Krause’s Sits Out Market Sag in Style
One way to judge how well Krause’s Sofa Factory is doing these days is to look at the employees’ bright blue T-shirts.
The shirts are emblazoned with the company’s all-time weeklong sales record--$3.5 million--which surpassed the old record by $400,000. The figure itself is not as significant as when it was set: the first week of 1992.
The week is usually pretty good in the furniture industry because many consumers delay making furniture purchases until after Christmas. But what makes it impressive is that the furniture industry has shouldered some of the heaviest blows of the recession.
One by one, the oldest and most respected names in Southern California furniture retailing have fallen or faltered. Barker Bros., RB Furniture and Ortho Mattress Inc. were driven into bankruptcy by a combination of weak sales and crippling debt incurred from leveragedbuyouts in the mid-1980s. W.J. Sloan, Angelus Furniture and Furnishings 2000 also filed for protection from creditors. Stylus Furniture Inc. slipped into Chapter 11 but has since emerged. Stor Furnishings International is being taken over by rival Ikea.
Krause’s Sofa Factory too has lost money for the past two years. But it turned a profit in its first quarter ended Dec. 31. Company projections point to a strong rebound this year.
The made-to-order sofa business founded by Kalman Krause in 1974 keeps humming alone. Bolstered by a change of ownership last spring and an infusion of $2 million, Krause’s has centralized its operations in a former Brea warehouse and is concentrating on what it hopes is a recession-resistant marketing formula.
The change came as the nation’s economy continued to weaken. Krause’s President Michael W. Gibbons summoned the company brass in April for a meeting to assess the market. Market studies showed the $650 average price that a middle-class family had been willing to pay for a sofa had fallen nearly 8%, to $600. At the same time, national demand for sofas had fallen off by 5% to 6%.
To cater to a changing market, Gibbons’ staff designed a new line of sofas with prices starting at $399. The sofas lacked a few features that some consumers might demand--for instance, they had solid backs, with built-in cushions that require less fabric--but are being offered at prices unseen from the company since the late 1970s.
“We began to shift the strategy to fit the need of consumers,” Gibbons said.
The company applied the same strategy to its leather sofas. Since its introduction of a leather sofa line in September, 1990, Krause’s has increased its West Coast market share of the upscale sofas to the point where it is now in second place, behind the Leather Factory.
Slowly, Gibbons is returning the company to profitability. The company had a net loss of $2.6 million for the fiscal year ended Sept. 30, 1990, on sales of $86 million. The 35-year-old Stanford MBA reduced the losses to $1 million in fiscal 1991 on sales of $79 million.
Now Gibbons expects company sales to rebound to as much as $100 million this year with its new “value pricing” strategy. The company had earnings of about $500,000 for the quarter ended Dec. 31, which is historically a strong period in the furniture industry. The record sales week, however, came the first week on the second quarter.
Gibbons is taking the strong performance lately as a sign of a turnaround. “We’ve seen some very positive signs . . . and we’re picking up market share,” he said. Same-store sales, through last week, were up 8% for the fiscal year.
Part of the turnabout is because of the disappearance of rival furniture sellers. “When competitors leave the marketplace, we want to fill the vacuum,” Gibbons said. It has also meant keeping prices low to stay competitive against liquidation sales.
Despite the misfortunes of its rivals, Krause’s has stuck by its formula: lowering prices without a corresponding loss of quality. The low-price sofas come off the same assembly line as expensive models, and there are no quality differences visible to the consumer. The concept of value pricing is the darling of the nation’s most successful retailers at the moment.
Value pricing “is not only a trend. It is a response to the frugality, conservatism and thriftiness of the public,” said Kurt Barnard, president of the Retail Marketing Report newsletter in New York. “Retail is doing poorly, but the real exception is those stores that offer a pleasing environment . . . under the umbrella of low price tags.”
Krause’s has some advantages over other furniture sellers. It operates its own factory, which gives it greater control over costs and quality of its made-to-order sofas. It can concentrate on a single type of product that frees the company from carrying much inventory.
The value of this became readily apparent during last month’s record sales week. Krause’s was betting that a modern family-room-style, low-back sofa with a bright blue-green fabric would be the top seller that week. The models were placed in the showrooms of each of the company’s 67 stores. Shown beside a bluish-gray model, however, the potential sales leader looked too green, Gibbons said. Customers shunned it because they were afraid it might not match their room decor; sales of the model bombed.
Because it had only made floor models, the company was not stuck with an abundance of unsold stock. “At the most, we have 67” showroom models, Gibbons said. “We can mark them down and sell them.”
The downside of the made-to-order business, of course, is that customers have to wait four to six weeks while their sofas are being made. But because furniture is so bulky, most customers want their purchases delivered anyway.
The made-to-order concept popularized by Krause’s has raised eyebrows among followers of the retail industry.
Ivan S. Cutler, retail editor for Furniture/Today, a weekly trade publication of the furniture industry based in High Point, N.C., said he is impressed at how Krause’s has been able to stand out from other companies by manufacturing its own products.
Also, he said, Krause’s is notable in its policy of emphasizing product value, rather than resorting to rampant discounting. “I believe one of the problems with furniture retailers is that instead of differentiating themselves, they are driven by discounts,” Cutler said.
Also, Krause’s has chosen to specialize in upholstered goods, rather than presenting a wide range of furniture. As a “category killer,” as the company likes to refer to itself, Krause’s taps into the large upholstery market, which makes up as much as half of all furniture sales. About 15% of Krause’s production, in dollar volume, is in leather sofas. Gibbons said he expects that figure to rise to 25% by year’s end.
Barbara Weathers, a spokeswoman for the National Home Furnishings Assn., a trade organization also in High Point, said the firm’s boom at a time when much of the furniture industry is deep in recession shows “they’re doing something right.”
And competitors pay Krause’s grudging respect. “Krause’s is doing pretty well. They’re smaller. They’re different,” said Ken Roe, vice president for Levitz Furniture West in Huntington Beach, which oversees Levitz stores in Arizona and California.
And the chain has certainly come a long way since Kalman and Bernelle Krause opened the first store beside a freeway in the San Diego County community of La Mesa. They went on to operate the chain for 12 years.
For Krause, now 64 and dabbling in various business ventures from his Woodland Hills home, the idea of creating a combined factory and sales operation was a natural. “I understood the manufacturing side, and I had been involved in retail most of my life,” said Krause, who formerly owned a furniture factory and a shoe store.
He decided to move the manufacturing operations and company headquarters north to Fountain Valley in 1975. He had repeatedly driven by those buildings on his way home, which then was in Santa Ana, before he decided to stop in one day.
“We must have drove by 100 times. I stopped and made a helluva deal,” he recalled. Krause’s later moved its factory to Brea.
Krause retired from the active running of the company in 1986, when he sold 80% of the company to a team led by Gibbons and Robert and Ayse Kenmore, who were partners in a consulting business. The sale brought in a raft of expansion-minded executives. They improved production methods and used a more corporate approach--stylish logos and using computers to handle everything from inventory to payroll.
Among them was Michael H. Solomon, who was president for 18 months. He eventually had differences with the owners and has since gone on to head the Stylus chain of eight stores, based in Corona.
“I think (it is) a decent concept if it can be executed properly,” Solomon said of Krause’s. “When I was there, the company was extremely successful.”
Gibbons decided to assume daily management of Krause’s in June, 1989, to hasten the chain’s growth and take control as the economy began to go sour.
When the Kenmores decided to retire to the Bay Area last year, nearly 62% of Krause’s was sold to a holding company that was formerly one of the nation’s largest franchisers of Nutri/System diet centers, KMC Enterprises Inc. in San Jose. The $2 million derived from the additional sale of company stock to KMC is being used to pay for expansion and for costs associated with opening the new Brea plant.
Gibbons said Krause’s tries to ease customer anxieties with a computerized scanner tracking system that follows the making of a sofa at every step through the plant. If a customer makes an inquiry about the status of his order, a sales representative at any of the showrooms can learn from the computer exactly where the sofa stands in the manufacturing process.
The system’s reliability is put to the test every day, as the company services stores as far away as Denver and Seattle from a single factory in Brea. Since moving in last year, the $20-million plant has been found to be so much more efficient than the five-building complex it replaced in Fountain Valley that the company saves about $20 in manufacturing costs per sofa, Gibbons said.
All things considered, Gibbons does not complain too much about the recession.
“Recession gets you to focus on inefficiencies and where you’re making errors,” he said.
California’s Top Furniture Retailers Of the top 100 furniture retailers in the country in 1990, 11 are based in California. Of those, Krause’s Sofa Factory--ranked 28th nationally--emerged as the fifth largest in the state. However, nearly 40% of those California companies have filed for bankruptcy. How each company is ranked nationally by size and how they have fared in annual sales, in millions of dollars:
KRAUSE’S SOFA FACTORY, Brea
U.S. rank: 28th
Sales in No. of Year Millions Stores 1990 $ 90.0 65 1989 $103.0 60 1988 $100.0 59 1987 $ 90.0 57 1986 $ 68.0 56 1985 $ 67.0 56
BREUNNER’S FURNITURE, San Ramon
U.S. rank: 17th
Sales in No. of Year Millions Stores 1990 $145.0 20 1989 $152.5 19 1988 $197.0 17 1987* $205.0 17 1986* $216.0 17 1985* $216.0 17
*Includes sales from rental stores
RB FURNITURE, Irvine
U.S. rank: 20th Filed for bankruptcy nov. 15, 1991
Sales in No. of Year Millions Stores 1990 $110.0 50 1989 $100.0 50 1988 $101.3 50 1987 $ 97.7 50 1986 $105.0 53 1985 $110.0 66
MC MAHAN FURNITURE, Carlsbad
U.S. rank: 23th
Sales in No. of Year Millions Stores 1990 $103.2 88 1989 $ 93.2 89 1988 $ 93.1 89 1987 $ 90.0 89 1986 $ 94.0 89 1985 $ 84.5 85
MC MAHAN’S, Santa Monica
U.S. rank: 24th
Sales in No. of Year Millions Stores 1990 $ 97.7 52 1989 $100.5 53 1988 $103.0 56 1987 $ 99.0 61 1986 $ 90.0 61 1985 $ 80.0 50
STOR, City of Industry
U.S. rank: 34
Sales in No. of Year Millions Stores 1990 $ 72.2 3 1989 $ 59.8 3 1988 $ 60.0 2 1987* $ 10.0 1
* First year in national rankings
BARKER BROS., Pasadena
U.S. rank: 52
Filed for bankruptcy Nov. 4, 1991
Sales in No. of Year Millions Stores 1990 $ 54.0 11 1989 $ 52.2 11 1988 $ 60.0 12 1987 $ 55.0 12
FURNISHINGS 2000, San Diego
U.S. rank: 53
Filed for bankruptcy Sept. 14, 1990
Sales in No. of Year Millions Stores 1990* $ 53.9 0 1989 $ 86.8 41 1988 $126.1 40 1987 $ 92.2 31 1986 $ 81.8 24 1985 $110.9 23
* Figures through July 30
Called Cousins Home Furnishings)
ORTHO MATTRESS, Rancho Dominguez
U.S. rank: 57
Filed for bankruptcy Dec. 4, 1991
Sales in No. of Year Millions Stores 1990 $ 52.0 91 1989 $ 52.0 91 1988 $ 50.0 90 1987 $ 47.7 84 1986 $ 42.0 79 1985 $ 40.0 79
ARNOLD’S INTERIORS, San Diego
U.S. rank: 70
Sales in No. of Year Millions Stores 1990 $ 40.7 4 1989 $ 40.0 4 1988 $ 32.7 4 1987 $ 28.6 4 1986 $ 26.1 4 1985 $ 23.2 4
THE LEATHER FACTORY, Encino
U.S. rank: 91
Sales in No. of Year Millions Stores 1990 $ 32.0 22 1989* $ 30.0 20
* First year in national rankings
Source: Furniture/Toda y
Researched by DALLAS M. JACKSON / Los Angeles Times
