It’s critical that furniture dealers understand how the current industry climate is affecting their business. But understanding the challenges dealers face is also something professionals from the A&D community can benefit from as well. Knowledge is power, and the more each professional knows about the other players in their game, the more successful they’ll be.
At NeoCon 2016, we attended a seminar called “By the Numbers: 5 Ways to Boost Your Bottom Line.” The session was led by David Solomon, founder and managing principal of dealer consulting and research firm SolomonCoyle.
Mr. Solomon framed the current environment dealers are facing today. He laid out a lot of the financial measures dealers need to be aware of and concerned with in order to be financially successful. And at the end of the presentation, he outlined five ways dealers can boost their bottom line to become more profitable.
What are the biggest challenges dealers face today?
Simply put, there’s more pressure to get market share.
“There’s a shift in the product mix going into buildings, there are more types of competitors, and there’s a big move to the bottom with price competition,” said Mr. Solomon. “Corporate real estate is controlling of the business.”
There’s also a lot more price competition.
“Customers have gotten a lot smarter and are more demanding,” said Mr. Solomon. “According to the CEB, by the time a customer makes an inquiry, 56% of the time, they’ve already made up their mind on what they want.”
Customers are also willing to make a change and select another dealer for future projects.
“The turnaround time is much shorter,” said Mr. Solomon. “Loyalty is not what it used to be, and dealers are often getting a ‘last look.’ The bid process with A&D firms is very expensive, and dealers have to be really efficient in order to be profitable.”
Mr. Solomon pressed dealers to focus their energy on installed margin and margin dollars, which refers to the dollars left over that the dealer uses to run its business.
“For years, installed margin has remained fairly consistent at about the 18.5% range.”
Of that, dealers are only making 2-2.5% operating profit [gross profit less operating expenses], which is a lot lower than A&D real estate and customers often think it is.
Margin erosion is the difference between what dealers first quote for the job – what they think they’re going to make – and what the number actually is at the end of the project.
“The average dealer loses around 2% to margin erosion, and a lot factors go into that loss.”
Mr. Solomon highlighted four common causes of margin erosion:
>Errors
>Poor scope of work
>Poor contract management
>Poor execution
“A furniture order is not a blank check,” said Mr. Solomon. “Dealers have to have good contract management and good policies and procedures in place,” said Mr. Solomon. “That also goes back to having a well-defined scope of work.”
Having a well-defined scope of work and executing that work well will make a huge difference, and includes planning for firm dates and times, having access to a freight elevator, and planning for an adequate staging area to get the products in. As much as possible, dealers should plan to move products into the space when the site is clean, and when they won’t have to work around contractors.
“Dealers often think like vendors – they’re focused on satisfying the customer at any cost and looking for the next deal. But they should be thinking of themselves as a professional services firm.”
Conducting risk analysis is a big part of this mindset.
“The most important thing a dealer can offer a customer is the mitigation of risk. Customers want the team that is looking at the overall project and can best execute the project.”
Error management includes double-checking order quotes prior to giving them to the customer and double-checking before booking the order. Interestingly, he noted that errors are not the biggest contributor to margin erosion.
Mr. Solomon outlined five ways dealers can “boost their bottom line”:
>Leadership. This includes developing several things: deliberate strategy, a business plan (which is not same as a sales plan; it needs to be something you can live with and revisit every quarter), a defined business model, and effective management model.
“You need to understand your business model and do it really well, whether it’s a lean or diversified model.”
>Financial Strength. This includes planning financially for the following: a strong balance sheet, budgets and forecasting, cash flow, revenue per employee, and installed margin per employee.
>Superb Selling Organization. Your entire organization should understand and support how your company goes to market.
Developing a “superb selling organization” includes: making plans to increase revenue, increase install margin, training for effective sales management, defining a specific sales process (when in your sales process are your sales allowed to start spending money?), and promoting professional procurement management.
“The entire company needs to be engaged in the selling process. For example, a good salesperson won’t use design as the main driver – They’ll sell the right product to the right customer. They’ll take one layout and present multiple options. Part of that is having a design department nimble enough to respond quickly.
“Sales expense is very important. It takes 18-24 months for a new sales person to become profitable. Sales compensation average is around 3.5% of total revenue, but higher performing dealers typically pay sales less than the average.”
>Manage Core Expense. Sales expenses include: selling expense, sales compensation, project management residual, and design residual. G&A expenses include: occupancy expense, office expense, administration expense, insurance, tech and phone systems expenses.
>Operational Excellence. This includes developing a disciplined business process, increasing installed margin, cultivating a “specialty contractor/professional service firm” identity, developing professional project management (project management should be a sales support function), and minimizing margin erosion.
These five elements of success are obviously intertwined.
For example, “The single most important factor in a dealer being successful is for them to do a great job of managing their core expenses. And in order to do that, you have to have operational excellence – and in order to do that, you have to have great leadership in place.”
Mr. Solomon’s session proved insightful and, even more important, helpful on a practical level for dealers and attendees from other parts of the contract furniture, architecture and design industries.