Why The Container Store is betting on its Custom Spaces business to reverse sales slump
When Satish Malhotra took over as chief executive of The Container Store in 2021, after 21 years of experience at Sephora, he was tasked with refreshing a business weighed down by sluggish sales and heightened competition.
To do that, Malhotra doubled down on its Custom Spaces brand as a key focus of the whole enterprise, helped in part by the acquisition of Closet Works, a manufacturer of closet organization systems, in late 2021. The Container Store has highlighted its Custom Spaces business, which sells custom home offerings that can often cost at least $1,000, as a key initiative to help it achieve $2 billion in annual sales by 2027. While The Container Store is no longer committing to a timeline for its path to $2 billion, it still believes it can get there over time.
The timing of the acquisition made sense as The Container Store had seen success during the pandemic from stuck-at-home shoppers who could no longer spend money on travel and outings turned to a specific form of retail therapy: beautifying their homes and apartments with do-it-yourself home improvement projects. The Container Store’s earnings peaked in 2021 when the retailer reported a full-year profit of more than $81 million on revenue that surpassed $1 billion for the first time in the company’s 46-year history.
Since then, The Container Store hasn’t posted a full-year profit. In the past year, sales fell to about $847 million, below pre-pandemic levels. Like other home goods and improvement brands, The Container Store is weathering a moment of softness as higher interest rates and inflation continue to dampen consumer demand.
The company has looked to protect its business against weaker demand in the home market and increased competition from the likes of Walmart and Amazon by touting the expertise of its in-store employees. This has manifested in the form of its Custom Spaces offering, which leverages a team of 120 in-house designers who offer free consultations. Malhotra has said the retailer hopes to double its number of designers over time.
The Container Store has continued to beef up its Custom Spaces business with new product offerings. In June, The Container Store launched Decor+ by Elfa, which followed the release of Garage+ by Elfa, which was added in late 2023. But the initiative has struggled to gain traction. Sales of Custom Spaces were down more than 14% during the fourth quarter of 2023, according to the retailer’s latest earnings report.
Modern Retail spoke with Malhotra about changing consumer behavior, how it’s doubling down on Custom Spaces through influencer marketing and new products, and standing out in the crowded home space.
This conversation has been edited and condensed for length and clarity.
The Container Store recently collaborated with former Philadelphia Eagles player Jason Kelce and his wife Kylie Kelce to renovate their garage. Does it have more influencer and celebrity marketing campaigns planned in the future, and are there any particular demographics The Container Store is trying to attract?
We’re starting to do more collaborations, and I think the partnership we did with the Kelces was really encouraging for customers to see. Oftentimes, they think that expense is a reason why things are not done, and they look at someone like the Kelces and they go, “Obviously money is not an issue for them.” Their issue was knowledge, time and solutions, and that’s why they wanted to work with The Container Store.
We’re definitely spending more money and more time on top-of-funnel marketing. That’s where we believe we have the opportunity to spread brand awareness. Historically, we’ve been at the bottom of our marketing funnel, and it’s really been focused around conversion, and I think that we end up doing ourselves a bit of a disservice, which is why we’re now focusing more on the top of the marketing funnel.
We have a test going on with our five key markets and what we’re having them do is follow the entire marketing funnel, from top to middle to bottom, and see how that resonates with new customer acquisition.
The Container Store has continued to face heightened competition in recent years. Not only from online shopping upstarts that offer similar organization solutions, oftentimes at a lower price, but also superstore chains such as Walmart and Target that have increasingly expanded beyond grocery. What is The Container Store doing to differentiate itself from the rest of the competition?
What we find out, interestingly, with Walmart and Target customers after a purchase is: they come to us and they tell us, “We bought all this stuff, but we don’t know what to do with it.” How we differentiate ourselves is making sure we can spend the time with the customers to get them the right solution to their products.
There will always be a cheaper alternative to a plastic bin. Our objective is not to compete there because we don’t have the scale and buying power to do so. Where we can win is with our Custom Spaces coming together with our general merchandise and services. It’s a bit of a white glove experience we offer.
Despite what the name suggests, The Container Store doesn’t just sell containers. You also offer home goods, from candles to kitchen gadgets. How is The Container Store diversifying and expanding its general merchandise to stay competitive?
We’re a culture of testing and learning. We did that with home fragrances. We did that with travel. Both of those categories, done in a very curated way, did incredibly well for us. We went a little bit into home decor, and I don’t say we necessarily won there, so we’re scaling back.
Another area that we are investing more in is generalized solutions that work harmoniously together with our Custom Spaces. For example, we never had a vegan leather bin. It just wasn’t part of our portfolio. But now we’re now starting to embrace more luxurious materials to support our different product lines. We have artisanal, fluted bins that can support our Decor+ lines, and we have the Everything Organizer that’s been created for Elfa.
A slowing housing market plus inflation have dragged down the number of people undertaking expensive home renovation projects. What’s your outlook on when consumer demand will pick up?
We definitely feel the impact of interest rates and inflation, and the uncertainty that comes from today’s environment causes customers to pause their purchases. I think that’s going to hopefully dissipate after the election. In fact, we’re starting to see customers investing more now over the last few months, progressively, sequentially, getting better month over month in Custom Spaces, as they’re starting to get a bit more comfortable that the uncertainty will be over.
Homes are aging. That’s a fact. As interest rates start to come down, people in existing homes will start investing, that’s where Custom Spaces is playing. New homes are a little bit more of a laggard, and I don’t think that’s going to turn around in the next 12 months. It’s going to take a little bit longer, and that is predicated on interest rates coming down, and when interest rates do eventually come down, we’ll start to see new home purchases and our foray into that will take off.
Earlier this year, S&P downgraded The Container Store’s credit rating. What is The Container Store doing to address upcoming debt maturities and improve cash flow?
We’re actively pursuing the refinancing of the debt, which is why we’ve been so focused on cash flow management. We ended fiscal 2023 with $6 million of positive free cash flow, and we have put on hold future expansion of new stores so that we can manage our cash flow. When we’ve been able to refinance the debt, we’ll be able to get back on our journey of growth, both in new stores, as well as continuing to push our belief in Custom Spaces.