Williams Sonoma Internet case study written response questions

Williams-Sonoma continues with its current strategies and objectives in five years, it will be facing declining sales, declining profits and may be evaluating the merits of continuing some of these brands. Basically, the company's financials have been strong and it has responded with a variety of new brands and brand extensions. However, the company's business is cyclical, and correlated with the health of the economy and in particular the housing market. Both the economy and housing market are doing well in 2003, and will continue to do well for about 3 more years. By 2008, however, the housing market will be dead, and the economy will be tanking. This will have a strongly negative effect on Williams-Sonoma. The company's current strategy is to build its share in furnishings by filling in gaps in the market, using these many brands to achieve that objective. The problem inherent in this is that all none of these new brands represents significant diversification away from the core industry. Worse, as an aspirational brand, Williams-Sonoma is going to benefit from a strong economy where customers are seeking to "trade up," but when the economy tanks aspirational brands often take a hit as consumers are forced to "trade down" or defer purchases altogether. Williams-Sonoma is not as successful at targeting the truly recession-proof market that exists at the very high end of the furniture market.

Another point of concern strategically is that Williams-Sonoma is starting new brands for every tight demographic, instead of extending the reach of its core brands to engage more consumers. This is going to result, unfortunately, in some of the new brands not receiving the attention and quality management they need to thrive -- resources at the company are going to be spread thin with these rapid brand introductions. The company is also going to be more difficult to manage -- and needlessly so. A streamlining of the organizational structure is likely going to be necessary when the recession hits.

2. If I was the CEO of Williams-Sonoma is 2003, I would save money for a rainy day. Basically, I would avoid taking on debt to fuel expansion, only using equity, in order to preserve a healthy balance sheet that can survive recession. Paying down long-term debt during this robust part of the business cycle is recommended here. It is worth keeping in mind, however, that the company needs to keep some of its free cash flow to engage in share buybacks during the next down cycle to prop up the share price, so not all of the free cash flow should be put into debt repayment, in case that down cycle comes soon.

I would streamline the organizational structure a bit by finding ways to expand the target markets for the existing brands, rather than introducing new brands for every sliver of target market. An example of the thing I would avoid is having a brand for teenagers -- teens are not big consumers of furniture so why do they need their own brand? Pottery Barn targets the parents, so having three brands to target the same spenders is a bit unwieldy. A more streamlined organizational structure will allow for more efficient use of scarce resources.

In addition, Williams-Sonoma is focused almost exclusively on the U.S. market. I can understand not wanting to stray too far from what it does best in home furnishings, but some diversification would be nice. Canada is a good market. There is no learning curve to speak of, and both the banking system and housing markets are more robust than in the U.S. Mexico is a massive market and if the company has enough Hispanic talent in its managerial pipeline, it can begin to tap the 20-30 million middle class Mexicans who can afford Williams-Sonoma brands. I would make these two countries a priority, but also begin to look at some of the high growth markets as well to see which ones should be the source of focus.

3. Crate & Barrel is conceptually similar to W-S, but is more focused on the online space, which is likely to be a high-growth space in the coming years. Restoration Hardware is slightly differentiated with its style, rather than its route to market. Pier 1 is a little more downmarket, but better diversified geographically. Bombay is positioned similarly to W-S, and is focused on accessories. Door Store also focuses on the aspirational market. Rolling Pin is mostly online. The most effective of these strategies is probably Pier 1, mostly for its diversification. Otherwise, Crate & Barrel's online emphasis is quite progressive for the industry. Restoration's sense of style could be cyclical, so that is a less desirable strategy in the long run -- its earnings seem volatile which attests to its dependence on the fashion cycle. The best strategy among these competitors is probably Crate & Barrel, followed by Pier 1. They all have high cyclical exposure, but Crate & Barrel sees the future as being online, and Pier 1 understands the need to diversify outside of the U.S. market.