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Takeaway: New Grey Card went live Sunday. Different from AMZN Prime/Costco model, but clear value proposition & democratizes interior design services.

The company didn't put out a press release this morning, but the new RH rewards program went live to customers on Sunday. Called the Grey Card -- the key feature is 25% off all orders for a $100 annual fee. There are other benefits associated with the card: early access to sale events, preferred financing (w/ an RH Credit Card), and 10% savings on sale items. But the key benefit (outside of the discount), we think is access to RH's in-house Interior Designers at no additional cost.

RH | Membership Program Goes Live - 3 14 2016 1 

There are few examples in retail of a customer funded membership program. The two obvious corollaries are Amazon Prime and Costco, which offer benefits in the form of free shipping and low prices to encourage customer loyalty. But, the Grey Card from RH is not that. Instead, it's a democratization of the interior design services.

Under the old RH Trade Sales membership agreement, interior designers were offered 20% off all non-sale purchases. With the new membership model -- non-RH interior designers are offered free membership to the Grey card. For the ~60% of purchases that come from customers who do not use external interior design services, the new membership model allows for the same type of services at a steep discount to the current market rate. Not only does it up the customer service element of the equation, but it also allows RH interior designers to up-sell RH product across every room of the house.

Over the near term -- there is little doubt that the shift in promotional posture will make quarterly top-line results choppy as customers adjust to the new value proposition and the company laps meaningful promotional events. But, if we look at it over a slightly longer duration we think it will a) allow RH to get valuable insight on customer behavior as it analyses customer buying behavior through membership rewards data, and b) allow the company to smooth out the demand curve which will allow for greater efficiency from the vendor network and supply chain.

RH | Membership Program Goes Live - RH tradesales 2

There is still a ton left unanswered as it relates to the rewards program, and we expect the company to speak to the initial reads on the program when it reports numbers/provides guidance at the end of the month.

Additional details…

  • Value proposition: The value proposition from a $100 subscription fee is clear and up front for anyone looking at a big ticket item. That's reflected in the pricing on the company's website (and we assume in store) where the ticket price and membership price are clearly displayed on every item.
  • Small Ticket: The breakeven point on a rewards membership is $401 for the customer, so for the marginal customer only interested in bath towels and sheets there is little incentive to drive incremental purchases. But consider that a bedding set (composed of a duvet cover, sheets, and pillow cases) costs $707 at the advertised price. When we factor in the 25% discount and add back the subscription fee we get to an 11% discount. These types of transactions don't move the needle when RH is selling $4000 couches, but it may limit new customers looking to the brand at more accessible price points now without a promotional sweetner.

RH | Membership Program Goes Live - 3 14 2016 3

  • Not a secondary revenue stream: We think the customer base within the rewards segment will shift meaningfully from year to year. Furniture is an event driven purchase and due to the replacement cycle doesn’t lend itself to an Amazon prime esque annual subscription model. At checkout for the Grey Card there is a box that needs to be checked to allow RH to automatically renew the membership after the first year has expired. That all but eliminates the multi-year subscription members.