Importance of ROI

Importance of ROI

Calculating the Return on Investment for a showroom display can go a long way toward determining whether the display is pulling its weight in helping a dealership remain profitable.

By Morton Block, CMKBD, IIDA

A related fact of life is that it's becoming increasingly important for kitchen and bath dealers to be aware of whether their investments in showroom displays is translating into enough of a profit to make the investments worthwhile.

That's why it's important for dealers to understand the concept of Return on Investment, or ROI, for showroom displays.

The principle behind calculating ROI is to determine if the investment made in a showroom display is generating enough of a profit to justify the space the display is using. Major retailers calculate ROI by vendor, breaking it down to ROI per square foot and comparing the results with the total square footage a vendor occupies. Vendors with the best ROI usually receive the best in-store locations and a greater percentage of a store's square footage.

Kitchen and bath showroom owners need hard information about whether a particular display is doing the job. More importantly, they need specifics about how cabinetry is performing, because that part of a kitchen sale generates the highest gross profit.

Another reason to break out cabinetry costs is that total sales figures can become distorted and misleading. For example, a display could have $6,000 dollars of cabinet costs and a combined cost of $10,000 for other products, bringing the total cost to $16,000. Total gross profit on sales generated by the display of $75,000 would show an ROI of 368% against a cost of $16,000. However, if the total gross profit of a display's cabinet sales was $45,000, when measured against the $6,000 of cabinet cost, the ROI would be 650%.

According to one recent survey of traditional kitchen/bath specialists and remodelers, the average investment made by kitchen and bath dealers for showroom products is $70,000, or $86 per sq. ft. of showroom space.

Based on the findings of that survey, there was no correlation evident between a showroom's size and a company's annual sales. Average sales per square foot of showroom space ran from a low of $281 (among firms doing $300,000 to $499,999 annually) up to a high of $1,053 (among those doing $1 million or more annually). However, firms with the lowest sales volumes, under $300,000, had only the second lowest sales per square foot, at $362.

The survey results revealed, for example, that:

  • Showrooms with annual sales under $300,000 averaged 1,320 sq. ft. in size, and had invested an average of $37,500 (at their cost) for their displays. Average sales per sq. ft.: $362.
  • Showrooms with $300,000$499,999 in annual sales averaged 1,250 sq. ft. in size, and had invested $87,500 (at their cost) for their displays. Average sales per sq. ft.: $281.
  • Showrooms with $500,000-$699,000 in annual sales averaged 1,350 sq. ft. in size, and had invested $56,250 (at their cost) in displays. Average sales per sq. ft.: $421.
  • Showrooms with $700,000-$999,999 in annual sales averaged 2,023 sq. ft. in size, and had invested $75,000 (at their cost) in displays. Average sales per sq. ft.: $505.
  • Showrooms with $1 million and more in annual sales averaged 1,515 sq. ft. in size, and had invested $96,154 (at their cost) in displays. Average sales per sq. ft.: $1,053.

The survey also revealed an interesting fact about showroom owners: Far less than half of the respondents just 39%, in fact said they calculate ROI (return on investment) for their showrooms. Of those who do, the average is 25%.

As the survey results indicated, it's difficult to draw a direct correlation between product costs and gross profit on sales or square footage used. There's also no industry standard for ROI, such as the 33% to 40% gross profit on sales that's been touted as the industry standard for years.

However, it's not really rocket science to understand ROI, because if you know the costs (including overhead) for a given display, and one sale has covered the costs, then all future sales from that display will be "gravy" and will increase the ROI.

Be aware, however, that even though sales may have covered the costs of a display, a significant increase in overhead for the whole showroom such as increases in rent or additional payroll could threaten a favorable ROI.

David McNulty, CKD, president of Kitchen and Bath Creations in Chicago, owns and operates a showroom that that's 1,250 sq. ft. in size. Total display square footage is 850 sq. ft., including a bathroom (which is used as a display); 400 sq. ft. is used for offices.

Kitchen and Bath Creations' gross profit on sales from Display A was $111,650. The cost of cabinets and labor to install the display was $16,650. The display uses 169 sq. ft. of space. The ROI is 668% per square foot.

The company's gross profit on sales from Display B was $49,006. The cost of cabinets and labor to install that display was $7,513. The display uses 84 sq. ft. of space. The ROI is 652% per square foot.
Gross profit on sales from Display C was $68,617. The costs of cabinets and labor to install the display was $2,097. The display uses 40 square feet. The ROI is 3,172% per square foot.

As you can see, although McNulty has a good return on his displays, there is still no comparison to be made or correlation drawn between sales, the amount of investment made or square foot used in his showroom that establishes any trend.

ROI, of course, should not be the only criteria deciding the value of a display. McNulty notes, for example, that one display was designed specifically for window shopping. "It brings the people in, so I'm not too concerned about the ROI because it's helping to sell other products from other displays," he explains.

In fact, it's not an uncommon practice in retailing to utilize an element that will lead buyers in another direction. Supermarkets are experts at this. Although shelf space is provided to the highest bidder, store brands at lower prices and higher profits are positioned to attract the shopper's attention.

Other retailers use "loss-leader" marketing. They will advertise items at cost in the hope that shoppers will upgrade their choices and buy more expensive items. If this is true, then the items sold at cost will demonstrate a poor ROI, while actually producing a better ROI for other products.

If the ROI on a display is below expectations, changing out the entire display may not be necessary. Sometimes a simple "facelift" can do the trick.

Perhaps the colors or materials used to accessorize a display are dated, and could be changed. It may be difficult to "make a silk purse out of a sow's ear," but items like countertops, backsplashes, wall coverings and flooring can be changed to give a display an entirely different look. For example, the display could have a laminate countertop at the same time that granite tops are selling very well from other displays. Try changing the top to granite before changing the entire display. Similarly, changing a tile floor to a wood floor can produce better results.

Sometimes an emotional attachment to a display can cloud an intelligent business decision. Maybe the display in question is the first display ever put in the showroom and it's a staff favorite. However, if over the last year or more, no sales have been made from the display, emotional attachments should take a back seat to financial considerations.

As a general rule, it's useful to get feedback from salespeople before doing away with a display. Salespeople can provide key insights about certain displays. Perhaps a special feature of a display has gotten a lot of attention from prospects and provides a springboard to sell other things.

When a display does outlive its usefulness, however, there are options on how to do away with it. The best option is to sell it. Two things happen when it's sold. The first is that additional items will probably be added to the display sale because it's unlikely to be a perfect fit in someone's home. The second is that the sale of the display gets recorded, and that will increase the ROI calculation.

Another option is to donate the old display to a charitable cause one that can be claimed as a write off for taxes. The final option is to take it home and hold a garage sale.

It's not difficult to calculate simple ROI per square foot.

First, set up an Excel or other form of spreadsheet like the one in the illustration provided. Next, identify each display with a unique number or name. Record the cabinet manufacturer's name, the date installed and the number of square feet of showroom space used by a display.

The date installed can be useful in getting a handle on the aging of displays. The average life span of a display is about three years, unless it's a business' trademark or is the "meat and potatoes" behind strong sales.

Next, record the date of the sale. This can provide important sales information regarding any special promotions, and will enable you to see how many sales were made for the display.

Post the gross cabinet sales, as well as the cost of cabinets sold. The hypothetical example used in the illustration provided assumes a 40% gross profit on cabinet sales. Compute the gross profit by subtracting the cost of the cabinets sold from the selling price of the cabinets sold. The net result is the gross profit from cabinets sold. Enter this figure onto the spreadsheet.

Add the totals for each column. Document the actual cabinet display costs on the total line. Be sure to include in the display's cabinet costs the overhead factor derived from operating expenses used by the business, because it's part of the cost for the display space. Set up the per-square-foot section below the sales figures.

Now, divide the total gross cabinet sales by the square footage of the display. Do the same for the cost of cabinets sold, the gross profit on cabinets and the display cabinet cost.

To calculate the ROI per square foot, subtract the display cabinet cost (DCC) from the gross profit on cabinets (GPC), then divide the remainder by the display cabinet costs (DCC). The abbreviated formula for Excel is as follows: GCC CCS = GPC DCC / DCC = ROI. (Note that the symbol ( / ) means divided by, in spreadsheet lingo.)

The ROI calculation is best done after the first year a display has been in place. As you can see by looking at the numbers, there could be all kinds of distortion if the calculations were made after one or two sales. Also note the date installed. Doing so will track the age of the display and provide input to the display's life span. The example provided reveals a good ROI for the display.

When these steps are repeated for all displays, there should be enough data to make informed decisions about keeping or changing a display. How long has a display been in place? Is it "paying" for the space it uses? Does it help sell other products?

As noted earlier, there is no real time line no industry standard for the life of a display. If the ROI is good and the display is about three years old, then keep it. If the ROI is below the standard set for the showroom, but has a positive effect on other products, then keep it. In contrast, if a display is just taking up space and not paying for itself, then age doesn't matter. Consider either changing the accessory items to try to generate more customer interest or sell it off and move on to the next display.

Whatever the case, ROI may just be the catalyst you have been waiting for to make a decision about a display's future. Put the ROI calculator in the same place where other management tools are kept. And don't forget to use it from time to time.