Importance of ROI
Calculating the Return on Investment for a showroom display
can go a long way toward determining whether the display is pulling
its weight in helping a dealership remain profitable.
By Morton Block, CMKBD, IIDA
Today’s average kitchen and bath showroom may not be changing
dramatically in overall size, but it is experiencing a growing need
to pack more of a punch when it comes to displays than ever
before.
Competitive pressures and the increasing costs of doing business
have made that a fact of life for kitchen and bath dealers.
A related fact of life is that it’s becoming increasingly
important for kitchen and bath dealers to be aware of whether their
investments in showroom displays is translating into enough of a
profit to make the investments worthwhile.
That’s why it’s important for dealers to understand the concept
of Return on Investment, or ROI, for showroom displays.
The principle behind calculating ROI is to determine if the
investment made in a showroom display is generating enough of a
profit to justify the space the display is using. Major retailers
calculate ROI by vendor, breaking it down to ROI per square foot
and comparing the results with the total square footage a vendor
occupies. Vendors with the best ROI usually receive the best
in-store locations and a greater percentage of a store’s square
footage.
Kitchen and bath showroom owners need hard information about
whether a particular display is doing the job. More importantly,
they need specifics about how cabinetry is performing, because that
part of a kitchen sale generates the highest gross profit.
Another reason to break out cabinetry costs is that total sales
figures can become distorted and misleading. For example, a display
could have $6,000 dollars of cabinet costs and a combined cost of
$10,000 for other products, bringing the total cost to $16,000.
Total gross profit on sales generated by the display of $75,000
would show an ROI of 368% against a cost of $16,000. However, if
the total gross profit of a display’s cabinet sales was $45,000,
when measured against the $6,000 of cabinet cost, the ROI would be
650%.
ROI BENCHMARKS
According to one recent survey
of traditional kitchen/bath specialists and remodelers, the average
investment made by kitchen and bath dealers for showroom products
is $70,000, or $86 per sq. ft. of showroom space.
Based on the findings of that survey, there was no correlation
evident between a showroom’s size and a company’s annual sales.
Average sales per square foot of showroom space ran from a low of
$281 (among firms doing $300,000 to $499,999 annually) up to a high
of $1,053 (among those doing $1 million or more annually). However,
firms with the lowest sales volumes, under $300,000, had only the
second lowest sales per square foot, at $362.
The survey results revealed, for example, that:
- Showrooms with annual sales under $300,000 averaged 1,320 sq.
ft. in size, and had invested an average of $37,500 (at their cost)
for their displays. Average sales per sq. ft.: $362.
- Showrooms with $300,000$499,999 in annual sales averaged 1,250
sq. ft. in size, and had invested $87,500 (at their cost) for their
displays. Average sales per sq. ft.: $281.
- Showrooms with $500,000-$699,000 in annual sales averaged 1,350
sq. ft. in size, and had invested $56,250 (at their cost) in
displays. Average sales per sq. ft.: $421.
- Showrooms with $700,000-$999,999 in annual sales averaged 2,023
sq. ft. in size, and had invested $75,000 (at their cost) in
displays. Average sales per sq. ft.: $505.
- Showrooms with $1 million and more in annual sales averaged
1,515 sq. ft. in size, and had invested $96,154 (at their cost) in
displays. Average sales per sq. ft.: $1,053.
The survey also revealed an interesting fact about showroom
owners: Far less than half of the respondents just 39%, in fact
said they calculate ROI (return on investment) for their showrooms.
Of those who do, the average is 25%.
As the survey results indicated, it’s difficult to draw a direct
correlation between product costs and gross profit on sales or
square footage used. There’s also no industry standard for ROI,
such as the 33% to 40% gross profit on sales that’s been touted as
the industry standard for years.
However, it’s not really rocket science to understand ROI,
because if you know the costs (including overhead) for a given
display, and one sale has covered the costs, then all future sales
from that display will be “gravy” and will increase the ROI.
Be aware, however, that even though sales may have covered the
costs of a display, a significant increase in overhead for the
whole showroom such as increases in rent or additional payroll
could threaten a favorable ROI.
A CASE STUDY
David McNulty, CKD, president
of Kitchen and Bath Creations in Chicago, owns and operates a
showroom that that’s 1,250 sq. ft. in size. Total display square
footage is 850 sq. ft., including a bathroom (which is used as a
display); 400 sq. ft. is used for offices.
Kitchen and Bath Creations’ gross profit on sales from Display A
was $111,650. The cost of cabinets and labor to install the display
was $16,650. The display uses 169 sq. ft. of space. The ROI is 668%
per square foot.
The company’s gross profit on sales from Display B was $49,006.
The cost of cabinets and labor to install that display was $7,513.
The display uses 84 sq. ft. of space. The ROI is 652% per square
foot.
Gross profit on sales from Display C was $68,617. The costs of
cabinets and labor to install the display was $2,097. The display
uses 40 square feet. The ROI is 3,172% per square foot.
As you can see, although McNulty has a good return on his
displays, there is still no comparison to be made or correlation
drawn between sales, the amount of investment made or square foot
used in his showroom that establishes any trend.
ROI, of course, should not be the only criteria deciding the
value of a display. McNulty notes, for example, that one display
was designed specifically for window shopping. “It brings the
people in, so I’m not too concerned about the ROI because it’s
helping to sell other products from other displays,” he
explains.
In fact, it’s not an uncommon practice in retailing to utilize
an element that will lead buyers in another direction. Supermarkets
are experts at this. Although shelf space is provided to the
highest bidder, store brands at lower prices and higher profits are
positioned to attract the shopper’s attention.
Other retailers use “loss-leader” marketing. They will advertise
items at cost in the hope that shoppers will upgrade their choices
and buy more expensive items. If this is true, then the items sold
at cost will demonstrate a poor ROI, while actually producing a
better ROI for other products.
IMPROVING THE ROI
If the ROI on a display is
below expectations, changing out the entire display may not be
necessary. Sometimes a simple “facelift” can do the trick.
Perhaps the colors or materials used to accessorize a display
are dated, and could be changed. It may be difficult to “make a
silk purse out of a sow’s ear,” but items like countertops,
backsplashes, wall coverings and flooring can be changed to give a
display an entirely different look. For example, the display could
have a laminate countertop at the same time that granite tops are
selling very well from other displays. Try changing the top to
granite before changing the entire display. Similarly, changing a
tile floor to a wood floor can produce better results.
Sometimes an emotional attachment to a display can cloud an
intelligent business decision. Maybe the display in question is the
first display ever put in the showroom and it’s a staff favorite.
However, if over the last year or more, no sales have been made
from the display, emotional attachments should take a back seat to
financial considerations.
As a general rule, it’s useful to get feedback from salespeople
before doing away with a display. Salespeople can provide key
insights about certain displays. Perhaps a special feature of a
display has gotten a lot of attention from prospects and provides a
springboard to sell other things.
When a display does outlive its usefulness, however, there are
options on how to do away with it. The best option is to sell it.
Two things happen when it’s sold. The first is that additional
items will probably be added to the display sale because it’s
unlikely to be a perfect fit in someone’s home. The second is that
the sale of the display gets recorded, and that will increase the
ROI calculation.
Another option is to donate the old display to a charitable
cause one that can be claimed as a write off for taxes. The final
option is to take it home and hold a garage sale.
CALCULATING ROI
It’s not difficult to
calculate simple ROI per square foot.
First, set up an Excel or other form of spreadsheet like the one
in the illustration provided. Next, identify each display with a
unique number or name. Record the cabinet manufacturer’s name, the
date installed and the number of square feet of showroom space used
by a display.
The date installed can be useful in getting a handle on the
aging of displays. The average life span of a display is about
three years, unless it’s a business’ trademark or is the “meat and
potatoes” behind strong sales.
Next, record the date of the sale. This can provide important
sales information regarding any special promotions, and will enable
you to see how many sales were made for the display.
Post the gross cabinet sales, as well as the cost of cabinets
sold. The hypothetical example used in the illustration provided
assumes a 40% gross profit on cabinet sales. Compute the gross
profit by subtracting the cost of the cabinets sold from the
selling price of the cabinets sold. The net result is the gross
profit from cabinets sold. Enter this figure onto the
spreadsheet.
Add the totals for each column. Document the actual cabinet
display costs on the total line. Be sure to include in the
display’s cabinet costs the overhead factor derived from operating
expenses used by the business, because it’s part of the cost for
the display space. Set up the per-square-foot section below the
sales figures.
Now, divide the total gross cabinet sales by the square footage
of the display. Do the same for the cost of cabinets sold, the
gross profit on cabinets and the display cabinet cost.
To calculate the ROI per square foot, subtract the display
cabinet cost (DCC) from the gross profit on cabinets (GPC), then
divide the remainder by the display cabinet costs (DCC). The
abbreviated formula for Excel is as follows: GCC CCS = GPC DCC /
DCC = ROI. (Note that the symbol ( / ) means divided by, in
spreadsheet lingo.)
The ROI calculation is best done after the first year a display
has been in place. As you can see by looking at the numbers, there
could be all kinds of distortion if the calculations were made
after one or two sales. Also note the date installed. Doing so will
track the age of the display and provide input to the display’s
life span. The example provided reveals a good ROI for the
display.
When these steps are repeated for all displays, there should be
enough data to make informed decisions about keeping or changing a
display. How long has a display been in place? Is it “paying” for
the space it uses? Does it help sell other products?
As noted earlier, there is no real time line no industry
standard for the life of a display. If the ROI is good and the
display is about three years old, then keep it. If the ROI is below
the standard set for the showroom, but has a positive effect on
other products, then keep it. In contrast, if a display is just
taking up space and not paying for itself, then age doesn’t matter.
Consider either changing the accessory items to try to generate
more customer interest or sell it off and move on to the next
display.
Whatever the case, ROI may just be the catalyst you have been
waiting for to make a decision about a display’s future. Put the
ROI calculator in the same place where other management tools are
kept. And don’t forget to use it from time to time.