By David Holzel. Wine corks were popping in January at the gala opening of KB Home's newest home studio, an 8,000-square-foot design center in Tampa Bay, Fla. But while the facility, on the heavily traveled road to Busch Gardens, is the latest KB has opened, it is by no means the largest. The Las Vegas home studio, for example, is a sprawling 22,000 square feet.
And those aren't the only big numbers. More than 5,000 options. Browse sheets of up to 55 pages listing the prices of those options. "The possibilities in the kitchen," said one visitor to the Las Vegas center, quoted in the Southern Nevada New Homes Guide, "are endless."
That comment can be read as either a testament to KB's success in fulfilling customers' expectations -- or a cry for help in a sea of choices. With new home buyers spending an average of $7,000 in upgrades, according to the NAHB's latest available (2001) figures, the design center is proving to be a sales building machine that's generating significant incremental profits for many large companies. Buyers as well as builders increasingly see it as a necessary part of the business.
But the trend is moving the industry into the fickle world of retailing, where builder showrooms must contend with the steadily rising expectations of consumers who, influenced and spoiled by big box home improvement retailers, want more for less. As builders try to meet these expectations, they are increasingly struggling with how to regulate the options they offer, manage their branding strategies, and determine where to draw the line in the mass customization of production homes.
And it raises a pair of $7,000 questions: What is the right mix of ingredients to make a design center profitable? And: How big do you have to be to sell sufficient upgrades of cabinets, counters, and carpeting and still meet customer expectations?
Finding the Right Size
Most builders it seems are still finding their way toward the answers. In the case of KB's 19 design studios, with three more planned this year, the answer is that bigger has proven better, according to Lisa Kalmbach, senior vice president of studios. The average KB studio today is 10,000 to 12,000 square feet. The studios are open seven days a week to host buyers who on average make 2.8 visits to browse through those 5,000 options before sitting down with a KB consultant to make their final selections.
Buyers might be forgiven if they momentarily forget they are not in a retail store like the Great Indoors or Home Depot Expo. KB's most recent centers are located in retail space and were designed by the same firm that designs the Great Indoors, a division of Sears. KB wouldn't talk about why they chose this model, except to say that they considered what would give their buyers the best experience, and calculated what would be profitable.
Other builders have come up with very different conclusions.
Kellye Brill manages one of Beazer Homes USA's design centers that occupies 2,000 square feet in the company's regional headquarters in Chantilly, Va., outside Washington, D.C. The headquarters is a three-story building in an industrial and commercial park. The center is smartly laid out, but by no means extravagant. Two kitchen vignettes show dark and light cabinetry and contrast basic and gourmet layouts. Samples of plumbing fixtures, floor tiles, window treatments, and carpeting are on display. Brill's staff of three design consultants -- sales professionals with customer-service experience -- handles 900 closings a year.
What goes on here are the final steps in the home selection process that began in the sales office. "Here, you're finishing the interior feeling of the home," Brill says. "The emotional part of the purchase is easier in an environment like this."
The model that Beazer developed for its 21 design centers sits at the opposite end of the spectrum from KB's. And Brill says it works. "The profits are high. The margins are high."
The middle range might be called upgrade centers -- larger and with more options than a Beazer finishing center, but more limited than a KB design center. "We're trying not to overwhelm people," says Jim Frasure, president of D.R. Horton's Las Vegas division.
Since it opened in 2001, Horton's 3,300-square-foot design center in Las Vegas has made a serious contribution to the division's bottom line, Frasure says, and illustrates why big builders are focusing so much attention on design centers these days. By taking the option sales out of the sales office and placing that focus in the design center, Frasure not only saw a 75 percent increase in option sales, but a 25 percent improvement in annual new home sales for that subdivision. With 23 design centers, the sales improvements can start to add up fast.
Running Into Retail
Increasingly, though, builders are starting to look more deeply at the role of design centers as branding statements for their companies and the challenge of locating them as new housing developments becomes more far flung.
Most builders contend their model homes are the best branding tools; the design centers are simply a part of the selling process. Few builders, however, fail to make their design centers a key selling point in their weekend advertising inserts. What consumers experience when they finally walk in the door of a design center, on the other hand, often doesn't match their expectations, in part because many design centers resemble what in fact they are: a work in progress.
What design centers ultimately look like, however, is less of a problem than making them convenient for customers. There's a limit to how far people will drive -- even if there are 5,000 options waiting at the end of the journey. With the exception of California, where seemingly no one blinks about driving up to two hours, most customers are willing to travel up to 45 minutes, but not much more, according to design center managers interviewed for this article.
In traffic-choked markets such as Washington, D.C., Centex is experimenting with satellite centers, outfitting the basements of model homes with expansive showroom offices. But as big builders expand outward in congested suburban markets, locating design centers will be an increasingly important decision.
Once a customer is in the door, design centers are trying to remove bottlenecks in the selection process. That usually means eliminating note taking and other paperwork, and relying instead on technology. Barbara Hoskins, manager of the Centex Selection Center, in Chantilly, Va., equips her selection coordinators with wireless laptop computers that they can move with them around the selection center. Buyers can view the total cost of their purchases as they refine their decisions in real time.
D.R. Horton's Las Vegas customers roam the design center carrying scan guns that can add an item to the list of upgrades with just a shot to the bar code. Buyers chalk up an average of $5,000 an hour during their two-hour appointment to select options, Frasure says. "People are often floored how quickly they can spend money."
A Moving Target
Indecisive customers can create different kind of bottleneck. A challenge for design center managers, especially in rapidly expanding markets, lies in having the right number of sales design consultants, and managing the time each spends with customers. Most managers determine the size of their staffs by how many home sales a builder expects in the coming year and the hours needed to finalize selections. Some center managers said one consultant should be able to handle about 300 customers a year. Others put that figure higher.
Lynette McCauley, manager for M.D.C. Holding's Richmond American Homes design center in Fairfax, Va., has found that breaking the selection process into two defined sessions has made a big difference in keeping her customers focused and her design consultants efficient. The first session is a 90-minute orientation with a design assistant who explains the selection process and shows which assortments are available for the model purchased. The customer can come in and browse, but then must agree to a 2-hour final session with a design consultant. Changes afterward can be made, but at a price, typically $250 per change.
The new approach, along with expanded display areas, will help her team of three design consultants, three design assistants, and a very busy scheduling receptionist finalize 1,200 closings out of the center this year. M.D.C. currently has 13 design centers in operation with four more planned in 2003.
Price-savvy shoppers also have complicated the selection process. Up-market retailers like Home Depot Expo and the Great Indoors are reshaping the expectations of the home-owning public by showing them what's possible in home design at discount prices. And as a result, the new home buyer resembles nothing so much as a moving target the builder must aim at satisfying.
One design manager, who preferred not to be identified, recalled: "A buyer recently told me he could have a granite counter for $4,000 and my price point was $7,000. He wanted me to match his price."
Other customers have reportedly asked for credit against upgrades by asking to skip certain items' standard features, such as appliance packages, with the thought they could do better elsewhere.
KB Home and others have learned how to counter, reminding customers that retailers don't typically include the cost of installation, don't have the same warranties, and can't offer the same financing. At KB, notes Lisa Kalmbach: "We say, 'You can have this kitchen for $250 a month.' That's what makes us different from a retailer."
If customer expectations are a moving target, M/I Schottenstein has devised a two-pronged response. Coulter is overseeing a 2,000-square-foot addition to her 9,000-square-foot facility. The addition will only serve customers who buy from the top of the builder's three product lines. "For the Showcase buyer, we can be a little more semi-custom," she says. "They can have a faucet that takes three months to get in."
The company manages that feat by striking different deals with suppliers and subcontractors, Coulter says, and because it builds only 200 Showcase homes a year. Most of the company's six design centers, however, run closer to 3,300 square feet in size, which limits some of its leverage.
Indeed, one additional factor driving larger showrooms is the push by suppliers to get more of their product on display. In many cases, that effort has clearly paid off. At Richmond American's Fairfax location, a recent expansion that included a new floor-to-ceiling retail-like display of Delta Faucets resulted in a four-fold increase in faucet upgrade sales.
Not everyone thinks a big design center is the answer.
Norbert Jakubke, a Vancouver, British Columbia-based designer, has developed design centers from 25,000 square feet down to 540 square feet. He wonders if everyone would be better served if design centers didn't try to offer customers the moon.
"Ten types of kitchen cabinets. Who needs that degree of customization?" he says. He favors offering a limited number of bundled options. "It makes it less complicated, and at the end of the day when the buyer moves in, it all ties together."
These builders say design centers are worth running because they are good for the bottom line. But it isn't always worth it. Michael Noonan, vice president of the Rottlund Company's Minnesota division, has given a lot of thought to the value of design centers. He has decided to pass.
"We closed over a thousand homes last year," he says. "We're already selling upgrades in spades. I'm not convinced that a design center will increase that penetration."
D.R. Horton's Frasure sees it differently: "It's another profit center. Just like our brokerage company. Our biggest problem right now is people pulling the bar codes off the items while they browse."
Learn more about markets featured in this article: Las Vegas, NV.