As is well documented, the transmission of COVID-19 to U.S. soil sent major shock waves throughout retail. Store closings, heightened unemployment and GDP decline together drove a recessionary economy, yet certain areas of retail performed unexpectedly well. One of these was the home goods market, stoked primarily by lockdowns and the perceived need to improve our domestic surroundings.

Two segments of this category were particularly successful, indeed presenting a form of disruption over and above the pandemic, while in its service. First, mass merchants such as Wal­mart and Target achieved high growth within the home goods industry by combining value, convenience and a swift response to the heightened demand for these products. Another segment was also successful in capturing industry demand: Selected retailers from higher-end home goods companies like Williams-Sonoma, West Elm, Pottery Barn, Restoration Hardware and Crate & Barrel to lower-end giant Wayfair all saw robust growth throughout the pandemic. Williams-Sonoma and similar competitors saw double-digit gross profit improvement in FY 2020 compared to 2019, as they continued to capture top-line growth in the pandemic and furthered strategic expansion. Unsurprisingly, online home goods giant Wayfair also saw surging revenue and high double-digit growth across its products as customers looked for convenience and competitive prices. Although operating at different ends of the market, these tranches of companies all shared one critical trait: Each identified how and where they could be leaders — whether on cost/convenience/breadth of assortment or experience/lifestyle/product differentiation — and consistently executed against this strategy.

Wayfair, which saw over $5 billion in net revenue growth 2019 to 2020, acquired a massive supplier base and robust supply chain to get customer products when they needed them. This allowed the mass retailer to compete with even bigger mass merchants for in-stock availability.

At the other end of the spectrum were retailers like Williams-Sonoma and Restoration Hardware (RH). Williams-Sonoma decisively marketed away from generic product, moving toward ideas that resonated with its core customers. Laura Alber, chief executive officer of Williams-Sonoma, said its “mission has been to improve people’s lives at home … not just what we sell, but how we sell things and the company we are.” This plays out in the organization of its online merchandising strategy into cross-category lifestyle events such as “Party Central” and “Hosting a BBQ?” rather than by product departments. Similarly, RH marketed its products by grouping complementary items together on the same floor and, in its larger galleries, expanding into home-adjacent services, such as rooftop restaurants, that resonate with lifestyle. Whether high end or mass specialty, these business cases continued to carve out their own unique value proposition by fulfilling specific consumer demands.

Left in their wake were home goods companies in the “messy middle”: These retailers failed to successfully “pick a lane,” both in relation to their core customers and their industry peers, and further failed to adapt their business strategy to changing market dynamics.

Two such companies are Sur La Table, which had been losing foot traffic for years despite a strong online presence, and Tuesday Morning, a struggling brick-and-mortar retailer that took in practically zero sales once lockdown measures were initiated. High-end kitchenware supplier Sur La Table promoted virtually the same products that were available on Amazon, minus the shipping speed and breadth of assortment. Off-price “treasure hunt” retailer Tuesday Morning ended up stockpiling an undifferentiated assortment of goods that failed to fulfill industry expectations. Neither company successfully aligned their services to core customers within the changing market, whether for lack of a specific pre-existing infrastructure or the tough necessary investments to fully pivot into a lane — and were thus destined to fail in the pandemic disruption.

Fast Followers

Many companies remaining in the messy middle can still pivot to a specific lane. Some big-box specialty retailers such as Big Lots and Bed Bath & Beyond shifted quickly to deliver against a price/value customer proposition, and have begun to see positive results. Columbus, Ohio-based off-price retailer Big Lots grew over 16% in 2020, primarily through massive gains in e-commerce sales. But it was not until 2019, competing with increased competition from Amazon, Target and Walmart, that Big Lots invested in its e-commerce business, specifically buy online, pick up in-store (BOPIS), to eventually turn a profit. After Bed Bath & Beyond saw overall revenue decreases of 2.6% in 2018 and 7% in 2019, the company pivoted to a new footprint rationalization and store brand innovation strategy. Bed Bath & Beyond has continued to operate in the low-cost channel, but at the same time plans to launch 10 new store brand lines through 2021 and 2022. This targeted private brand offering differentiates the company while still allowing it to compete with mass merchants on assortment and price.

Post-COVID Implications

With COVID accelerating the exposure and amplification of fault lines that existed at many home goods retailers, we can learn about actions companies need to take to further differentiate their service offerings and mitigate share loss against mass merchants and other competitors during catastrophic times. First, home goods retailers need to decide which lane they want to swim in: lower-end/price conscious or higher-end/lifestyle. Second, they need to build out strategies around critical initiatives like assortment, omni-channel/digital and value-added services that deliver against that value proposition, targeted to their core consumers. Here’s how these actions can roll out:

• Deliver a differentiated assortment based on your value proposition and core customer: For mass specialty — choice and hidden gems. In the low-end tranche of mass specialty, choice is king. To differentiate themselves and drive uniqueness, mass specialty retailers have the opportunity to launch “hidden gems” of own-design product targeted to connect with specific core customer needs. Companies can cement this approach through comprehensive product search and website organization. Home Goods’ lack of clear national brand segmentation requires both an incredibly robust product search engine and online merchandise bucketing consistent with core consumers’ priorities and values.

• For high-end — market depth, then breadth. Higher-end competitors must often key in on which specific corner of the market they must specialize in. Once each market segment is targeted, high-end retailers can then fully build out the required context around each niche to drive holistic brand resonance. While the high-end home goods segment is difficult to carve out, this challenge provides new white space for firms to venture into non-industry services, such as restaurants, within the store format. High-end firms should utilize their existing footprint and capitalize on strategic business partnerships to build out “communities of sell” within their store to drive a sense of comfort, familiarity and overall foot traffic.

• Offer robust omnichannel and digital services. Whether a retailer operates in the mass or high-end space, the customer expects to shop and receive product wherever and whenever she wants. COVID has further cemented that the most important “right to compete” within mass specialty is a strong digital offering. In-store convenience and on-shelf availability must translate to online through omnichannel customer services, strong product search capabilities, and multiple fulfillment options between pickup and delivery once purchased. High-end stores must also use digital to drive convenience and messaging, despite the previous belief that luxury consumers lacked a desire for online retail. Factors such as convenience and payment optionality now drive demand for highly busy customers who require full purchase optionality, furthered by digital advertising’s multimedia approach from virtual room planning to branded video storytelling.

• Create a value-add service. One key competitive advantage for companies across the board lies in value-add expertise. High-end companies like RH lay out beautiful designs for their core customers to match, while mass stores such as Bed Bath & Beyond partners with others to offer installation help and expert interior decorating advice. Look for areas where category experts can provide value-added guidance to customers whether through home design, “hot” upcoming new products or product assembly help — areas where larger mass merchants cannot compete.

While developing robust strategies in these critical areas, retailers also need to be thinking about how the role of the store, supply chain optimization, and leveraging data and analytics can support and deliver against the value proposition.

And beyond home goods, other industries can also benefit from the above lessons. Across industries, first decide where and how you will compete, then look at combining differentiated products and services with competent cross-channel offerings to deliver against your value proposition. We recommend relentlessly challenging the team to assess: “Are those the right strategies, in assortment, for example, to deliver against that value proposition? How do we measure whether we’re executing against that strategy? How do we adapt and change with the customer?” What’s critical is to build out differentiated strategies to win in the marketplace, avoid the messy middle, and be on the right side of the next disruption.

Focused on retail operational and digital transformations, Kristin Kohler Burrows, Ajay Raina and Erik Britt are respectively senior director, managing director and associate at Alvarez & Marsal Consumer and Retail Group. They can be reached respectively at [email protected], [email protected] and [email protected].