Did you spend $129.99 to buy a portable record player this past Christmas? It's difficult to imagine how anybody—except for a prop assistant on a Merchant-Ivory film—might be interested in one. But for some reason, Restoration Hardware thought it would be a big seller. Oops. When I visited a Restoration Hardware in West Palm Beach, Fla., this week, the devices were stacked all over the floor.
On Dec. 31, the upscale home-furnishings company warned that profits for its fourth quarter—the one in which retailers are supposed to make up for the unprofitable first three quarters—would be 30 percent to 40 percent less than expected. Restoration Hardware's stock hovers near $3, it has only $2 million in cash, and it hasn't opened a new store in nearly a year.
These are tough times for many retailers but particularly tough times for Restoration Hardware, the zeitgeist-surfing chain that in 1999 seemed set to take the world by storm. David Brooks identified Restoration Hardware as the store of choice for the newly dominant upper-crust bourgeois bohemians—"The Bobos." (Brooks has a knack for identifying phenomena at the top of the market.)
It is tempting to see Restoration Hardware's travails as a metaphor for the woes of the New Economy Überclass. But the store's problems are more prosaic—more about boo-boos than Bobos. The chain has been hampered by poor merchandising, inefficient execution—it couldn't turn a profit even in the fat years of 1999 and 2000—and a fundamental strategic flaw. Specialty retailers must possess a certain narcissism. You have to believe—and convince investors to believe—that your passion, whether it is high-quality coffee, eco-friendly beauty products, or, in Restoration Hardware's case, $349 chrome-plated garbage cans, is shared by millions of consumers the world over. Howard Schultz of Starbucks and Anita Roddick of the Body Shop were vindicated in their obsessions. But Restoration founder Stephen Gordon's presumption that the masses are as interested as he is in high-priced precious accessories, expensive leather chairs, and faux-rotary phones, turned out to be off-base.
Restoration Hardware's story begins in 1979, when Gordon was renovating his (natch) Queen Anne Victorian house in Eureka, Calif., and had difficulty finding the right fixtures. Gordon opened the first Restoration Hardware store in his home in 1980 and started to expand in California, where retro aesthetics always seem to be in vogue.
The company went public in 1998, when it had 47 stores, and grew like crazy—let no city be without Chelsea sconces! The number of stores doubled within two years and peaked at 107 in the spring of 2001. Sales grew rapidly, but profits were elusive. Less than three years after the IPO, the company nearly flatlined. It rounded up some expensive financing and brought in Gary Friedman, the president of Williams-Sonoma, as its turnaround chief executive in March 2001. Gordon remained as chairman.
While the company stabilized—the diluted stock was as high as 13 last March—a true turnaround has not materialized. Part of the problem is flawed merchandising. Take the old-fashioned $99 black Gotham desk phone, which, we are told, was "a staple of communications in the '40s." People who are nostalgic for 1940s childhoods may be an excellent target market for arthritis medications but not necessarily for high-end household accessories. It's a safe bet that virtually every phone in a Restoration Hardware shopper's home is cordless.
Some of the items that seemed hip in the mid-1990s now just seem precious and overpriced. The Good Home Co.'s Lavender Laundry Fragrance comes in a fancy glass bottle and runs $18. The Carlyle sofa—the kind of furniture that decorates the lobby of the Harvard Club—goes for $3,895 at Restoration Hardware. Similar couches are far cheaper at Bloomingdale's or Pottery Barn or Crate & Barrel, all of which have proved more adept at shifting with consumer trends.
That failure to shift is part of the problem. Restoration Hardware trumpets its "classic and authentic American point of view." Positioning yourself that way is a Catch-22. By definition, that means you're not going to be rolling out new fabrics and styles every few months. And yet consumers are fickle. They get tired of sameness. Restoration Hardware might do better if it were less classic and less authentic.
Investors may have assumed that Restoration Hardware could easily mimic Starbucks, a West Coast retailer that turned a snobbish, high-end obsession into a profitable national craze. But Starbucks has the great fortune to sell a product to which many of its customers are addicted.
Restoration's need for growth—if you can't turn a profit with 90 stores, the thinking goes, you've got to get bigger—led it to expand into places that were bourgeois but not bohemian: Buford, Ga.; Metairie, La.; Grandville, Miss.; and Kansas City, Mo. It turns out that expensive soaps and towel bars aren't necessarily habit-forming. And it turns out that the natural market for Restoration Hardware may have been limited, like the audience for Bobo passions like art-house cinema or Afghan cuisine.