Making room for organization
During the recession years, a link emerged between rampant renovating and economic stagnation. You didn’t have to look too far to figure out why: More Americans were staying put in their homes, making the most of what they had with landscaping projects, kitchen remodels and redecorating sprees.
Now, with the industry poised on the brink of a housing recovery, yesterday’s home improvement trends continue to inform today’s market opportunities. In other words, America has begun the work of digging the skeletons out of its closet.
“People are now beginning to spend more on their own homes, not moving as quickly as they did before,” said Art Noparstak, product marketing manager at Racor Home Storage Products, which serves the burgeoning garage storage market. “Storage and organization has always been a problem, but people are realizing it’s worth it to spend a little money and take a little time [where storage is concerned]. People are also renting more, and when you rent you have smaller spaces.”
That theory is supported by research. A 2013 Freedonia Group study forecasts that U.S. demand for home organization products will grow 4.0% per year, reaching $9.4 billion in 2017.
Furthermore, a 2013 Houzz & Home Survey found that 42% of homeowners are renovating in order to improve storage and efficiency.
And when the Home Improvement Research Institute (HIRI) looked into garage enhancement in its 2013 “Project Decision Study,” it found the top five most common improvements were all storage-related: Added organization area for tools (39%), added wall storage accessories (39%), added metal shelving (32%), added organization area for outdoor power equipment (25%) and added wood shelving (24%).
Retailers hoping to capitalize on this trend may do well to make some extra room on their shelves, but the question isn’t whether they do, but rather how they do it.
For instance, decorative and modular units seem destined to experience the fastest growth — even more so than shelving, according to the Freedonia Group. Meanwhile, garage and closet organization is poised to be the fastest-growing product type by room. If it’s any indication, garage products outpaced those of family rooms in 2012 as the second most popular application of home storage, according to the survey.
Additionally, not all home storage products have the stars aligned for them. According to a 2012 Riedel Marketing Group survey, fewer customers were purchasing storage bags; filing boxes; wall-mounted hooks; and stacking, lidded containers compared with 2011. Growth was concentrated to products like in-drawer organizers, shelves and dressers, and closet shelving systems.
At Racor, the garage storage and organization market is the focus. The company projects this area to grow between 5.5% and 7.5% in compounded annual growth — that’s compared with 3.5% for non-garage storage and organization.
Of course, Americans are notoriously bad at making the most of their garage space — 32% are able to fit one car in their garage, and an additional 25% can fit none, according to Noparstak.
To that end, it seems fair to say that the next couple of years will see a heightened focus on the crossing of T’s and the dotting of I’s, especially in the lower-priority areas of the home.
“8y th3 numb3r5”
4% Annual forecasted growth rate for home organization products through 2017 (Freedonia Group)
25% Americans who can’t fit their cars in the garage (Racor)
42% Homeowners who are renovating with storage in mind (Houzz & Home)
Beyond the bottom line
Have you been to a movie lately? After you buy your large tub of buttered popcorn, your tray of pretzels, cheese dip and Diet Coke (you wouldn’t want regular Coke with all its calories), the ponytailed 16-year-old behind the counter asks if you want a receipt. After you fill your tank, the pump asks: “Receipt? Yes or No.” Ditto for your ATM.
Someone, somewhere has wondered, “How much do we spend on these rolls of receipt tape?”
The point is no expense is too small to measure. There is an old adage that says, “You get what you measure.” It may be a cliché, but at its core it is quite profound. “What should you measure?” you ask. Answer: Everything.
Most business people start with the profit and loss statement and too many people end there, neglecting completely, or at best, minimizing their scrutiny of their balance sheet. It should be the other way around. Your balance sheet is where your net worth resides.
The most basic balance sheet metric is the current ratio — current assets divided by current liabilities. It should calculate to at least 2-to-1. Receivable days outstanding and inventory turns are the most common assets measured. While the total days outstanding are important metrics, they should also be measured on a customer-by-customer basis. Keep track of what percentage of your sales and receivables are with your largest customer. Your personal risk tolerance will determine what this figure should be. More than 5% should start you thinking. Consider incentiv-izing your collection department based on reducing the amount and percentage of past-due accounts.
Inventory turns in the aggregate should only be the starting point. A truer measure of your purchasing effectiveness is turns by product or at least by product group. Base your purchasing peoples’ bonuses on inventory turns offset by the number of stock-outs.
Your mix of business will determine receivable days outstanding and inventory turns. The extent to which you have to dip into your bank line is a good gauge of how you are managing these assets.
Speaking of bank lines, be sure to pay close attention to any covenants. One that is pretty standard is the ratio of total liabilities to net worth. Liabilities should be less than net worth. Otherwise your bank and other creditors have more claim on your business than you do.
So far we’ve only discussed the balance sheet. Now let’s turn our attention to your P&L statement. Sure, everyone keeps track of sales, gross profit margins, operating expenses and pre-tax net. But what do you measure them against? How about the 30-20-10 rule? Thirty percent gross profit margin, 20% operating expenses and 10% pre-tax net, with about half the operating expenses being wages and salaries. “Ten percent net is a stretch,” you say? You’re right, but it is being done by a number of well-run yards. To achieve this, you need to set specific goals for every aspect of your business, then measure your performance. Remember, you get what you measure.
Have you ever “fired” a customer because you couldn’t make any money? How did you measure that? The obvious first metric is gross profit margin and dollars. Then analyze gross profit margin and dollars per delivery, using your picking ticket or shipping manifest. Then deduct your delivery costs. You need to know the cost per mile for each of your vehicles — fuel, maintenance, depreciation, interest on the cost of the truck, and finally driver wages and benefits. How far is the job site? Then deduct the “nuisance costs.” How much of your staffs’ time does he take up? How often does he ask you to pick up material that he over-bought? Does he pay on time? Only after you measured all these factors can you make an intelligent decision about “firing” this customer. Before you fire him, you might talk with him about the relationship, armed with these facts. He may even change his habits and become a profitable customer.
How do you improve your gross profit margin? By relentless scrutiny of every product category, then drilling down to every SKU. If you belong to a buying group — and everyone should — add the service fee to the invoice cost, plus 1% for shrinkage and mark up from that. Put the rebate in a separate account that has no bearing on setting selling prices. Another technique is to buy full truckloads, then set your cost for pricing purposes as though you bought from distribution.
Cost of goods sold is your largest expense. Next is payroll. Earlier you saw that wages and salaries should be in the range of 10% to 12% of sales. A basic metric for payroll is $400,000 to $450,000 in sales per full-time equivalent employee.
Below these are a whole host of other expenses.
Set new goals periodically.
And remember: You get what you measure.
Tony DeCarlo has more than 35 years experience in the building materials industry, first as CFO then CEO of Lumbermens Merchandising Corporation (LMC), from which he retired at the end of 2009. For the last three-plus years, he has been president of DeCarlo Advisory Services. DeCarlo sits on several industry-related boards and is associated with Anchor Peabody, a financial services firm providing advice to dealers regarding financing and M&A activity. He can be reached at [email protected] or (610) 408-8685.
You need to set specific goals for every aspect of your business, then measure your performance. Remember, you get what you measure.
Flush with good deeds
What does a humanitarian mission in Bangladesh have to do with the growth of an iconic American brand, or a new color scheme for American Standard?
Actually, a lot. And the connection between the three — and several other initiatives at Piscataway, N.J.-based American Standard Brands — revolves around relatively new CEO Jay Gould.
What’s happening in Bangladesh is basic human improvement. “When I joined the company, I was shocked to learn that 2,000 kids die every day for lack of access to proper sanitation,” said Gould, who took over as CEO in January 2012, replacing Don Devine.
Under Gould, the company flexed its humanitarian muscle when the Bill & Melinda Gates Foundation solicited ideas to develop innovative sanitation solutions in the Third World. During all of 2013, for every Champion toilet sold, the company donated a sanitary toilet pan for distribution in Southeast Asia. (Gould himself toured Bangladesh on a follow-up mission in 2013.)
For Gould, a self-confessed believer in “purpose-driven companies,” the effort that became “Flush for Good” was more than cause marketing. It was an event to boost morale at American Standard, following successive cuts and restructurings. The company had seen about three years of twice-a-year restructuring or downsizing.
“Frankly, [employees] were tired and beaten,” Gould said. “Survival is not a stirring reason to get out of bed.”
American Standard employees who talked to HCN confirmed the new-and-improved culture. And there’s also a new-and-improved strategy at work. To wit: The company is working to flush its low-cost-provider reputation.
In talking to major customers, the same three desires appeared on the top of the list: brand building, demand creation and product innovation. “They were all asking for the same thing, and it wasn’t ‘What’s your lowest price?’ ”
The company’s new look is playing a role also: updated, refreshed and described as slightly more feminine than previously — a marigold, teal and charcoal color scheme that was selected for its “bold and optimistic” message. (It’s also more distinctive within the industry than the classic red, white and blue, Gould said.)
A two-month-old deal with Ferguson, the nation’s largest kitchen and bath showroom company, is an important step for American Standard, which can help it begin to compete on a “level playing field” in a high-quality showroom environment, he said.
With a five-year plan firmly in place, the company is on pace for core revenue to increase 9% to 10% in 2013, with double-digit increases in 2014.
Behind the scenes, the company’s supply chain was revamped, leading to improvement in gross margins from 15%, when Gould became CEO, to its 22% level currently.
For Gould, the idea of doing good around the world goes hand in hand with business success. “I’ve actually been amazed by the response to Flush for Good,” he said. “It’s bringing humanity back to the category.”