CEO Gary Friedman has a lot riding on the success of RH’s first international venture: RH England, which recently opened in Aynho Park. It is the company’s bellwether for planned openings over the next two years in Brussels, Dusseldorf, Munich, Madrid, London, Paris, Milan and Sydney.
He’s also counting on the new RH Contemporary collection to generate customer excitement, along with new collections across RH Interiors, Modern, Outdoor, Baby & Child and Teen.
It’s all part of his grand plan to “climb the luxury mountain” and generate $20 to $25 billion globally and build to $5 to $6 billion in revenues in North America by expanding its footprint into every major market.
RH was over halfway to that North American goal, reaching $3.6 billion in 2022 but down 4% from $3.8 billion in 2021. However, first quarter 2023 took some wind out of RH’s sails.
Revenues dropped 23% year-over-year, from $957 million to $739 million in first quarter and the company forecasts second-quarter revenues ranging from $765 to $775 million, another big drop from $992 million last year. The company is projecting to end the year in the $3 to $3.1 billion range.
Then there’s the 24% drop in the RH Members Program on which 97% of RH’s core furniture business depends. It declined from 459k members in 2021 to 351k at the close of 2022.
The members program is essentially a pay-to-play discount program where, for a $175 annual fee, members get a 25% discount on full-priced items and an additional 20% saving on sale items, plus complimentary interior design services and special financing options with a RH credit card.
All-in-all, Friedman’s luxury mountain just got steeper. We’ll have to wait until September to hear directly from him, but new surveys from TD Cowen among U.K. interior designers and the Affluent Consumer Research Company (ACRC) with which I am affiliated provide insights about where RH stands now and its prospects for the future. Note: the company did not respond to my request for comment.
Opening England Inspires Designers’ Curiosity
As influencers-in-chief among their HNW clients, interior designers’ opinions matter. TD Cowen’s survey among 50 U.K. designers found high levels of awareness for the RH brand, and about half of the designers were aware of the new Aynho Park gallery, though most haven’t visited yet.
Its two-hour driving time from London has discouraged more visits, and designers believe that the opening of the London interior design gallery slated for next year will be the key to unlocking RH’s potential in the U.K. market.
Overall, a majority of designers believe that RH can succeed in the U.K. market. Their primary concern is that RH’s super-sized furniture may not fit into smaller-sized U.K. spaces. Also noted is that RH might need to tweak its assortment to reflect their clients’ taste for more elegance and traditional styles.
Another significant finding is that RH might appeal more to their lower-income aspirational clients than the higher-tier clients. For the later, designers might turn to RH for accessories and lighting, rather than furniture. Nonetheless, a majority of designers said they would recommend RH to clients.
TD Cowen concluded, “We overall came away more upbeat on RH’s opportunity to succeed in England and potentially broader Europe.”
U.S. Consumers Are Curious Too
Taking the pulse of high-net-worth consumers on both sides of the pond about their home furnishings plans and brand awareness, ACRC surveyed n=392 affluent consumers in June, including n=250 in the U.S. and n=142 in the U.K. The average income of the sample was $453k and their average net worth was $2.5 million, excluding their primary residences. The sample was also divided 50/50 by age, with half under 40 and half 40 and above.
Overall, 72% of those surveyed said they were very or extremely interested in visiting Aynho Park. Perhaps their interest isn’t so surprising considering the popularity here of Bridgerton, Downton Abbey and The Crown.
RH Contemporary Is A Work In Progress
In each successive earnings call leading up to its release in June 2022, Friedman has promised the Contemporary collection would be the “most compelling and potentially disruptive product introduction in our history.”
Then in the third quarter 2022 following its introduction, he reported that supply chain challenges had slowed progress in getting the complete collection to market. He described what people had seen so far as the “first course” of a full four-course meal to come.
In the fourth quarter call, he was more muted about Contemporary reporting supply chain issues continued. But despite the difficulties, he said the collection was “tracking to do more than Modern in its first year.”
Then he was even more muted in the first quarter 2023 call, suggesting the collection may be a little too new and the price points too high.
“I think we’re just too aggressive with the pricing, too arrogant maybe to some degree,” he admitted while affirming it is off “to a really good start,” despite being presented in only four of the company’s design galleries.
Contemporary’s newness drove early consumer interest, with TD Cowen reporting 125.6k RH Contemporary site visits in September 2022. But newness hasn’t brought them back, with site visits down to 15.8k in May 2023. Yet, the firm remains convinced the line “could break through,” which is critical for RH to scale the luxury mountain.
Friedman’s most recent comments suggest that Contemporary may be a little ahead of its time, and customer tastes need to catch up. More advertising and marketing will be needed to increase awareness and drive demand, which remains low among the U.K. designers. TD Cowen found only 13% of designers are aware of RH Contemporary.
While the ACRC consumer survey didn’t ask about specific style preferences, it found that 40% of affluent shoppers rate a brand’s artistic expression and creativity very important in their choices.
However, that is dwarfed by the opportunity to get a discount. Some 47% said where they shop is influenced a “great deal” by a promotion or discounts.
RH Membership Drops Sharply
RH Members Program, first introduced in March 2016, is the company’s implicit discount program offering significant savings on furniture and home furnishings for those who pay the membership fee. It is a year-round, everyday sales event for members.
However, RH can’t be too explicit about it because it may give shoppers unfamiliar with the brand the idea that they need a membership card to shop there, like at Costco.
At its launch, shoppers paid a modest $100 to become a member. It rose to $150 by 2021 and was bumped up again in 2022 to $175, where it stands today. However, paying that fee is a no-brainer for anyone serious about buying something from RH.
Say a shopper wants to purchase a $4,000 chair. If they pay the extra $175 member fee (4% of the list price), they can take it home for $3,200. And ACRC’s survey found replacing a damaged or worn-out piece of furniture was the top reason affluents shopped (30%), way ahead of wanting to update current furnishings (20%) or change the home’s style aesthetic (18%).
With those savings in their pocket, the new member may go on to pick up a matching ottoman, side table or area rug, incentivized by the 25% discount and even more if any of those add-on items are on sale where an additional 20% discount is applied. They walk out delighted with a total ticket that might be well above the $4,000 they originally expected to spend.
RH makes its sale-priced merchandise particularly attractive, especially for members. In a RH pricing study, TD Cowen found an average 36% discount off list price in a basket of 34 sales items, with discounts ranging from 20% to 30% for items marked down because the “original value proposition needs to be reset” and 40% to 60% for discontinued SKUs that must be moved to make room for new items.
Take those discounts, plus another 20% off for members, and that adds up to some serious savings.
But all of this doesn’t explain why RH Members Program dropped from 459,000 members in 2021 to 351,000 at the end of 2022, a 24% decline. In the fourth quarter 2022 earnings call, Friedman said, “It’s just minor. It’s not something that’s worth highlighting,” explaining that fewer members are factored in by increasing average unit retail.
Maybe RH crossed a boundary when it increased member fees by $25 to $175. However, no such slippage happened when the fee went from $100 to $150, with the number of members peaking in 2021.
Discounts Matter To Affluent Home Shoppers
In a final series of questions ACRC asked only of affluent consumers who were aware of the RH brand, some 39% said they were an RH member, and 10% said they’d let their membership lapse.
Among the current members, gaining early access to sales and promotions was their top benefit (64%), followed by the extra 20% off sales merchandise (59%). The 25% discount off regular-priced merchandise was less of an incentive (47%).
Current RH members also skewed toward the under-40-year-old affluents, but young or old, affluents value getting more for less.
However, Chandler Mount, ACRC’s founder and lead researcher on the study, sees dangers for RH relying too heavily on the membership model. It threatens the brand’s ultimate luxury brand status.
“The RH Members Program is an effective sales conversion tool that will resonate with certain customers. Given the situation – RH may be over-priced, under-sold, and on discount – it is in a position to have short-term wins but at the expense of long-term price strength,” he said.
“RH is releasing new Contemporary product for the higher-end customer who are not as motivated by price (discounts) as they are value (worth the money). It can leverage RH Member subscriptions to message about style and prestige, but ultimately the loyalty-club method is a sign that it’s not a luxury brand anymore,” he continued.
Affluents Still Going Strong In Home
Encouragingly, the ACRC survey found that affluents are still in the market for their homes. Nearly 60% said they are spending more on luxury home furnishings now, with 20% spending less and only 5% not spending at all.
So RH has a long runway capturing the $5,500 they budget for their living rooms, $5,400 for the master bedroom and $4,300 for outdoors.
RH also has the curiosity factor going for it, as signaled by the large number of this elite group interested in crossing the pond to see Aynho Park.
And as every retailer knows, newness in the store also brings shoppers in. RH Contemporary is a new look for the company, so the sooner it can get into the galleries, the better to stimulate shoppers.
And Friedman continues reiterating in his calls, “We have so much more newness.” It likely means more items will go on sale to make way for all that newness. That may not help RH’s bottom line in the short term, but it will surely benefit the customers’.
Overall, RH has much going for it but faces challenges to bring it all home.
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