Planning for Growth

Planning for Growth

Kitchen and bath dealers are projecting increases in 2004 for everything from gross profit margins to new retail outlets, though they still struggle with finding qualified help, managing leads and monitoring profit margins, a new survey reports.

By Janice Anne Costa

Today's kitchen and bath dealers are clearly planning for growth growth in sales volume, growth in number of projects sold, growth in gross profit margins. In fact, nearly one in five is even planning for growth in terms of opening an additional outlet in the near future.

However, even as the future looks bright, several key challenges remain specifically, finding qualified installers and subcontractors, increasing leads and leads-to-sales ratios and monitoring profit margins to ensure that the increased business also leads to proportionally increased profitability.

That's the word according to a recent survey by Kitchen & Bath Design News. The survey which polled kitchen and bath dealers nationwide about their business practices and plans for 2004 showed a largely optimistic kitchen and bath dealer projecting significant increases in business for the upcoming year. In fact, respondents said they expected to sell 25.1% more complete kitchens and 25.4% more complete bathrooms in 2004 as compared to 2003.

Survey respondents reported that they sold an average of 88.5 complete kitchens and 85.3 complete bathrooms in 2003, at an average cost of $32,024 and $14,029 respectively (see Graph 1). In 2004, they expect to sell an average of 118.2 complete kitchens, at an average cost of $36,109, and 114.2 complete bathrooms, at an average cost of $14,747, the survey showed.

The average reported sales volume for 2003 among those surveyed was $1.07 million with that number expected to increase to $1.42 million in 2004, according to survey respondents.

Likewise, kitchen and bath dealers cited their average gross profit margin for 2003 at 31.2% notable, in that a previous Kitchen & Bath Design News survey completed in mid-2003 saw dealers projecting an average gross profit margin of only 29.3%. for the year and they are now projecting that number will increase to 33.8% in 2004 (see Graph 2).

While dealer respondents admitted that monitoring and maintaining profit margins are still major challenges, many said they felt more confident in this area, and are taking steps to work toward greater profitability, rather than just greater overall sales volume.

As one dealer explained it: "The shortage of qualified, quality employees means we're forced to take on fewer projects, so we've learned to make each one more profitable. As a result, we're actually more successful now than when we were doing more work because we've learned how to make the work we have really count."

Taking the Lead
Lead generation both the cost, and the ability to turn them into sales was cited as a significant issue by a number of dealers. It was also rated as one of their biggest challenges, according to survey results.
As one dealer noted: "Leads are where it begins and ends. You need to know how to get them, how to figure out which ones are qualified, and how to turn them into business. It sounds easy, but it's not it's
an art and a science."

Survey respondents said they generate approximately 27.6 leads per month, and estimate their "lead-to-sales" ratio as 2.3 to 1.

Said one dealer: "I think there's a lot of focus on generating leads, but that can backfire [if you make that your primary purpose] because it becomes all about quantity, and not quality. What's really important is what you do with them, and whether you can turn the leads into sales once you get them in the showroom.

We've improved our ratio on that by having members of our staff 'mystery shop' at other kitchen and bath firms in the area to see what they aren't doing that we can."

While most dealers said they use various forms of public relations to generate leads, word of mouth was still viewed as the most compelling way to obtain quality leads.

However, even with referrals, many customers shop around before buying, according to several dealer respondents. As one explained: "We do find that people seem to be going to more places before committing to a remodel; they aren't necessarily comparison shopping for price, but they want to feel like they're seeing enough to know what they want."

Survey respondents estimated the average cost of generating a sales lead at $338.08, though many admitted that it was hard to be absolutely sure what they were spending to generate leads. "A lot of the costs aren't so tangible. I mean, how do estimate the cost of doing a few extra fixes for someone or making an extra visit to their home to get the positive word of mouth? In fact, how do you ever measure the cost of getting good word of mouth? It's free, yet it's not really free because sometimes you have to give something extra to create that positive feeling [that generates extra referrals]."

Other dealers discussed putting programs in place to try to more specifically measure the cost of generating a lead. Said one, "We've finally reached the point where we're doing some advertising and marketing, so it will be interesting to see what we get out of it, and if it's paying off the way we'd hoped. We have a spread sheet program to track it all, and we think it's going to be very positive for us."

One of the primary ways kitchen and bath dealers say they differentiate themselves from their competitors is with top-quality service. In a market that is still, to some extent, challenged by the big boxes' ability to offer discounted prices due to bulk buying, service is seen as key with the more services offered, and the more personalized the service, the better.

To that end, more than a quarter of all respondents (25.4%) say they fabricate their own countertops (see Graph 5). "We like to do it all our clients like that, and it means we know the job gets done right," said one dealer who offers full turnkey service with all the extras.

Nearly a third (30.1%) said they currently sell appliances (see Graph 4) with another 6.9% noting that while they don't currently sell appliances, they are planning to within the next year. As one dealer explained, "It's not even about the profit margins as much as it is about being a full-service dealer. You need to meet all your clients' needs that's what it takes to stay competitive."

"We've used outside fabricators, and lost business because things [went wrong] and if it's your job, you are the one the client holds responsible. We still subcontract [some work out], but now we use only the same three guys because we know and trust them. Your reputation is all you have, so if you let outside guys do things and they don't do it right, you can destroy your good name. The more you do yourself, the more control you have," another added.

Likewise, when it comes to cabinetry, 10.3% of dealers said they manufacturer their own, 61.8% said they can modify what they sell and 27.9 percent do both (see Graph 6).

"We don't see as much demand for custom you can do so much with semi-custom and even stock, we see more people putting their money into other areas [like] countertops. But people still want to know you can give them what they want, if they want something special," a dealer added

When it comes to competition, the majority of dealers surveyed said they believed the level of competition had not changed significantly in the past year. However, a significant percentage (26.7%) said they believed competition had gotten more intense, while another 8.1% said competition had actually gotten less intense in the past year.

Big box chains were still cited by many as a major competitive challenge, primarily because of pricing issues.

"They can't compete on service, but they can offer great prices, and that can be hard to overcome especially if your primary clientele isn't the real high end of the market," said a dealer who's located within two miles of two major home centers.

"Competing in price with the big boxes is a real issue," another dealer concurred. "Price margins may have to drop slightly and service has to rise if we want to keep these people in our showroom and out of the EXPO Center [located nearby]."

Another dealer who competes with a local home center believes, "It's not as bad as we thought ten years ago when we first saw the [big box chains] coming out. For a while, we thought it might be the end of the independent dealer. But we still have plenty of customers, and most of our clients hate the home centers [in terms of] the service aspect.

"Still, the big boxes are a threat in some ways. They offer unbeatable prices. And it's hard to explain to clients why [we can't] offer comparable ones. We tout our service, but today's consumers are so sophisticated, they expect service, they don't want to pay extra for it. And until they've dealt with a home center for a complete project, they may not realize how much service they're not getting until it's too late."

In the same vein, more than a quarter of those surveyed (25.6%) said they view Internet product service providers as a viable competitive threat. As one dealer stated, "A few years ago, after the dotcom bust, we figured they [Internet companies] were dead and gone. But now they're beginning to come back, slower and maybe with more substance. We're not worried, per se, because it's still a touch and feel business, but we keep an eye on it. And it really forces you to be more high-tech [and have a Web presence] because everyone, even the kids, surfs the Web these days and if they don't find you, they'll find someone or something else."

Of course the Internet also brings new challenges that can make business more difficult, dealers note. As one stated, "One of our biggest challenges right now is dealing with 40-50-year-old clients who get way too much misinformation off the Internet, and then challenge all the information they have asked us to supply.

These clients want tremendous hand holding, but won't allow us to work efficiently based on day-to-day

A number of dealers also said they felt threatened by cut-rate remodelers and handyman services that take their cues from the home shows on TV which make everyone feel like an expert. "They try to convince everyone that they're design savvy enough and educated enough to buy their own products, then they promise to put them in for cheap," one dealer lamented. "Unfortunately for them, you get what you pay for.

It always costs twice as much to have a project done badly and it takes four times as long to fix!"

Another dealer believes, "It's a case of consumers not really understanding the whole process they have too much knowledge, but all the wrong kind. It's not even a money issue, it's an ego issue. They think they can do it themselves because they don't comprehend the process, but they saw it on TV and think they do, and then some guy out of a truck says, 'Yeah, that other guy is just trying to take advantage of you. But you're smart enough and sophisticated enough not to need their advice and you can save money, too.' How can they resist that?"

Just as many argue that real estate is all about location, location, location, many kitchen and bath dealers surveyed cited their showroom location as a key factor in their success.

According to the survey, some 57.1% of respondents are located in a free-standing structure away from a business district; 22.1% are located in a downtown retail business district; 8.1% are located in a design center; 6.9% are based in a general shopping mall, and 1.2% are located in a home improvement shopping mall (see Graph 3). Only 11% said they expected to relocate in the next 12 months (see Graph 7).

"Although we don't get a lot of walk-in traffic from pedestrians, it helps that we're in an area [with a lot of street traffic] where our window displays get noticed," stated on dealer. "People see us, even when they're not thinking about kitchens and baths, and they admire the displays, we're visible. Then when they do decide to remodel, they're more likely to remember us and stop in."

But not everyone agreed that location was significant. As one dealer explained it, "You need to be a destination spot. With the right kind of showroom, it doesn't matter where you are because you are a destination in your own right, and they will come to you."

In addition to issues with lead generation and maintaining gross profit margins, labor issues were repeatedly cited by survey respondents as a significant challenge. As one dealer explained it: "It's all but impossible to find qualified, skilled field labor. We could do twice the volume if we had the people who could do it the way I can and the way my clients expect it to be done. We continue to beat the bushes, and ask all our contacts about good qualified people, but it's a real problem."

Concurred another dealer: "Unreliable or poorly trained installers are a really big problem for us. We don't bring in enough money to keep people on staff full time the way we'd like, so we end up subbing out, but then we don't always get the availability [of the installers we want to work with], so we end up at the mercy of whoever we can get. It's very frustrating. It also can cause an inconsistency in the [quality] of the finished project. That can hurt your chance of referrals."

"My toughest challenge is always labor management," said another dealer. "I am looking for a way to inspire my people to perform at a higher level, so they are always trying to do their best."

Still, another dealer noted, "One of our toughest challenges is bidding against unqualified 'remodelers' who work off the back of their trucks and promise to deliver the same quality project. We, as an industry, need to educate the consumer!"

Rising costs of insurance, medical benefits and materials were also cited as major challenges facing kitchen and bath dealers today. "How do you stay profitable when costs are rising, and the home centers are pressuring us to lower prices? We've had to respond to some degree by 'dumbing down' our designs in order to stay profitable," complained one dealer.

Likewise, uncooperative vendors were noted by several respondents as an issue that challenges productivity.

"We're learning to do business with fewer and fewer companies to give our clients what they need, we can't afford to do business with vendors we don't know and trust," one dealer stated.

Another dealer cited the importing of Chinese cabinets as a problem he foresees becoming more of an issue in the future. "They knock down the prices for American-made cabinets, and reduce the profits of the end seller," he said.

Several dealers cited costly errors as a major challenge. "The solution for that, obviously, is more training," one dealer said. "Also, we are thinking about giving bonuses to staff based on an [acceptably low] percentage of errors."

Dealers seemed to have mixed views on whether new technology means fewer errors or not.

"In theory, it's a good thing, having so much done on the computer," believes one dealer. "It should be more accurate and you should have more efficiency and less mistakes. But not only do you have the learning curve, and maybe everyone doesn't know the programs the way they should, so errors can happen that way. But also, there are still problems [with manufacturers] because everyone is on a different system. There are all these different programs and catalogs and libraries [when using design software] where you have to substitute because they don't have the right product. They're not compatible, and it seems like it almost makes mistakes inevitable. I miss being able to have everything done by hand so I could check it manually!"

For those relatively new to the field, getting name recognition was cited as a challenge.

As one designer noted: "The big boxes have the big, splashy TV campaigns, and many of the [independent] dealers are third-generation places that have been around forever, where everyone in the community knows them. If you don't have either of those going for you, you have your work cut out
for you."

However, that designer said she's worked hard at networking with contractors, architects and builders to try to raise her visibility and gain referrals. "Even dealers who have been around a long time can do well to network and get out there," she remarked. "People forget that it's a people business."

Conversely, several long-time kitchen and bath dealers are more concerned with their ability to successfully expand to new locations to meet demand.

"We need more outlets to meet the 'known' need of the market," explained one dealer.

"But that means we need more people, more training, and more money to invest. It also may mean expanding our product offerings, which also means we need more knowledge. When you think about it, growing is actually the biggest challenge of all!" KBDN