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Never Too Small – Or Too Large - To Buy Better

Oct 3, 2018 4:56:27 PM

It’s absolutely true that a 1% reduction in your cost of sales increases your net profits by fully 1%. But the same is not true of a 1% increase in sales. Yet dealers always seem to focus on the top line.

By the time variable costs like commissions and payroll taxes are paid, only a fraction of the 1% sales increase falls to a kitchen/bath dealer’s bottom line. And when sales increase dramatically in any one given year – like a 25%-30% increase – more human errors are typically made in the planning, ordering, manufacturing, shipping, and installation of products, generating lower gross margins. A dealer’s customer service can only stretch so far without added infrastructure and automation. As a result, a 1% sales increase can actually reduce that fraction of 1% improvement to zero. Or even generate a negative impact on the dealer’s net profit!

Perhaps, it’s a pervasive lack of a business management orientation, in favor of a design focus, that explains why only a few hundred kitchen/bath owners belong to a buying group out of the thousands of independent dealers that exist in our industry. Or maybe it’s because these thousands of dealers think they are too small in sales volume to gain much of a financial benefit from being a part of a buying group. That would be an incorrect assumption because even one dealer can wield a lot of power by leveraging their purchases within a group.

Imagine for a moment that you are an average kitchen/bath design studio owner with revenue of $1,000,000, cost of sales at $650,000, gross profits of $350,000, and net profits of $50,000 (after market-rate salaries for you and your staff). You have taken the leap of joining a buying group, costing all-in about $3,000 annually (when including conference attendance expenses), and find 5 preferred vendors in the first year that you can easily switch to. So you shift $100,000 of your purchases to them and collectively save a minimum 4% - or $4,000 - in the process. Furthermore, you earn another 2% in purchase rebates paid quarterly from the group. Now compare what your Income Statements (simplified) would look like:

                  Unaffiliated                                          Buying Group Affiliation – Year 1

Income            $1,000,000      100.0%                        $1,000,000      100.0%
Cost of Sales       650,000        65.0%                             646,000        64.6%
Gross Profit         350,000        35.0%                             354,000        35.4%
Overhead             300,000        30.0%                             303,000        30.3%
Rebate                            0             0%                                 2,000          0.2%
Net Profit              $50,000            5.0%                           $53,000          5.3% 

At first blush, that modest $3,000 addition to your bottom line after one year of affiliation may not seem like much. But it actually represents a robust 100% return on your $3,000 membership investment. When was the last time you earned a 100% ROI from any investment whether it be on a stock, mutual fund, or piece of real estate? And that’s just the beginning of the monetary rewards that can be earned from the leveraging power of one smallish kitchen/bath dealer.

man drawing a graphNow imagine in Year 2 that (1) you switch another $100K in purchases to 5 more preferred vendors in the group and (2) you convince a friend who is a non-competing kitchen/bath dealer to join the group. This new member follows your lead and picks up 5 of the same preferred vendors. You buy a total of $200,000 and your friend buys $100,000 and each save 4%; as a result of this $200,000 increase in purchases, the group now earns on average 2.25% in rebates. That's how each member-dealer gains additional purchasing leverage: by focusing on a select few preferred vendor partners and growing their sales within the group, triggering greater rebate percentages at gross performance levels that have been pre-negotiated by the buying group management team.

Repeat the same cycle in Year 3, so you again each save 4% on material purchase costs, and the added aggregate purchases help boost the group’s average rebate rate to 2.5%. By Year 3, your P & L Statement comparison would now look like this:

                  Unaffiliated                                          Buying Group Affiliation – Year 3

Income            $1,000,000      100.0%                         $1,000,000      100.0%
Cost of Sales       650,000        65.0%                              638,000        63.8%
Gross Profit         350,000        35.0%                              362,000         36.2%
Overhead             300,000        30.0%                             303,000         30.3%
Rebate                            0             0%                                 7,500           0.7%
Net Profit              $50,000          5.0%                             $66,500           6.6% 

The combined $12,000 improvement in lower material costs (4% on $300,000) and $7,500 in greater rebate dollars (2.5% on $300,000) yields an overall $16,500 positive impact on your bottom line, after paying for your $3K buying group dues. It also creates an incredible 550% return on your $3,000 average annual buying membership investment …. proof positive of the power of just one small dealer/owner when teamed up in an industry buying group.

For simplicity purposes, we have left the annual income flat at $1M per year in these examples. Imagine how those numbers would stack up with just an average 10% increase in revenue per year!

money-finance-bills-bank-notesNeed real life proof of the "Power of One"? During the period of 1995 through 2012, one buying group dealer from suburban Philadelphia, that today does about $1,700,000-$1,800,000 in annual revenue, earned $208,000 in rebates alone. “Those rebates paid for my two kids’ college educations,” stated John Lang of Newtown, PA. Pretty good buying leverage, wouldn't you say?

Much larger dealers – doing $5M or more – also benefit from a buying group membership. Indeed, from the rebates alone, many are happy with the $50-$80,000 added to their bottom lines. However, most will say the greater membership value is in the business education they acquire, applying marketing strategies, sales processes, coaching advice, and financial metrics that increased their gross profits by hundreds of thousands of dollars.

Central to a SEN membership is this value proposition: You will earn more (and learn more) with us than without us. As proof, we invite you to experience one of the many educational opportunities SEN has to offer, such as the 4-day Business School in March 2019.