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Kitchen Cabinets

Industry Overview

Residential customers purchase kitchen cabinets and other cabinetry products such as shelving, bookcases, vanities, and workstations from four primary sources: kitchen-cabinet dealers (who sell primarily to homeowners and interior designers); distributors (who sell primarily to remodeling contractors); home centers; and builders. About 25,000 firms specialize in kitchen and bath design and installation (Kitchen & Bath Business, or K&BB, www.kitchenbathdesign.com). Some franchise operations specialize in kitchen remodeling and include design advice and recommendations for cabinetry, either providing cabinet specification and installation themselves or outsourcing to specialists. According to Entrepreneur (January 2007), three of the largest franchises are: Kitchen Tune-Up, headquartered in Aberdeen, South Dakota, with 295 locations; Kitchen Solvers, Inc., based in La Crosse, Wisconsin, with 124 locations; and DreamMaker Bath and Kitchen by Worldwide, headquartered in Waco, Texas, with 180 franchises. Market share among the sources from which kitchen cabinets are purchased shifts slightly from year to year. Dealers continue to be market share leaders, accounting for 44% of sales volume, down from 46% in 2005. Builders' share was also down a bit, to 15% from just over 17%. Home centers' share also dropped, falling from 20% to 16.6%. Distributors picked up most of the slack, accounting for 22% of sales in 2006, up from 15% in 2005.

(Percentage of Sales, By Type of Outlet)

Kitchen-cabinet dealers, distributors, and home centers sell three basic categories of cabinets, described briefly below:

· Stock cabinets. Typically the least expensive option, these units come already assembled and are sold by home centers, building material dealers, and kitchen remodeling stores. Stock cabinets come in standard sizes and dimensions, and require some installation know-how. · Semi-custom cabinets. These cabinets come in more sizes, materials, finishes, exterior-trim choices, and with more storage accessories than stock cabinets. Dealers or home centers have customers provide size and configuration specifications and choose from a list of options, and the cabinets are made to order. · Custom-made cabinets. These are the most expensive cabinets. The customer dictates style, materials, sizes, and features to a cabinet maker or a kitchen specialist, and the cabinet maker or builder creates and installs them.

The following charts show the breakdown of sales for the three cabinet types for 2006, and the most common types of wood used in kitchen cabinets (wood cabinets represent 90% of all cabinets installed in U.S. kitchens). Sales by Cabinet Type

(Share of Dollar Volume, By Type of Cabinet)

Stock cabinets 49.0% Semi-custom 32.5%

Custom - 18.5%

Source: Kitchen & Bath Business, July 2007.

Cabinet Distribution Channels

Other* - 2.1% Builders - 15.3% Home centers - 16.6%

Dealers - 44.0%

(Share of Dollar Volume, By Type of Wood)

Wood Cabinet Sales

Others* - 5.0% Birch - 1.8% Alder - 2.4% Hickory - 4.3% Cherry - 18%

Maple - 46.5%

Distributors - 22.0%

Oak - 22%

Source: Kitchen & Bath Business, July 2007. * Includes direct-to-consumers and through architects and designers.

Source: Kitchen & Bath Business, July 2007. * Includes pine, ash, walnut, mahagony, lyptus, and exotic veneers.

© 2007 Profile America, Inc. All rights reserved. www.profileamerica.biz

Issues and Trends

Cabinet industry revenue increased by 6% in 2006, to around $14 billion. While 6% gains are still considered healthy, growth has slowed from the more significant increases in previous years. The last time in the recent past that double-digit gains were realized, for example, was 2003. Slowing growth in 2006 was the result of lower consumer confidence levels brought on by turmoil in the housing and mortgage industries in particular and economic uncertainty in general (K&BB, July 2007). Kitchen cabinets are installed when consumers add new kitchens or remodel existing ones. According to Consumer Reports, cabinets are replaced in 64% of kitchen remodeling jobs (July 2007). In 2006, 7.4 million kitchens were remodeled (generating around $127.1 billion in revenue) and 1.8 million were added as new construction (generating $42.7 billion), which puts the total kitchen market at $169.8 billion (NKBA, "2007 Kitchen/Bath Industry Outlook"). The outlook for kitchen cabinet sales and remodeling activity in 2007 is positive but cautious. K&BB notes that the cabinet market has been strong during previous housing market downturns, which "may be the result of homeowners remodeling in order to get a higher price at resale and thus counter the effects of the market slump" (July 2007). The NKBA projects 7.6 million kitchen remodeling projects for 2007, an increase of 1.5%, with revenue predicted to hit $130.4 billion. The projection for new construction (kitchen additions) in 2007 is 1.6 million new kitchens, amounting to $38.3 billion, a 10.1% drop from 2006 ("2007 KBIO"). The chart below shows project and revenue breakdown for 2007 by type of outlet:

(By Type of Outlet, for % of Projects & Spending)

Kitchen & Bath Design News (2007 Market Overview) is bullish about the future of the industry based on several positive demographic trends:

· · · The rising number of household formations Household incomes that continue to grow The record number of two-income baby boomer households -- which are in their peak earning and spending years -- and the growing number who are purchasing second homes and upgrading primary residences to reflect new design trends and express personal tastes and lifestyles

Industry Stats & Facts

· More consumers are hiring designers for their kitchen remodeling jobs. Design professionals (employed by dealers, distributors and kitchen design shops) are involved in a little over one-third of all kitchen remodeling projects, representing over half of the revenue generated by kitchen remodeling (pointing to higher average project costs than DIY kitchen projects). Satisfaction with cabinet purchases is about more than price. J.D. Power's "Cabinet Customer Satisfaction Study" revealed that the top characteristics that lead to customer satisfaction (and the percentage of people citing each as the primary factor determining satisfaction) were operational performance (26%), ordering and delivery (21%), design features (20%), price competitiveness (17%), and warranty (16%). Cabinet manufacturers, dealers, kitchen designers, and other retailers should keep these priorities in mind when determining cabinet product lines to carry, price points, ordering procedures, delivery methods and schedules, and marketing and advertising messages. Consumer Reports (August 2007) evaluated customer satisfaction with remodeling jobs undertaken by home centers, independent contractors, local stores, and manufacturer-recommended contractors. When it comes to installation, home centers ranked about 10 points lower in customer satisfaction levels than smaller cabinet dealers and kitchen design shops, which ranked around 87 (out of 100). Fewer consumer problems occurred with manufacturer-recommended or local store installers than with home center installers (30% and 40% experienced problems, respectively). Consumer interest in "green" (healthy and environmentally friendly) kitchen design is growing. A big concern for customers is the level of formaldehyde in cabinet-box construction. A number of alternatives are available, such as Medite, a type of fiberboard free of formaldehyde, which consumers should be educated about before and during sales presentations.

Sources: K&BB, "2007 Media Kit"; July 2007; April 2007; Consumer Reports, August 2007.

·

·

Kitchen Remodeling Forecast 2007 Projects

Cabinet specialist/ installer 16% K&B dealer, 14% designer/ architect

70%

Home centers

·

Cabinet specialist/ installer K&B dealer, designer/ architect

Dollars

24% 29%

47%

Home centers

Source: Kitchen & Bath Business,"2007 Media Kit."

The importance of showrooms in driving the kitchen remodeling market is often overlooked, according to Kitchen & Bath Design News. Most customers have little idea of what they want when they enter the showroom, and they are usually unfamiliar with manufacturers'

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© 2007 Profile America, Inc. All rights reserved. www.profileamerica.biz

brands. The showroom is essentially a "hands-on catalog" where customers can experience a wide variety of products. Working displays demonstrate to customers the superiority of some products to others. Developing a relationship as trusted advisor begins in the showroom, by learning about the customer's interests, needs, and desires. Although the Internet is becoming an important resource for customers, the value of the showroom is unique because people have no other means of seeing and touching products they may want to purchase (July 2007). Having a website is an increasingly important tool for kitchen specialists, since 70% of all adults now use the Internet (and 91% of those regularly use search engines), and online retail sales increased by 25% in 2006 (Parks Associates, "Digital Lifestyles: 2007 Outlook"). An estimated 22% of kitchen specialists have websites, according to True Local, a search engine and Internet business directory specializing in "driving online customers to offline businesses." An article in Kitchen & Bath Design News (May 2007) recommends that kitchen specialists update their websites frequently, show as many completed jobs (and before-and-after photos) as possible, and post educational material and design advice to help consumers before, during, and after the kitchen remodeling process (May 2007). Factors mentioned in the advertising placed by kitchen cabinet specialists are many that are intended to inspire potential customers to call or visit. Examples of "confidence factors" and "convenience factors" follow: Confidence Factors Mentioned in Ads

Years in Business Fully Insured / Bonded All Wood Construction Brand Names / Color Photos Expert Installation Guarantees / Warranties References NKBA Certified Number of Kitchens Remodeled PKBP Certified

$4,200. Custom cabinets, on the other hand, can cost upwards of $25,000 (Boston Globe, September 10, 2006). Consumer Reports (August 2007) provided another range of pricing options: For a typical 21-inch-wide base and 30-inch-tall wall duo, the price range for basic cabinets is $250 to $350, midlevel is $400 to $900, and premium is $600 to $1,000 plus. Average household spending of $120.54 for kitchen cabinets is calculated by dividing $14 billion in annual spending by 112 million households. Average spending is helpful in determining market potential and market share. For example, in an area of 40,000 households, it is safe to assume that $5 million is spent on kitchen remodeling. If a kitchen specialist generated $350,000 in revenue, his or her market share would be 7%, a baseline against which future performance can be measured.

Critical Success Factors

CSFs for Kitchen Cabinet Specialists

· Offer a variety of cabinet product lines, but ensure plenty of choices exist for high-end consumers and designers -- since higher-end products carry better profit margins and the customers who buy them are less price-sensitive. Ensure customer satisfaction by streamlining the ordering process, offering warranties on products and workmanship, delivering on time, and hiring top-notch contractors to install cabinets and countertops. Create awareness of the company's services and increase traffic into the showroom by inviting website visitors and home show attendees to sign up for a weekly email newsletter series about the kitchen remodeling process, and include in the newsletter images of the showroom and staff to familiarize them with the firm. Encourage referrals from past customers; for example, create a cooking club and host parties in kitchens completed for customers, and have them invite their friends and neighbors. Use the showroom for more than selling cabinets and countertops; make it available for fundraising events like luncheons, cocktail parties, and celebrity chef demonstrations -- to build awareness, generate good will, and encourage referrals.

Sources: Kitchen & Bath Design News, February 2007; May 2007; June 2007.

·

·

Source: 2007 Comparative Ad Analysis Survey, Norbert J. Kuk & Associates.

Convenience Factors Mentioned in Ads

Days/Hours Open Online Showroom Schedule Appt. Online Free Estimates In-Home Measuring Location Data / Maps Model Kitchens Invitation to Visit Website Free Design Service Website / Email Address

·

·

Source: 2007 Comparative Ad Analysis Survey, Norbert J. Kuk & Associates.

Value of Products and Services in the Industry

The cost of kitchen cabinets depends on the type of cabinets purchased and the outlet at which they are purchased. A budget-priced set of cabinets purchased at Lowe's, for example, can cost $1,350, or a mid-level set,

Industry Resources

Kitchen & Bath Business, www.kbbonline.com Kitchen & Bath Design News, www.kbdn.net National Kitchen & Bath Association, www.nkba.org Kitchen Cabinet Manufacturers Association, www.kcma.org

© 2007 Profile America, Inc. All rights reserved. www.profileamerica.biz

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© 2007 Profile America, Inc. All rights reserved. www.profileamerica.biz

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