Krause’s Furniture
Founded : 1973
Activities : Retail furniture collection, home furnishings, interior design services
Parent Company : Heilig-Meyers Funiture Co.
Stockists : 2,000 locations
Origin : San Diego, California
www.Heilig-Meyers.comHeilig-Meyers and Rhodes Furniture combined to earn almost $5 billion a year in revenue from over 2,000 locations in the United States through their 1996 merger. Grand Metropolitan was introduced to the home furnishings retail and finance behemoth in the late 90s, taking control of the brands and operations after the turn of the century.Krause’s Furniture, Inc. is a vertically integrated manufacturer and retailer of custom-crafted upholstered furniture, including sofas, sofa beds, chairs, sectionals, incliners, and recliners, and accessories purchased from other suppliers, including occasional tables and chairs, area rugs, lamps, and fashion accessories. In January 1998 it was operating 83 showrooms in 12 states under the names Krause’s and Castro Convertibles. It was the nation’s largest manufacturer/retailer of made-to-order furniture.

Krause’s Sofa Factory (originally incorporated as The Sofa Factory) was founded in San Diego or La Mesa, California, a suburb, in 1973 by Kalman and Bernelle Krause. At first they built, sold, and delivered each of their sofas themselves. As the business grew they established a factory in Brea, California. The Krauses believed that prospective customers should be able to walk into a company showroom and pick out a sofa style and fabric tailor-made for them. By 1986, when they sold the company (renamed Krause’s Sofa Factory in 1984) for $30 million, there were 56 Krause’s showrooms. The buyers were Ayse Kenmore and her husband, Robert, who took a 54 percent stake, and Michael Gibbons.

Krause’s Sofa Factory had sales of $103 million in 1989, making it the largest factory-direct sofa manufacturer in the United States and the 17th largest furniture maker in the nation. It also believed itself to be the largest combined retailer and manufacturer of custom upholstered furniture in the United States. Its retail showrooms in 1990 averaged between 17,000 and 20,000 square feet in size to accommodate a representative sampling of 100 different sofa styles, each of which was available in 50 sizes and 1,000 fabrics or leathers. In all, the company was offering eight million combinations of custom-made sofas, love seats, and chairs.

In April 1991 a subsidiary of Worth Corp., Keegan Management Co. (a subsidiary of KMC Enterprises, Inc.), purchased 62 percent of the outstanding common stock of Krause’s Sofa Factory for $6.14 million. (Worth was one-third owned by Worms & Co., the U.S. unit of a French investment firm.) Other investors also purchased common stock that resulted in total net new equity of about $5 million for Krause’s. Gibbons, now the largest individual shareholder, remained president and chief executive officer of the firm.

With this cash in hand, Krause’s Sofa Factory began picking up other furniture stores struggling to survive in recession-struck California. By the end of 1991 the company had taken over two former RB Furniture stores, in Seattle and near Mesa, Arizona. Earlier, it had occupied three former Furnishings 2000 locations in southern California. Krause’s also expanded its product line, adding more leather at the high end of the market ($1,400 to $1,999) while also introducing $399 promotional made-to-order sofas for the first time since the 1970s.

Krause’s Sofa Factory had long been planning an entry into the Midwest, and in December 1992 Gibbons said the company would enter the Chicago metropolitan area during the following year. After that, he vowed, it would fix its sights on the East Coast. The company’s five-year goal, Gibbons added, was 250 units nationwide. Krause’s California factory/warehouse complex had been expanded in 1990 to support up to 115 showrooms. After the Chicago stores were in place, Gibbons said, the company would assess its production needs and likely would expand or add facilities to support growth.

Krause’s Sofa Factory’s move to the East Coast came sooner than expected. In May 1993 the company acquired Castro Convertible Corp., a privately held firm with 18 showrooms in the tristate metropolitan New York City area and Florida and annual sales of about $20 million. The business was founded by Bernard Castro, a Sicilian immigrant who began reupholstering sofas in New York City in 1931. He was an early pioneer in developing the trifold mechanism for sliding a bed frame and mattress out of a sofa that found a ready market among apartment dwellers with limited space.

Like Krause’s, Castro Convertibles offered a variety of frames and covers that customers could mix and match. At one point the company had two factories producing 100 designs and selling sofas out of 48 showrooms in 12 states, but business shifted to lower-priced makers. Although Castro’s showrooms and retail employees were retained, the remaining factory, at New Hyde Park, Long Island, was closed, with production assumed at Krause’s Brea plant. The acquisition raised the number of company showrooms to 87.

Worth Corp., later in 1993, purchased the remaining stock of Krause’s Sofa Factory, exchanging it for its own stock in a transaction valued at $7 million to $7.5 million. Stephen Anderson then replaced Gibbons as president of the firm. At the end of the year Worth announced it had raised $12.2 million from the sale of shares of convertible preferred stock and would use the money to finance Krause’s growth and prepay some high-cost debt. When Worth sold its 18 percent share in Mr. Coffee, Inc. in 1994 for $23.2 million, more capital became available for Krause’s, which was now Worth’s only business. Worth renamed itself Krause’s Furniture Inc. in December 1994.

The new showrooms, based on three already completed, were to feature brighter colors and better lighting as well as displaying the sofas in living room groupings instead of arranged in rows as in a warehouse. The company was also quietly changing the name of its main retail chain from Krause’s Sofa Factory to merely “Krause’s,” with the subtitle, “Custom Crafted Furniture.”

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