Q&A: DFS CEO Tim Stacey on finding growth in a market slowdown

You’ve seen impressive order growth. Could you elaborate on what’s driving that, especially given concerns about consumer confidence around big-ticket items and the slowdown in home improvement?

We’ve definitely seen the same challenges in the last three years. Since around the end of March 2022, it’s been really tough in the sofa market in particular. We track that very closely and estimate that the market is down about 20% in volume terms since that time. There’s been a big decline in high-ticket purchases.

From our point of view, we started to see an improvement in performance around March last year. 

What’s driving this isn’t necessarily the market—we’re not seeing huge amounts of footfall growth or web traffic. For DFS and Sofology, we’ve hit a sweet spot with our marketing, particularly from a digital perspective. We invest over 50% of our marketing in digital, and it’s working well and efficiently.

The product ranges in both businesses are the best they’ve ever been. We’re also using four-year industry credit in DFS in particular, which is market-leading, to help customers through the cost of living crisis, convert, and increase average order values.

To break it down, that 10% is 5% volume growth and 5% average order value growth. This is mix, not retail price inflation—it’s people trading up into the brands and into higher-priced products.

Do you think this is indicative of that slowdown coming to an end?

I’d love to say the slowdown’s coming to an end. I think the word we use is “stabilising.” Some of the metrics that we look at are very relevant to our particular market—consumer confidence and climate for major purchase—both are improving slightly.

Housing transactions, which drive 20% of our business, have been in growth for the last 10 months, so they have a knock-on effect as well. We can see real household income is also improving. If you look at things like the Asda income tracker and savings ratios, they’re very high.

“Stabilising” is probably the word we would use, rather than “recovering.” We’re not seeing market growth; we’re seeing it plateauing a bit, which is an encouraging sign.

Your market share has improved. Could you give any detail on where it’s coming from?

There’s a long-term trend happening in our market including a structural decline in some of the independent shops struggling to cope in this environment, and they’ve been in decline for a while.

Also, specifically in our sector, ScS was purchased by a private Italian business. They’re going through a transformation, so there was quite a lot of disruption for them.

In the first half, 60 of their stores were closed and refurbished, and we probably benefited a bit from that. The pleasing thing is that they’ve been open with no disruption in January and February, and we’ve held onto all the share gains that we got in that half.

So there’s a combination of a long-term structural shift towards the shed retailers and the generalist retailers, plus some disruption at ScS.

“It’s a combination of everything: great colleagues, stores that look great, a great range, and now, targeted marketing as well.”

Sofology seems to be doing particularly well within the mix. Can you give me an idea of how you see that balance between the brands evolving?

DFS is a market leader by a long way, and it’s very much for everyone. It’s for middle-income families, with the full range from entry price points at £399 all the way up to £5,000. Sofology is targeted at a slightly more affluent, slightly older customer.

About 12 months ago, we began rebalancing the range and pricing for Sofology. We’ve changed 75% of the ranges, rebalanced all the price architecture, and invested in new product development, introducing cinema sofas and other innovations that have resonated with customers.

We’ve put a lot of the group marketing power behind Sofology, taking all the best practices from DFS and plugging them into Sofology.

It’s a combination of everything: great colleagues, stores that look great, a great range, and now, targeted marketing as well.

You mentioned in your results that you’ve been using AI, can you tell me more about that?

We’ve been using AI for a good few years in our sofa delivery company, which was created by merging the delivery operations of DFS and Sofology.

We use huge amounts of data to optimise our deliveries with real-time routing through an AI tool that learns about the best way to route our vehicles every day. That has saved us a lot of money in the last few years and improved customer service.

We’re also using AI for marketing, creating thousands of digital assets and using them in our targeting. We understand customer profiles and what type of sofa they might be interested in, so we use AI to generate assets to draw them into our website and into the purchase funnel.

That’s enabled us to become much more targeted and relevant in our approach, particularly on mobile devices. We work very closely with Pinterest, Meta, and YouTube in this area.

“We track every pound we spend from an ROI perspective, and we do that on a return on profit basis with all the curves, using data to drive optimisation.”

Do you know what the cost savings are from using AI in that way? Do you have a rough figure?

That’s probably not something we would disclose. However, what we will call out is our actual marketing investment in pound notes in half one is pretty much exactly the same as last year. But that spend is much more effective in terms of return on investment.

We track every pound we spend from an ROI perspective, and we do that on a return on profit basis with all the curves, using data to drive optimisation. So it’s not necessarily saving in pound notes, it’s how we use existing investment much more effectively, which is a smart way of growing our business.

As we’re a bit further into the year and moving closer to April, how are you feeling about the Autumn Budget?

We’ve always been a national living wage payer, which is a good thing for our people. We factored that into our budgets for this year and weren’t far off with our assumptions, so that cost is within the guidance we’ve given. 

The national insurance changes in this financial year (our year-end is June) will cost us just over a million pounds. I think the annualised impact is something like £5m.

We’re trying to absorb that cost within the business and we’re not looking at any structural changes or people changes in terms of redundancies. We’ve been through a lot of restructuring in the last couple of years and have other major cost programmes underway to try to balance that.

Our people—in manufacturing, stores, logistics, and support offices—are important to us, and we think we’re in the right place in terms of headcount. It’s just one of those headwinds that constantly come at us that we’ve got to face.

When you say the cost efficiencies won’t be found with people, where else will you be looking?

We’ll be looking across the board. We’ve got some savings in property and other operating costs. We’ve been working on this for a couple of years, looking at where we can trim suppliers—for example, merging DFS suppliers with other suppliers to get better deals.

We’re also looking at efficiencies in the Sofa Delivery Company, finding ways to reduce the time vehicles are on the road by having much more efficient delivery patterns. Really, we’re trying to find savings across all areas of the business.