Leadership

Have It Your Way

Design centers sprout like mushrooms as GIANT production builders go into retailing options and upgrades for big, big money.

June 1, 2004
10 min read

 

Fireplaces, like those shown here in the Edison, N.J., design gallery, are a big seller for Hovnanian. But the hot room for option sales is still the kitchen.
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A Growth Story

With mortgage rates low and existing homes selling for appreciating prices, home shoppers intent on moving up are out in droves nationwide. Their pockets are bulging with home equity cash they'll use to buy a better house, not just a bigger one.

Housing's GIANTS noticed the upsurge in option sales, and eventually began to ask themselves how to better serve this inclination of buyers to turn a $250,000 house into a $400,000 purchase. Design centers - run similarly to retail stores - answer the "how" by selling options and upgrades that homebuyers roll into their new mortgages. These outlets capitalize on the very human trait to prefer buying product that can be seen and touched rather than something pictured in a catalog or on a computer screen. Builders staff their centers with interior design consultants who help customers spend money.

 

Bradenton, Fla., builder Lee Wetherington's design center associates sell an average of $80,000 worth of options per home out of 2,500 square-foot facility now handling more than 300 buyers a year. Before building design center, Wetherington averaged $35,000 per home in option sales.

Experienced Help
Manufacturers eager to court the business of big production builders, especially those with national operations, are only too happy to furnish products and displays to the centers. They'll also provide retailing savvy from the consumer side of their operations to help the builders turn the design centers into cash cows. It's lucrative for both builders and manufacturers, and the stores draw rave reviews from buyers because they turn a stressful selection process into a fun shopping spree.

Whirlpool contract marketing manager Nancy Butner admits builder design centers are a gold mine for appliance manufacturers: "In most cases, builders make a commitment to one manufacturer for appliances. That's how they get preferential pricing," she says. "That means we can show a full range of products in their design centers without worrying about competitive product in the next booth. Customers see the added value of our high-end lines. They want the best they can afford. We're just like builders; we make our best margins on the highest-priced products."

Two Points to the Bottom Line
Since the design-center phenomenon began about five years ago, it's hard to find one that failed as a profit center. Florida builder Lee Wetherington, who opened his first design center at Lakewood Ranch in Manatee County four years ago, says his 2,500 square-foot store adds 2 percentage points to the company's pre-tax net profit. Many other builders say they do even better but refuse to say by how much.

A few builders, however, admit that the rush to sell customers all the options and upgrades they want often creates disarray in construction operations.

"When I first took over, there was chaos in the field," says Donna Sanders, vice president of options for California Giant Pardee Homes, a division of publicly traded Weyerhaeuser Real Estate. "Design centers have conflicting goals with construction. We want to sell options to boost sale prices and profits, but that jeopardizes the very things field people are paid bonuses on - quality and on-time delivery. If we sell $100,000 in options, the house is tougher to build, but the super doesn't get anything out of it. It's a challenge."

These problems often are exacerbated by a lack of coordination between construction scheduling and buyer visits to the design center to choose options. If upgrade choices are made too close to installation time, the paperwork may not reach vendors and trades in time.

Hovnanian Enterprises senior vice president of corporate operations Mark Hodges has a plan to correct these problems: "I don't think there's a builder anywhere that got it right the first time on design-center relations with construction operations," he says. "We all rushed to respond to consumers with more choices and bigger design centers, but we didn't think through the implications of all that increased complexity.

"That's an execution issue, but there's no turning back now; the genie is out of the bottle. We won't walk away from the high margins we make on option sales. We just have to figure out how to keep it from killing us in the field. And we're doing that."

 

Hovnanian design gallery director Kara Opanowicz has staff of 22, including eight design coordinators, operating out of 20,000 square-foot building in Edison, N.J. It will serve 2,700 buyers this year, from all over Northeast. One day, she envisions selling new kitchens and other remodeling options to past buyers.

The Hovnanian Model
Five years ago, Hovnanian opened one of the earliest mega-centers, a 20,000 square-foot facility in Edison, N.J., to sell options to all its buyers in the Northeast. Still one of the top practitioners of the trade, that home design gallery is now the model for a dozen Hovnanian centers scattered across the country.

"The size of a center relates to the volume of business that moves through it and the kind of houses you're selling," Hodges says. "If your business is primarily entry-level, the center won't be as big because you can't sell nearly as much stuff to those buyers. Our buildings range in size from 2,500 to 20,000 square feet. But as our business units grow, we certainly expect all our design centers to grow and use Edison as a model."

The critical change Hodges made to the relationship between the Edison gallery and construction operations throughout the Northeast is that buyers must now complete all selections before construction starts.

"Once the customers sign their printout, with all the selections and pricing on it, that document goes right into our release process," Hodges explains. "It triggers the purchase orders. Buyers can take as long as they want to make selections, but until they are 100% complete, we will not issue a release to start the home. The closing date we quote people in the sales agreement is dependent on their performance in the design gallery. We usually ask people to make their appointments and go through the gallery within 30 days. If that doesn't happen, the closing date is 'subject to discussion.'"

Many builders phase cutoffs for option selections that correspond to must-have dates in the construction process. That doesn't work, Hodges says, because there are often too many things happening at once. "What if the customer misses an appointment at the design center and then goes on vacation? Now the super calls and says he's got to order cabinets today, and nobody can tell him what to order," Hodges says. "There are too many moving parts. We finish the selection process before we start the house and charge the customers a boatload of money if they change their minds.

"We try to draw a line in the sand, but our fall-back position is to charge as much as 2 1/2 times more for a change made after construction is under way, plus a $500 processing fee. We're just not good at making changes during construction," Hodges says. "We'll screw it up. It's not just our company: 20 or 30 vendors and trades are affected."

Hovnanian learned the retailing trade through the Edison design gallery. Manufacturers push the learning curve. "They keep our product lines fresh," Hodges says. "We keep what sells on display and get rid of what doesn't. We pay commissions to the people who work with customers, and we turn a profit. The metric we track is profit per home."

Brian Eckman, director of builder sales for Hovnanian's cabinet supplier, MasterBrand Cabinets, says there's more at work here than show-and-tell: "Seeing and touching cabinets of various grades is part of it, but the designers are important. There's some real salesmanship involved.

"My focus is on the top 100 builders," Eckman says, "and we'll see more design centers among builders with that kind of volume. It takes 250 to 300 closings a year in a market to make a stand-alone design center pay off."

 

Pardee Homes' Orange County design center in Irvine, Calif., sells upgrades to 250 home buyers per year. The highest margins are on room changes, built-ins and structural options with high skilled workmanship content, says vice president of options Donna Sanders.

Technology Gap Closing
Technology is just now catching up to the builder's business, especially in the design center. As Hovnanian's Hodges suggests, insatiable consumer demand, not technology, drove builders to design centers. Within the next 12 to 18 months, look for major breakthroughs inside most large building companies that will tighten design center connections to customers, vendors and trades.

"Design centers create an opportunity to improve efficiency and cut costs by reducing the number of vendors we deal with," says Pardee's Sanders. "For instance, we now have five plumbing vendors, but we think we can get that down to two without degrading the option choices we present to buyers. We'll just display the full product lines of each, rather than bits and pieces of five. By increasing our volume with each of the remaining vendors, we should be able to get better pricing and tighten our communications links."

Pardee's design center computer technology now has closed most of the gaps between the builder and its vendors and trades. "We set up every option in the computer," Sanders says, "including all the trades required to make that option happen, and the pricing for each. Purchase orders are automatically generated to the trades and vendors. At the same time, the option selection shows up on our super's computer screen."

However, Sanders is more excited about what comes next: "We're developing our own Web-based software that will allow customers to view their option choices online. Trades will be able to pull up everything that's been ordered for each house by entering the community and lot number."

Hovnanian has similar goals for the design galleries' piece of new, enterprisewide software now in the testing stage. "When a sales order is entered, it automatically goes to the design gallery," says Hodges. "The design consultant enters the option and upgrade selections. Then it becomes part of an electronic release package that goes to the field and triggers building-permit applications and P.O.s to vendors and trades. Right now, all of this data transmits electronically, but the connection points aren't as elegant as they will be. For instance, we now have to re-enter data from the design gallery into the start pack."

Bottom-Line Building
Today's design centers are hugely profitable, and every builder with one seems to be planning to expand it or build more. If a center's impact on the bottom line is now 2 percentage points, what will it be when computer technology is fully leveraged against design center operations? It seems likely that design centers are here to stay and that they may become even more visible - one more way that large builders seek to differentiate themselves from smaller competitors and marketing methods of the past.

More to Come
Part II of this report on the impact of design centers, appearing in the August issue of GIANTS, takes a close look at the building industry's largest retail operator and another who insists design centers should
not be profit centers.

About the Author

Bill Lurz, Senior Editor

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