How CEO Gary Friedman Made RH a Luxury Brand

In early June, much of the country was beginning to emerge from its pandemic-induced hibernation—cars creeping back on to roads, restaurants moving tables outside and, of course, stores opening their doors. But while most retailers were shifting their focus to reconfiguring their existing stores to the new realities of the Covid-19 era, RH—previously known as Restoration Hardware—took a different approach. In an annual letter that Gary Friedman, RH’s CEO, wrote to shareholders, he laid out the brand’s plans not just for the next year, but for its next chapter: opening new stores (or galleries, as RH calls them), expanding into the travel sphere (with RH-branded guest houses and a yacht), and entering the residential real estate market with RH Residences. It was a bold blueprint at a time when the industry has seen five years’ worth of ecommerce growth in mere months. “We invest with a long-term view, not a short-term,” Friedman, who spoke at Brandweek on Sept. 17, tells Adweek. “There's going to be all kinds of distractions that happen along the way in our lives. Great brands have great lives and are built because of great vision.” If he pulls off the changes he’s planned, it wouldn’t be the first time. Even in the prepandemic era, RH managed to defy the odds. It expanded its brick-and-mortar footprint while other stores shuttered; as retailers stopped printing catalogs, RH not only continued producing its thick tome, but eschewed the digital properties retailers migrated to instead. (Case in point: RH doesn’t even have an Instagram account.) In fact, RH has done what seems impossible in today’s retail climate: maintain success, without the embrace of massive promotions or a digital-first model, while undergoing a near-complete reinvention as a luxury brand, guided by Friedman’s vision. Since going public in 2012, RH's stock price has multiplied more than 15 times the original offering. Most recently, its fiscal second-quarter earnings beat expectations, with revenue rising 0.4%, despite the ongoing pandemic, sending the stock price climbing again. “This is the payoff of a really long-term commitment to innovation,” says Melanie McShane, senior strategy director at Siegel+Gale. “They've made it very clear that they want to get into the luxury business.” Restoration Hardware's quaint branding circa 2001 (inset) and RH's New York City flagship store in 2018. How Restoration Hardware became RH Friedman’s move to Restoration Hardware, nearly 20 years ago, came out of “heartbreak,” as he puts it. He spent 14 years at Williams-Sonoma, working his way up to president of the company. He was told for years that he was next in line for the chief executive role, but when he was passed over for the job, Friedman decided to make a change—despite the fact that he had around $50 million in unvested stock options at Williams-Sonoma. Friedman was familiar with RH (then known as Restoration Hardware), as Williams-Sonoma had contemplated a purchase of the brand a few years prior—an acquisition that Friedman had championed and would have led had it gone through. He reached out to Steve Gordon, RH’s co-founder and then CEO, about coming on board. The business was in dire need of a turnaround. Financials were in sore shape, with the stock price slumping—at one point to just 50 cents a share. An influx of capital was necessary if the brand was to survive, let alone grow. The 60,000-square-foot RH Marin, the Gallery at the Village, opened in California in July and features a rooftop "park." “It really wasn't a relevant business or brand at all,” admits Friedman. “The company was built on nostalgic discovery items, things that people don't really go shopping for—things that you might trip over.” What Restoration Hardware did have was the “skeleton of an infrastructure,” as Friedman puts it. There were 106 stores, designed by an architect, as well as distribution centers on the East and West coasts. It wasn’t the product or the brand name that drew him to the company, but rather seeing a hole to fill and feeling that RH had the structure in place to build upon. “There was a big void at the high end of the market, and I thought that's where the most opportunity was,” he explains. “People who have more money, they spend exponentially more on their homes, and the homes get bigger. The furniture they're buying is higher quality, and they're buying more of it.” Becoming a luxury brand But before RH could leap to a more luxe segment, the first decade of Friedman’s tenure, he says, was working RH out of the place it had been in when he arrived. Avoiding bankruptcy was his first priority, after which he turned his attention to profitability. Both those goals were achieved through changing the brand’s positioning and building a product assortment that would last—more foundational pieces, fewer knickknacks. “He moved Restoration Hardware from a product-driven brand, what it was 20 years ago, to a lifestyle brand,” says Thomaï Serdari, a professor at NYU’s Stern School of Business. “That's not easily achieved.” Even more difficult, notes Steve Dennis, founder and president of SageBerry Consulting, is catapulting a brand into a higher-end category than it previously occupied. “He just really leaned into a very specific set of customers and went deep into what it takes to win a disproportionate share of their spending,” says Dennis. Friedman’s challenge wasn’t just to identify RH’s target consumer but also to convince them to accept his interpretation of the brand and set aside what they previously thought about it. To facilitate this shift, the company rebranded in 2012, now simply going by the acronym RH. “To change people's perception of who you are, you have to do such extraordinarily great work that you create a forced reconsideration of who you are,” says Friedman. “Nobody's going to notice if you make incremental changes.” The gallery as an aspirational hub To date, RH’s biggest bets have been in its approach to brick-and-mortar. Today, the company has expanded into new spaces, beyond the 106 stores it initially operated when Friedman joined. It’s focused on freestanding spaces, allowing for more natural light. Inside some of its flagship stores, like those in New York, Chicago and West Palm Beach, Fla., RH operates high-end restaurants or coffee bars. A chic crowd dines under chandeliers at RH's rooftop restaurant in New York City. The San Francisco gallery came first in 2010, but the Chicago location was perhaps the true start of the concept in 2015. A massive space, at 70,000 square feet, it’s housed in what used to be the Three Arts Club, a residence for young women studying the arts, built in 1914. The building had an interior courtyard that the RH team covered with a glass roof—for year-round use—and installed a restaurant. Skepticism, Friedman recalls, abounded. (Dennis admits that nearly a decade ago, when he first heard Friedman explain the gallery concept, he thought it was “pretty crazy.”) The Chicago space in particular posed challenges: Because the gallery wasn’t situated in or near Chicago’s main shopping districts, instead tucked on a quiet corner in the residential Gold Coast neighborhood, the location didn’t have the benefit of natural retail foot traffic. But Friedman felt the unique space and the surrounding area (which, yes, is residential, but is also one of the city’s wealthiest) reflected the sort of image he wanted to create. “The first restaurateur we partnered with said, ‘No one’s going to come to a furniture store to eat,’” Friedman says. “Yet, from the first day, we had a line around the block.” It helps that the restaurant in Chicago, named the 3 Arts Club, stands on its own as a high-end eatery. It’s a destination—and with that, so are the galleries themselves. Each one is designed for the space it occupies, and is meant to showcase the RH brand as much as it is a place to sell product. Actress Uma Thurman poses for a photo with Friedman at the May 2014 opening of RH Greenwich in Connecticut. But the gallery’s foundation, Friedman says, is the product assortment. RH’s galleries are gargantuan spaces, occupying 60,000 square feet or more. Instead of taking an assortment meant for a smaller store and multiplying it to fill a larger space, RH tailors its selection for each site. “It really aspires to sell a lifestyle to people who are driven to aspire to that,” says Pamela Danziger, luxury market expert and owner of Unity Marketing. “That's what the galleries are all about—providing this vision, so even if you can't afford to buy a $10,000 sofa, you can still go to the gallery and participate in that with a $15 cocktail in their restaurant.” Making RH an exclusive club RH devotees can also buy into that lifestyle and luxury positioning by way of RH’s membership model, where consumers pay an annual fee and receive automatic discounts on RH products, as well as access to interior design and concierge services. At its core, Friedman says, the membership model allows RH to mark down merchandise without running storewide sales or deep discounts. In avoiding the red lines, RH has separated itself from the vast majority of American retailers: At the height of the financial crisis, with consumer spending seeing its steepest declines since World War II, there were few retailers who didn’t run promotions. And in doing so, they set consumers’ expectations accordingly. “Once you become promotional,” says Friedman, “it’s really hard to get off that drug.” RH, instead, has camouflaged its promotions, touting membership to an exclusive club with benefits. It’s a similar strategy, says Milton Pedraza, CEO of the Luxury Institute, to that of high-end fashion brands. “The ones that are true luxury do not do discounts; they do value adds,” he says. “With Rolex, you might get a cleaning or free maintenance every year. You're not going to get discounts.” Focus on the future If Phase 1 of Friedman’s tenure at RH was shoring up the brand’s financial future, and Phase 2 was moving it into a higher-end category and cementing its status as a major home retailer, then perhaps Phase 3 is something akin to domination of the luxury shelter category. RH’s plans for the next several years will expand its reach, “moving the brand beyond just curating and selling product to conceptualizing and selling spaces,” says Friedman. In the travel sphere, RH Guesthouses are planned in cities like New York and Aspen, Colo., as well as full-blown experiences, like RH Yountville, which brings together food, art and lodging, and RH3, an RH-branded yacht, is available for charter in the Caribbean and Mediterranean. RH Residences are turnkey homes and condominiums designed in the style visitors have come to expect from the galleries. RH3, an RH-branded yacht, is available for charter in the Caribbean and Mediterranean. The galleries will play a major role in the future too: RH has its eye on international expansion, and plans to open a gallery in “every major market.” And its interior design services will grow in importance—particularly because that part of the business has already expanded overseas. “Hermès, Chanel, Louis Vuitton, Gucci, Cartier, Tiffany and the rest of the finest luxury brands in the world were all born on the top of the luxury mountain,” wrote Friedman in this year’s shareholders letter. “Never has a brand started near the base and made the climb to the peak. We believe RH can be the first to make the climb.”

Brandweek

How CEO Gary Friedman Built Restoration Hardware Into RH, a Luxury-Brand Juggernaut

A transformation 20 years in the making

Diana Pearl

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Diana Pearl