BREAKING OUT OF THE BOX
Despite some new store expansion, Container Store’s first quarter sales were down by 2.1% on last year. With a relatively narrow focus on home storage, does it need to think outside of the box to generate future growth?
The first quarter of each trading year has always been a challenging one for Container Store, traditionally representing a period of slower business which typically gives rise to a loss. This year has been no exception with fairly anemic sales producing a net loss of some $5.2m, a deterioration on last year’s $3.6m loss.
While the numbers are undeniably weak, the detail behind them does give slight cause for optimism. Firstly, the total sales number was unfavorably impacted by a strong dollar against the Swedish Krona, the currency of the company’s elfa shelving division. When translated into a constant currency basis, total sales rose by a modest, but respectable 0.9%. Looking at core retail, while comparable sales fell by 0.9% this was better than anticipated and when the impact of the West Coast port delays is factored in, underlying sales were virtually flat.
"Low purchase frequency weakens comparable sales - Container Store needs to get its customers to shop more often - and to spend more when they do"
With the adjustments accounted for, the comparable sales number represents a small step in the right direction – especially given that Container Store posted negative same store sales across most of last fiscal year. Reversing this trend is the key to enhancing both productivity and profitability; something that should, at least in theory, now be easier with a stronger housing market and a slightly more confident and affluent consumer.
That said, there are three fundamental issues that present challenges for Container Store. The first is one of differentiation. Arguably, Container Store is light years ahead of both its direct and indirect competitors: its assortment is better, its merchandising is superior, and its customer service is exceptional. However, for many customers storage is a relatively functional category and Container Stores’ points of differentiation are sometimes relatively unimportant and not compelling enough to sway shoppers to use it over rivals.
This leads onto the second challenge, which is one of competition. While Container Store is the best in its niche, a growing number of other retailers have actively expanded into home storage. Ultimately this has given occasional and infrequent purchasers alternatives and has helped to make share growth more difficult for Container Store. Moreover, many non-specialists, like Bed Bath and Beyond, have far greater store counts than Container Store, which means in many areas they are a much more convenient and visible option.
The third challenge comes from the nature of Container Stores product. For most, home storage is a relatively infrequent purchase. Combined with the fact that there are many non-specialist rivals, this means that visit frequency is fairly low. Indeed, even Container Stores top customers only visit around 4 times per year.
If purchase frequency is hard to increase, one of the solutions is to increase average ticket value – something the company is attempting to do via the launch of a range of luxury fitted closets known as TCS Closet Line, and a customized home design service called Contained Home. Both of these are logical extensions for Container Store, and both are revenue enhancing.
At the end of this quarter, the TCS Closet offer was available in some 36 stores with average ticket exceeding $10,000; this compares extremely favorably to the average ticket for other categories which is around $60. Although volumes are obviously more limited than for other categories, the scale of the uplift is providing a solid revenue boost to stores. Indeed, the 7 stores in the Dallas area where the range has been present for longest, saw an incremental boost to comparable sales of some 3 percentage points across the quarter.
Given that Container Store intends to roll out the offer to all stores by the end of this fiscal year, and that it is putting significant marketing efforts behind its new offer, we expect this initiative alone to help push the company into positive same store sales growth as it moves into subsequent quarters.
The Contained Store home design service is another revenue enhancing initiative that capitalizes on the company’s expertise in storage and organization. This is currently available in some 47 stores, and should be rolled out across the entire fleet by fiscal year end. Again, average ticket price – which is now at around $2,500 – is quite some way above the average for other categories. The model is also a lean one as the organizers who visit homes are professionals that the company contracts as needed and pays commission to, rather than being full time employees on the payroll.
As well as uplifts in same store performance, there will also be some gains in total sales from the 10 new stores that are planned for this year. While this is a rather modest expansion – especially for a company that has far fewer stores than rivals like Bed Bath & Beyond – it is prudent given the number of other initiatives the company has on its plate. That said, we see room for much more significant physical expansion in the next fiscal year.
As beneficial as all of these things are, we also think that Container Store needs to think about its wider proposition, especially in relation to other categories. In our view, Container Store needs to think about and promote itself less as a place for ‘storage solutions’ and more as a place to help people create better living spaces and homes. As part of this the company should be looking to logically expand out some of the categories it offers. For example, it is not a huge leap to offer more office products like premium stationery and office accessories like mouse-mats, nor is it unfeasible to gently expand into areas such as soft furnishings and textiles.
The company may well see this as a radical step that takes it away from its ‘storage’ heritage, however, we believe it is consistent with the company’s overall ethos of helping consumers solve issues that they have at home, and of helping to create great places and spaces in which to live.
This piece is taken from our Viewpoints service, which provides subscribers with analysis and opinion of retailers’ results as and when they are released. For more a free trial of this service, click below and complete your details.