Rising Costs

Rising Costs

Business costs are on the rise, while gross profit margins continue to challenge kitchen and bath dealers, a new K&BDN survey reports.

By Janice Anne Costa

The survey which polled dealers nationwide about the cost of doing business in the kitchen and bath industry showed the great majority expecting double-digit cost increases in 2003, with respondents projecting an average increase in business costs of 12.7% by year's end (see Graph 2). While 75% of dealers expected increases, another 20% said they expected costs to remain the same, and 5% projected cost decreases.

The area in which dealers believed cost increases were most likely was salaries and commissions, where 65% of respondents said they expected cost increases in 2003. More than half of all dealers expected to see increases in the cost of products (60%), general overhead (60%), materials (59%) and subcontractors (51.3%), while 44% projected increases in technology costs, 36.8% expected to pay more for advertising and promotion and 34.3% saw training costs increasing in 2003 (see Graph 4).

However, this fact might prove less than helpful to dealers looking to control overall costs, since these items were noted by respondents as among the least significant of business costs, with travel and entertainment,  advertising and promotion and miscellaneous costs totalling a mere 7.6% of dealers' total business costs, according to the survey.
The largest percentage of dealers' business costs (see Graph 3) was eaten up by product costs (35.7%), salaries and commissions (21.6%), subcontractors (12.2%), general overhead (11.3%) and material costs (8.7%).

Despite the hype training and technology have gotten in the industry in recent years, dealer responses suggest that these are still not a big part of their firms' investment strategies at least not yet with the amount of money spent for training and technology totalling a mere 1.2% and 1.7%, respectively, of their companies' overall costs.

Margin Goals
Perhaps the most notable result of the survey was the evidence of dealers' continued struggles with their gross profit margins. Survey respondents seem to be setting lower gross profit margin goals than in years past, with dealers reporting their average goal for gross profit margin at a less-than-ideal 33.8%.
Despite setting lower gross profit margin goals, dealers still reported having problems meeting these goals, with survey respondents saying they expect their actual gross profit margin to be only 29.3% in 2003 a full 4-1/2% lower than their average goal (see Graph 1).

Yet, many felt that reaching acceptable margins was largely out of their hands, citing factors such as rapidly climbing insurance costs (see related story, Page 66), change-orders, subsidiary product costs (i.e., displays and promotions), scheduling difficulties and fast-growing labor and product costs as making a serious dent in profits.

Labor costs, too, seem to be a growing concern as dealers note difficulties in finding qualified help. In fact, one Midwest dealer believes, "Competent help is becoming an endangered species...you need to pay more money to find good people because there just aren't as many around these days."

An East Coast dealer concurred: "Labor costs are hard to control, particularly with subcontractors, who seem to be demanding more and more money, and providing less and less quality. Even in a rocky economy, it's hard to find good employees, and when you do, you have to pay more for them sometimes a lot more. But what's the alternative? Giving up on quality? If you don't [spend on] quality personnel, you end up paying for it on the other end in [the form of] errors and change-orders." Indeed, estimating mistakes, organizational problems and miscommunication were all cited as areas responsible for increasing costs.

Oddly enough, while many dealers cited problems finding good employees, not as many seemed to be investing in training. In fact, training costs were seen as comprising a mere 1.2% of the overall cost of doing business, with only a third of respondents planning on investing more money in training in 2003.

Margin Slippage
While dealers agreed that despite their best efforts, some margin slippage is inevitable, not all agreed on how much should be considered tolerable, or what measures they should take to prevent it.

Of course, to correct margin slippage, the first step is always to identify when and how the problem is happening. Reviewing projects regularly for margin slippage is essential, most dealers agree, yet the majority (58.3%) said they reviewed jobs for margin slippage only after the project was completed (see Graph 6). Some 16.7% of dealers took a more proactive approach, reviewing projects for margin slippage on a weekly basis, while 5.6% said they reviewed projects every two weeks, 13.9% reviewed projects once a month, and a mere 5.6% said they never review projects for margin slippage.

Even in reviewing projects for margin slippage, some spouse the view that it's not a cut and dried process. As one dealer noted: "People think it's a science, but it's part art and part science just like design. You have to watch the pennies, but also trust your intuition. You can lose money in ways that aren't always easy to measure, so you can't just just take an accountant's approach. You have to know your business, too, and know when something feels off. That is a big part of controlling slippage."