China Focus  

Nice Home Upstream, Buffet Downstream

By Dr CS Lim

I would like to discuss the business model of furniture retail in China.

During the recent International Famous Furniture Fair (Dongguan), I finally realized that the existing “manufacturer – dealer” model that is so common in China is coming to an end. Dealers are now going through a phase of reduction, not growing in numbers. Recruitment of dealers via trade fairs is also at the end of the road. This is due to the following:

* Over the years, those dealers that need to be recruited have been recruited. There is now a great surplus of both factories and dealers;

* In the past 2-3 years, business have been poor for most dealers. They have been reducing the number of stores and sizes of their stores. This certainly has impact on the furniture malls in China. Can the number of furniture malls not reduce with lesser dealers?

That is not the case. Bucking the trend, the numbers are instead growing! This is the current state in China. Some companies have moved ahead and enjoyed success. Quite a number have gone upstream in the industry chain to become developers, decorators etc.

To give an example, I recently visited Guangdong “Nice Home” (靓家居). As there were many trade secrets, I can only state briefly the following:

Nice Home works with property developers to take over the renovation of units that are unfinished (in the raw/blank state). The company will then enter into direct agreements with owners of the units to undertake their renovation and furnishing works.

The agreements may be customized, thus bringing about the below benefits: * Developers can complete their work at the unfinished phase thereby advancing handover by at least six months;

* Owners of the units can customize their renovation. They do not have to wait until after a unit is decorated and then having to re-do it if they are not satisfied. This saves owners lots of money and time;

In addition to working with developers, Nice Home employs holistic marketing tactics: * Online – shops are opened on Tmall (similar to Taobao; another product of Alibaba) to draw traffic;

* At Construction site - they deploy dedicated personnel onsite to communicate directly with new home owners. They also build demonstration/show units to showcase their capabilities;

* Offline – Nice Home has showrooms in more than two dozen shopping centres (all limited within the Guangdong Province).

In addition to professional sales/design personnel, services are available online, onsite. Also available are furniture, appliances, renovation materials, bathroom tiles etc. for customers to choose. Nice Home not only provides renovation/decoration services but home appliances, furniture, etc. The units can be done up till move-in state, saving owners a great deal of trouble.

In Chinese expression, this model can be described as “deep plowing and careful cultivation” (深耕细作), a form of holistic indepth marketing. In e-commerce language, this means a high conversion rate. However as there is too much depth, Nice Home can only operate within the perimeters of the province. This model is difficult to sustain a nationwide expansion throughout China. This is an example of success achieved going upstream.

The downstream of the industry chain are predominantly retail outlets of dealers, be them in the form of stand-alone shops or stores in a mall.

Some months back, I discussed Warren Buffet’s furniture store in an article entitled “I am priority - For Retailers”. Below is an extract of its content:

Buffett started Nebraska Furniture Mart, a 5,000 square metres furniture retail store in Omaha, his home town. Omaha is a small town and Buffett’s store instantly dominated the retail scene.

In his store, the total floor area was divided into many smaller units with each approximately 200 square meters in size. In each of these units, only 20 percent of a factory or importer’s products (best sellers) are available on display. The remaining 80% slow movers, such as parts of a collection or products to be sold in package deals are shown via display screens within the unit.

Buffet adopted the 20:80 rule of management focusing on the top 20% best sellers. However, the remaining 80% cannot be omitted even though they are slow moving. Often customers would want some of these products as complements. This 80% is what the Chinese terms as “chicken rib” – to mean no meat but with taste so wasteful if discarded.

Most people do not realize that the “chicken rib” is often the main reason for the losses sustained by many furniture dealers.

Dealers can duplicate Buffet’s tactics to address the “chicken ribs”. By providing QR codes on the 20% best sellers on display, customers will be able to obtain information of the remaining 80% online via their mobile phones.

As a result of this, there can be 25 different brand-names (products of different factories or importers) sold within a 5,000 square meters of store space. The saving of floor space for the other 80% provides for the valuable saving in rent.

My article also addressed issues such as product selection, procurement etc. which I will not go into details here.

This is a success story of a downstream of the furniture store. Well, Buffett is Buffett after all.

President, Council of Asian Furniture Associations Professor, Beijing forestry University , currently the Chairman of the Council of Asian Furniture Association (CAFA). He read at Nanyang University in Singapore and completed his PHD at Beijing University of Forestry. He holds a Post Doctorate from Michigan State University and is a visiting scholar there. Dr Lim has been active in the Singapore furniture industry, chairing both the Singapore Furniture Association and Furniture Association of Asia and Pacific previously.