The state of the industry with Alex Shuford of Rock House Designer Brands

30:02Matter of fact, our growth is going to be accelerated if we can act like today. If I had 75 more people, we'd be a 5%, 6 % bigger company. No question. We have the backlog. We have the incoming business. Right, because the business is there. Business is there. It's just the capacity. Yeah, that's right. I mean, would my designers and retailers like it if I could ship sofas in three weeks? Absolutely. Would our business grow? Absolutely it would grow, right? So what's holding us back from being a three-week, four-week shipping company? Skilled labor that, you know, when you send me a$200 yard COM and we're putting it on a complex sofa with a lot of optionality, I can't just pull somebody off the street and say, hey, tomorrow you're going to work with this$4 ,000 worth of Brunswick and fee fabric.

30:49Please don't miscut it. And so I'm so limited that we can't absorb our backlog as quick as we'd like. We can't grow as much as the industry probably would allow us to grow because my service and timeframes can't be as short as in the real physical world they could be if I had limitless labor. So besides, or in addition to the humanoid robot aspect of it, how, how is AI creeping more into both how you're thinking about the business and, and, and how it's really helping you? I mean, because I know you spend time thinking about it and fooling around with it a lot. A lot. Yeah. You know, so, you know, I won't go through the marketing part because we, we mentioned that earlier in the Wayfair scenario, we're doing all those things.

31:32So it's a big difference maker in content creation. And I will say, just as a side note, there's a bit of a backlash of the AI-generated image. And there's some justification around that. But my point is, our goal is to get the consumer and designer to understand the product as well as possible so they can make an educated decision. If AI imagery, in addition to real-life physical imagery, helps them get a better understanding of that product with less friction, then it's actually serving a really good purpose. Where it gets its bad rap is when you're trying to hide it, right? You're trying to create something that can't physically be real in the real world, right?

32:20But as far as an educational tool, let me graphically show you what I would otherwise have to verbally describe to you because graphically you can get it quicker, cleaner. You can understand scaling and size. We're going to put it in a room near a fireplace, which otherwise we wouldn't be able to do across all of our sofas. Oh, and you say, yep, now I see how that looks. I'm more comfortable making that purchase decision, like great use case. And so the friction side of it, you got to nuance a bit. But the more interesting place, I think, where we're using AI, and the easiest way is for me to anecdote it to you.

32:54I've told a number of our management team that I don't want to go sit through an hour-long meeting on a business concept any longer if that concept hasn't already been run through our clawed or chat GPT incident. because my analogy is if I hired for every one of you, the smartest kid to have ever graduated from MIT as an intern, and I put them in your office in a chair next to you, and you chose not to check your work against them, like with them helping you, like if you ignored them and they were sitting there, I would fire you for that. Like that would be malfeasance, right? And so we've given you that tool.

33:40Like we've given you Claude and ChatGPT. And if you take your concept and you show up to the meeting and say, well, I didn't bother running it past my genius intern. I just thought I'd come here and we'd kick it around for an hour and do that work slowly as a team instead of like going ahead and pre-lifting the work to a higher level so that our time is more valuable, you know, reviewing a dissertation and not reviewing a freshman, you know, two-page written the night before it was due paper. And that for us has created quicker, more efficient analysis of things that we are considering doing, things that are in process or things that are complete and allowing us in a way to derive a lot more value with a lot less invested time in sort of the meeting side of things.

34:35I'll give you a great example. This is, I mean, it's low level. It's a combination of like marketing, but also sticky, hard project that we keep avoiding. I don't know how many SKUs we have on the Century website. Call it 5 ,000, 10 ,000, God only knows. And, you know, and we write product descriptions constantly and we're, you know, and, but even just finding the products on our websites that are missing a product description is this huge nightmare project, right? You know, and so the other evening I set up a, a clawed project and, you know, in the project world, you know, it's, it's a little bit more than just your prompt, get an answer, prompt, get an answer.

35:14It's, I'm going to give you multiple components. I'm going to give you access to tools. I'm going to let you use my browser. I'm going to let you access a spreadsheet. I'm going to allow you to pull data out of this file folder. But, but, you know, I conceptualized this project of, look, I want a complete web crawl of our website. I want you to identify every item that is missing a product description. I want you to pull the primary images for that product. I want you to then cross-reference those across the internet to see if you can find similar items so you can type class them, you know, by their style category, by their item type, et cetera.

35:48And then I want you to write me a three sentence product description. And then I want you to set up a separate incidence where you review your own product description as an interior designer to make sure it's useful, you know, and that it sounds, you know, like high quality and, you know, and, you know, and then I want you to put all that together for me in a spreadsheet with these specific columns and then create me a PowerPoint with what you would recommend so that it is concise and I can feed it back to my marketing department. And then I hit go and I went and made myself a cup of tea. Like literally 30 minutes.

36:22I was working really hard and it took it, you know, that ran for about an hour and 20 hour and 30 minutes to grind through all of that. But at the end of it, I had this incredibly powerful set of documents that took what we would have consumed months to do as these little sort of side projects for major marketing team members. And then we would have tried to knit it all together into a cohesive, actionable thing. And the most likely scenario was that project would have failed. And we would have fixed like five item descriptions. And then we would have gotten fatigued by it. And we would have moved on to like October market.

37:04And in an hour and a half, we had actionable documents. And like three days later, because we review them all and nuance them, like we're uploading and fixing the entire basket of products, like incredibly powerful. And, and that's just one example, you know, when you're, we haven't gotten there yet, But another good example is, so scheduling, and it doesn't happen that much anymore in the United States, but we've got a couple of case goods factories because we're crazy. And we seem to like that particular form of punishment. But these case goods factories are, you know, like they're jewels for us.

37:40Like we love them. It's a passion project. Scheduling a case goods factory in the modern era is an incredibly complex thing. You know, there's dozens and dozens of machines, each that are really specific and do a particular task and, you know, right, and a part. So you imagine a cabinet that's got, you know, 78 parts in it, all the way down to the little corner blocks and the internal cleats that have to be cut a particular length and drilled different ways to the front post that might be shaped and carved and cut and the whole nine yards. The veneer panels, the doors, each one of them move through that factory on a different timeline, hitting different machines and different people.

38:21And they go to different spots to wait for the next machine to free up. And then they all have to come together at the end so that somebody can assemble them all. And if you're missing the side panels, you can't make the cabinet. If you're missing the front leg, you can't make, you know, like, and then at the same time, there are 500 other SKUs. screws each made up of 20 to 100 parts all moving through the factory at the same time. Like it is literally a bowl of spaghetti, you know, that somebody has, you know, just dropped on the table. And you say, that's the flow chart on how things move through this factory.

38:59You know, the future case there is to be able to say, hey, here's what all those machines do and what all those people do. And here's how long each part takes at each place. here is an enormous amount of unstructured data over a long arc of time. Optimize this for us. Make this smooth and clean. Make every part show up when it's supposed to so that we have fewer people in our factory literally just reading route cards trying to figure out why this part is here and not over there and what happened to it last and what didn't happen to it last for just one of 2 ,000 parts that might be moving through that factory at any moment in time.

39:40Wonderful use case that then makes more of our people spend more of their time actually machining the part, which is what the customer cares about. Our customer doesn't want to pay us for somebody to read the time chart on where this part should be and say, oh, it's in the wrong place. I need to walk it across the factory and I need to put it in front of the boring machine on the far side. What they want to pay us for is actually carving the leg or actually sanding it to a finish quality sand and actually spraying finish. And so the more that AI and careful AI planning can shift the percentage of hourly labor to the skill and away from the chaos, the better for everybody.

40:28And that's like we're right on the cusp of all those. And those are exciting. Like those, when I wake up in the morning and, you know, if you were to ask me, well, what do you get excited about and what depresses you? Well, that falls in the side of the ledger of that excites me.

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41:29Each finalist will receive$2 ,000, and the overall winner will receive an additional$10 ,000. Entries are open now through September 17th. Follow Lalloy for more information. And now, back to the show.

41:49You know, it's funny because last time you and I were together in New York, and we were talking about AI a bit, and you were sharing a little bit of what you've been spending your time on. And I thought to myself, what would AI-enabled Alex be able to do? How would he transform this classic American furniture manufacturing business? And then what would that make possible? What would Alex want to do once some of the – I mean, so here we've talked about the incredible potential humanoid robot transformation, the efficiencies found in the manufacturing process. would that make you feel more expansive about acquisitions and wanting to bring more factories like that online?

42:30Would it make you want to move into other parts of the market? How, how does it make you think about the future when you get excited about that? So the answer is yes. Um, you like with that vision of the future that AI, uh, and AI coupled with maybe automation, robotics or otherwise, will begin to alleviate some of the capacity frictions and the complexity frictions in our future and allow for more projects to come to completion. Then we start thinking more expansively. And I'll give you a perfect example. we're launching a new brand this October that we would not have had the bandwidth to do had it not been for AI enabling us to, again, package that project, refine that project, and take a small lean team who already has full-time day jobs.

43:31I don't have team members sitting around there like, you know, you paid me for 40 hours, really only got a 20-hour job. Alex, what do you want me to do with the other 20. Like we, like those people don't exist in my world. So, you know, when I'm asking for like, we're going to stand up a whole new brand, it's on top of everything else you do running current brands, but we're going to launch a new brand called Hancock Modern that focuses on sort of the modern upholstery world, leather, heavy, but you know, modern motion, U.S. made to compete with a lot of what we're seeing in the modern leather and modern sectional world coming in line.

44:09And it'll be a connected brand or Hancock and Moore brand, but with a very clear, distilled focus in the modern aesthetic. But in the past, the temptation would be just make it a product line within Hancock and Moore. We can't stand this up as a separate brand. AI enabled us to increase capacity for the people that handle those things, first and foremost, refine the concept at lightning speed, create the visuals, create the story and the language and the atmosphere and the mood, and move right into like execution deployment instead of being bogged down for months and months in, you know, sort of this visioneering path.

44:51And we went from concept to launch, like it'll launch in October. Concept was coming out of the April market. Like that's how fast we're moving. And that would have been impossible in a pre-AI world. So from an acquisition standpoint, I would tell you I'm probably less about AI, more about where I or we end up falling on the optimist-pessimist spectrum from an economic standpoint, from a macro standpoint. So if you're taking a dystopian view of how things will go, it gets really hard to convince yourself and your board and your executive team that, hey, we think the killer robots are coming and we're living in a bubble economy that's all going to collapse.

45:39And this thing's probably just got a half-life of six months, 12 months. And by the way, we should go buy another company and double down in this industry that is highly durable goods sold to – like pretty hard pitch. So you've got to get yourself to the optimist side of that, too, that we think, yes, while there may be some of the scaffolding underneath all this that is a little wobbly, we think that the core of what's going on has a real sustainable story to it. And I've gotten to the point, especially over the last six months or so, where I think that the underlying momentum is such that while there'll be waves along the road, ups and downs, I think generally speaking over the next three, five, seven years, the quality of life in the Western world in particular is going to rise.

46:34and that more people will have accessible options in our range, right? That the amount of the pyramid that can afford what we sell will expand and that we have a growth opportunity in front of us. And tariff policy notwithstanding, which I know we want to talk about a little bit, that like U.S. manufacturing in particular types of goods is a very defensible strategy. And so we're, you know, we are certainly eyes open, ears open for the right thing. And you and I've talked about this before, that there always seems to be two types of companies available to be purchased, broken and overpriced. And we just aren't really attracted to either of those two types of things.

47:28So it takes a kind of little perfect pitch down the middle for us to want to swing, which is you're not broken. You're not outrageously overpriced. We're going to be fair, but we're not going to be foolish. And we've also done enough in that world now to know that we shouldn't go buy something that is going to take all of our time and attention away from the core business. So we're picky. But I would tell you that in this environment right now, just based on what I've been seeing, there are more attractive potentials showing up in the strike zone, which is great because that wasn't the case, I would tell you, six months ago.

48:13And why do you think that is? I think it's turmoil forces people to think about what they want to do. You know, so you might have a good company that hits that sweet spot, but you're just at an age where you're ready to migrate out of the industry. or I think there were some companies that sort of aggregated and are taking a different tact. But I think as much as anything else, there's a natural fatigue that happens in the industry. People, they kind of evolved to the point where they're ready to take either the company they founded or the company that they invested in, and it's time to, quote-unquote, go to market with it.

48:57And right now, there's plenty of that kind of low-grade existential stress that causes people that are at a certain point in their career to say, you know, instead of going deeper in, I think it might be time to pull out. And I personally have sort of faced that demon over the last year, year and a half that, am I ready to invest another seven, 10 years into this industry? Or do I want to get a sailboat and be in Nantucket? And I've gotten my head around this idea that we're in a once-in-a-century moment where technology, market dynamics, this is changing times. And you either want to be in the game during the changing times or you're fatigued by the idea of it.

49:59And I kind of want to be in the game. You know, it's kind of like, I don't know where all this goes and want to have a hand in it, want to be able to help steer a little bit, if not in a big way, but at least my little piece of it. Yeah, well, so right. And so you so you've you've just brought us to this this very, again, complex moment that we're in, where in in this cauldron of inflation is suddenly this war in the Middle East, this war in Russia that's been dragging on forever. and then we're reintroducing tariffs. Oh, and by the way, transportation costs are higher and jet fuel prices are higher and all of that.

50:37So, so many inputs are impacting this. And my question is, how are you, what's the formula you're using now to try and navigate all this? And do we have to continue to have conversations with designers? Hey, we don't know where prices are going in any return. Maybe they're going up again. All of that, which we were hoping to not have to do. Yeah, no. And I mean, add to that also fuel related that container prices have spiked, have doubled effectively in the last four months. Um, you know, so again, anything that moves, unfortunately, which is everything we consume is going to go up in price. And yeah, the, the volatility, like there's two parts of it directionally prices tend to be, you know, up into the right.

51:20Um, you know, but normally if you talk to a consumer or a designer, you say, well, the reason there's a modest price increase each year is because we want to pay the craftspeople a little bit more because their cost of living is going up. So they're going to get raises. And most things we consume as parts and materials have people that made them. And so you say, is anybody unhappy that there's a small modest price increase that helps the craftspeople keep up with inflation? And everybody goes, no, that's perfectly reasonable, That's our 2%, our 1.5 % to 2.5%. The part where we all get upset is when it's these geopolitical crises that force unrequired and unpredicted price changes that were inflicted on us by the choice of a leader.

52:14an individual or a small handful of individuals made decisions that now impact broadly the rest of us because of this and you know so take the middle east take ukraine take you know you can take any number of these uh that you know they're kind of popping off around the world right now and that's the part where like it's an unfortunate unexpected reality that has seemed to be consistently predictable over the last five, six years. You know, and so like back to like what would I think is likely to happen? I think we are at peak chaos. I think there's still yet one more shoe to drop because I think we're going to see some more Section 301 tariffs.

52:59I think the broad based tariffs, you know, that kind of are now at that 10 to 12 % range. the sort of replacement of the IEPAs, we're predicting that's the new sort of level set. And then on top of that, again, is the steel and aluminum. And on top of that is the upholstery. And my expectation is there will be one or two more that are piled on that are very segment specific that impact the furniture industry. And then that will be codified. You know, that will be that cement will set up and that will become the new taxation reality for importing our industry's goods from, you know, from trading partners.

53:41And my gut is by the time we get to the early spring of next year, that'll all be known and that the amount of volatility will drop considerably. And then the inflation piece, you know, look, it's all, not all, but a big chunk of it right now, energy related. I also think that begins to normalize, you know, that it is unlikely, I hope, God, I hope, knock on wood, that this, you know, this conflict with Iran stretches out for another year, year and a half. I think its depletion impact on them, on us, on the world economy is so dramatic that the bias is towards peace. And so you kind of have to bet on that bias maybe over the medium term to long term.

54:35And so I think stability within the pricing world returns, and not over like 24 months. I think like over the next six to nine months, we get to a good place. So we'll see. I've been wrong almost 100 % of the time this year. So for October market, it sounds like it's still a little bit unclear and a little uncertainty. But by spring, you feel like things will be set in. I mean, what should we expect in October? And what I'm wondering about in October, too, I mean, listen, you hear all these reports from Wayfair and from our house and from others. It doesn't seem like the bottom is in, but amazing that they can grow revenue in the way that they have in this very challenging environment.

55:25Yeah. Well, one of the sneaky things is like inflation also is a revenue growth engine. Sure. Hey, we had three and a half percent inflation and we're doing great this year. Our sales are up 4%. Um, but no, I think, so the, the, the biggest factor right now, the two biggest factors, uh, we're predominantly, you know, we're a 85 % upholstery manufacturer in the U S. So the cost of, of, um, oil is a direct input cost into foam. Um, that and container rates are the ones that are, are sort of, they're sort of disconnected from everything else at the moment. um you know and and what we had three weeks ago we were expecting the price of oil uh because it dropped back into the 70s to become a lowering mechanism for the price of foam to the point where we uh actively were reaching out to all of our foam suppliers we were pressing them that look we you know like this thing looks like a solved conflict oil is back down in the 70s we need price reductions, et cetera.

56:30And then again, we went kinetic four days later and we're blowing up ports. And so it gave them the justification to come back and go, oh, we can't. You see, it's not stable yet. But at some point that will become stable and the price of foam will stabilize and we hope decline a little bit. Same thing with containers. So again, consume an awful lot of energy to move freight across oceans. Container rates are some 2x what they were three, three and a half months ago. And there's too many components, parts and pieces that move by them. So that's another one that's directly oil related. Like if price of oil drops, hold steady and visibility sees that it could sustain that lower level for a period of time, container rates will come back down right and then so what would that mean we had a surcharge in place that was a foam related surcharge coming out of the spring market in that april time frame on specifically upholstered products etc we were ready to completely take it away our foam supplier said no no it's not going anywhere and so what we did was we said let's take half of what we're paying and codify that into a price increase and republish our price list.

57:53Let's eat the other half because we think this thing is going to end up at a lower level. And we're causing friction for our designers and our salespeople because they have to do multiple elements of math to figure out what the price is. They got to figure out what the price list says and they got to go over here and say, oh, it's got a surcharge. And they hate that. So let's eat half for what we hope is only going to be another month or two. Maybe it's a week. And then let's get ourselves forward in time. On the container side, let's pick a number that is above where we were three and a half months ago, but below where the market is pricing is on spot rates right now.

58:36And let's gamble on the future that this thing comes back normal. So if you said, where is Rockhouse betting? Rockhouse is betting that those costs come down and they come down on some, you know, half of what they increased. You say that we are betting we find a level that is lower by half of what the increase was. and we're betting it so big that we literally just repriced and said, we think we can live with this hopefully for a year at these levels. And that's a bet on future stability at lower prices. So directionally, we think that's where things are heading. We hope. We've got midterms in front of us.

59:19We don't know what that's going to look like. The midterms make me nervous. I'm nervous about that as well because we've got a lot of big issues to deal with. Separate and apart from the war and all of this, long-term, you know, we've got this deficit to deal with. We've got social security insolvency to deal with a lot of big issues. And who has the level head to talk about the solutions for, for all of that? No one that I see currently. And that, that concerns me a great deal. None of the current candidates. Yeah. So that's my only concern about you deciding that you are going to stay longer term at Rockhouse is you telling me you're not running for office and you're not going to step up and be the voice of reason that we need in some elected capacity.

1:00:00More likely to be on a sailboat than in Washington. Well, listen, I hope you're not going to be on a sailboat for a while. It's too much fun. And listen, well, exactly. I'm excited to hear that all of this is engaging you in a way that, as you say, makes you want to form this exciting new future. And I think that remarkable things could come to this industry if things move in the right direction. I hope that it gets easier. I hope that it gets less expensive and that we have some clarity around all of this. And as always, I look forward to seeing you in October at market. And I really appreciate your time and sharing all this.

1:00:43Yeah. No, I can't wait to see you too, Dennis. And to everybody that's coming, it's important to come to our class reunion twice a year and to see how everybody has progressed in the last six months. And it's one of my favorite things on the calendar is that opportunity to network, to see smart, thoughtful people like yourself and have side conversations about what we think is going to happen, to be able to put out beautiful objects and let people get excited. But more importantly, to watch our industry help network with each other, help each other compete with each other. We're a good example of what large industries should be like in the world.

1:01:31We have lots of companies, fragmented, aggressive entrepreneurs, stable, mature companies trying to navigate that and revitalize themselves. those unbelievable supply chains and great friendships across all because people get in the industry and stay in the industry. And so it's, it's truly a treasure. Um, you know, and, and it's kind of our responsibility, uh, the young people just getting into it. And the old people like me that maybe just have a few years left that like we pass it forward, take care of it. Um, don't take it for granted. What they say about democracy, you know, it's yours if you can keep it, right?

1:02:09Say that about the furniture industry too. Like it's ours if we can keep it. Yeah, no, no, no. To be sure, I'm looking forward to all of that. And it sounds like Alex has a hot new brand that he's going to be introducing. So yeah, yeah. Come by and see us. It'll be fun. Thanks for listening. If you'd like to keep up with the latest design industry news, visit us online at businessofhome.com where you can sign up for our newsletter, browse job listings, and join our BOH Insider community for access to online workshops, a free print subscription, and much more. If you have a note for the podcast, drop us a line at podcast at businessofhome.com.

1:02:47If you're enjoying these conversations, please leave us a review on Apple Podcasts. It helps others to discover the show. This show was produced by Fred Nikolaos and edited by Michael Castaneda. I'm Dennis Scully. Thanks again for listening, and I'll see you next week. Thank you.