Business is booming in the remodeling industry. Profits, not so much.
Looking ahead to better days, consumers are undertaking long-delayed home improvements. But their wallets are stuck in the recession. This makes it tough for smaller firms to increase their fees and eke out a bit more profit.
What if your firm could stay small but take advantage of a broader reach and economies of scale, like larger firms? Some firms are experimenting with new business models to do just that.
Because of the nature of the work and the personal relationship with the homeowner, small firms have dominated the residential interior design and remodeling industries. While they offer many advantages to the practitioner, such as low capitalization and little barrier to entry, small firms are more susceptible to downturns in the industry or the local economy. They also have difficulty competing for larger or more complex projects.
In the current climate, with tight budgets and demanding deadlines, small firms have more of a challenge to earn a profit. This has resulted in a growing trend toward consolidation. A recent survey by the Zweig Group found that more than three-fourths of A&D firms are considering undergoing some type of expansion or aggregation in the next five years.
"Consolidation will become increasingly common as firms seek to either serve as a 'one-stop shop' and provide full-service design services, or seek to specialize and find niche markets," notes the Zweig Group's Jamie Claire Kiser.
Consolidation offers many benefits. According to a study on achieving scale in the residential remodeling industry, conducted last year for the Joint Center for Housing Studies at Harvard University, consolidation is more than just increased revenue growth, labor productivity and stability across business cycles:
"Industry leaders reported that some of the biggest advantages of scale for their companies were improved buying power, lower costs of materials, efficiency of centralized accounting and management, improved use of technology systems, geographic diversity (that is, not being dependent on the economic strength of one market or region), greater consumer recognition and trust, and greater ability to explore new business prospects and provide growth opportunities to key team members."
The study points out that because of the great diversity within the remodeling industry, scale can be difficult to achieve. It documents a variety of strategies that firms have used, other than organic business expansion, acquisitions or mergers, to improve economies of scale.
One of the more successful is creating strategic alliances. Rather than add staff, outsource or team on an ad hoc basis, firms join forces with other practitioners, tradespeople, vendors and/or suppliers — through formal partnerships or written agreements — to gain flexibility and offer a greater range of services, to increase their buying power, and to broaden their market reach.
One innovative model for creating a strategic alliance among designers, remodelers, a showroom, contractors and vendors is being tried out in New Jersey. The approach is similar to a co-op.
As reported by NorthJersey.com, the alliance was the brainchild of Michael Fink and David Greenberg, co-owners of New Jersey Decorating Exchange. They created a partnership with 10 businesses that share leads and referrals and contribute to each others' projects. Fink and Greenberg carved out space in their showroom where each business can display information about its products or services.
The businesses are not competitors, but rather complement each other. The result is "one-stop shopping" for designers who visit the showroom. It saves the designers time, brings traffic to the showroom and provides a "point-of-sale" marketing opportunity for the contractors and vendors.
Whether yours is a kitchen and bath showroom or design firm, the co-op model could be a quick and easy way to achieve a greater level of scale without jeopardizing the integrity of your business. With the right partners, it can be a win-win for everyone involved.
