Inflation Is Back
authors Patrick O'Toole | December 3, 2021
Remodeling and home improvement professionals have a reason to feel upbeat right now. No matter which services you sell—from repairs and replacements to additions and whole-house projects—demand for services is very strong. The surge in business that accompanied lockdowns in 2020 continues unabated. That is why a celebratory atmosphere filled the first in-person gathering hosted by Qualified Remodeler since 2019.
The owners, leaders and CEOs who made presentations at TOP 500 LIVE, held Nov. 1-3 in New Orleans, universally acknowledged their growth and success in recent months. Those thoughts were expressed in their prepared remarks. A more sober and balanced perspective came later in unscripted panel discussions.
That is when CEOs addressed some new and persistent challenges such as product delays, the worsening labor shortage and lengthening backlogs. Ken Kelly, owner and president of Kelly Roofing in Sarasota, Florida, may have been the first to mention the i-word: inflation.
Ever since the government began supporting the economy with upwards of $5 trillion to offset the effects of the COVID-19 pandemic, experts knew that inflationary pressure would inevitably follow. The only question was whether it would be transitory or longer lasting. Context is important here.
Kelly was asked his opinion on the acceptable level of net profit required of a company that intentionally scales up to higher revenue levels. “Does it have to be 10 percent?” the audience member asked, “Or could it be lower during a period of growth?” Kelly’s response: “Remember that inflation is at 5.8 percent right now, so even at 10 percent net profit, you are really only earning less than five.”
That was a thunderbolt. Maybe the champagne should go back in the fridge for now. Even though demand is strong and will likely stay that way, inflation and other market complexities have made the path forward for entrepreneurs less clear-cut.
The latest core inflation numbers are actually higher than those cited by Kelly. It is now 6.2 percent, the highest level since 1990. Gas is at $5 per gallon in California and parts of the East Coast. Rising prices for building materials is already a concern, particularly for remodelers with prices set in contracts for projects that won’t be installed for many weeks.
Donnie McMillan Jr., CEO of fast-growing DaBella in Portland, Oregon, added his thoughts on the question of the correct net profit for a growing company. “Profit is everything; nothing else matters.” This is wise counsel as remodelers and home improvement entrepreneurs continue to enjoy strong demand.
Indeed, these are good times. But continued inflation could easily sap consumer confidence. If that were to happen, a company that has scaled up with low or non-existent profits would likely face the challenge of a more costly overhead, a higher cost of leads, and a potential for losses.
What if consumer financing were to rise to a price where it was no longer a good choice for consumers? The percentage of your business is contingent on consumer financing would certainly decline.
Inflation, a worrisome foe that has been dormant for more than three decades, is back. Putting the focus on consistent profitability, even at the expense of easy growth, is the prudent course of action. QR
Patrick O’Toole is co-owner of SOLA Group Inc. He serves as chief of content for the company and publisher of Qualified Remodeler.