail sectors for years,
many wondered why they had never before included home improvement products in those online transactions. A sentiment of ‘Why haven’t I done this before?’ emerged and will continue. Retailers who had been expanding their online presence and e-commerce capabilities reaped the benefits of these new, more tech-savvy customers. High-performance retailers are greeting new customers, even from afar. Many of these new customers are leaving big boxes because they see independent enterprises as providing a safer and more expedient shopping experience. The most successful retailers will welcome new shoppers with open arms and highlight the customer service for which independents are known. Even against uncertain odds, high-performance retailers have forged new paths and continued as essential operations in their communities, all while maintaining superior customer service and adapting to supply chain uncertainty. Above all, the past few months have shown the resilience of home improvement retail and brought into focus the solid opportunities the future holds for the industry.
High-performance retailers had to figure out a new set of retail rules under fire.
Jim Robisch Senior Partner, The Farnsworth Group
Summer 2020 High Performance Retailing
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Dave Gowan is the vice president of finance and business services for the North American Retail Hardware Association. Among his duties, Gowan oversees the production of the annual Cost of Doing Business Study, which collates data from more than a thousand independent home improvement, hardware and lumberyards across the U.S.
IN CONVERSATION
Build Your Base
Get Powerful Insights With the Cost of Doing Business Study
T
racking each aspect of your business’s performance is more important than ever for high-performance retailers. As each day brings new obstacles for you and your team to overcome, understanding where your business has been—and where it’s going—gives you the competitive advantage in your community.
Make Your Mark Submit your data for the 2020 Cost of Doing Business Study now through July 15. Visit nrha.org/codb to discover the many options you have to safely and securely share your data to strengthen the independent channel and illustrate a powerful baseline for your business.
“With the study, retailers can determine where they stand compared to typical and high-profit peers. This information gives you head start to make quick adjustments.”
For more than a century, home improvement leaders have counted on the Cost of Doing Business Study for unparalleled insight into their operations. The annual report helps operators identify trouble spots and quick wins to run more streamlined, efficient home improvement operations. “With this study, retailers can determine where they stand compared to typical and high-profit peers,” says Dave Gowan, vice president of finance and business services for the North American Retail Hardware Association. “This information gives you a head start to make quick adjustments.” Gowan explains how you can use the study to improve your business.
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Know the Right KPIs Using aggregated financial data from income statements and balance sheets of independent hardware stores, home improvement centers and lumberyards, the study reveals key metrics for typical and high-profit operations, including GMROI, debt to equity, sales per customer and more.
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$21
$68
$112
Inventory Per Square Foot “This metric helps you see how your products are performing,” Gowan says. “Do you have too little, or too much?”
CE N T
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2019 High-Profit Store Metrics
$58
$111
$218
Sales Per Employee “This is certainly one to know,” Gowan says. “If the typical home center makes $3.5 million a year, can you afford to hire new employees?”
E LU
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2019 High-Profit Store Metrics
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Prepare for the Future “The Cost of Doing Business Study helps you stay agile,” Gowan says. “The study lets you make strategic decisions to better position your business for the years ahead.”
ME O
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Confirm Your Position “Every time you borrow money, you’re educating the lender about your business,” Gowan says. “They don’t understand your business like you do. Having an in-depth tool like the Cost of Doing Business Study offers a representation of the industry to a bank or financial institution.”
RE ST WA O D
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Set New Goals By participating, you get a free copy of the Cost of Doing Business Study. Along with those results comes a What-If Scenario tool. You can adjust your operation’s performance to see how minor changes in certain metrics can yield results across your business.
2019 High-Profit Store Metrics
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Analyze Your Performance “It’s amazing to see the number of companies with multiple stores that have truly been successful and around for generations still participate in the study,” Gowan says. “They still want to benchmark their performance. They’re always questioning how they can get better.”
“This figure is always important to retailers,” Gowan says. “It’s so consistent year over year. If I were a hardware operator, I’d want to see where I fall. Am I consistent with typical and high-profit operations?”
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Retailers across the U.S. rely on the Cost of Doing Business Study to help them understand their businesses better, establish new performance standards and illustrate their place in the industry to people outside it.
Transaction Size
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Personalize the Study
$203K
$251K
$406K
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AUTHOR
Todd Taber Trends Editor
ANALYSIS
ttaber@nrha.org
What Comes Next
3 Expert Views on COVID-19’s Home Improvement Impact
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ummertime in North America is traditionally a season of momentum for the home improvement industry. Construction crews take advantage of warm weather to build new homes and offices. Families spend more time outdoors, discovering small projects—a doorknob to replace, pavers to upgrade—that prompt a trip to the local home improvement store. COVID-19 has upended traditions. Since March, when many states and provinces began enacting shelter-in-place orders,
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the novel coronavirus has disrupted almost every facet of the home improvement industry: from supply chain stability and product availability to the basic ways you greet your customers. Even if home improvement stores are operating, they’re serving customers with strapped wallets and frayed nerves. High Performance Retailing spoke to three experts representing three fields critical to home improvement success to help you make sense of an unprecedented situation. Discover their insight in the following pages.
ONLINE
Keep It Running Visit HPRMag.com/covid-hr for more insights from SHRM’s Julie Schweber, including the importance of maintaining performance reviews.
Uncovering New Guidelines THE LEGAL IMPLICATIONS OF PROTECTIVE MASKS IN RETAIL
Julie Schweber Senior Knowledge Adviser Society for Human Resource Management shrm.org
the workplace, so COVID-19 could meet that definition. OSHA requires business owners to assess those possible risks and develop an action plan. That means retailers must list the steps the employer is taking to minimize them, which can include revised cleaning protocols and employee training.
As home improvement operators How should employers handle balance a new set of health situations where an employee does and safety guidelines alongside not want to or cannot wear a mask? shifting customer service If a state requires anyone in a public-facing job to wear a mask, an employer might want to start by expectations, Julie Schweber, training and educating employees to follow local senior knowledge adviser for guidance. Sharing the benefits of wearing masks the Society for Human Resource and how to properly care for them will also be especially important. Sharing the rationale behind Management (SHRM), offers any decision an employer makes is crucial to help employees understand why it’s so important. clear guidance to retailers. Many retailers are mandating masks be worn in stores. Does SHRM have guidance on the use of masks in retail? Above all, an employer should check their state or county regulations. In some areas of the country, local or state governments are requiring public retail workers to wear masks. Some locations are even requiring customers to wear some type of face covering before entering a retail establishment. By the same token, even if wearing a mask is not specifically required, OSHA regulation says business owners have a general duty clause, which applies to recognizing potential hazards in the workplace. Employers have to be aware of potential hazards and act to prevent or minimize them in
Don't present wearing a mask as an ultimatum. Help employees understand why you or your city are encouraging employees to wear them. If someone has a preexisting condition that prevents them from wearing a mask, an employer should know that it might represent a potential disability, which would include Americans with Disabilities Act protection. At that point, having a constructive conversation about what else could be done to accommodate an employee with a medical condition would be the right step. Maybe there is a certain type of mask that works better for their condition, or maybe their work could be done away from customers or other employees to limit interaction. It might have to be a oneon-one conversation with every employee to gauge their comfort level.
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Housing Struggle COVID-19 DISRUPTS CONSTRUCTION MOMENTUM Robert Dietz Chief Economist National Association of Home Builders nahb.org
The National Association of Home Builders (NAHB) regularly surveys its members to guage their confidence in getting new jobs. In December, that figure hit a 20-year high. In April, the same metric plunged to an all-time low as COVID-19 paralyzed home construction in the U.S. How has COVID-19 impacted the 2020 housing market? We entered the year with a pretty strong builder sentiment: We had seen greater new home sales and single-family construction. We were expecting 2020 to see about a 3 percent gain in single-family building starts, and some were even projecting up to 7 percent. We had low unemployment, and we had strong housing formations. Apartment construction in 2019 had the best year since the Great Recession, and remodelling continued to be solid. That all changed. In April, builder confidence took a 42-point drop, the largest we’ve ever seen. It was the first reading below 50 since 2014 (and 50 denotes a neutral outlook). What that points to is a sharp decline in
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single-family home construction in the middle of this year. We anticipate single-family starts will be down about 20 percent through 2020, but we see the beginning of a rebound in the second half of this year. If the economy can open up safely, and we can get through some additional economic weakness we anticipate in the third quarter, the construction industry could be on its way to a recovery in the coming months.
How does COVID-19 compare to the housing crisis a decade ago? There are many differences between the Great Recession and what we’re experiencing now. COVID-19 is biological, while the Great Recession was largely due to a financial crisis. Going into 2008, we were overbuilt. There was a surplus of housing, which lowered overall home prices. Today, there’s a deep deficit of up to a million residences throughout the U.S. That shortage matters because while there could be some weakness in near-term home prices as demand falls off and unemployment goes up, in the long run, home prices will probably remain steady because of the limited supply of resale and new homes.
How can U.S. construction and the economy begin recovery? Housing’s share of the U.S. GDP is right around 15 percent, so home building’s impact is huge in the overall U.S. economy. On average, every single-family home built supports the equivalent of three full-time jobs in the labor force. Every apartment is one full-time job and every $100,000 in remodeling is one full-time job. Then there are downstream benefits of construction: building supply manufacturers, home improvement stores and
Data Dashboard COVID-19’s Effect on Remodelling
others. Real estate is high volatility, but it has a really high multiplier effect because that market stimulates construction and retail sales directly. As we begin to open up local economies safely, most economists would agree construction and manufacturing are two industries where you can practice social distancing measures. These sectors have a huge impact on the U.S. economy and could eventually help lead an overall economic recovery.
What are homebuilders saying about jobs in their areas? Homebuilding was considered an essential service and allowed to continue during most stay-in-place orders. Buyer traffic is down, but we witnessed more activity toward the beginning of May. As cities and states begin opening up as the pandemic subsides, you’re going to see more activity. It’s important to remember construction doesn’t require a dense concentration of people in the same way a retail store might. The typical construction site has fewer than 10 people at any given moment, so they can spread out. We’re hearing some jurisdictions are being flexible and are allowing for virtual inspections or one-on-one tours of properties to reduce the number of people on a job site. We’re going to have to continue these kinds of measures for the foreseeable future, but when you think of an economic sector that can continue and provide a lot of economic impact, U.S. home construction is one of them.
What would you want home improvement retailers to know about U.S. construction in the months ahead? It’s probable that home remodeling will fare better than construction in 2020. Remodeling did decline after the Great Recession, but nowhere near as sharply as multi- and single-family home construction. Our data suggests some homeowners are uncomfortable with having workers in their homes, but we are seeing relative strength for repair and remodeling done outside the home.
96%
96% of NAHB survey respondents say COVID-19 is affecting the rate of remodelling requests
93%
93% say the virus has impacted homeowners’ willingness to remodel
84%
84% say COVID-19 has delayed or caused cancellations of existing projects
Source: National Association of Home Builders
As we begin to open up and deal with a new reality, we’ll need to recognize a fundamental change in people’s perceptions of their homes and what they can do. More people work from home, and we don’t see that trend reversing. If that becomes permanent, they’ll want a true home office, even spaces for home gyms. Based on NAHB surveys, some builders indicate they are concerned about access to certain building materials. They’ve mentioned certain lighting and plumbing fixtures and specialized window and door hardware, so ensuring retailers carry those products could directly benefit builders.
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A Variable Situation COVID-19 DAMPENS CONSUMER OPTIMISM
James Bohnaker Associate Director of Economics IHS Markit ihsmarkit.com
COVID-19 has brought economic instability not seen in generations. In response, the U.S. government has readied more than $2 trillion in economic aid through the CARES Act. As of June 2020, more than 40 million Americans remain unemployed, putting massive strain on the U.S. economy and the home improvement channel. What is your greatest economic concern amid COVID-19? Given the unprecedented nature of this situation and knowing that it’s tied to a health pandemic, my biggest concern is that we won’t get a handle on the disease and that it will last for much longer than we expect, or we have recurring outbreaks. That would
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cause a situation where we’re in an uncertain mode where we don’t know if businesses can only reopen temporarily: that would be the worst-case scenario for a lot of businesses, especially nonessential retail.
Have stimulus payments sent to U.S. families had a tangible effect on the economy? Stimulus payments and the extension of unemployment insurance benefits have had a bit of an impact. Pretty much all of those payments were sent out April 15, and in the week following, we did see a rise in consumer spending. We saw increased spending in grocery sales (which were already high), a little bit in health care and general merchandise stores, which includes big-box and hardware stores.
Consumer confidence has fallen according to several organizations that track that metric. What does that drop mean for retailers? Overall consumer sentiment doesn't always translate directly into spending, but it certainly is a negative indicator for consumers’ mood and willingness to spend. It’s definitely a leading indicator of what we expect to be an extended period of weak spending. We’ve already seen that because many stores have been closed necessarily, but even once the economy truly reopens, you’ll need to see a rebound in consumer sentiment before people are willing to spend on discretionary items.
Data Dashboard
“I think it’s important
Small Business Jobs Report
to know that a V-shaped economic recovery is unlikely. A true recovery will probably be much more nuanced.”
Across the U.S. in May, businesses with fewer than 50 employees reported overall job losses compared to the same period in 2019.
—James Bohnaker, IHS Markit All consumer confidence readings are pointing to the fact that people are feeling nervous about their economic prospects going forward. Twenty million people lost jobs in April alone; that’s mind-boggling. That’s going to have a very real impact on their bank accounts and psychology.
Percent of Decline
What would you want home improvement retailers to know about their role in the U.S. economy in the months ahead?
-4%
-3.6%
-4.6%
Source: Paychex | IHS Markit Small Business Employment Watch
Consumer Sentiment Index
Consumers' willingness to spend remains low during COVID-19.
INDEX VALUE (NEUTRAL = 100)
I think it’s important to know that a V-shaped economic recovery is probably unlikely. A true recovery will probably be much more nuanced. I think the number of positive COVID-19 cases and the fear factor both have to decrease quickly to hope for a V-shaped recovery, especially for industries that are predicated on having close contact with others, like travel and entertainment. I think it’s important to understand that retailers will be operating with uncertainty for some time. They should set their own standards for how they want their businesses to function in this time, using guidance from federal, state and local governments. It would be a good idea for retailers to talk among their peers and set the standards they want to see for their industry going forward.
-3.5%
100 95 90 85 80 75 70
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Y C R R V ' 20 E B F NO DE JAN MA AP MA
Source: University of Michigan Consumer Sentiment Index
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