Pathways to Profitability
Boosting dealer profit margins is more about having a
business plan that allows for better gross margin and operating
expense management than increasing sales volume, say
BY BARBARA CAPELLA LOEHR
If the number of projects a kitchen and bath dealer does in a
year is high, then that should translate into automatic profit,
shouldn’t it? If it doesn’t, then a dealer needs to simply go out
and generate more jobs, right?
Not necessarily. A large number of projects doesn’t always add
up to a large profitability numbers. And dealers should be wary of
generating jobs that will simply cover their costs.
That’s according to several experts on profit margins: Stephen
Vlachos with CBI in Portland, ME; Ken Peterson, CKD and president
of the Chapel Hill, NC-based SEN Buying Group, and Kitchen &
Bath Design News columnist; Thompson Price, CKD, CBD, CR and
president of Callier & Thompson Kitchens and Baths in St.
Louis, MO; Dennis Dixon of Flagstaff, AZ-based Dixon Ventures,
Inc.; and Morton Block, CMKBD, IIDA and president of Kennett
Square, PA-based Morton Block Associates.
These experts stress that, in order for dealers to increase
their profit ma rgins, they must be aware of more than just the
number of jobs they complete annually. Dealers should be looking at
everything from general overhead, labor/subs and salaries/benefits
to marketing to determine the best areas for investment and most
likely areas for cutting costs in order to increase their profit
The NKBA agrees, noting in its most recent Dealer Profit Report
(2002), “Profit margin focuses on sales productivity, gross margin
management and operating expense control.”
SPEAKING of figures
But, before dealers
start investing or cutting to boost profit margins, they need to
analyze their financial statements, including their income
breakdown and balance sheet, to determine what profit margins they
need to meet in order to break even and what they will need to be
According to the same NKBA report, “The income statement
summarizes the income and outgo of funds for the entire year. It
reflects the ability of management to make sales, control expenses
and thereby earn profit. The income statement serves as a ‘report
card’ for management’s performance over the year. The level of
performance depends primarily upon control of two areas: gross
margin and operating expenses.”
The NKBA report’s income statement section (see table at right)
shows that for a typical NKBA dealer with a typical sales volume of
$1,537,858 and an annual sales growth of 5.0%, the average gross
profit margin would be 36.1% .
“Gross margin, the first measure of profitability, considers all
expenses related to the cost of buying and installing the products
sold,” explains the NKBA report.
It further indicates that the average operating profit is 2.6%,
which takes into account the total cost of goods sold; the total
payroll expenses; the total occupancy expenses, and the total of
other operating expenses.
The report finally boils these figures down to an average profit
before taxes of 2.5% for a typical NKBA dealer, which takes into
account -0.1% of what the NKBA terms “other income/expenses” (see
graph, Page 68).
However, simply going by an average gross profit margin and
average profit before taxes may not be the best bet for
“In my judgment the term ‘current industry standard’ is a
terrible misnomer,” believes Peterson. “About 25 years ago, NKBA
then AIKD determined that kitchen dealers should earn a 40% gross
profit. That ‘standard’ is misleading because it applies more to
the mid- to-high-end dealers who perform the turnkey remodeling
services package where the degree of difficulty in producing these
type of jobs is substantially greater than furnishing a
materials-only package to builders.
“Dealers who supply product only to builders are likely to have
a very different overhead structure than dealers who do turnkey
remodeling. Therefore, their gross profit margins might be lower to
earn an equivalent net profit,” Peterson continues.
Based on the many financial statements Peterson analyzes each
year, and the Financial Statement Comparisons that SEN does for its
membership twice a year, he remarks, “The ‘current industry
average’ for all dealer business models is a 35% gross profit
margin. And, again, from experience, 35% is not a high enough gross
profit average because the vast majority of kitchen and bath
dealers fail to achieve enough net profit for the risk of being in
Thompson agrees, noting, “NKBA number is low, at around 36%. I
would absolutely tell you that 40% is the number to reach, but it
is the absolute minimum We start at 44%, 45% and 46% for each job,
and hope we come out at 40% or 42%.”
“[However], I have always believed that the standard was around
40%,” Vlachos chimes in. “This, of course, is for the traditional
kitchen and bath dealer who works with consumers. I have done a
number of business valuations of all sorts of firms and found that
those firms that offer some design services and market mostly to
building contractors can be successful at 36%. Other firms that
offer no or limited design services can go as low as 30% and still
be profitable. It all depends on the service level that the firm
offers. Obviously, the more services, the higher the margin needs
“[Profit margins] all depend on volume. So, for example, 33% on
$1 million is a nice return, but 33% on $300,000 is not. So, total
volume does have an effect on profit margins,” adds Block.
However, according to Peterson, there needs to be a shift of
focus and incentives from sales volume to gross profit margins.
This starts with a shift in the dealer-owner’s mindset.
“Too much emphasis is put on sales volume. The more a firm
sells, the greater the cost of sales and, with it, the greater the
risk of error by all parties involved, including sales designers,
vendors, truck drivers, project managers, installers and
subcontractors. As a result, gross margins often decrease as sales
volume grows. Additionally, there are the variable overhead
expenses of commissions, payroll taxes, etc., that increase with
sales volume, shrinking the net profit still further,” says
Indeed, dealers need to assess their own operating expenses and
total sales volume to be able to determine the right gross profit
margin and, in turn, their profit before taxes. But exactly how
should dealers calculate their target profit margins?
“[Start with a] pricing formula i.e., mark-up [which] should be a
direct function of the annual budgeted overhead, a fair market
salary for the job they perform as the dealer-owner and their
desired net profit,” says Peterson. He further notes that there are
six steps that should be followed to develop the correct gross
profit margin for a firm, regardless of its selected business
format (see table, Page 66).
The six steps outlined in the table are listed in the order they
should be done, says Peterson. In contrast, many dealers actually
determine their gross profit margin differently, using the same
steps listed in the table, but starting with step one, followed by
steps four, five, six, three and two. If dealers were to follow
these six steps in the order indicated in the table, Peterson
believes dealers would end up with more accurate figures.
Additionally, Vlachos advises that “every dealer should look to
put 10% on their bottom line. So, add up your costs, use your
multiplier to determine sales price and then deduct expenses to
make sure you end up at 10%. If you do not, then you have not added
enough margin to your costs. Unfortunately, many dealers worry more
about the competition’s pricing than about their own profitability.
The focus should be solely on profitability. If you maintain
profitability, but find that the competition is stealing jobs, the
problem is not in how you charge, but probably in how you are
Another piece of the profit
puzzle is putting a solid business plan in place. “Dealers should
have a business plan in place, especially when tabulating their
overhead and other costs,” says Block. “You need to be able to see
the historical data and where you are today. The plan should
include everything you have now and want to do, such as showroom
expansion, additional locations, etc. Then, determine the amount of
sales it will take to meet your goals, and forecast profit to see
if it stacks up to operating expenses.”
In addition, “call on consultants such as accountants and
financial advisers and get their analysis. It may cost more but a
good consultant who understands the industry is worth the money,”
“An investment of time and money in a strategic plan with a
qualified business and/or marketing consultant can pay major
dividends,” agrees Peterson. “For one thing, it will determine the
three to four uniqueness factors that should be promoted about your
firm and which media will deliver the most cost-effective
When dealers are outlining a business plan and analyzing
numbers, they need to avoid some common profit pitfalls, say
Vlachos, Peterson, Price, Dixon and Block. They include:
- Having too much focus on sales volume and selling jobs to
generate cash flow.
- Not understanding the value of certain products versus
- Having no price formula based upon annual budget, and not
pricing jobs correctly.
- Not collecting enough money at the start of the project.
- Lacking good service (i.e., slow response to problems,
- Continuing to deal with subs or suppliers who don’t
- Having an inadequate marketing plan.
“They can avoid these pitfalls by joining an industry
organization that offers services to dealers in fulfilling all of
these critical needs,” stresses Peterson. He further suggests
attending industry-specific seminars on business management.
Once dealers have reviewed their financials, outlined a business
plan and calculated a profit margin that works specifically for
their firm, they can then start implementing practices that boost
Vlachos, Peterson, Price, Dixon and Block all have many
tried-and-true ways of improving profit margins that range from
investing to cost-cutting measures (see related story, below).
However, all recommend that before doing anything, dealers
should examine the pros and cons of each investment or cost-cutting
measure they consider. As Peterson explains: “Dealers should always
weigh the quantitative and qualitative results. Quantitatively,
they should project their return on investment: Extra Gross Profit
Dollars – Extra Overhead Dollars ÷ Investment Dollars).
Qualitatively, they should evaluate how well the idea satisfies a
particular critical success factor that gets them closer to
achieving their vision for the business. If both results are
positive and congruent, then that makes for
a sound business decision.”
Dealers should also be careful what costs they cut in the short
term because they could cost them more in the long run.
“Be careful not to cut critical expenses, such as advertising,
education and training, and keep an eye on areas such as travel and
entertainment,” advises Block.
Price agrees, noting the importance of advertising and
marketing. “It doesn’t cost a penny if it’s done right. You may
need to put 2% to 3%, maybe upwards of 5%, toward marketing tools
and advertising, depending on the firm size… And, there are so
many low-cost ways to advertise and promote a business.” For
instance, he cites speaking at local home builder shows and
contacting your local newspapers with design story ideas.
“I usually operate on the premise that you need to invest money
to make money. To me, it is better to grow and earn more money than
to try and cut back to save money. That does not mean that
understanding your true costs isn’t important. Instead, cutting
hours, cutting employees, etc., are usually not great long-term
ways to boost profits,” adds Vlachos.
Thompson also relates a practice that has worked for his firm over
the years: “We base our sales commissions on profitability, not on
the sale. We work on a sliding scale the higher the profitability,
the more commission.”
Selling upgrades, having written job specs, billing for
change-orders up front and expanding product offerings are also
ways in which dealers could increase their profit margins, say
Vlachos, Peterson, Price, Dixon and Block.
Despite the fact that, in some cases, certain product mark-ups
may not seem as profitable, they recommend that dealers consider
selling as many products as they can instead of sending their
clients to home centers and other product distributors, such as
appliance distributors. KBDN