Rising Costs

by WOHe

Rising Costs

Business costs are on the rise, while gross profit margins
continue to challenge kitchen and bath dealers, a new K&BDN
survey reports.

By Janice Anne Costa

Business costs are climbing at a much higher rate than inflation,
particularly in the areas of product and material costs, salaries,
insurance and general overhead. At the same time, kitchen and bath
dealers are setting lower gross profit margin goals than ever and
frequently still failing to meet these goals, according to a recent
survey by Kitchen & Bath Design News.

The survey which polled dealers nationwide about the cost of
doing business in the kitchen and bath industry showed the great
majority expecting double-digit cost increases in 2003, with
respondents projecting an average increase in business costs of
12.7% by year’s end (see Graph 2). While 75% of dealers expected
increases, another 20% said they expected costs to remain the same,
and 5% projected cost decreases.

The area in which dealers believed cost increases were most
likely was salaries and commissions, where 65% of respondents said
they expected cost increases in 2003. More than half of all dealers
expected to see increases in the cost of products (60%), general
overhead (60%), materials (59%) and subcontractors (51.3%), while
44% projected increases in technology costs, 36.8% expected to pay
more for advertising and promotion and 34.3% saw training costs
increasing in 2003 (see Graph 4).

Few dealers were projecting cost decreases in 2003, though some did
seem optimistic about achieving lower costs in areas such as travel
and entertainment (where 17.9% of those surveyed expected their
costs to decrease), advertising and promotion (where 13.2%
projected lower costs) and miscellaneous costs (where 12.5% of
respondents expected a decrease in costs). Not surprisingly, the
areas where more dealers expected cost decreases represented the
types of expenses that, unlike products, are more easily controlled
by the dealers themselves.

However, this fact might prove less than helpful to dealers
looking to control overall costs, since these items were noted by
respondents as among the least significant of business costs, with
travel and entertainment,  advertising and promotion and
miscellaneous costs totalling a mere 7.6% of dealers’ total
business costs, according to the survey.
The largest percentage of dealers’ business costs (see Graph 3) was
eaten up by product costs (35.7%), salaries and commissions
(21.6%), subcontractors (12.2%), general overhead (11.3%) and
material costs (8.7%).

Despite the hype training and technology have gotten in the
industry in recent years, dealer responses suggest that these are
still not a big part of their firms’ investment strategies at least
not yet with the amount of money spent for training and technology
totalling a mere 1.2% and 1.7%, respectively, of their companies’
overall costs.

Margin Goals
Perhaps the most notable
result of the survey was the evidence of dealers’ continued
struggles with their gross profit margins. Survey respondents seem
to be setting lower gross profit margin goals than in years past,
with dealers reporting their average goal for gross profit margin
at a less-than-ideal 33.8%.
Despite setting lower gross profit margin goals, dealers still
reported having problems meeting these goals, with survey
respondents saying they expect their actual gross profit margin to
be only 29.3% in 2003 a full 4-1/2% lower than their average goal
(see Graph 1).

Yet, many felt that reaching acceptable margins was largely out
of their hands, citing factors such as rapidly climbing insurance
costs (see related story, Page 66), change-orders, subsidiary
product costs (i.e., displays and promotions), scheduling
difficulties and fast-growing labor and product costs as making a
serious dent in profits.

Labor costs, too, seem to be a growing concern as dealers note
difficulties in finding qualified help. In fact, one Midwest dealer
believes, “Competent help is becoming an endangered species…you
need to pay more money to find good people because there just
aren’t as many around these days.”

An East Coast dealer concurred: “Labor costs are hard to
control, particularly with subcontractors, who seem to be demanding
more and more money, and providing less and less quality. Even in a
rocky economy, it’s hard to find good employees, and when you do,
you have to pay more for them sometimes a lot more. But what’s the
alternative? Giving up on quality? If you don’t [spend on] quality
personnel, you end up paying for it on the other end in [the form
of] errors and change-orders.” Indeed, estimating mistakes,
organizational problems and miscommunication were all cited as
areas responsible for increasing costs.

Oddly enough, while many dealers cited problems finding good
employees, not as many seemed to be investing in training. In fact,
training costs were seen as comprising a mere 1.2% of the overall
cost of doing business, with only a third of respondents planning
on investing more money in training in 2003.

Margin Slippage
While dealers agreed that
despite their best efforts, some margin slippage is inevitable, not
all agreed on how much should be considered tolerable, or what
measures they should take to prevent it.

When asked what percent margin slippage they were willing to
accept, more than half of all survey respondents (52.5%) said they
considered 2% or less to be tolerable (see Graph 5). Another 30%
said they could live with 3% margin slippage, 7.5% were willing to
accept 4% slippage and 10% said they found 5% margin slippage

Of course, to correct margin slippage, the first step is always
to identify when and how the problem is happening. Reviewing
projects regularly for margin slippage is essential, most dealers
agree, yet the majority (58.3%) said they reviewed jobs for margin
slippage only after the project was completed (see Graph 6). Some
16.7% of dealers took a more proactive approach, reviewing projects
for margin slippage on a weekly basis, while 5.6% said they
reviewed projects every two weeks, 13.9% reviewed projects once a
month, and a mere 5.6% said they never review projects for margin

Even in reviewing projects for margin slippage, some spouse the
view that it’s not a cut and dried process. As one dealer noted:
“People think it’s a science, but it’s part art and part science
just like design. You have to watch the pennies, but also trust
your intuition. You can lose money in ways that aren’t always easy
to measure, so you can’t just just take an accountant’s approach.
You have to know your business, too, and know when something feels
off. That is a big part of controlling slippage.”

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