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.