CEO Conversations Installment VI: Jay Shane, Founder and Chairman, Shane Global Holding (8482 TT)
(Photo credit: Businesstoday)
It was a beautiful morning, sunny but with a cool breeze, which is quite rare in Taipei. The pool area behind Howard Hotel is where Jay and I usually meet, and this time is no different. As I walk in, Jay is already in our usual spot, smoking his favorite Cohiba cigar and drinking black coffee. Jay is very easy going and unassuming. One would never know, unless told, that he is the Founder and Chairman of a company that’s worth north of USD300m.
Jay founded Shane Global Holding in 1999. It is the largest custom-made furniture outsourcing service provider in the world; and the company’s services include design, sourcing and manufacturing. With its highly vertically-integrated structure – more than 90% of raw materials are internally sourced – and the operational know-how to “mass produce” custom-made pieces using Just-in-Time (JIT) manufacturing, Shane Global is able to provide a one-stop shop service offering to its clients. It is these core competencies that has allowed Shane Global to build a tight-knit relationship with its major client RH (NYSE: RH, Market Cap USD5.5bn).
The relationship started about 10 years ago, when RH requested Shane Global to produce custom made furniture. Volumes started at one shipping container per week, and have now blossomed to more than 40 containers per week, contributing roughly 60% of Shane Global’s annual sales. Suffice it to say that Shane Global has become the number one proxy to RH. It hasn’t been all smooth sailing, but Jay has built a solid foundation in Shane Global, even in the face of 25% tariff hike, Shane Global was still able to deliver an impressive gross margin of ~40% in 2019. Jay believes that Shane Global is fully equipped to support RH’s strong ambitions, and he is ready to grow together with the giant as RH expands its US domestic and international footprint.
An industry pioneer: From leather jacket manufacturer to customized furniture total solutions provider
What people don’t realize is that Jay went through quite a few boom bust cycles in his business career before setting up Shane Global. “It is kind of normal in the market place these days, as soon as something new and shiny comes to the market, it doesn’t take too long before cheaper, me-too versions of the product show up and totally destroy the market. Even though I have experienced it first hand in the past, I’m really not fearful of it. As long as we think a few steps ahead, we should have our value in the market.”
Jay’s first big success came when he set up a leather factory in Kaohsiung, Taiwan in 1974, when Taiwan was quickly transitioning itself from an agricultural-based economy to an industrial and manufacturing powerhouse. At its peak, his factory had so many orders that he had to outsource them to 35 other factories in order to fulfill them all! However, in 1987, the Koreans were undercutting the market by 10-20%, which forced Jay to move his production base to China to remain competitive in the international marketplace.
After moving to China in 1988, Jay used his experience and business network built up from his days as a leather processor to quickly become the largest leather jacket manufacturer in the world. In fact, Tom Cruise’s iconic patched leather jacket in the movie “Top Gun” was manufactured by his company. However, this success once again brought more competition. Local Chinese competitors started poaching his employees and copying his factory production line. Jay knew he had to look for other opportunities.
After going through another boom bust experience in the leather couch cover business, he set his eyes on furniture, which is a natural move from leather couch covers. But this time, he was determined to develop a business model that is not easily copied. As luck would have it, RH approached Jay at that time and inquired if Shane Global would be interested in producing custom order furniture. “RH wanted to try something new, and I wasn’t afraid to try. That was how this fruitful relationship began.” said Jay.
Shane Global’s bread and butter service - Custom Order Furniture
Over the past 12 years, Shane Global went from one shipping container of custom order furniture per week to the current level of more than 40 containers per week. When asked about how Jay has managed to build this niche, given the competitive nature of the industry – especially in China – Jay puffs on his cigar and says, “RH’s orders are mostly custom orders. Each piece is different; and no one else in the world can manufacture these custom pieces at mass production quantities.”
Jay said proudly, “A furniture factory will generally set a minimum order requirement at, say, 100 pieces for a particular style of couch. But at Shane Global, we can even take a one-piece order. To appreciate the difficulty of what we are doing, consider that we offer over 800 fabric options and more than 100 leather options, different dimensions and several firmness options. The set of possible permutations is endless! We now have to manage 300,000 SKUs just for RH alone. Our know-how is in the way we manage inventory and accurately control all the manufacturing processes to be perfectly in sync so that all components arrive at their appropriate assembly line at the right time. It is a carefully orchestrated process that took us many years to develop.”
Custom order pieces generally generate higher ASPs and margins, but the problem with the business model is it is very difficult to scale. Jay is very proud of Shane’s JIT factory management and its highly vertically-integrated operation, which has allowed Shane Global to achieve large-scale production volumes, while at the same time achieving industry leading turnaround time of 5-7 weeks (5 weeks to US West coast and 7 weeks to US East coast). Says Jay, “Even though our furniture has to cross the Pacific Ocean to get to RH’s end customers, our lead times are better than those of US-based custom furniture producers, most of whom require 8-9 weeks from order to delivery.”
By collaborating seamlessly with RH, Shane Global is able to ship each piece directly to its new owners for an unparalleled furniture shopping experience. Says Jay “Each piece is different. When finished we ship it directly to its new owner on Rodeo Drive in LA, in mid-town Manhattan or wherever the end customer might live without the need for it to go into a warehouse first. This requires that we do all of the logistics planning here in our manufacturing facility, and our system CANNOT mess up! Basically, if you send the wrong product to ONE end consumer, you have really sent TWO wrong products to TWO end consumers.”
“Can you imagine the hard work that we had to put in when we first started this service? Most of our factory workers have not been formally educated beyond the primary school level. Yet, it was necessary to teach them how to read all the English-language product and logistics information on our labeling system, one step, one detail at a time.” Jay pauses to consider the scope of the challenges he has faced, smiles broadly, then adds, “We overcame all of these hurdles, and now have a fail rate lower than 1%.”
Jay added further, “More importantly, due largely to our service offerings, RH was able to reduce the size of their furniture distribution centers down to two, from five. Just imagine how much money they have saved. The reduction in working capital requirements allows them to appropriate more cash towards business expansion. So, there is a reason why our gross margin is at around 40% even after the 25% US tariff hike. I believe we are at least 5 years, if not 10 years, ahead of our competition.”
Jay concluded, “As a business we are constantly striving to extend our competitive edge. Therefore, we need to improve on all fronts constantly. We have continuously raised our level of vertical integration to the point that we have already in-sourced 90% of the necessary materials and processes, while we have further refined our JIT to be even more efficient. Our turnaround time is the fastest in the industry, faster than my US counterparts. Our quality is on par, if not better than American-based producers – and all the while we have been very competitive in terms of pricing. As to my Chinese competitors, they continue to poach my employees, but they can’t copy the entirety of our business model and management culture.”
Design service – a new initiative that elevates Shane Global to a total solutions service provider
In many people’s eyes, Shane Global already has a first class ticket in providing furniture outsourcing services for a high-end home furnishing giant like RH. However, Jay is not satisfied just yet, “I need to transform Shane Global into a total solutions provider.”
A few short years ago, Jay launched an initiative to become a total solutions service provider. He hired a team of designers and set up a design center and showroom in the San Francisco area. Shane Global now showcases their new designs to clients on a quarterly basis, up from once or twice a year. Furthermore, as designers all speak the same “language”, Shane Global and its design team have been able to collaborate efficiently and effectively with other famous designers or design houses – most of whom have previously worked with RH – to come up with new collections to garner new orders. The design service model is extremely beneficial to Shane Global because Shane Global’s proprietary designs can only be manufactured by Shane Global. This changes Shane Global’s role from a passive one (order taker) to an active one, in which Shane Global is able to lock in manufacturing orders through the use of their own design. Furthermore, the more designs customers pick from Shane Global, the more of their designs occupy the floor space of the client’s showroom, resulting in more opportunity for end consumers to buy Shane Global furniture. This in turn means less floor space for competing products. As Jay explains, “Retail floor space is like real estate; we all are fighting for more floor space so our products can get more exposure and generate more and more orders.”
Jay explains further, “What we are doing now with the new design service initiative is to widen the moat we’ve built around our core business. Having our own design team strengthens our design know-how, and at the same time, no other manufacturers that we know of have this ability to service clients the way we do. With our design services model, we have created a mutually beneficial relationship of trust with the designers and with our clients. The result is a win-win situation for all.”
Shane Global’s largest client RH is expanding rapidly
RH is a curator of design, taste and style in the luxury lifestyle market, offering high-end furniture, lighting, textiles, rugs, bathware, décor and outdoor products. RH has gained quite a lot of traction in recent years as its brand continues to grow and its earnings have frequently hit or beat expectations (52% bottom line CAGR from 2013 to 2019). RH contributes about 60% of Shane Global’s annual sales.
Many investors have become believers in RH over the past 1-2 years, and one in particular is Warren Buffet. In fact, RH was one of the very few positions that Berkshire Hathaway added in 4Q19 amidst the covid-19 outbreak (after having added in 3Q19 also). Berkshire currently owns 8.9% of RH.
Gary Friedman, visionary Chairman and CEO of RH, has a grand goal of building RH into a luxury brand like Hermes, LV, Gucci, Prada and the like. In a recent letter to shareholders, he went so far as to quote Bernard Arnault, the Chairman and CEO of LVMH Group, writing “Luxury goods are the only area in which it is possible to make luxury margins.”
Jay has been working with Gary for a long time, and he believes “Gary is scaling taste, curating furniture, lighting, décor, etc…like he is curating art. And like art, Gary wants you to experience it, feel it, live in it, immerse yourself in it, in order to create the sensibility to eventually purchase it. This is why he calls his retail stores Galleries, and why he thinks a majestic physical presence is so important to RH. RH’s soon-to-be opened luxury boutique hotel in New York, called ‘Guesthouse’, and ‘3 Arts Club’, a rooftop restaurant in Chicago that is a member of the top ten ‘most instragrammed’ restaurants in the United States, are both outstanding examples of Gary’s strategy to deliver the design aesthetics of RH to consumers of high-end luxury goods.
“RH has set a long term target to nearly double US sales to USD5bn (2019 sales were USD2.6bn) and to reach USD20bn in international sales (from the current low base), with target annual revenue growth of roughly 10%, and target net income growth of 15-20% per annum. The company is planning an aggressive entry into the European market soon,” says Jay, as he sips his coffee.
“We believe that Shane Global will be able to benefit greatly from RH’s expansion. We are definitely ready to fully support Gary’s plans and to grow with RH. But most importantly, we need to continue to work on our craft. Whether it be in upgrading our design capabilities, collaborating with other designers, or providing more new and exciting product offerings, we need to continue to enhance and extend our key core competencies. We will embed so many value propositions into our services that our clients WANT and NEED to work with us, so that they can fully focus on retail, marketing and brand building. When we reach this point, only then we will become a true total solutions provider. And then, we will need to look ahead to the next step, because the competition is always coming for you.” Jay says this thoughtfully as he looks over the sun-glistened pool deck, his cigar smoke rising into the air, as if he is seeing Shane Global’s future shining as brightly as the sun.
If you would like to arrange a meeting with Jay Shane, please contact yvonnehuang@qtumic.com