1998 Performance Benchmarks Reveal Keys to Higher Profits

by WOHe

1998 Performance Benchmarks Reveal Keys to
Higher Profits

Hackettstown, NJ – High-profit kitchen and
bathroom design firms reported sales growth last year of nearly 21%
over 1997, compared to 12% for the typical kitchen and bath firm,
according to a newly released report just completed for the
National Kitchen & Bath Association (NKBA).

The NKBA’s “Performance Analysis Report (PAR)” study was conducted
for the second consecutive year in 1998 in conjunction with the
Chicago-based Arthur Andersen. The study – aimed at providing
critical performance benchmarks with which kitchen and bath dealers
can compare their company’s results – revealed, once again, that
there are a number of distinct differences between the way
“high-performance” companies operate and the way “average”
companies operate.

The 1998 PAR study, whose results were released last month, was
based on 1997 data. Among its key conclusions were the
following:

1. High-profit firms achieve a higher gross margin with the same
mix of sales as the typical firm. Of all the companies
participating in the 1998 study, kitchen sales comprised about
71.2% of their total annual sales volume. Bath sales accounting for
some 14.8%, while all other sales – including home offices –
accounted for roughly 14%. However, while these percentages varied
only slightly for high-profit firms, high-profit firms reported a
gross margin percentage of 36.24%, compared to 34.10% for all
firms.

2. High-profit firms achieved higher growth rates in 1997. While
the typical kitchen and bath firm participating in the PAR study
reported sales growth of roughly 12% high-profit firms were able to
achieve nearly 21% growth during the same period.

3. High-profit firms continue to achieve superior personnel
productivity with comparable compensation levels. High-profit firms
report very similar compensation per person results compared to the
typical business. However, they achieve superior output from their
workforce compared to other businesses. This superior productivity
is consistent with the superior sales growth reported by
high-profit firms.

4. High-profit firms spend less of their gross margin on
non-personnel-related expenses. Non-people expenses are often
considered more fixed in nature – for example, rent, depreciation,
utilities and the like. Regardless of this fact, high-profit firms
augment their advantage in personnel productivity by maintaining
tighter control over the non-people expenses of the business. They
spend significantly less of their gross margin on both payroll and
non-payroll operating expenses. It is this superior expense control
that is one of the primary drivers of their superior overall
profitability.

5. High-profit firms carry much less inventory than the typical
firm does. In fact, there is a distinct difference in the number of
days of inventory carried by high-profit firms compared to other
businesses. In 1997, for example, high-profit firms carried roughly
10 less days of inventory on hand than the typical firm. Based on
approximately one million in sales annually at a gross margin of
35%, the 10 less days of inventory on hand for high-profit firms
equaled about $18,000 less of inventory on hand, rep-resenting a
significant advantage in cash flow for high-profit firms.

“Clearly, high-profit kitchen and bath firm owners are those who
know the financial make-up of their business,” said Rick Prohammer
of Arthur Andersen. “They have a good understanding of their fixed
and variable costs, and know them well enough to maximize
profitability on almost each and every project
they complete.

“Other firms may have high-end projects that they complete, but
could be losing money on up to 40% of those designs,” Prohammer
added.

In other PAR study findings:

  • While custom cabinets still represent the majority of sales for
    most kitchen and bath dealers, semi-custom appears to be gaining,
    particularly in the Midwest and among those dealers with smaller
    annual sales (less than $500,000).
  • These same dealers also feature moderately-sized showrooms,
    between 1,001 and 2,000 sq. ft. in size.
  • Dealers who sell predominantly custom and semi-custom cabinetry
    are much more likely to charge a design fee than dealers who sell
    predominately stock cabinetry.
  • Those selling mostly custom command the highest design fees –
    an average $957 compared to $7111 for semi-custom firms and $590
    for stock firms. Dealers in the Northeast receive the highest
    design fees (an average of $1,084); the Midwest and the West
    receive an average of $809 and $816, respectively, while the South
    trails other regions considerably with an average of $634.
  • With the Year 2000 fast approaching, nearly all dealers use
    computers for word processing. Interestingly, high-profit firms are
    less likely than other firms to use computers for design or
    estimating, although an additional 17% of these businesses
    planned
    to start using the computers for estimating.
  • When it comes to financial management, high-profit firms are
    apparently somewhat more inclined than others to use computers, the
    study suggests.

    In addition, more firms are planning to use on-line services and
    CD-ROM product catalogs. About 38% of all reporting dealers said
    they used on-line services in 1997 – up from about 23% from the
    previous PAR study report. An additional 20% reported that they
    planned to get on-line in 1998.

Editor’s Note: Additional details on the NKBA’s
1998 Performance Analysis Report will be explored in upcoming
issues of Kitchen & Bath Design News.

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