By Christina B. Farnsworth. "Today's consumers demand options to personalize their possessions--whether it's a 'loaded' car, custom jeans, or a 'have-it-your-way' hamburger," Steve Cameron says. "The bottom line is that consumer demand for options to customize new homes has never been higher ... . This can translate into profits for savvy builders who know how to effectively develop and manage the options process," says Cameron, president of the Orange County, Calif., metro division of Fieldstone Communities.
"We were the first in our market to have a design center, but a lot of other builders are now offering them," says Kara Opanowicz, Hovnanian Enterprises' Home Design Gallery director. "No one in New Jersey has been able yet to replicate our scale," she adds.
Independent design centers, whether stand-alone, adjacent to corporate offices, or even in strip malls, are becoming common. Builders who have capitalized on them, such as Hovnanian and Fieldstone, say design centers add muscle to builders' bottom lines, increase customer satisfaction, and can potentially increase the number of home sales.
Done right, experts say, builders can realize gross margins of 45 percent to 61 percent.
In the beginning
Fieldstone Communities may have been an early adopter of stand-alone design centers. And Hovnanian may have been the first in the New Jersey market, with its Home Design Gallery four years ago. But the first company in the United States to offer a design center was probably Rayco Homes in San Antonio, says Debra Hotaling, spokesperson for Los Angeles-based KB Home.
Rayco (founded by Ray Ellison) built a reputation for its affordable homes and ultimately established a lock on more than 40 percent of the San Antonio housing market. Rayco was a big fish in a small pond with enviably successful business methods. It achieved a number of industry firsts: It initiated evenflow production, starting and finishing 10 homes a day, and its dedicated design center focused on buyers' product selections.
KB Home acquired Rayco in March 1996 and absorbed and disseminated throughout the company much that had made Rayco successful, including design centers. KB Home now has 19 KB Home Studios. The first KB Home Studio to appear after the Rayco deal was a stand-alone center in Phoenix that opened in 1996, says Lisa Kalmbach, senior vice president of KB Home Studio.
There were lessons to be learned. The Phoenix studio is in a business center that gets no walk-by traffic. It is successful and still open, but it will likely move to a more trafficked location. Studios KB has opened since have been in more public locations; its Orlando, Fla., center is near the area's largest regional shopping mall. And in Tucson, Ariz., KB chose a strip-mall location at the intersection of two main thoroughfares that already had two popular retailers--PETsMART and Trader Joe's.
The size of the design center may matter as much as its location. KB Home's Home Studios range from about 6,000 to 11,000 square feet, much smaller than the 17,000 square feet of Hovnanian's Edison, N.J., Design Gallery, for example. Kalmbach says KB Home uses a proprietary formula for all of its design centers to determine needed size based on a location's business plan and the expected number of home sales in the next five years. The studio is just one piece of the business puzzle wherever KB Home builds, Kalmbach says.
But success isn't limited to mega builders, and design centers don't have to be gigantic to be profitable. Builders building fewer than 1,000 homes annually and even those building just a few homes have also found ways to tap into design center success stories.
Fieldstone Communities, in Newport Beach, Calif., (which closed 800 homes in 2002), reports gains from selling options and upgrades at its three stand-alone regional design centers. Fieldstone has trademarked the name HomeFitting Centers, and the centers are located in Yorba Linda, Calif., San Diego, and Salt Lake City.
And, even-smaller builder Kensington Homes, based in Naperville, Ill., has its own Design Studio located right next to its corporate office. Kensington Homes typically builds 100 homes annually, though in 2003 it expects to build 160.
Small builders (100 or fewer homes annually) find it more cost effective to create a shared center, as Jodi Ann Stasse has done in Chantilly, Va., with her 1,800-square-foot Creations Home Design Studio. Creations in Chantilly opened March 18 and presently serves six builders with two design studio directors and an administrator. Such centers, she says, could handle as many as 25 builders and orchestrate the products, options, and upgrades selection for 500 homes with the addition of one sales associate. She can easily imagine a chain of Creations Home Design Studios all over the country.
Stasse, the force behind the Chantilly design center cooperative, garnered her expertise starting up Hovnanian's Design Gallery four years ago. Once it was up and running, she used what she had learned to launch her own company profitcentersolutions in Pennington, N.J. Her company prepares design center analyses for clients, identifying a proposed center's size, staffing needs, policies, and processes. It recommends appropriate product selections and researches pricing. It also can staff the centers and manage builders' selection programs with trained real estate professionals. Stasse feels that for an independent facility to be successful for a single builder, the builder needs to be consistently building 250 homes annually. She also recommends that the center be no more than 15 miles away from the builder's sites.
Homes for sale
Some design centers, however, do more than just host products and options selection. And though most design centers do not sell homes, KB Home's are the exception. With the majority of its centers located in well-trafficked areas near other shopping, KB deliberately sets its centers up as one-stop home shopping stores and encourages buyers to drop in often, Kalmbach says.
KB uses its centers as a gathering place for its Buyers Club meetings. The Buyers Club helps potential home buyers prepare themselves for homeownership with how-to classes in clearing up potential credit issues, managing money, and maintaining a home. KB helps club members start a down payment savings plan, too.
The studios also have fully equipped kitchens, used in some locations for cooking classes and demonstrations. Studios sponsor real estate broker events and seminars, meetings, and all kinds of events appropriate for the area in which the studio is located. Kalmbach refers to the programs as community outreach, since the events attract local real estate professionals and others, strengthening the builder's ties with the community.
And, of course, "While you are there, you can buy a home, too!" Kalmbach exclaims. Each Home Studio has a dedicated home sales staff, separate from the design selections and upgrades staff. Home sales associates like selling at the centers, Kalmbach explains, because unlike at a specific subdivision, the studio never runs out of homes to sell. Sales associates there can sell homes from any of KB's subdivisions.
Dollars and cents
But other builders swear by the more traditional design center concept. Hovnanian is among builders large and small seeing the dollars and cents in options and upgrades. While keeping mum about exactly how much these centers add to revenues, the company is willing to admit that its four-year-old Design Gallery paid for itself in its first year of operation.
Fieldstone Communities grew its HomeFitting Centers in baby steps--first launching in a garage in 1992, says Cameron. The company expanded the concept as profits flowed from its initial investment. The Yorba Linda HomeFitting Center opened in 1996 and is typical of all its centers at 10,000 square feet. Cameron says Fieldstone, a privately held company, keeps its profit numbers close to the vest. He was only willing to say, "The design centers have paid for themselves several times over."
It is only Stasse who will ballpark a few numbers. A design center, she says, should be able to generate a minimum of 10 percent of a home's purchase price (say $30,000 on a $300,000 home). Expect 39 percent of those upgrades to be spent in the kitchen and 31 percent on flooring. Gross margins should be a minimum average of 45 percent, but she has seen average gross margins of 61 percent. Such strong margins are generally higher than those for building homes and argue well in favor of establishing a design center. But do careful homework, Stasse says.
Competitive product pricing is one key to success. Talk directly to the manufacturer, Stasse says, "if you are only getting 5 percent off list price that isn't good enough; 30 percent off is OK. We get 30 percent to 35 percent off on plumbing fixtures and 40 percent off list on lighting fixtures," she says.
Design centers make the grade when they both competitively price products and successfully turn the home buying process from a common transaction into a personal experience. Whether the building company builds just a few homes (some of Stasse's clients are so small they don't have separate offices) or more than 25,000 homes a year, each customer is buying just one home, and it should reflect that customer's own vision.
Buying a home is about buying dreams, Opanowicz opines. Hovnanian's Home Design Gallery tempts buyers with the stuff of those dreams--19 full kitchen displays, 12 bathrooms, and chock-a-block with tile, carpet, and lighting--plenty to fulfill home buyers' visions of the perfect home.
At 450 square feet, Kensington Homes' design studio is small. Even so, "It showcases everything from flooring, exterior color packages, sinks, granite, cabinets, and full-scale interior doors and trim," says Kensington's sales and marketing director Cheryl Bonk. "Scheduling private appointments to review features prior to selection has made the experience for the buyer very personal."
Stasse's Creations Home Design Studio features 16 faucets, 150 carpet samples, 60 tile boards, and three cabinet lines. Even in 1,800 square feet, she is able to offer a complete kitchen, a security system, and a working fireplace. The studio also has relationships with outside vendors but doesn't send the customer out alone; the design center coordinator accompanies the home buyer, often driving the customer to the outside vendor's location. One way builders can often lose out, Stasse says, is by sending clients to an outside vendor who doesn't pay enough attention to them.
Deciding the undecided
It's no secret that options and upgrades generally have higher markups that add to builder profits, but design centers help home sales in other ways too. Opanowicz points out that a visit to Hovnanian's Home Design Gallery "always seals the deal" for buyers on the fence. It gets them excited about buying a home.
For smaller-sized builders, especially those without models, a design center, with its carefully constructed displays, can help potential buyers visualize what their new home might look like. It's more inviting than the typical site trailer, says Bonk. And since the design center has a staff dedicated to helping buyers choose new-home products, this frees up the home sales associates' time to focus on selling homes. Bonk says Kensington Homes' design center "has enabled us to work through the selection process in a more timely and efficient way."
"Our design studio has served as a real way for buyers to touch and feel prior to having completed models in our Woodland Lakes townhome community of 116 units," Bonk notes. "We have exceeded our projected sales goals for presales in this community by 25 percent. The design studio certainly contributed to this success."
Hovnanian has presold and even launched communities at its design center, Stasse says. There is also a valuable but less tangible benefit. Hovnanian buyers, Opanowicz says, have much higher customer satisfaction because they have receive so much personal attention.
Hovnanian's Design Gallery is a destination in and of itself. It's the company's sole center, serving 62 communities in New Jersey and Pennsylvania. Although some buyers initially balk at what may be a two-and-a-half hour drive to select products for their new homes, once they arrive they are hooked by the carefully orchestrated process that sales manager Lannie Foster and her team of seven design coordinators execute.
The first visit is a structured 45-minute introductory tour. Buyers also receive two, three-hour sessions with their own personal coordinator. Although three hours are allotted, visits don't always take that long, Foster notes. The process includes filling out a proprietary worksheet and an agenda that walks buyers through kitchen, bathroom, and flooring decisions. "It's a very friendly but very directed process," Foster says.
Once seduced, buyers return on their own just to shop and often bring family and friends, some of whom soon become Hovnanian home buyers themselves. Buyers also may meet their new neighbors there. Once the process is complete, a presentation area showcases all the buyer's selections. The presentation is similar to an interior designer's color board with samples, and it is part of the process of signing off on selections.
There is a lot to select and a lot to covet at the Home Design Gallery. Buyers arrive with a budget based on how much house they qualify for. They have already taken care of any structural changes on site with the home sales associate before arriving to choose products at the design gallery.
Because of Hovnanian's evenflow building production, buyers typically have 45 days within which to make their decisions (which is eight to 14 months before the house is finished).
On average, Opanowicz says, buyers add 13 percent to the price of their home through options and upgrades--that means between $35,000 to $40,000 in add-ons to the typical home purchase. It can add up to lots more: One buyer added roughly half the house price in options and upgrades ($330,000 in options for a $600,000 home), bringing the total price to nearly a million dollars.
The company builds at a variety of price points and showcases the full range of options at the Home Design Gallery. One byproduct is that buyers of less expensive homes can and do splurge (especially in the kitchen), selecting cabinets, counters, and appliances expected to appeal to buyers of higher-priced homes. Generally, buyers pick the options that would be difficult to add later. The most profitable upgrade for the builder, Opanowicz says, are the kitchen cabinets.
Because of Hovnanian's size (9,925 projected home sales in 2003) it can offer buyers some items, such as Whirlpool's Duet series of laundry equipment, at competitive prices. The benefit is twofold: the washer and dryer are installed and ready to go when the buyers move in, and the appliance price is wrapped in the mortgage. The popular washer-and-dryer line, introduced at the gallery five months ago, is now optioned by 17 percent of buyers.
Hovnanian also uses the gallery as a product refinement tool. It regularly surveys buyers as they shop the center and uses the information to refine product selection. It takes three to six months to add a new product to the design gallery mix. Presently, there are 26 major manufacturers represented at Hovnanian's Home Design Gallery. These include Therma-Tru entry doors, KitchenAid/Whirlpool appliances, Master Brands cabinets, Moen faucets, Jacuzzi bath fixtures, Dal-Tile, and Shaw carpets. Vendors provide products to the sales center and train the sales coordinators in features and benefits.
Looking at the future of its Design Gallery, Opanowicz says Hovnanian is considering adding decorating features such as window treatments, area rugs, and wall coverings (to be installed post-settlement). The decorator items may be Hovnanian's way of dipping its toes into the remodeling market. The gallery might become a magnet for existing Hovnanian homeowners looking to remodel their homes--and with 75,000 Hovnanian homes built over the last 40 years, the market is certainly out there.
Whatever the growth path, remember three things, Stasse says: Carefully examine "product, pricing, and process."