Williams-Sonoma is a multi-channel retailer of lifestyle products, focused primarily on the home furnishing and accessories. Williams-Sonoma markets its products through multiple sales platforms such as retail stores, catalogs, and internet. Multiple retail channels increases proximity with customers, which in turn, would lead to top line growth. However, the US home furnishings store industry is fragmented with 50 largest companies comprising 70% of the industry sales.The company primarily competes with players such as Bed Bath & Beyond, The Home Depot, and Linens ‘n Things. Increasing competition could affect Williams-Sonoma’s margins and market share.

Strengths

Multiple sales platform
Williams-Sonoma markets its products through multiple sale platforms such as retail stores, catalogs and internet. As of January 2008, the company operated 600 retail stores in 44 US states, Washington, D.C, and Canada. This includes 256 Williams-Sonoma, 198 Pottery Barn, 94 Pottery Barn Kids, 27 West Elm, nine Williams-Sonoma Home and 16 outlet stores. An extensive store network helps it cater to a varied consumer needs and segments and thus create customer loyalty.
Williams-Sonoma also operates in the DTC channel through web portals and catalogs. Williams-Sonoma sells its products from various merchandise concepts through six e-commerce websites.These include williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com, and wshome.com.

The internet continued to be the fastest growing shopping channel, with revenues increasing 19% to $1,103.8 million in FY2008. Online sales, while offering that extra convenience to customers, also improve a company’s margins by cutting down its operating costs. Williams-Sonoma currently operates seven mail-order catalogs.These cater merchandise concepts including Williams-Sonoma, Pottery Barn, Pottery Barn, Kids, Pottery Barn, Bed and Bath, PBteen, West Elm and Williams-Sonoma Home. These websites and catalogs create awareness about its products amongst customers. Multiple retail channels enable the company to enhance its reach, cater to a wider customer base and meet their diverse needs efficiently.

Strong portfolio of brands
Williams-Sonoma’s strong brand portfolio caters to different niche of the home furnishing and accessories industries. The company’s core brands, Williams-Sonoma, Pottery Barn and Pottery Barn Kids, cater to the upper-middle-class and higher-end consumers.

These brands offer a slew of products for the diverse needs of customers.Williams-Sonoma focuses on kitchen-related cookware and other products including pots, pans, cookware, knives, storage containers and small electrical appliances.Williams-Sonoma stores also carry an assortment of table linens, flatware and glassware. These stores also offer private label products including various ‘ingredients’ like oils and sauces. While Pottery Barn caters to the casual home furnishings and table accessories needs of the customers.

Pottery Barn stores sell oversized, stuffed chairs, candles, mirrors, frames, pillows, blankets, rugs and window treatments. Pottery Barn Kids is an extension of the Pottery Barn concept and retails children’s furnishing and accessories. Pottery Barn Kids also offer the option of customization of products. These brands help the company cater to different requirements of its core customers.
Williams-Sonoma’s emerging brands, PBteen, West Elm, and Williams-Sonoma Home, cater to separate customer base. PBteen targets teenagers with its bright colored, sport themed, customized and other theme-based lifestyle products. West Elm is different from the company’s rest of the brands. West Elm’s products are more simple and modern than what is usually found in a Pottery Barn store. The merchandise is priced at ‘mass market’ points. Williams-Sonoma Home targets high-end customers with its more formal furniture and home decor products.The company’s strong portfolio of brands enables it to cater to the diverse needs of customers. Such a portfolio, focused on various demographic segments and varied customer needs, provides a competitive advantage.

Strong infrastructure
Williams-Sonoma’s retail and DTC operations are well supported by its distribution centers located in the US. As of February 2008, the company’s distribution centers include: Olive Branch, Mississippi, occupying a floor-space of 3,275,000 square-feet; Memphis, Tennessee , occupying a floor-space of 1,523,000 square-feet; City of Industry, California , occupying a floor-space of 1,180,000 square-feet; Cranbury, New Jersey, occupying a floor-space of 781,000 square-feet; and South Brunswick, New Jersey , occupying a floor-space of 418,000 square-feet; Williams-Sonoma also forms alliances with third parties for its offsite distribution center requirements. Strong distribution and logistics ensure timely replenishment and delivery of stock.
The company further strengthened its infrastructure to support the growth of its core and emerging brands in 2008. In supply chain operations, the company witnessed good results by in- sourcing east coast operations in FY2007. It improved the delivery experience of customers and reduced furniture return rates. Further, in FY2008, the company in-sourced its west coast furniture hub operations to improve its process.

In addition, in FY2008, the company implemented a new retail inventory management system in the Pottery Barn, West Elm, and Williams-Sonoma Home brands. This system allows the company to optimize the flow of inventory and improve the in-stock position in retail stores. Such initiatives would ensure the long term sustainability of the company. Strong support infrastructure ensures timely delivery of products and indicates efficient inventory management.

Weaknesses

Declining profitability
The profitability of the company has been declining over the past three years. Though the revenues of the company grew at a modest rate over the past three years, the company has witnessed declining profitability from 2006 onwards. The company’s operating profit and net profit declined from $345.1 million and $214.9 million in 2006 to an operating profit and a net profit of $313.4 million and $195.8 million in 2008. In addition, the company’s operating cash flows declined from $348.4 in 2006 to $245.4 in 2008.

The company’s operating profit margin and net profit margin declined to 7.9% and 4.9% in the FY2008 from 9.7% and 6.1% in 2006, respectively. Decline in profitability, operating cash flows and margins could hamper expansion plans which could erode the investor confidence in the company.

Law suit
The company faced copyright infringement suit in 2008. In June 2008, Ms. Weinrib, a New York designer sued Williams-Sonoma for copyright infringement claiming the retailer is selling carpets that are “virtually indistinguishable” from rugs featuring designs she has copyrighted.

The suit, which was filed in US District Court in Manhattan, claims the Moorish Tile Rug and Taksimi Tile Rug sold by Williams-Sonoma through its catalog and website ‘knowingly and willfully copied’ two of her copyrighted Brooke Carpet Design rugs. The suit also claims that the defendants Pottery Barn and West Elm which are owned by Williams-Sonoma, have been able to pass off and sell their respective carpets at a cheaper price bearing reproductions of copyrighted designs without permission or authorization of the plaintiff.

It also alleges the defendants had access to Weinrib’s copyrighted Brooke Carpet Design rugs prior to creation of their copies. The suit argues that unauthorized sale of carpets that are ‘strikingly similar’ to those designed by Weinrib have caused and will continue to cause irreparable injury to plaintiff unless enjoined by this court.

Ms. Weinrib has asked the court to stop Williams-Sonoma’s businesses from directly or indirectly infringing on her copyrights and is seeking a halt to the sale and promotion and a recall of any offending products. She is also seeking actual damages to be determined at trial plus all profits, gains and advantages derived by copyright infringement. Such incidents not only affect the company’s business but also damage its brand image and consumer loyalty.

Opportunities
Brand revitalization strategy
Williams-Sonoma is working towards restoring its brand after the dismal performance of its largest brand, Pottery Barn, in 2007. For this purpose, the company has adopted a five pronged strategy. The company intends to offer innovative, unique products to its core customers. It not only seeks to bring differentiated products in the market but also narrow down the time lag between conceptualization and commercialization. This would allow the company to gain the first mover’s advantages of greater brand recognition and market share by arriving ahead of the competition and capitalizing on the changing trends. Williams-Sonoma is also improving its marketing and visual merchandising for a more exciting shopping experience. Williams-Sonoma intends to ensure the ‘right balance of quality and price’, and is testing new shipping charges to attain the same. The company is stressing on value to attain competitive advantage. It is reworking on its product display and presentation in its mid-sized store units. This includes remixing the assortment, re-allocating floor space among categories, and improving in-store merchandising. The company is also testing new concepts in its stores such as the Outdoor Book and the Bed + Bath stores. These initiatives will not only revive the company’s brand equity in the market but also help acquire new customers, enhance its market position, and generate incremental revenues.
Amongst all the initiative, Williams-Sonoma is primarily focusing on pricing. The company believes that pricing is the key factor that would help it attain competitive advantage. In line with this strategy, the company reduced the shipping rates of Pottery Barn products. Williams-Sonoma adjusted the shipping rates in its 2008 spring catalog. Reducing shipping rates could lend towards ‘Pottery Barn’ brand revitalization. A brand revitalization strategy would enable William Sonoma acquire new customers and also translate to top-line growth.

Expanding store base
Williams-Sonoma intends to increase retail leased square footage by approximately 8% in fiscal 2009. This involves adding 29 net new stores, including 31 new stores such as 12 West Elm, 7 Pottery Barn, 7 Williams-Sonoma, 2 Pottery Barn Kids, 1 Williams-Sonoma Home and 2 Outlet. Besides adding new stores, the company also plans to expand or remodel additional 20 stores. This includes 11 Williams-Sonoma, 7 Pottery Barn and 2 Pottery Barn Kids. The average leased square footage for new and expanded stores in FY2009 will be approximately 17,000 leased square feet for outlet, 16,400 leased square feet for Pottery Barn, 15,300 leased square feet for West Elm, 13,000 leased square feet for Williams-Sonoma Home, 9,600 leased square feet for Pottery Barn Kids and 7,100 leased square feet for Williams-Sonoma. The expanding store base would ensure close proximity with customers and create brand awareness. In addition, stores help in building customer relationship and loyalty owing to personal touch, shopping ambience, and tangible customer experience.

Increasing online sales
Online shopping has steadily grown in popularity in the US. The online retail channel generated revenues of $114.2 billion in 2006, growth at a CAGR of 26.4% during 2004-2006. In 2006 alone, the US online retail channel grew by 32.8%. Given the low operational costs, the online sales channel
has become a lucrative option to many retailers. The US online retail sales are expected to register a similar growth rate over the period 2006-2011 to reach a value of $386 billion by 2011.
In keeping with this trend, Williams-Sonoma is putting high emphasis on direct marketing in order to enhance its customer reach and optimize circulation with customer-specific versioning. In FY2008, the company improved its online sales operations by implementing new functionality in DTC marketing systems, which enabled company to reduce catalog circulation and improve the relevancy of its on-line marketing. In e-commerce, the company launched its first “next generation” website in the Williams-Sonoma brand. Further, in 2008, the company announced plans to implement similar features and functionality to other brands. Through these initiatives, Williams-Sonoma plans to accelerate its e-commerce sales. Online sales while offering that extra convenience to customers, also improve a company’s margins by cutting down its operating costs.

Threats

Intense competition
The US home furnishings store industry is fragmented with 50 largest companies comprising 70% of the industry sales.The US home furnishings industry includes 22,000 stores with combined annual revenues of over $23 billion. Williams-Sonoma faces intense competition from local, regional and national retailers. The company faces competition from various types of retail stores including department stores, specialty stores, mail-order retailers, discount and mass merchandize stores, and national chains. Most of Williams-Sonoma’s brands compete directly with traditional furniture stores.The company primarily competes with players such as Bed Bath & Beyond, The Home Depot, and Linens ‘n Things.These companies are undertaking intense promotional campaigns to increase their brand image and visibility in the market.
Williams-Sonoma’s toughest competitors are small players such as Mom & Pop shops and Crate and Barrel. Players such as Mom & Pop shops and Crate and Barrel focus on a particular niche in the home furnishing industry and thus establish a strong customer relationship and loyalty. Intense competition could restrict market share growth and lower the company’s margins as it undergoes pricing pressures. In addition, there is an increasing competitive pressure in the mass-market home furnishings market mainly due to the entry of major departmental stores such as Wal-Mart, Kmart, Target and JC Penny. Increasing competition could affect Williams-Sonoma’s margins and market share.

Slowdown in US housing market
The US housing market recorded a slowdown in 2005. Housing prices have moderated in several markets, but an expected market-wide meltdown did not happen. The US housing market declined further in 2007. Declining prices coupled with an increase in defaulters has led to a decline in home loan lenders. This caused a slump in the US housing market in 2007. Second-hand house sales declined by 2.6% to reach around six million in April 2007, as compared to April 2006.The reduction

was considerably lower than the forecasted figure of 6.2 million. In the north-east region of the US, the fall in the sales of second-hand house was around 8.8%.
The prices for an average house were $220,900 in the US in April 2007, as compared to $222,600 in April 2006. The backlog of the unsold homes in the US was 4.2 million in May 2007. This market scenario could result in further decline in the US housing market and is expected to continue even in 2008. A weak housing market is likely to reduce demand for home improvement products. As a result, revenues of retailers such as Williams-Sonoma are likely to come under pressure.

Low consumer confidence
Consumer Confidence in the US declined in September 2007, owing to low home values, weakening labor market and harder borrowing standards. Consumers spending on home and holiday furnishings declined from $115 (per customer) in December 2006 to $94 (per customer) in December 2007, owing to slumping home sales, tighter credit standards and rising fuel prices. It has been estimated that consumer spending on furniture and bedding grew by approximately 1.5% in 2007, worst since 2001. According to the Conference Board, the index fell to 99.8 in September 2007 from an adjusted 105.6 in August 2007.

The consumers’ appraisal of the present-day conditions declined further in September 2007. Consumers stating that the conditions were good declined from 26.2% in August 2007 to 25.7% in September 2007, and those saying that the conditions were bad increased from 16.3% to 17.9%, during the same period.

Consumers with a negative outlook towards job market increased to 22.1% in September 2007 from 19.7% in August 2007, and those with a positive outlook decreased to 25.7% from 27.5% during the same period. The expectations for the next six months declined with consumers anticipating worse business conditions rising to 11.8% from 10.2%. A decline in consumer confidence could adversely affect the company’s business.