If past trends in American industry are any indication, more and more building products manufacturers and retailers will be forced to install what they make or sell. Naturally, they'll want to make money doing it.
Installed sales gain ground every year. This year, for instance, The Home Depot will do more than $3 billion in installation, and the chain expects to do $10 billion by 2006. Lowe's will do $1.2 billion in installed sales this year and plans to boost that to $5 billion in the next few years. As product prices continue to rise, the big boxes will likely gain a large share of the installation market. I believe that, in the next five years, most retailers will offer installation for every product they sell. This will mean that some contractors will be forced to take another look at the process and how they price higher cost items.
How can contractors survive and prosper in a market where installed sales are going to get bigger and bigger? Well, small remodeling contractors who are presently charging a 15% to 20% markup will likely find that the retailer will pay them a markup in the same percentage for installing many different products. Because there's no cost related to the sale, that will be a fair price.
Roofing, siding, and window replacement companies with weak sales skills will also be able to live on what they're paid for installation. Many will install for retailers part-time and sell the same products to their customers at a higher markup.
In the kitchen market today, installed sales are a way of life. Many retailers subcontract the total installation and pay the contractor an adequate markup over cost. Expect that to continue. Installing for kitchen retailers is a full-time job for some contractors. Sometimes there's enough business to warrant hiring additional installers.
Another approach is for retailers to sell the cabinets, countertop, appliances, and flooring and then allow the installer to charge separately for the installation, drywall, painting, and other products, as long as the contractor buys those products from the store.
A study conducted by the Joint Center for Housing Studies at Harvard shows that the wealthiest 9% of the population is responsible for 52% of the remodeling business. High-end design/build companies service these clients, usually charging at least a 67% markup. Because the projects are usually substantial, the products are often purchased from more than one retailer, largely eliminating the installed sales option.
However, these contractors face a different kind of challenge to their markup. What's happening in many areas around the country is that the customer wants to supply big ticket items (cabinets, countertops, tile flooring, sinks, tubs, appliances) and have the contractor install them. While most contractors fight this approach, others accept it to sell the job.
Kitchen and bath remodeling projects are probably the toughest to hold the line. It's hard to mark up a $3,000 refrigerator 67% over cost. Once the customer starts to ask for itemized product prices, it becomes a negotiating problem.
Look for change
There is no doubt that the past two or three years have been one of the best times in the remodeling market. Many contractors have been able to sell at a markup of 75% to 80%, even on large projects. When contractors are backed up for six months or more, raising the price is easy. Unfortunately, this is probably not going to continue much longer.
More important, manufacturers and retailers are starting to recognize that there are profits to be made selling service as well as product. At the same time, they are realizing they have to provide high customer satisfaction -- they know that if a product they sell isn't installed properly, they have likely lost that customer for life. --Walt Stoepplewerth is a publisher of management and estimating information for professional remodelers. (800) 638-8292; firstname.lastname@example.org; www.hometechonline.com.