Herman Miller turning back to its retail roots for growth

CITY MODERN Presented By New York And Dwell Magazines Host Meet The Architects And City Modern Opening Reception
NEW YORK, NY - SEPTEMBER 27: General view during the opening reception of Meet The Architects and City Modern presented by New York and Dwell Magazines at Design Within Reach on September 27, 2013 in New York City. (Photo by Michael Loccisano/Getty Images for New York Magazine)
Photo by Michael Loccisano—Getty Images

Herman Miller, the maker of classic midcentury designs, is on its way to becoming a “premier lifestyle brand.” Again.

The Zeeland, Mich., -based company purchased modern furniture-retailer Design Within Reach (DWR) for $154 million last week. The investment gives Herman Miller (MLHR) an 84% interest in DWR and access to a ready-made consumer retail chain, which is already the largest seller of Herman Miller furniture.

“We’re benefiting on the business side both by adding the revenue immediately as well as adding the capabilities and the platform to grow a consumer business overall, and to do that quickly,” said Ben Watson, Herman Miller’s executive creative director. “We see ourselves as making a journey almost back to our beginning.”

Herman Miller is known today, and for the past nearly 20 years, as an office-outfitting business. The company created the first cubicle in 1964 and still provisions offices from Madison Avenue to Silicon Valley. Odds are you’re sitting in one of Herman Miller’s high-tech Aeron chairs right now.

However, 109 years ago when Herman Miller got started it was better known for bed frames and side chairs.

Under the tutelage of legendary designer George Nelson in the 1940s, the company became famous for its host of modern, midcentury designs: Charles and Ray Eames’ molded chairs, Alexander Girard textiles, Nelson’s “storageall” and bubble lamps, and Isamu Noguci’s precariously balanced coffee table. The list reads like a run down of a Mad Men set.

Even as many retailers lament sluggish sales, Herman Miller is betting big that returning to its retail roots is a key pillar for its future growth.

Herman Miller faced steep drop-offs in revenue in 2009 and 2010 as businesses put spending on office spaces on hold. The office furniture industry faces jagged peaks and valleys in demand, unlike the softer curves of retail purchasing patterns, said Watson. Having a retail arm will help smooth out the company’s exposure to recessionary dips and gains.

“We see this as a way to find higher margin business that is less impacted by economic cycles,” said Watson. “And an industry that has a nice growth trajectory.”

While DWR’s $218 million sales last year are a fraction of Herman Miller’s $1.9 billion revenues in fiscal 2014, the retailer’s gross margins are 7-8 points higher. DWR will help provide “the margin and profitability outlook to continue to significantly improve our operating margins,” said Watson.

Add in expected cost savings from operation streamlining, and cross-selling opportunities between DWR and Herman Miller’s contract clients, and the purchase should boost overall gross margins, which are already a healthy 33.5%.

After the DWR purchase, Herman Miller’s retail sales account for 15% of total revenues, and the company expects that share to grow even as total revenue expands: a possible boon for the company and shareholders.

“Overall, demand on the consumer side is growing significantly more than it is on the contract furnishing side,” said Watson. “Fifteen is a starting point, and we’ll grow from there.”

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