Kitchen & Bath Design News

JUN 2018

Kitchen & Bath Design News is the industry's leading business, design and product resource for the kitchen and bath trade.

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LEAH: In our last column, you defined an own- er's return as the total of three things: (1) an owner's market-rate salary, (2) company perks like car expenses and retirement benefits, and (3) pre-tax net profit expressed as a percentage of a company's overall income, right? KEN: Correct. For example, on a $3,000,000 "showroom business model," where the owner's main job is general and/ or sales management, I commented that his return should be 18-20%. So somewhere between $540,000 and $600,000 in total compensation. LEAH: That's a lot of money! Better than a lot of compensation packages for upper level corporate jobs. Plus, the owner is building enterprise value, which could deliver a heck of a payday if and when they choose to sell their business some day and retire. KEN: True enough. But analyses of hun- dreds of dealer financial statements show that most owners' returns are coming in at ab out 9-12%. LEAH: So really most kitchen and bath owners are achieving only half their potential. That's so sad! Why are these financial results so disappointing when consumer demand today seems to be at an all-time high? KEN: Well, if I limited my answer to one word, it would be "time." Dealers spend way too much time grinding away in their opera- tions to keep up with that demand you men- tion. And not nearly enough time away from their businesses, learning what they don't know about running financially successful operations. Granted designing, ordering and installing kitchens and baths is a complex and time-intensive business. But if owners made the time, they could learn about the most impactful competitive advantages that could literally turn their operations into engines for genuine wealth. LEAH: That would be time well spent. From your 40+-year perspective in the industry, what do you consider to be the key competitive advantages dealers need the time to learn, develop and implement? And how much would each fill the approximate 9-10% gap between the typical owner's actual return and his or her potential return? KEN: Great questions! Without a doubt, the very first advantage would be financial know-how. Numbers run a business. The most successful entrepreneurs understand their financial statements and use them to make intelligent business decisions, always advancing their operations forward. It gives them visibility and maneuverability. Plus, the insights and confidence if they choose to pursue economies of scale where certain functions – like marketing, buying and accounting – are centralized to serve satellite showrooms that are supremely profitable. LEAH: I have been at SEN for just over five years now, but I know firsthand that very few owners truly know what their financial state- ments say about their operations. So once owners understand what financial metrics must be achieved to make a solid net profit year after year, they will be able to create a strategic plan for building their businesses into those engines for wealth. For you, mas- tering the financial side of the business seems to be pivotal to achieving this goal. KEN: Yes, it is. In my view, that skill alone will close the 9-10 point gap by one-third. A close second important advantage would be purchasing power. Typically, in Europe, 90% of the dealers belonged to one and buy over 75% of their products from them. As a result, dealer gross profit margins averaged 47%. By contrast, fewer than 7% of the estimated 6,000 American kitchen and bath dealers today belong to one of four buying groups. LEAH: It could also be that American dealers prefer independence to the interde- pendence that Europeans leverage for much higher gross margins. Didn't Kitchen & Bath Design News report about a year ago that the average U.S. dealer's gross margin is only 29%? KEN: Indeed, interdependence is one of the key principles advocated by Stephen Covey in his iconic book: The 7 Habits of Highly Effective People. And speaking of higher gross profit margins, that would be a third competitive advantage I have witnessed making a huge impact on an owner's return. Like buying power, it's probably worth 2 points of the 9-10 point gap we have identi- fied. Research proves that consumers will pay more – even a lot more – for a kitchen or bath if they experience a superior service they feel compelled to have. LEAH: Such as the interactive client budgeting system you developed with your own Connecticut-based showrooms, cor- rect? It empowered your sales designers to charge 30-40% more for your projects than the competition. If I'm not mistaken, those four showrooms averaged 51% gross profit for 8-10 years running. And that was 30 years ago! Clearly, most owners and designers today have not yet learned how to market their peo- ple, systems and services effectively. As well as not buying their products better. So they ultimately toil at 29% average margins while the Europeans thrive on 47%. KEN: Yes, that proprietary sales process was something our 14 sales designers consid- ered to be central to their success. But they received extensive and consistent training on the selling fundamentals that contributed to their high level of professionalism and pro- ductivity. They certainly weren't order takers. They knew how to motivate prospects to buy. LEAH: To me, most people selling kitchens and baths today prefer to consider themselves designers, not salespeople. I guess they expect their design solutions to pretty much sell themselves. So when a recession hits, most sales designers are probably not as capable of motivating the fewer prospects they have to get off the fence. KEN: That's exactly what happened 10 years ago in our country's last recession. Business fell like a rock off a cliff. But there was another, bigger reason for those dark days. Owners were so close to their opera- tions, they couldn't see the fatal flaws in their own business models. Had they belonged to a strategic, industry-specific community – where they were comfortable enough to share their financial statements – I believe thou- sands of kitchen and bath firm owners would still be in business today. " Numbers run a business. The most successful entrepreneurs understand their financial statements and use them to make intelligent business decisions, always advancing their operations forward." Unfair Competitive Advantages BY KEN PETERSON, CKD AND LEAH PETERSON 22 Kitchen & Bath Design News • June 2018 NEXTGEN MATTERS

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