In the land of prosperity, two contractors find the business climate almost too hot

September 13, 2000
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In this final installment of our series on New Jersey contractors, we’ll look at two businesses with different markets and different labor environments:

One is union and the other is open shop. One is a commercial contractor in a position to partner with utilities, and the other is a commercial-residential contractor taking a wait-and-see approach to utility competition.

Yet they have a common bond; they are both members of Excellence Alliance, Inc. EAI, a “consolidation” of independent owners, has several contractors in New Jersey and continues to grow rapidly nationwide.

Hughes Environmental Engineering, Inc.

In the northern section of New Jersey, within miles of the New York border, is the pleasant town of Montvale. It is located far enough away from the Manhattan skyline to be considered part of the rural landscape, yet it retains a lot of roots in the New York/Newark metropolitan area.

Frank Hughes knows about both areas. His grandfather and father started Hughes Environmental Engineering, Inc., in Jersey City in 1935. It eventually moved to the area now known as the “Meadowlands” before settling in Montvale in 1993.

“We needed to expand and this building became available,” said Hughes. “Our marketplace has been expanding into New York and we are only a mile away. There are also a lot of big corporate names here, like A&P and Mercedes-Benz.”

The contracting company is based in the commercial-industrial sector. Hughes said that the industrial base is beginning to wane, with some of the bigger companies headed toward the southern United States.

“We do quite a bit of refrigeration work with food processors and food storage facilities,” he said. “We like to be involved with some of the more sophisticated applications, like humidity and temperature controls for the chemical and pharmaceutical markets, which require a little different type of expertise.”

Union, yet non-traditional

His company has put aside a traditional union shop activity, sheet metal work, to focus on the high-tech challenges of its customers. Hughes said that he enjoys the challenge of working in the controls environment.

He credits his union employees for raising the bar of excellence for the company and providing him with the quality of work that has become synonymous with the company name. He stated that he has a “good relationship” with the union.

He added that unlike other areas of the country, where technical training is sorely lacking, the New Jersey area is lucky to have a good teaching facility.

“We have a magnificent, state-of-the-art, 20,000-sq-ft school in the middle of the state called the Edward R. Gehm Education Center,” he said. “The apprentices are indentured to the school trustees and if they don’t satisfactorily complete their education, they are discharged.

“The school is able to give students their second phase of education after entry-level trade school. All of our apprentices go through that school. This is a great industry for young people. With a minimal amount of overtime, they can earn a salary in the mid-50s and higher.”

Hughes thinks that the companies with large payrolls will eventually cut back when business slows down. He doesn’t think a slowdown is such a bad idea, either.

“We need a little recession to get rid of the excess,” he said. “Those of us who have the nice service businesses will do OK, too.”

Consolidation, long term

But what about those businesses that have rolled up with consolidators? Will they be able to sustain a slowdown? Hughes said he thinks the consolidated companies will have to rethink their charters if they are to successfully compete during slower economic times.

“I think consolidators were originally planning on going into design-build and staying away from plan and spec,” he said. “I don’t think some of these businesses can sustain their gross sales without plan and spec. There isn’t enough design-build to go around.

“As soon as we go into a recession, the private money will dry up and be replaced by public money. And how are public projects bid? Low bid, which is plan and spec, means lower gross margin.”

Hughes said that the theory of consolidation is good, but may not apply in the real world.

“In theory, consolidators will get married to the utilities and become local providers,” Hughes said. “But in reality, utilities are trying to protect their rate base. The big players in the utility market are utility brokers; they do not want to be in contracting.

“Contractors that are being acquired by utilities may be let go after the utility has solidified its rate base.”

Hughes said he has no plans to put his company in the middle of the contractor-utility mix. That’s one of the reasons he decided to join EAI. “EAI is a defense mechanism against consolidators and utilities.”

But he added that he would not hesitate to do business with utilities if it would benefit his company. “I’d be less inclined to do business with a local utility who might be my competitor,” he said. “But if a big utility like Duke Power came in and wanted to do business that would be good for Hughes, I’d absolutely work with them. I’d have no concerns whatsoever.”

Meyer & Depew Co.

There were reasons to laugh and give high-fives. A new service technician agreed to come to work for Bobby Ring. Judging from the slow trickle of job applicants, this occasion was fit for a celebration.

With a staff of 45 and 12 service trucks, the addition of a qualified service technician is a significant event. Ring, executive vice president, said he is giving his employees a lot of good reasons to help recruit new workers.

His company is giving $500 to its employees if someone they recruit stays employed with Meyer & Depew at least 90 days. The program gives everyone a chance to get involved and build up the staff of experienced technicians.

“The hardest thing for me is getting my people to think like me,” he added. “We’ve just made the decision to grow our technicians from within. We want some of our installers to spend a year in the field, learning the service business.

“In our trade, all of the good service techs are working. Very few are looking to make a change.”

Ring is taking these measures to bolster his staff and lay the foundation for future projects. He is also acting to favorably position his company in the wake of competition for service contracts from local utilities and consolidators.

Meyer & Depew is located in Kenilworth, seven miles west of Newark. The company has been around for 46 years. Ring’s father, Bob Sr., has worked for the company 38 years.

Bobby spent his first 14 years in the hvac business working for Meyer, and left for a position as national sales manager with Trol-A-Temp. He eventually returned to the business when he and his dad bought out a former partner.

Today the company splits its market between commercial and residential service and new installations. It’s projecting sales of $5.5 million in 1999, a modest gain over 1998 revenues of $5.3 million.

Like others, the company has been moving from the plan-and-spec arena to design-build work.

“We want to get into a design-build relationship with our existing commercial accounts,” Ring added. “There are a lot of areas our residential installation business can go, too.”

But Ring is concerned that the role of major manufacturers is changing and it will impact his residential business.

Residential risks

“I’m concerned about which major manufacturer is going to partner with utilities,” he said.

“Manufacturers are already selling to retailers like Home Depot. An end-user can pick up enough parts at a Home Depot to build their own system. You can buy what you need on the Internet, too.”

Ring said he has seen many changes since his return to the business, and one of the biggest is in the parts distribution channel. He noted last year’s 49% acquisition of Carleton-Stuart, a Carrier distributorship, by Carrier Enterprises, a company that owns interest in other Carrier distributorships.

“Carrier, Lennox, and others are trying to mirror the benefits offered by Excellence Alliance by helping dealers with their back-office expenses,” Ring said.

“We would prefer that manufacturers and distributors focus their attention on more traditional responsibilities, such as proper maintenance of equipment and oem parts inventories, as well as improved levels of customer service.”

One of the groups that is helping Meyer & Depew with professional services is EAI. Ring said he has gotten a lot out of his membership, and likes the fact that he didn’t have to join a consolidator to enjoy “consolidator-like” benefits.

“We wanted the services without being consolidated,” he explained. “EAI is not just a buying group. Their affiliate, Mechanical Excellence Alliance [MEI], has the ability to negotiate national accounts like McDonalds and we have exclusive rights to service their local restaurants.

“Our goal is to strengthen our service business,” he said. “It is the one area where we can beat the utility companies.”

Ring said that the best way to fight the battles is in the field, being the best at what it does best. He believes that contractors need to put their best foot forward in order to compete.

Sometimes, however, being the best at what you are isn’t enough to win customers. The power of the almighty dollar is another way to do battle.

Battle fatigue

Fighting utility competition has been a long and expensive battle for New Jersey contractors. Ring said some of the reasons it’s an uphill fight is the sheer number of utility company employees involved in public and legal maneuvering.

“Some of the corporate staffs of these utilities are bigger than my entire workforce,” he said. “They [utilities] have full-time lobbyists and attorneys on board. We have to raise money to hire these kind of people.”

Ring cited the high profile of companies like Public Service Electric & Gas Co. (PSE&G), which donates money and projects to New Jersey communities.

“I can’t compete with that. I don’t have the financial resources,” he said. “The dues to belong to these community organizations are based on the number of employees a company has. A utility with thousands of employees has the money to be more influential, even if it isn’t in the best public interest.”

Ring compared local utility PSE&G to a social services agency.

“If you’re interested in relocating your business in New Jersey, PSE&G will fly you out in a helicopter and help you find a place to locate your business,” he said. “That is not what their role should be. It is all a way to fluff up state regulators by showing what tremendous value they [PSE&G] bring to the business community.”

According to Ring, many consumers are buying whatever the utilities are selling, because the utilities have name recognition and are “perceived” as being more trustworthy.

He gave the example of a customer who called his company, demanding that it remove a newly installed furnace. The new furnace had been inspected by a utility employee who was not familiar with the equipment and told the customer it was installed wrong.

“I got out the installation manual and explained the furnace to the customer,” Ring said. “By the time I was done, they were convinced that the job was done right. But they believed the utility at first because they were Elizabethtown Gas Company, and could be trusted.”

He added a story about one of his former employees who went to work for PSE&G. Ring said the worker was told by the utility to go out to customers’ homes and ask homeowners if everything was OK with their systems.

He said that some days were so slow for the worker that he was spotted on a New Jersey boardwalk handing out flyers for the utility.

“The utilities can afford to do this because someone else is paying for the guy’s truck,” he said. “And all of the trucks are equipped with laptop computers. Ratepayers are paying for that.

“The utilities are sending out guys to service air conditioning units who are also servicing gas leaks. I say, let contractors do their service work and utility workers provide utility service work.”

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