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Why Restoration Hardware is Lavishing Millions on Luxury Stores and Catalogs

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Photos courtesy Restoration Hardware.
Photos courtesy Restoration Hardware.

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While most brick-and-mortar retailers are battening down against the advance of e-commerce competition—closing locations, scaling back costs—luxury furniture chain Restoration Hardware is doing quite the opposite.

Later this week, the company will debut 13 giant source books (encyclopedia-sized catalogs) for its 2014 products, but the 3,300 pages of distressed farm tables, patinaed wood headboards, and brass lamps will be nothing compared to the brand's storefront plans.

So far, the retailer has built five posh storefronts, or "galleries," in RH parlance. Unlike standard furnishings stores, these galleries have cafes, art installations, fountains, and wine bars. The Boston location, which opened last year, is a 40,000-square-foot museum of home décor, and is actually located in Boston's former New England Museum of Natural History. The company plans to open 60 to 70 more opulent galleries, including one in Greenwich, CT—which will debut this Friday inside a beautiful ancient post office building—and they plan to give the New York gallery in the Flatiron neighborhood a 21,448-square-foot expansion.

"RH is really like a $1.6 billion start-up with all that's about to come," Gary Friedman, RH's CEO, told Racked in a recent phone interview. "What's coming next will be transformative and disruptive to the furniture market."

The cover of one of RH's Spring sourcebooks./span>

Friedman's vision for RH is expensive and, some might say, extravagant, but the man has proven himself to be a tenacious businessman. This focus on luxury is how Friedman pulled RH out of near-bankruptcy nearly a decade ago and he's using that same strategy to crush the furniture market.

A life-long retail veteran, Friedman started his career at Gap watching Mickey Drexler transform the brand before taking a key leadership position at Williams-Sonoma for 13 years. When Friedman became CEO of Restoration Hardware in 2001, the company was practically bankrupt. Things only got worse as the recession hit a few years later. But instead of lowering inventory prices, a move many retailers made in response to the economic crisis, Restoration Hardware raised its prices and offered a better quality product, and business did a complete 180.

"Everyone thought I was crazy, coming from Williams-Sonoma to try to [save the company]. But we had a clear vision of filling a void in the furniture market—high quality at a good price—and so I said, 'if we're going to go down, let's go down with style. Let them remember us,'" Friedman said. "At the time, we needed to do something to inspire people to buy in a marketplace where no one would shop. Every retailer was crying value, value value and so they were taking down prices to give customers better value but they were decreasing their quality. We went the other way because sales were down 30, 40 percent anyway. We took quality up, the level of design and taste up, and our price point. We went down like everyone else but then our business responded."

Thanks to Friedman's business gamble, the company was able to turn itself completely around. RH reported a net loss of over $35 million for the fiscal year of 2001, but since the beginning of the recession, business has skyrocketed. In 2009, the company reported $18.5 million of adjusted income and only three years later, its income doubled to $37.7 million. 2013 proved to be a record year, as RH reported over $69 million in adjusted net profit, up 52% from the prior year, according to SEC filings.

Friedman said the business idea of raising prices and quality came from wanting to target "the Neiman Marcus, Saks shopper" who wanted luxury but not to hire an interior designer.

"Restoration Hardware's focus [on luxury] is the secret of how they've been able to pull themselves off the brink of disappearing and back into growth mode," said Pam Danziger, a retail analyst at Unity Marketing. "I don't know if luxury is the right term, but they are aiming for quality and timeless, classic style at a reasonable price. They really know what their customer is looking for. They've really found a real niche in hitting the popular conception of how more affluent Americans want to decorate their homes. They understand people who are house-proud."

Wooing customers with its luxury appeal, Restoration Hardware now believes pumping cash into extravagances like textbooks featuring inspiring product vignettes as well as storefronts with sculpture gardens and impressive architecture will prove effective in the long run. Friedman believes the next struggle retailers will face will be how to transform their shopping spaces and experience; hipster retail giant Urban Outfitters has already begun to do this with its lifestyle shopping spots.

A rendering of Restoration Hardware's Greenwich, CT gallery. Drawing by Backen, Gillam & Kroeger Architects.

"There's the thought that everything is moving online, that retail stores are dying and people should shrink or close their stores. I actually think that's not true. I think we're going through natural evolution and shift with a new channel and platform," Friedman said. "Retail now has to change the way its been done for the last 50 years. The majority of business is controlled by shopping centers, which are boxes with a couple of entrances and no windows. If you stick a plant in a department store, it will die because living things aren't supposed to exist [in that type of setting.] We're going to create the next-generation [of retail experience]—a place that is reflective and harmonious, with cafes and fountains and rooftops. It will be transformative to how people will shop because it'll be a place you'll love."

Many retailers still use catalogs as part of their marketing strategy because of their capabilities to double as lookbooks and fashion magazines, the Wall Street Journal reported last month. Companies like British retailer Boden found that shoppers spend 15 to 20 minutes on their catalog but only eight seconds on their emails. Friedman believes that by putting enough money into Restoration Hardware's catalog, the company will triumph over every other retailer. [Interestingly, Williams-Sonoma, a major competitor of RH, admitted to spending half of its marketing budget on its catalog production and mailing].

Image via the RH source book.

Friedman is less interested in the Internet; quoting Steve Jobs, he said websites are the ultimate customer platform because even the smallest of retailers can have an amazing website because "everyone is limited to the size of the screen."

"It's important to have the physical manifestation of the product so the customer can know what we have. When you see their book, and its six pages, and then you see ours, which is 300 pages, you think, 'wow, these guys have a lot!' and that's the difference," Friedman said. "There's also a way to integrate the way you shop, how you organize your selection to the customer. We do it in two ways, by offering a category-dominance approach or lifestyle books where you can find inspiring ideas. They are both necessary to shopping."