Slow Road to Recovery

For kitchen and bath design professionals, the past 24 months have certainly been a test. Ongoing news reports of foreclosures, rising unemployment rates, decreased consumer confidence and plummeting home prices have created a climate of carefully controlled purse strings, with product shipments down significantly and a great deal of discretionary spending on hold.

As a result, kitchen/bath dealers and designers have seen markedly decreased traffic, fewer leads, longer lead-to-close times, smaller-ticket jobs – often at lower profit margins – and greater competition for customers.

However, there are now some encouraging signs that not only may the worst be over, but that there’s legitimate reason for long-term optimism (see Editorial).

Total housing starts, which descended to historic lows in 2009, are expected to post a modest increase in this year due to a rise in the production of single-family units. While a sustained recovery for housing is expected to accelerate into 2011, as illustrated by the graphic above, the road back to 2006 levels will be long, based on the steepness of the 2007-’09 decline.

According to Don Sciolaro, CEO of the Hackettstown, NJ-based National Kitchen & Bath Association (NKBA), economic indicators and many top analysts contend “that the recession is over – that most markets already bottomed out and are beginning a slow recovery. So, the question now isn’t whether things will get worse,” he says, “but how quickly they’ll recover.”

The extension of the $8,000 first-time home buyer tax credit, signed into law recently, is expected to have a substantial stimulative effect on home sales, and should assist the nation’s housing market on the road to recovery, according to the Washington, DC-based National Association of Home Builders.

The home-buyer incentive extension should boost both housing production and home sales in 2010, according to David Crowe, chief economist for the NAHB. Crowe notes that the latest permit patterns indicate that builders “are preparing for the possibility of more favorable housing market conditions in the future.”

Aided by the home-buyer tax credit, the outlook for housing and the economy appears headed “for a sustainable recovery,” according to the National Association of Realtors (NAR). Lawrence Yun, chief economist for the Washington, DC-based NAR, projects that existing-home sales – a key predictor for residential remodeling – will rise 10.8% in 2010, to 5.71 million units, up from 5.1 million units in 2009. According to NAHB, new-home sales are projected to increase to 532,000 units, from an estimated 393,000 last year, while housing starts should grow to 695,000 units in 2010 – up from 559,000 units last year (see related Barometers and Consumer Buying Trends, Pages 8-9).

According to Dick Titus, executive v.p. for the Reston, VA-based Kitchen Cabinet Manufacturers Association (KCMA), many economists believe that with the economy growing at a 3.5% rate in the third quarter of 2009, the apparent bottoming-out of home prices and increased stability in some key financial markets, economic recovery in the U.S. really began this past summer. However, Titus believes that unemployment and inflation containment will remain key issues.

“On the encouraging side,” he says, “home prices have begun to move up in some markets and sales appear to be growing in many areas. The inventory of unsold homes has decreased, but job layoffs and foreclosures remain a problem for housing.”

According to Titus, who reported a 30% year-over-year decline in cabinet shipments through the first 10 months of 2009, the recovery is expected to advance slowly at a pace well short of “good times.”

“Overall, the outlook for housing, consumer spending and job creation all remain soft for the foreseeable future,” he says, although he is quick to point out that “a slow recovery is still better than continued economic decline.”

But while the signs suggest cautious optimism, there’s still plenty of questions about the future. In fact, this year, Harvard’s Joint Center for Housing Studies opted not to issue projections due to what it termed “the murky nature” of the economy right now.

To monitor activity within the industry, the NKBA conducts two separate internal market research studies. The annual NKBA Consumer Remodeling Study asks consumers to describe their remodeling activity in the past 12 months, as well as their expectations for the next 12 months. The quarterly NKBA Kitchen & Bath Business Barometer surveys NKBA dealer members and enables the association to track dealers’ kitchen and bath sales every three months as well as average monthly revenue for the typical kitchen and bath dealer.

“Both our consumer and industry research indicate a stronger market for kitchen and bath remodeling in 2010,” Sciolaro says.

More good news was evident in a recent report from the Knoxville, TN-based Shelton Group, a marketing company for energy-efficient products and manufacturers. The report stated: “Last year, in the heat of the economic meltdown, the most likely home improvements if given $10,000 were energy-efficient improvements, while this year the key home improvements cited were ‘refinish kitchen or bathroom,’ with 37% of respondents answering as such, compared to 26% the previous year.”

Residential remodeling, including kitchen and bath projects, should receive a boost in 2010 and 2011 from expected increases in sales of existing homes, which are generally a target for remodeling efforts shortly after their purchase. At the same time, both new homes and resales are being projected to post gains this year, largely due to favorable affordability, a stabilization of prices and an increase in consumer confidence.

Staying Competitive

According to Sciolaro, now is the time for kitchen and bath professionals “to think positively and look for ways to promote your business going forward.”

But even though the economy seems to be on the upswing, kitchen and bath dealers and designers are likely to face continued challenges in 2010. So what’s the best way to move forward in these still uncertain times?

Patricia Gaylor, of Patricia Gaylor Interior Design in Little Falls, NJ suggests: “Definitely offering discounts, or any incentives that will draw in new customers, will lead to increased profits. I’d also suggest doing in-house seminars on new products, or open houses with refreshments. Whatever you think will set you apart from your competition is the way to go.”

She also recommends attending trade shows and forging relationships with other industry professionals through such social networking sites as LinkedIn and Facebook.

For Duval Acker, ASID, CMKBD, of Mt. Pleasant, SC-based Kitchens by Design, choosing the right products and aligning your firm with companies that are true partners are good strategies for sustaining or increasing profits. In a value-conscious society, Acker is also an adamant supporter of designers remembering to value their own work. For that reason, she is an advocate of design fees, regardless of what the economy
is doing.

She also believes strongly in holding margins firm to avoid profit slippage. “We’ve adjusted them slightly, but we hold them when pricing,” she says.

Along the same lines, Gail Olsen, CKD, of Goshen, CT-based Ducci Kitchens says that competing only on price is not always the most sound strategy. “We’ve chosen to pass on some jobs that simply wanted us to ‘match’ a cheaper price, rather than start down the slippery slope of reduced prices and frustration. It’s important to stay competitive, but not if you have to compromise on quality or product or services.”

She continues: “We haven’t changed the style of our approach to customer sales, however. No job is too large or too small. This has always been our mantra, and it has served us well this year. During times when installations of full kitchens or baths were slow, we were actively pursuing small, partial jobs, such as countertop replacement, new appliances or tile work.”

Olsen says companies that have built strong reputations prior to the recession are actually well positioned for growth going forward, as their positive word of mouth and reputation for integrity give clients confidence that they will be around for the long haul, providing superior service and value. Her firm has been in business for 27 years, and she notes that she uses her longevity and familiarity in her community to every possible advantage – both with attracting customers, and for keeping staff morale strong.

“We have survived tough economic times and a variety of other challenges, yet remain consistent, solid and strong in our commitment to our customers. We find this of great value to our customers and we emphasize it. They are confident in knowing that we will be here to take care of them for years to come,” she states.

Graph above illustrates the annual year-over-year growth rates for U.S. cabinet sales for the past 20 years, as reported by the Kitchen Cabinet Manufacturers Association in its monthly ‘Trend of Business’ reports. Reflected is the steep downturn in the housing market, which resulted in 20% and 32.2% declines, respectively, in 2008 and 2009, after years of sustained cabinet industry growth. Cumulative growth over the entire 20-year period was 96.20%, an average of 4.81% annually. In contrast, cumulative growth from 2001-’09 was 5.7%, a yearly average of 0.63%. According to Tony Bour, president of Harrisburg, SD-based Showplace Wood Products, who shared the information with Kitchen & Bath Design News, the numbers reflect the impact of the housing downturn on cabinet sales. Bour estimates that the cabinet industry’s current ‘run rate’ for total units being manufactured is about the same as it was in 1989, and believes that the industry is running at 40%-50% of capacity, even after plant closings.

Acker agrees: “We all need to remember that clients buy people, and in our experience, that which can be proven to them by way of referrals, recommendations and photos, works best. It seems that clients now have fear, doubt and general uncertainty, but it can be used to your advantage if you can promote your long-established reputation for excellence, integrity and great products in the market.”

But even as the softened economy continues to affect how kitchen and bath firms are operating, dealers and designers should not lose sight of how these changes are impacting consumers’ values.

“Products that can demonstrate environmental awareness, contribute to sustainability and are manufactured responsibly will have an advantage with new and young buyers,” Titus offers.

Gaylor concurs: “Consumers today are extremely cautious about what they purchase, and having an added benefit of saving even a little money, or a little of the planet, might just push them toward that product.”

As a green expert, Gaylor is focusing on this growing market, and is currently at work on a 70% energy reduction retrofit project.

She states: “Not only are we remodeling existing housing stock, which is definitely the only thing that’s moving right now, but by significantly reducing the energy footprint, it creates an incredible bonus for the homeowner. I call that a real win-win situation.”

Olsen concludes: “[Always], give it your best shot. Honesty and integrity are still valuable commodities in business. Always express your appreciation to your customers and have a positive attitude.”

On the Horizon

So, what kind of expectations should kitchen and bath designers hold going forward? In Titus’ view, the kitchen and bath industry should prepare for more challenges – but also new opportunities.

“The coming year for the kitchen and bath industry likely will present continued challenges as consumers remain cautious amidst job and other economic concerns,” he says. Titus also sees a premium being put on value, as well as a continued surge of interest in all things green, such as the KCMA’s Environmental Stewardship Program (ESP)-­certified products.

Gaylor agrees: “The main challenges still haven’t really changed – it’s all about the economy. But we as design professionals need to view this economy as an opportunity. It’s an opportunity to step back and think about what it is that’s driving it – and then make the needed changes. It has taught us first and foremost that we can’t keep doing what we’ve been doing without expecting consequences, both financially and ecologically. And manufacturers have realized that they can re-invent themselves and keep their heads above water.”

She is optimistic about 2010, and advises that it’s time “for all of us to take a collective breath and try to remain positive about what lies ahead.” Gaylor also notes that she has indeed been hearing positive feedback from colleagues about their businesses recently.

However, some weary kitchen and bath design professionals are opting to approach 2010 with more cautious optimism, if not outright caution.

“Throughout 2010, I expect that most retail firms will hold on as long as they have been prudent in the past with management of their finances,” says Olsen. “We, too, will have to be scrupulous in reducing expenses – exactly as we have done in 2009, which helped us make it through successfully.

“However,” she continues, “we will also continue to spend, wisely but sufficiently, on our marketing and advertising programs. It has been an advantage to us that we can further our radio and print advertising during a time when many have eliminated such from their budget.”

Sciolaro agrees that marketing remains critical. He states: “Unfortunately, when faced with a difficult market, many business owners will cut their marketing efforts to save money, but that just makes the problem worse. If sales are already down, and then you cut your ability to reach new customers, sales are going to decline further.”

He continues: “The solution in a tough economy is to maintain your marketing efforts as much as possible. As your competitors make the knee-jerk reaction to slash their marketing activities, you’ll be better positioned to increase your market share, which will allow you to not only weather the economic storm, but come out of it in a much better position than you entered it.”

Acker, who describes herself as “cautiously optimistic” about the upcoming year, concludes: “We may never see the boom of the last few years again – at least in the next few years. But, I believe that professionals who are smart will prevail by adjusting as necessary, while never compromising who they are in the process.”

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