Keeping an Eye on Rising Costs

“ The market is promising. But it means little if costs rise as quickly as revenue, and profit goes up in smoke.”

Author Eliot Sefrin 
Kitchen & Bath Design News
April 30, 2017

As 2017 approaches midyear, it’s clear that the market has become a double-sided coin: rife with exciting opportunities, yet full of critical challenges.

The good news, of course, is that housing, remodeling and the kitchen/bath niche all continue to post steady, sustainable gains. The residential remodeling market is pegged at more than $300 billion this year, much of it in kitchens and baths. Housing starts and home sales remain on the rise. Shipments of key products continue to post gains. Rising consumer confidence, an improving jobs market and a wide range of demographic and lifestyle factors are expected to fuel continued growth.

But today’s robust market is coming – quite literally – at a cost. And it’s a price tag that needs to be both monitored and controlled.

To wit, according to a major survey conducted for Kitchen & Bath Design News, rising business costs are proving problematic to a significant number of kitchen and bath design firms – even as revenue continues to climb.

The survey, conducted last month by KBDN’s exclusive research partner, the Research Institute for Cooking & Kitchen Intelligence (RICKI), found that the two cost centers kitchen/bath design firms are finding most difficult to control are subcontractor and product costs. Specifically, subcontractor costs are the leading cost-containment issue for small businesses, while product and payroll costs are proving more vexing for larger firms.

The reasons for this should be evident. Kitchen and bath design firms have always had little control over product prices, which are determined solely by suppliers. At the same time, a strengthening job market, as in the past, has led to increased competition for workers, driving up employee wages and retention costs, while ongoing labor shortages in many markets are driving up the cost of hiring skilled subcontractors.

All of this threatens the ability of kitchen and bath design firms to meet increased market demand while maintaining cost-effective operations and preserving healthy profit margins. It also points to a heightened need to implement appropriate financial controls and related disciplines, to control costs in a way that doesn’t jeopardize either operations or reputations.

Interestingly, despite the cost challenges they’ve faced, gross profit margins for residential remodelers have reportedly gained ground for the past several years – a sign that businesses are being run more efficiently.

The KBDN/RICKI survey found, for example, that kitchen and bath design firms are reporting average gross profit margins in excess of 30%, with expectations for those margins to rise even more in the next fiscal year.

Nonetheless, kitchen and bath design professionals will no doubt continue to be squeezed with respect to spiraling costs. It’s inevitable in a growing market. Businesses will have to be selective about the projects they take on, and be careful about committing to cost estimates. They’ll have to keep as close an eye on the bottom line as they do on sales, paying scrupulous attention to margin preservation, profit-draining oversights and other financial disciplines.

The kitchen and bath market remains rich with promise – lots of exciting opportunities, lots of homes to be remodeled and built, lots of money to be made. But all of it means little if costs rise as quickly as revenue, and profit goes up in smoke.

Goodbye Stainless, Hello Matte

A new trend in kitchen appliances

The Buffalo News/Buffalo Magazine

By Emily Wyckoff

Published Sun, May 7, 2017
 

If you’ve redone your kitchen or purchased an appliance in the last decade, chances are it has a stainless steel finish. Stainless has been the leader in kitchen décor for many years, and a sparkling new kitchen with granite counters and shiny appliances was the preferred style for many consumers.
As always, times — and trends — change. Available in a variety of colors, from neutrals like slate gray and black to bold hues like red and blue, matte finish appliances have arrived on the scene and are gaining in popularity in Western New York. Initially reserved for premium products, appliances like refrigerators, ranges and hoods in matte finishes are now available at mainstream retailers like Home Depot and Lowes.

Jeff Rexinger, longtime sales manager at Artisan Kitchens and Baths in Buffalo, said that matte appliances are trending for a number of reasons. Matte finishes in general have become popular in home décor  — from cabinets to lighting to decorative pieces to even pianos — and kitchen appliances are following suit.
“Appliance manufacturers are starting to listen to the design community,” Rexinger said. Randal Sanderson, president/CEO at Kitchen World in Williamsville, agrees. He also thinks the trend is just plain practical, too.  “We started telling people five years ago at Kitchen World, ‘we know you are interested in stainless, but keep in mind stainless appliances  — especially large appliances like refrigerators — are difficult to keep clean.’ Matte doesn’t show fingerprints and is easy to clean,” said Sanderson.  Sanderson also thinks it was time for something new. “The stainless craze has been 13 years or more — and it’s not that practical. Regular high-grade stainless shows everything - it’s like a part time job to polish your stainless refrigerator. People don’t want to spend their evening polishing stainless steel.”

KitchenAid, GE and BlueStar all produce appliances including ranges, refrigerators, dishwashers and microwaves in matte finishes ranging from popular neutrals like gray and black to statement colors like red, blue and yellow.  At Artisan Kitchens and Baths, black and slate gray are the most popular matte colors. “GE Appliances’ Slate Collection is very popular and a nice alternative to stainless. It’s neutral and versatile,” said Rexinger.

A trend within the matte trend, said Rexinger, is customers selecting a range and vent in a bold color and sticking with a neutral for the rest of their appliances. “Customers want something that sets their kitchen apart. You can have a white kitchen and throw a sapphire range and hood in the middle of your cabinet run, and it pops and gives people a beautiful splash of color,” said Rexinger.
But is this trend affordable – and accessible? As for cost, these appliances are “certainly not the bottom of the price spectrum,” said Rexinger. However, there are deals to be had as manufacturers will bundle appliances and consumers can “buy a slate-colored fridge, dishwasher, range and microwave together in the $2,400 price range,” Rexinger added. They are also not exclusive to modern kitchens, said Rexinger: if you pick a neutral color, matte appliances work well in any style kitchen, from modern to Victorian.

Sanderson of Kitchen World sees the brightly hued matte appliances as a way to have fun with your kitchen décor. “We recommend people keep areas of the kitchen neutral that should last for 30 years — the cabinets, countertop — then buy interesting appliances. When it’s time for a change, replace your appliances. What’s not smart is to replace your cabinets, or put in a red granite countertop — you will get tired of that. With appliances, it’s fine to have a little fun.”

Next Hot Housing Market

Starter Homes 

Millennials are buying homes, steering builders toward lower price points

The Wall
Street Journal 
Laura Kusisto and Chris Kirkham

After sitting on the sidelines for a decade, millennials are buying homes en masse, promising to kick the already strong housing market into higher gear.
Virtually all major builders are migrating away from the luxury homes that dominated the early years of the economic expansion and are focusing on lower price points to cater to this burgeoning clientele.

“There’s an increasing confidence level in that part of the market,” said Gregg Nelson, co-founder of California home builder Trumark Cos. “The recovery is finally starting to take hold in a broader way.”
The share of first-time buyers fell to 32% in 2015, its lowest level in nearly three decades and down from a historical average of around 40%, according to the National Association of Realtors. That number climbed back up to 35% last year.

The housing recovery has been divided, as the luxury market has soared in recent years while the more affordable end of the market has struggled to make up for lost ground. Tough lending standards, slow wage growth, growing student-debt obligations and a newfound fear of ownership have combined to crimp demand among millennials in particular. The return of the starter-home market means the housing bifurcation is finally starting to narrow.

Demographers generally define millennials as people born between roughly 1980 and 2000.
“They’re crawling out of their parents’ basements, they’re forming households and they’re looking to buy,” said Doug Bauer, chief executive of Tri Pointe Group Inc., which operates in eight states.
The return of first-time buyers allays fears that millennials would eschew homeownership and provides a long-awaited infusion of new demand to the market. These new buyers could also be a boon to the overall economy by driving builders to build more homes. But demand is ramping up at a time when supply is already tight and price growth is significantly outstripping wage gains.
Some 854,000 new-owner households were formed during the first three months of the year, more than double the 365,000 new-renter households formed during the period, according to Census Bureau data. It was the first time in a decade that more households chose to own than rent compared with a year earlier, according to an analysis by home-tracker Trulia. In Orange County, Calif., Trumark’s Mr. Nelson said he has been selling entry-level homes at nearly double the rate of his higher-end properties.  He is even gaining confidence to build homes in more far-flung locations. The company is about to begin construction on a 114-home project in the Inland Empire east of Los Angeles and another development in Manteca, Calif., about 80 miles east of San Francisco. Both areas were hard-hit during the housing crash and were among the slowest to recover.
Outside Las Vegas, Tri Pointe has introduced a new-home design that is specifically targeted to millennial buyers, featuring indoor-outdoor patios and deck spaces, as well as a separate downstairs bedroom-and-bathroom suite that could be rented out to a roommate. Mr. Bauer said the homes, geared toward first-time buyers, have been selling more rapidly than pricier homes.
Joey Liu, a 28-year-old technology worker, purchased his first home in San Jose, Calif., earlier this year. He said it is more expensive than renting but that he is getting to the stage in life where it was time to buy. 

“A lot of friends of mine bought a home so I started thinking maybe it was time to buy a home and stop paying rent,” said Mr. Liu, who settled on a three-bedroom townhouse for $690,000. He plans to rent out a room to help with the expenses. He had three house-warming parties to celebrate his newfound status. “This is my first house, so it definitely feels different,” he said. 

In the first quarter of this year, 31% of the speculative homes built by major builders were smaller than 2,250 square feet, according to Zelman & Associates. That is up from 27% a year ago and 24% in the first quarter of 2015.  “Most builders really preferred to stick straight down the fairway, right at the corner of Main and Main. They were afraid to go back into the rough where they built a lot of homes in the prior cycle,” said Alan Ratner, senior homebuilding analyst at Zelman.
Builders said that while they are taking a chance by building homes farther out and starting construction before they have a buyer in contract, it remains a far cry from the mid-2000s.
“One of the misconceptions is that, here we go again, this is another 2005, 2006 where all these builders are going to build hundreds of thousands of homes. We’re not going crazy,” said Brent Anderson, vice president of investor relations at Arizona-based Meritage Homes Corp. Mr. Anderson said that last year the company was building four to five speculative homes per community and is now up to on average 6.4.

Some 42% of the mortgages acquired by Fannie Mae so far this year were to first-time buyers, up from 31% at the recent low in 2011 and 38% in 2015. Fannie, which acquires about one-third of single-family mortgages, defines first-time buyers as anyone who hasn’t owned a home in the past three years.

Building executives said one challenge is that many people are buying first homes later in life, meaning they have higher incomes and greater expectations molded by years of living in luxury downtown rentals. They also appear wary of driving farther out to get more space.
Sheryl Palmer, president and chief executive of Arizona-based Taylor Morrison Home Corp., said to cater to this demographic the company is building more three-story townhouses or single-family homes on narrow lots. She said about one-third of the company’s buyers this year are millennials, up from 22% last year.

Even Toll Brothers Inc., which typically builds homes for the top end of the market, is venturing into lower price points. In Houston, the company is building homes starting in the mid-$300,000s range, while a typical Toll home in the area costs around $850,000.