Unfair Competitive Advantages

by Anita Shaw

Leah: In our last column, you defined an owner’s return as the total of three things: (1) an owner’s market-rate salary, (2) company perks like car expenses and retirement benefits, and (3) pre-tax net profit expressed as a percentage of a company’s overall income, right?

Ken: Correct. For example, on a $3,000,000 “showroom business model,” where the owner’s main job is general and/or sales management, I commented that his return should be 18-20%. So somewhere between $540,000 and $600,000 in total compensation.

Leah: That’s a lot of money! Better than a lot of compensation packages for upper level corporate jobs. Plus, the owner is building enterprise value, which could deliver a heck of a payday if and when they choose to sell their business some day and retire.

Ken: True enough. But analyses of hundreds of dealer financial statements show that most owners’ returns are coming in at about 9-12%.

Leah: So really most kitchen and bath owners are achieving only half their potential. That’s so sad! Why are these financial results so disappointing when consumer demand today seems to be at an all-time high?

Ken: Well, if I limited my answer to one word, it would be “time.” Dealers spend way too much time grinding away in their operations to keep up with that demand you mention. And not nearly enough time away from their businesses, learning what they don’t know about running financially successful operations. Granted designing, ordering and installing kitchens and baths is a complex and time-intensive business. But if owners made the time, they could learn about the most impactful competitive advantages that could literally turn their operations into engines for genuine wealth.

Leah: That would be time well spent. From your 40+-year perspective in the industry, what do you consider to be the key competitive advantages dealers need the time to learn, develop and implement? And how much would each fill the approximate 9-10% gap between the typical owner’s actual return and his or her potential return?

Ken: Great questions! Without a doubt, the very first advantage would be financial know-how. Numbers run a business. The most successful entrepreneurs understand their financial statements and use them to make intelligent business decisions, always advancing their operations forward. It gives them visibility and maneuverability. Plus, the insights and confidence if they choose to pursue economies of scale where certain functions – like marketing, buying and accounting – are centralized to serve satellite showrooms that are supremely profitable.

Leah: I have been at SEN for just over five years now, but I know firsthand that very few owners truly know what their financial statements say about their operations. So once owners understand what financial metrics must be achieved to make a solid net profit year after year, they will be able to create a strategic plan for building their businesses into those engines for wealth. For you, mastering the financial side of the business seems to be pivotal to achieving this goal.

Ken: Yes, it is. In my view, that skill alone will close the 9-10 point gap by one-third. A close second important advantage would be purchasing power. Typically, in Europe, 90% of the dealers belonged to one and buy over 75% of their products from them. As a result, dealer gross profit margins averaged 47%. By contrast, fewer than 7% of the estimated 6,000 American kitchen and bath dealers today belong to one of four buying groups.

Leah: It could also be that American dealers prefer independence to the interdependence that Europeans leverage for much higher gross margins. Didn’t Kitchen & Bath Design News report about a year ago that the average U.S. dealer’s gross margin is only 29%?

Ken: Indeed, interdependence is one of the key principles advocated by Stephen Covey in his iconic book: The 7 Habits of Highly Effective People. And speaking of higher gross profit margins, that would be a third competitive advantage I have witnessed making a huge impact on an owner’s return. Like buying power, it’s probably worth 2 points of the 9-10 point gap we have identified. Research proves that consumers will pay more – even a lot more – for a kitchen or bath if they experience a superior service they feel compelled to have.

Leah: Such as the interactive client budgeting system you developed with your own Connecticut-based showrooms, correct? It empowered your sales designers to charge 30-40% more for your projects than the competition. If I’m not mistaken, those four showrooms averaged 51% gross profit for 8-10 years running. And that was 30 years ago! Clearly, most owners and designers today have not yet learned how to market their people, systems and services effectively. As well as not buying their products better. So they ultimately toil at 29% average margins while the Europeans thrive on 47%.

Ken: Yes, that proprietary sales process was something our 14 sales designers considered to be central to their success. But they received extensive and consistent training on the selling fundamentals that contributed to their high level of professionalism and productivity. They certainly weren’t order takers. They knew how to motivate prospects to buy.

Leah: To me, most people selling kitchens and baths today prefer to consider themselves designers, not salespeople. I guess they expect their design solutions to pretty much sell themselves. So when a recession hits, most sales designers are probably not as capable of motivating the fewer prospects they have to get off the fence.

Ken: That’s exactly what happened 10 years ago in our country’s last recession. Business fell like a rock off a cliff. But there was another, bigger reason for those dark days. Owners were so close to their operations, they couldn’t see the fatal flaws in their own business models. Had they belonged to a strategic, industry-specific community – where they were comfortable enough to share their financial statements – I believe thousands of kitchen and bath firm owners would still be in business today.

Leah: Right! They would have received the laser-like advice, direction and support from industry-specific business coaches and peers to make changes and stay afloat. It’s a shame because they would be killing it today. Anything else you consider to be an important competitive advantage?

Ken: Yes, automation. Our highly segmented kitchen and bath industry is one that technology has left behind. What businesses need is a program that greatly improves team productivity and operating efficiencies, speeding up the sale, ordering and production of kitchens and baths. Technology like that can attract smart, young talent into the industry, boost revenue by three to five times and rocket profitability into the next stratosphere – a decided advantage! That kind of ground-breaking automation is just being made available.

Leah: I count then six critical advantages: financial know-how; purchasing power; higher gross profit margins; sales professionalism; strategic community, and automation. Can we call them the six unfair competitive advantages?

Ken: Absolutely. Unfair because when a kitchen and bath firm deploys them simultaneously, they will zoom past the competition and into a zone of prosperity no dealer has ever experienced before. When the new technology really kicks in, the 18-20% potential owner’s return will probably need a revised percentage range. I think it could be considerably higher. ▪

Ken Peterson, CKD, is founder and president of the SEN Design Group, the industry’s first buying and business development group. Leah Peterson joined her father in 2013 after a decade in corporate sales and marketing; she is now the company’s executive v.p. Representing both industry-specific and corporate business experiences, as well as different generational points of view, Peterson & Peterson address a variety of industry issues for KBDN in their quarterly column, NextGen Business Matters. For more information on the upcoming 4-Day Business School or BIZCON Conference, contact Leah at [email protected] (1-800-991-1711). The Petersons welcome comments, questions or concerns.

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