Lessons from the Great Recession

Now, as the economy is finally gaining some traction in 2012, it’s appropriate to take stock of the kitchen and bath industry. The devastating effects of the 2008-2009 Great Recession have shattered any illusions that our industry would be eternally robust.

Finding out the root causes of industry weaknesses is a little like peeling back an onion. Each explanation gives rise to further questions at a deeper level.

A nine-question Dealer Survey entitled, “Takeaways from The Great Recession,” drafted by SEN Design Group and distributed by Kitchen & Bath Design News to its dealer/design firm readership last year, generated 200 electronic responses. Here are three key survey results, and the lessons that must be learned from the Great Recession if our industry is to regain the vibrancy, scale and productivity of five years ago.

THREE KEY LESSONS

1. The vast majority of dealers are not professional businesspeople. The survey revealed that 83% of respondents never prepare an annual budget; 90% don’t have a business plan or strategic plan, and 80% admitted to being totally unprepared for the recession.

Imagine for a moment the next $60,000 kitchen you contract for doesn’t have a signed floor plan, elevation or perspective. What do you think would be the chances of success with the finished project in terms of client satisfaction? What do you think would be the likelihood of achieving the desired $24,000 in gross profit? Not very good on either score, right?

So how can a kitchen/bath firm owner expect to achieve a $1,000,000 revenue goal and $100,000 net profit goal without an annual budget and business plan?

A budget and business plan to a small business is like a floor plan and a set of specifications to a kitchen remodeling project. Apparently, our industry is such that we will take an endless number of hours to plan a prospect’s kitchen, but we won’t invest an equivalent amount of time to plan our own business!

The fact that that 82% of dealers from the survey don’t have a strong banking relationship and 89% don’t have a liquid portfolio equal to 6-12 months of fixed overhead expenses reveals two other weaknesses. First, most owners need a serious education in financial management. Second, most are grossly undercapitalized, relying on the illusion that customer deposits will adequately finance their operations.

Unfortunately, the industry’s historical emphasis on design has trumped the development of sound business management practices. If kitchen/bath design firm owners expect to recoup the business luster of yesteryear, they need to balance their outstanding design skills with much better business management skills.

Getting a Benchmarking Report, where your company’s financial performance is compared to others in the industry, would be another giant step forward. How can business owners know what’s possible if they don’t have access to accurate financial comparisons? How can a business owner gain a new perspective without an industry-specific business coach? According to the survey, 90% of respondents don’t receive business counsel from a trusted industry organization, board of directors or advisor. Such insulation from business reality is stultifying.

2. The vast majority of dealers reacted weakly to an absence of leads when the Great Recession began. The survey shows that 79% of respondents didn’t increase their marketing budgets. Most selected courses of action that were the easiest and least costly to implement – like marketing to past customers, dropping their price or marketing to allied professionals.

Word-of-mouth advertising can be good for your ego. But if that is all you are doing to keep your brand alive in your market, it won’t be much of a help when sales drop off. Marketing experts say even established companies need to annually invest 3% to 4% of their revenue in marketing. That percentage needs to increase when a serious recession sets in. That’s the only way a dealer can gain market share when prospects are few.

Furthermore, during a recession, the only motivation for consumers to get into your showroom will be a strong, value-based message. Historically, kitchen and bath dealerships haven’t been comfortable advertising themselves as a good value or having a low price.

The advent of digital marketing and social media has further confused the situation. To say that there needs to be a grounding in effective guerrilla marketing techniques for small businesspeople in this industry would be an understatement.

3. The vast majority of dealers had huge sales declines that would put most small operations out of business. Some 66% of respondents experienced a sales decline of 31% or more in 2009 compared to 2007, before the Great Recession took hold. Another 17% had a sales decline of more than 60%.

For far too long, this kitchen/bath industry has been driven by designers with a preoccupation for design creativity and fashionable products. It’s been an industry of order-takers – which became so abundantly clear in the aftermath of the Great Recession when designers proved to be incapable of motivating prospects to buy.

Going forward, designers must master the fundamentals of salesmanship. This will likely take study, discipline, role-playing, practice and preparation. But it is absolutely essential for renewed success and market share gains in the current economy.

There are all kinds of professional selling courses available; among the best are those that are conducted weekly, and extend for six months or more because they are the most effective in changing behavior and instilling proven techniques. Selling is like playing golf; to be really good requires a great deal of effective instruction and dedicated practice.

Business education, marketing education and professional sales training should be the lessons learned from the Great Recession. Without a renewed industry focus on these three disciplines, it will be a long, long climb back to the level of success we all took for granted a few years ago.

To speed the process along, trade associations that offer professional accreditations could give more weight to these disciplines with members needing to earn continuing education credits. Vendors could help underwrite the costs of business education, business coaching and sales training.

Additionally, vendors with co-op advertising programs should allow cash-strapped dealers to tap these dollars to pay for travel and lodging associated with the educational opportunities in these specific disciplines.

An industry crisis is a terrible thing to waste. I hope these lessons become cornerstones for positive industry reform.

Ken Peterson, CKD, LPBC, is president of the Chapel Hill, NC-based SEN Design Group and an instructor for “Competing & Thriving in the New Economy: Best Business Strategies for 2012” seminar that is co-produced by KBDN. Peterson can be reached at 1-800-991-1711 or kpeterson@sendesign.com.

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