Sunday Strategist: Restoration Hardware’s Lavish Palaces are Working

(Bloomberg Businessweek) -- Restoration Hardware—now known as just RH—has a sanguine strategy for the bricks-and-mortar retail apocalypse: more bricks. Lots of them. 

The company has been feverishly building lavish palaces of décor in a contrarian bid to boost business and bigfoot the digital darlings putting couches, lamps and carpets through the Warby Parker playbook. These stores are like Super Walmart for people inclined to Downton Abbey cosplay. If you live in Tulsa, Oklahoma and need a $2,000 crib upholstered to look like a 19th-century wing-backed chair, RH has you covered.

RH’s strategy is to inspire, to show the life unlived. First, it did this with phone-book-sized catalogues, or “source books” in company-speak. Now, it’s doing it with the massive stores, or “galleries.” At the 90,000 square-foot RH in Manhattan’s Meatpacking District, there’s a wine terrace, a “Barista Bar” and a rooftop restaurant “influenced by the great classical gardens of Europe.” While Macy’s has its antique wooden escalators, the RG staircase is framed by 120-hand-blown crystals, an art installation writ large. Come for the $14 kale Caesar salad, stay for the $6,300 bathtub. Next year, RH will start renting rooms like a hotel and it's considering renting the stores for weddings.

“Customers are inspired to consider purchasing a full collection of products to replicate the design aesthetic,” RH explains in its SEC filings. It appears plenty of people are doing just that. On Wednesday, the company unveiled a bullish set of books, besting by a wide margin analyst estimates for its recent quarter. RH reckons its sales this year will surge by 6 percent, while profit will quadruple. RH now has 85 galleries and another 18 or so in the works.

There’s some other strategic magic at play in the RH furniture estates: namely hanging on in an apparently dying business model. Bankruptcies and panicked pivots, it turns out, instantly free up a lot of market share and the spoils go to the stubborn holdouts. A game theorist expecting a bunch of zigs, can do well with a pronounced and well-timed zag. This is why Mercedes still makes a station-wagon, which other marques relegated to the scrapheap long ago. It's also why Urban Outfitters is all-in on vinyl records.

At RH, the hysteria of other retailers has led to some screaming real estate deals. The lavish new stores, in many cases, are subsidized by landlords and developers looking to prop up nearby tenants. A few years ago, when RH was first setting out on its building blitz, CEO Gary Friedman called it new math in an interview with Bloomberg Businessweek. "In many cases, we're building stores that are eight or 10 times bigger than our existing stores and paying very little more rent," he explained. "I think it's hard for people to wrap their heads around."

This week, five years on, they are just starting to.

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To contact the editor responsible for this story: Silvia Killingsworth at skillingswo2@bloomberg.net

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