A recent compilation of 30 kitchen dealers’ financial statements revealed the following averages:
income = $1,760,000
gross profit = 32%
overhead = 29%
net profit = 3% ($52,500)
owner’s return (salary + perks + net profit/company income) = 10%
These numbers don’t lie. The average kitchen dealer is neither making enough profit to reinvest in his operations and gain market share nor making enough compensation, in my judgment, for all the blood, sweat, tears and time he puts into the business.
Most dealers figure that if they just sold another $250,000, or $500,000 or $1,000,000, they would make their desired net profit, enjoy truly comfortable living and build a strong net worth. But, contrary to popular opinion, income growth marginally impacts net profit in the short term for several reasons.
First, more errors are made with higher sales volumes, so gross margins typically decline by a few percentage points. Second, variable expenses such as sales commissions and payroll taxes increase with higher sales volumes. And third, more staff people are usually needed to support the higher sales volumes, which adds to overall expenses.
By “sharpening the saw” on basic business finances, kitchen and bath dealers can indeed make more profit in this industry. What follows are seven fundamental strategies to boost your bottom line. The more of these strategies your firm implements, the greater your profit will improve.
Strategy #1: Lower Cost of Materials. The largest cost item on any dealer’s financial statement is that of materials. On this particular compilation report, that number was 51%. Paradoxically, most dealers don’t channel any resources toward reducing this largest of expenses. However, there are a number of ways to decrease material costs. One of the best, in my opinion, is to join a buying group. Buying groups have been operating in the industry since mid-1994 and membership in one is the easiest ways for dealers – even relatively small dealers – to make immediate progress in reducing this expense.
Buying groups also allow members to earn rebates that drop directly to the bottom line, increasing profitability.
Strategy #2: Lower Cost of Labor. The third largest cost item on the dealer financial compilation report was labor – averaging 10% of overall corporate income. By using subcontract labor instead of payroll installers, a dealer will save on indirect costs such as payroll taxes, vacations, workman’s compensation insurance and health insurance. Furthermore, it has been proven that subcontractors can produce more volume in a year’s time than payroll installers because they have a monetary incentive to do so.
Some dealers fear the loss of control and slower customer service if they used subcontractors. But these just may be convenient excuses for a weakness in project scheduling and management – something that, in my experience as a business consultant, can be improved with a paradigm shift.
Gary Lazzaro of Webster, NY had positive results when he made such a change. “It was easier converting my payroll installers to subs than I thought, and I didn’t lose any control over my jobs,” he said.
Strategy #3: Increase Gross Profit Percentage. The vast majority of dealers are fearful that raising their prices will lose them business. But how is it, then, that one dealer in a marketplace can grow his business while operating at gross margins that are 8-10% higher than any of his competitors? The answer is that this dealer engages in more effective marketing that is built around the clients’ needs.
Dealers in this industry must come to realize that how they deliver their products and services determines their perceived value.
For example, all prospects are looking for a plan and a price on their kitchen projects. If your presentation is similar to what the big boxes currently do – a computer printout of a layout and a price – don’t expect to sell too many jobs if your price is 10% higher. However, there is substantial proof that designers who interactively develop a layout and budget with their prospects earn high marks for their professionalism. The perceived value of this professionalism motivates prospects to pay a higher price.
Strategy #4: Add More Product into the Sale. It is a lot easier to add more product into a sale where you have already gained the customer’s confidence than it is to find a new customer. Small add-on purchases – such as plumbing fixture packages, lighting, snack bar seating or new closet interiors – add profit with very little effort.
In addition to adding on product, dealers can increase their sales by adding on services. When Carol Lindell of Charlotte, NC decided to market the one-stop shopping appeal of her showroom, she changed her company name from DCI Kitchen & Bath to DCI Home Resource. This tells potential clients up front that her firm is not just offering product; rather, the firm will act as a complete resource center capable of meeting all of a client’s needs. This adds intrinsic value to her firm’s offerings – and, as a result, can enhance her bottom line.
Strategy # 5: Lower Overhead. In this recent financial statement compilation, personnel salaries were the second biggest cost item at 17%. I have found the use of spreadsheets helps dealers to appreciate the true cost of an employee. “Burden” is a term used to cover all of the indirect costs, such as payroll taxes, vacations, sick days, retirement, etc. Once a dealer realizes the magnitude of these expenses, he is more inclined to explore different ways of reducing or eliminating them. For example, some dealers have eliminated both the cost of a truck driver and a delivery van by using a local moving company to receive in merchandise. This firm then redelivers the goods at a fixed expense when the job site is ready.
Strategy #6: Create Correct Price Formula. Most dealers don’t realize that there is a science to creating the correct price formula for their operations. It is the single most important by-product of the budgeting process.
Ultimately, a firm’s price formula must “finance” all of its indirect production expenses (such as truck drivers, trucks, warehouse rent, etc.), selling and administrative expenses, and net profit. Once an accurate budget and price formula have been produced for a desired 10% net profit, a dealer confidently can put 10% of every check he receives into a liquid investment instrument as long as he is achieving his monthly income goals.
Gary Lichlyter of Lemont, IL gained control of his finances and his future about 10 years ago. “Through the three-year budgeting process, I learned the correct price formula for my overhead and desired net profit. Now I earn a six-figure salary and my growing firm has a very bright future,” he concluded.
Strategy #7: Sharpen Financial Management Skills. It has been my experience that, sadly, most kitchen and bath dealers do not know how to read their financial statements, or know how to use them to make sound business decisions, or know how to ask the right questions to get more value out of their accountants and financial advisors. Until dealers feel as comfortable performing these assignments as they do designing and selling a kitchen or bath, they will never realize their full profit potential.
If dealers take time out for courses in financial and business management, this pervasive industry trend can be reversed. Local community colleges or adult education programs at major universities are a great resource. There are also organizations such as the American Management Association or Skillpath that offer helpful one-day courses entitled “Financial Management for the Non-Financial Manager.” And, new in 2006, the SEN Design Group is partnering with Kitchen & Bath Design News to produce an industry-specific seminar entitled “Managing for Maximum Profit” in Charlotte, Metro New York and San Francisco. Interested parties can view the agenda online and register for the program at www.sendesign.com.
As competition continues to grow, operational costs increase and the economy cycles through good and bad times, a 3% annual net profit is just not sufficient to reinvest into your business while still building a strong corporate net worth. Darwin’s survival of the fittest applies to industry as well. American industry looks for a minimum 8-10% pretax net profit. After fair market salaries to everyone in his organization – including himself – why should the kitchen and bath dealer achieve anything less?
As for a proper owner’s return, defined as salary + perks + net profit divided by company income, it will vary according to different business models. For a “showroom model” where the owner serves as a general manager for a fleet of sales designers and department heads, the goal should be 18-20%. For a “studio model” where the owner does all of the selling with help from a strong support staff, the goal should be 25-28%.
How does your firm measure up? If your results don’t fall within these ranges, create a plan to prioritize and implement the strategies outlined in this column. Depending upon your determination and support, it might take one to three years to get there, but it will be well worth the time and effort, won’t it?