Freedom serves military niche
Clint Engel -- Furniture Today, June 18, 2012
FAYETTEVILLE, N.C. - The operators of Freedom Furniture & Electronics know a thing or two about adapting to challenging conditions.
When tax laws changed in 1986, leading many of its competitors to go out of business, the credit-oriented retailer - which sells mainly to members of the military and their families - scaled down, met its lender and tax obligations and rebuilt.
In the early 1990s, when a then Freedom TV & Stereo saw its military consumers were leaving it behind, moving to other product categories it wasn't carrying, Freedom expanded its stores, introduced furniture and appliances and perfected a credit model that has kept delinquencies down and customers coming back.
And now, as more and more of the young military men and women do their shopping online, the retailer is pursuing yet another path - a focused and aggressive online strategy.
Freedom Furniture, with 15 stores in 10 states, has a straightforward approach to serving a fairly small niche market. It provides everything from furniture to TVs to jewelry and appliances on installment credit to an overwhelmingly military customer base.
"They come in like anyb ody at that (young) age," said Link Melley, president of the Norfolk, Va.-based family business he runs with his brother John Melley. "They don't have anything and they need everything. What we do is recognize they need a vehicle to get the stuff, and we offer them the credit to get it."
For those who spend their careers protecting this country, he said, Freedom's goal is "to make sure they've got a good bed to sleep on, they've got a comfortable place to sit and whatever else they need."
While sales were down a bit last year - something Melley attributes primarily to the buildup of troops in Afghanistan ("When they're gone, they're not shopping"), same-store sales were up 8% in 2010 over 2009. And 2009 same-store sales, in the midst of the credit crisis, were up 15% over the year before.
That's partly because Freedom's business is largely recession-proof. Its customers' employer, the U.S. government, won't go out of business, nor are these customers affected much by the stock market.
"And because they're typically in government housing, they're not affected by the real estate slump," Melley added.
This year, business is climbing back. Melley expects to end 2012 with revenues of about $32 million, up from $26 million in 2011.
Furniture, bedding and accessories sales account for about 48% of total sales. Some key suppliers include Ashley, Coaster, Emerald Home Furnishings in Freedom's West Coast stores, and Serta with its hot iComfort gel memory foam bedding.
When the retailer opened its first store in 1983 in Fayetteville, N.C., it was known as Freedom TV & Stereo. The hot product was VCRs, accounting for 20% of sales.
Melley, a partner in the business with his father Leonard Melley Sr. - the lead investor - and brother John Melley, focused on the cash and credit-hungry military market niche, opening stores just off military bases, starting with the 3,000-squarefoot location here, next to Fort Bragg.
In less than five years, the company had expanded to 11 stores, but a 1986 tax law change crimped future growth plans. New rules required companies like Freedom to start paying taxes on their operations whereas before, as long as they carried their own receivables and the receivables were expanding, the taxes were deferred.
That change wreaked havoc on installment credit businesses, suddenly required to pay all those deferred taxes within three years. Lenders to retailers feared this would be nearly impossible and started calling loans, Melley said, bankrupting many of F reedom's competitors.
Freedom faced a tough road too, but it was small and nimble. It quickly cut its store count to five and liquidated much of its loan portfolio, freeing up cash to pay its taxes and set itself up for growth again.
Then came the next challenge: a military consumer base that was evolving away from Freedom. Many had already purchased their car stereos and TVs. Now they were moving off base and needed another set of goods that the Freedom stores weren't carrying - appliances and furniture.
To prepare for this next phase, Link Melley said he and his brother brushed up on the needed business skills to run a professional organization. John Melley became heavily involved on the information technology side of the business and went back to school for accounting and other courses. For two years starting in 1996, Link Melley worked at Freedom until 4:30 p.m. and then headed to business school at the University of North Carolina for an executive MBA.
"That's when we strategically started understanding the business," Link said.
The brothers began overhauling everything - from store design to the financing model and customer service.
"Frankly, to be successful you have to satisfy customers, you have to take care of suppliers, take care of employees and ultimately take care of investors," Melley said. "But it has got to be in that order."
Freedom also changed the way it measured its performance. The company had been measuring itself against the big players in its niche - Devon Stores, with more than 100 locations, Military TV and Stereo, with about 88 stores, and Military Sales with 65 stores.
Today, they're all gone, Melley said, and what he realized was that Freedom really needed to benchmark against loan companies - in terms of delinquencies, charge-offs and similar credit issues.
"The universe has gotten so much smaller," he said. "We want our portfolio to perform like a very well run loan company."
On the furniture side, the company gained new perspective by joining a performance group of other credit-oriented, non-competing furniture stores, including Dearden's in Los Angeles and Royal Furniture in Memphis, Tenn.
Today, it operates the product and finance sides as two separate businesses. Most of the corporate activity takes place in Norfolk, Va. - a banking and lending hotspot where Freedom is able to hire from a strong pool of talent.
In all of its products, Melley said the focus is on quality.
"Whether it's a Serta mattress, or Sony television, Kenwood car stereo or computer tablet, we want to sell them a quality product that will last a long time," he said. "We could sell them a cheaper product. It would be easy for us to go to a low end mattress company for bedding that would be falling apart in a year or two, maybe a month or two.
"But our strategy is to make them very happy with the product, so they do come back, and I think that's part of the reason for their loyalty."
And indeed, Freedom appears to be earning repeat business. Melley said 59% of the customers who bought from the retailer in 2010 came back and bought more in 2011. It's not unusual for Freedom customers to come back eight to 10 times for purchases over the years, he said, adding, "They become family."
On the installment credit si de, the retailer is careful not to sink its customers so deep in debt that they can't get out - which would keep them from coming back and buying more - something else that Melley said separates Freedom Furniture from its competitors.
Price tags throughout the store typically show the payment per paycheck based on 24-month terms, but Melley said his company tries to get that term down to 18 months, freeing the customer up sooner for another purchase.
The company carries all its own paper and makes credit decisions on the spot. It works through lender Capital One and Melley said Freedom has been the lender's top performing asset-based lending portfolio, in delinquency and charge off rates, for several years.
Over the years, as Freedom Furniture moved into furniture, bedding, appliances and other categories, its store count and geographic reach have grown as has the average store size - from 3,000 square feet starting out to about 20,000 square feet today.
The company opened an unprecedented four stores last year, including its 15th in November in Junction City, Kansas, near Fort Riley. "They've been functioning way ahead of expectations," Melley said.