The tale of two Detroit-area contractors: One consolidates and the other stands pat
Oakland County (to the north) is consistently at the top of the country’s most affluent counties. Many of the top breadwinners in the Detroit business, professional, and sporting worlds call Oakland County their home.
To the south of Detroit lay the Downriver communities. This arrangement of small towns is characterized by middle-class, blue-collar workers. They are tight-knit neighborhoods where people are known for their hard work and close-knit families.
If the two communities could be put into a corporate structure, Oakland County would be upper management and Downriver would be the assembly line workers.
Kast Heating & Cooling/Blue DotIn Oakland County, two names stand out in the residential hvac market. Local contractors and their customers know them as Kast and Flame.
Now, these two prominent companies have each joined separate outside forces to strengthen their market share.
While Flame has been acquired by local utility Michigan Consolidated Gas, Kast has opted for consolidation with Florida-based Blue Dot. According to these contractors, the decision to choose one over the other was difficult.
“All six consolidators expressed an interest in us,” said Ken Cihon, owner of Kast, a Bloomfield Hills business. “We brought in four of them and eventually narrowed our choice down to Mich Con and Blue Dot.
“I wanted to go with a consolidator who was established in this market [Bergstrom’s in Livonia, a western suburb]. And I asked five contractors who joined Blue Dot a year ago if they would do it over again and all said yes, with no hesitation.”
Cihon did not like the fact that his largest competitor was completely swallowed up by a utility, name and all.
“They took the Flame name off the trucks and replaced it with MichCon Home Services,” he said. “They approached the business from a different standpoint. It turned me off.”
Cihon, who comes from a family background steeped in hvac experience, has owned the company since 1991, when he purchased it from the Carney family, which started the company in 1937.
The bulk of the company’s business is divided between the residential replacement market, and residential and commercial new construction.
“We do a lot of work for Pulte Homes,” Cihon said. “They are the largest home builder in the United States.”
Kast has approximately 72,000 active customers with 4,000 service contracts. The company is located in a region where new construction is booming and older homes are approaching the 20- to 30-year age, making this an excellent replacement market, too.
With a busy staff of 86, Cihon expects to have revenues of $9 million this year.
Tuck-insKast is considered the platform company in the Oakland County area. Cihon is interested in talking to other contractors for possible tuck-ins.
His advice to would-be consolidated contractors: “Make sure you look at all of your options. Bring everybody in to compare them and see what they say. There is a big difference between consolidators.”
It isn’t just the consolidators that are giving contractors the sales pitch. It is also the utilities and more recently, manufacturers.
Cihon, who runs the business with his wife Jane, was interested in the financial gains from a consolidation move and thought it would be best for his employees, too.
He doesn’t have any other family members in the business and therefore, had no succession plan in place. If he had decided to sell rather than consolidate, he probably would have sold the company to his employees.
“We are looking out for the best interest of our company in the long term,” he said. “We were concerned about the effect of what utilities and other consolidators might have on our business.”
Cihon said the “jury was still out” as to the success rate of utilities that offer home services. He said there really isn’t much an independent contractor can do to avoid utility competition — just hope to compete on a level playing field.
A strong base for competitionOne way of ensuring a strong base from which to compete is to have a good core of people.
Kast is no different from other contractors — the company is concerned about the tight labor market. That’s why Cihon likes to “grow his own.”
“The majority of our people have come up through the ranks,” he said. “We hire people in helper and apprentice positions. Unfortunately, if we hire 20 people in a year, only four or five will stick with us.
“People have a hard time coming to work. Work habits are poor.”
Cihon adds that he has had a good year with keeping new people on. Six out of the eight helpers he has hired will eventually become journeymen. On the flip side, he has not had a lot of luck getting good people out of trade schools.
“It’s not the quality of the schools, it’s just the lack of students,” he said.
Cihon hopes to have more people on board as the company faces the challenges of a fickle economy and the changing face of the hvac industry.
“We want the company to be successful with double-digit growth annually,” he said. “As long as the automobile business is doing well, we will do well.
“The industry will have a new look in two or three years. It will be a difficult time for manufacturers, distributors, and contractors to get a clear picture until the market shakes itself out.
“It is going to be more difficult for the independent contractor to make it.”
Krutsch HeatingA name synonymous with residential service is a valuable commodity in the Downriver communities south of Detroit. One such name is Krutsch Heating, Inc.
Owner and founder Tom Krutsch had “a gift — an ability to sell” according to current owner Art Grace Jr.
“In 1997, Motor City Services [owned by Grace’s father] purchased Krutsch from Tom,” he said. “Tom stayed on as our sales manager until he passed away.”
Motor City Services started in 1946, specializing in custom work. The company gained a reputation for its work with aerospace projects, including the NASA shuttlecraft program. It also worked for the U.S. Air Force and Navy.
“I remember as a child, seeing some of the military attachÃ©s who would arrive at the business with their briefcases handcuffed to their wrists and literally wait for a custom part to be made,” Grace said.
The contractor’s reputation and high quality ratings eventually paid off with numerous commercial contracts to complement the residential service customers Tom Krutsch worked so hard to build up.
“Krutsch Heating never had a commercial side,” Grace said. “They were strictly residential replacement. Eighteen months after we bought them, we have established a large number of commercial accounts, including Selfridge Air Force Base [a nearby military installation].”
In addition, “We just completed a project with the FBI and are ready to start contracts with the Detroit Health Department and the Detroit Police Department.”
Grace said that 60% of his business still depends on residential service and he’s added an electrical company to the business, too. Krutsch is looking to acquire a plumbing contractor soon.
This diversification has gone to the bottom line, with revenues up by over $500,000. Grace is targeting $2.8 million to $2.9 million in total sales for 1999.
Picking up the fringesWith a flurry of commercial development in downtown Detroit, Grace sees a new opportunity for contractors like him to pick up commercial accounts.
“The focus on development in the core of the city has drawn most of the current commercial contractors in, one way or the other,” he said. “Some of the fringe customers who are not being serviced [because of the larger projects] are our greatest growth area. We are able to step in and service these people.”
The company’s impressive sales figures and diversity have attracted the eye of Wall Street consolidators, but Grace said he isn’t going to be swayed.
“I think that there appears to be a large pot of gold for the business owner who sells to a consolidator. The pot may not appear to live up to expectations.
“We like our employees to help guide the direction of our company. We look at the business as a family. We’ve entertained offers from consolidators but if we ever decide to sell, it would probably be to our employees. They have built the company, not us.”
Grace said he doesn’t believe it would be fair to his employees if he were to sell to a national consolidator. He cited an example of a Detroit-area contractor who sold to ARS, which eventually was bought out by ServiceMaster.
“Because [of the ARS fallout], the contractor is half the size of what it used to be. It lost a lot of key people who formed another company, who have become a direct competitor.”
Utilities: a blessing?Speaking of competitors, Grace cites the recent utility entry into the residential service market as a blessing in disguise. One of his nearby competitors joined forces with Michigan Consolidated Gas and Grace said he is happy about it.
“I consider the acquisition as one of the biggest favors they could ever have done for me,” he said. “They have driven up the price of service typically 10% to 15%. They have also lost a lot of their customer base because they haven’t been able to service them.
“I don’t see them as a threat. I see them as giving me business every day.”
In fact, Krutsch does quite a bit of work for another local utility, Consumers Energy. One reason is because of its experience working with boilers.
“Most utilities have very few people with steam or hot water boiler skills,” Grace said. “We do three or four boiler replacements a week during the winter. We are the last call for Consumers Energy when other contractors couldn’t fix the boiler problem. There’s only a few of us left who know that business.”
Grace is fortunate to have people with boiler experience, but when it comes to hiring and training new people, he’d rather take on someone with no background in hvac work at all.
“I look for electronics’ technicians — they make excellent service techs,” he said. “I look for people in the automotive business because they have been taught customer service and can handle some of the same management aspects of our business.
“One guy we hope to have on board soon is coming from Toyota. I can’t think of a better customer service-oriented company. “If you have the basic core skill required, the educational process is shorter than normal. You have to look outside the industry to find the best talent.”
Grace suggested that giving vo-tech students a quick taste of the job is a good way to get them interested in an hvac career.
“We should take a service truck and a technician to a local high school and give the student some hands-on experience to see what a tech goes through in the course of a day,” he said. “I think we should be able to set up a program where a student gets to ride with a service truck [as part of its curriculum].
“Unless we take measures like this, we are going to lose a whole generation of skilled tradespeople.”
Sidebar: Lifetime of experienceArt Grace Jr., owner of Krutsch Heating, Inc., started working with his father at the tender age of eight. He said he swept floors and occasionally ran some machinery, gaining a lot of hands-on experience.
He eventually went to school and received a degree in electrical engineering. Coupled with a background in refrigeration, he felt well-qualified to work in the hvac field.
“I always felt that there was nothing I couldn’t air condition,” he joked.