The Internet has been a major disruptive force in modern retailing, helping bring about the demise of

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The Internet has been a major disruptive force in modern retailing, helping bring about the demise of numerous familiar stores in your local mall: The Limited, American Apparel, Wet Seal, Aeropostale, and Pacific Sunwear, to name a few. Even stalwart Macy's has closed at least 100 of its stores. While most retailers have rushed to embrace e-retailing as their future, interestingly Restoration Hardware (or RH, as it likes to be called) is not ready to write obituary for its brick-and-mortar presence.

To the contrary, it is utilizing an array of rather "traditional" retail marketing approaches, including one that may seem to some like a relic of retailing's past.

RH is a luxury brand offering home furnishings, lighting, décor, bathware, and a variety of other products clearly targeted to an upper-income clientele. Visit its stores and you can pick up a nice linen couch for $7,000 or perhaps a crystal chandelier for $9,000. You can also find a selection of decorative drawer pulls, faux fur throws, and even some affordable plush toys for under $50. RH has decreased its total number of stores, but then has "doubled down" on the remaining ones by renovating them into big, beautiful galleries located in renovated historic buildings. These 45,000-square-foot stores are filled with natural light and include cafés where you can enjoy a latte or a Bellini cocktail while you contemplate just which French steamer trunk you want to purchase. One store even has a wine cellar!⁷¹ And of course, child care will also be provided (we would expect nothing less in such a rarefied retail environment).

Particularly fascinating about RH is how it views its retail spaces—not as stores, but rather as galleries or showrooms, where customers can get inspiration and style guidance. CEO Gary Friedman's vision is to "reinvent physical retail" with these elaborate new stores and a broader set of services. RH's emphasis on the service experience puts it in a league with retailers like Apple, where customers get to see, touch, and try out all the latest Apple products. According to one retail consultant, these new RH showrooms serve as a kind of "giant 3D real-time catalog."

And RH knows a thing or two about catalogs. It is famous (some would say infamous) for its annual catalogs called Source Books. One year, it sent out a shrink-wrapped set of 13 different books weighing in at a reported 17 pounds and three thousand pages. These are not your grandpa's Sears catalogs—rather, they are more like fashion magazines, with high-quality photography throughout. Rather than timing the mailing of these catalogs with seasons, RH gives customers the whole source book of products all at once so that it can be referenced throughout the entire year.

In another break from tradition, the chain is implementing a loyalty card with a blanket discount for members and no regular promotional sales. The RH Grey Card costs $100 per year, but provides members with a 25 percent savings on all full-priced purchases (there are still clearance sales). Ninety percent of RH revenue now comes from Grey Card members, and since its implementation RH has seen growth in the average order size. The company also expects margins to grow due to deferred memberships and renewals from the program's current members. It also expects additional new members to join every year.

But perhaps RH's most striking departure from current "mainstream" retail strategic thinking is the lack of priority they place on Internet sales, which is near heresy in today's market where e-commerce rules. Although approximately 37 percent of its business comes via the web, CEO Friedman insists that RH's business is "not about the Internet." Rather than competing with other retailers through websites (where it is difficult to differentiate by size and quality), RH leverages its extravagant physical retail spaces (and its stylish source books) to strategically differentiate its brand in the marketplace. Friedman sums up his feelings about Internet-obsessed retailers as follows: "Make no mistake, many retailers find themselves in a race to the bottom, a race we at RH have chosen not to join." Recent RH sales numbers show an increase in "same store sales," but not as great as in past years. So it remains to be seen whether the firm's contrarian approach is one that will have long-term positive profit impact, and also whether any other retailers will embrace a similar swim upstream from convention to lure customers away from their laptops and smartphones and back into brick-and-mortar stores.

1. RH’s CEO believes that the Internet is limited in its ability to facilitate differentiation among retailers. Do you agree? Which retailers do a particularly effective job at presenting their products through their websites?

2. Does the RH strategy work only for high-end/prestige products or are there elements of its approach that would be appropriate for retailers at all price levels? Choose one of your favorite retailers and discuss how that company could best apply the approach that RH is using.

3. Is it environmentally responsible for RH to produce and distribute such large paper catalogs? Are there ways it could mitigate the environmental impact of this program? How could it best deal with the likely negative reaction from “green” customers?

4. What are some other novel ways that retailers could define the role of their brick-and-mortar stores to optimize their effectiveness in contributing to increasing firm revenues and profits?