Planned Replacement Can Be Profitable

June 10, 2005
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For some, selling a planned replacement system in the rooftop market seems a lot like trying to sell ice to Eskimos. However, Lennox is trying to get the word out to contractors that a planned replacement strategy in the market can be profitable.

Today, a growing number of companies are replacing their HVAC rooftop unit before it fails. This allows them to avoid the high costs of maintaining outdated equipment and the expensive downtime that ensues if aging equipment fails. In addition, selecting new equipment that is more advanced than what was available in the early 1990s can help customers reduce energy usage and improve indoor air quality (IAQ).

Gary Davis, Brian Stampley, and Jerry Davis with Linc Services remove the old HVAC unit to prepare for replacement at the Stanley Works Dallas plant. (Photo courtesy of Linc Services.)

Don't Ignore The Market

According to Lennox, the demand for replacement HVAC is twice the size of the market for new construction systems. In fact, the company's statistics show that 65 percent of the opportunities for selling commercial HVAC systems consist of replacing older units.

"It's a huge opportunity. There are 33,000 supermarkets in the United States, many of which could replace outdated HVAC systems with superior humidity-control options and high-efficiency systems," said John Whinery, director of commercial marketing for Lennox.

"This would help grocers meet the Environmental Protection Agency's 2005 Energy Star® challenge to the grocery industry to decrease energy usage by 10 percent, cutting electricity and natural gas spending and reducing greenhouse gases."

The company recommends the planned replacement program for numerous reasons, including:

  • To differentiate you from your competitors.

  • To help spread out your business over the off-season.

  • To provide opportunities for creating strategic partnerships with your customers.

    "Focusing on planned replacement can only strengthen your business by providing extra income, helping you retain skilled employees from season to season, and giving you the opportunity to learn more about your customers' concerns," Whinery noted.

    (From left to right) Russell Ferris, Jeremy Snyder, and Jerry Davis, service technicians with Linc Services, guide Lennox L Series 20 ton RTU to the proper location on the Stanley Works Dallas plant rooftop. (Photo courtesy of Linc Services.)

    Where To Begin

    Once you've identified likely targets - such as stores with 10-year-old HVAC systems - you'll need to talk with these potential customers to determine how much time is left on their lease, the name of the decision-maker, and the key financial considerations. Ask if the building use or load may have changed since the original equipment was installed, and whether there are issues with humidity and IAQ.

    "With the old R-22 refrigerant equipment being phased out over the coming years, this is an excellent time for your customers to replace existing units with models featuring the environmentally friendlier R-410A refrigerant," Whinery said.

    "This one change can help your customers realize the full life of their equipment while minimizing future expenses, as production caps are expected to significantly increase R-22 equipment servicing costs."

    Providing financial examples that demonstrate return on investment and initiating a site survey will help you develop a program targeted to each potential customer.

    Gary Grider, a systems analyst for Ace Air Inc. in Indianapolis, said 25 percent of his company's business comes from planned replacement. He said emphasizing planned replacement has helped the company keep employees busy during the normal downtime and pick up service agreements, while saving customers money.

    "Our customers have been pretty receptive," Grider said. "But you have to do it the right way. Just because something is a little older does not necessarily mean that it should be replaced. You have to look out for the customer. But there are a lot of people out there pumping a lot of money into older units that are not very efficient."

    Getting The Word Out

    Engineering Excellence Inc., located in Cincinnati, gets about one-third of its business from planned replacement. According to company president Tom Winstel, the key is getting the word out.

    "Vast majorities of people do not know what they have on the roof. They do not know the model, the condition, or if their cost flow is high or low," Winstel said. "You just have to show the net value of the program. The two drivers of the program are knowledge that the equipment is obsolescent and performance-based reasoning."

    Engineering Excellence recently completed a planned unit replacement with Elder-Beerman Stores Corp.

    "Back then, both internal and external costs were too high for managing our HVAC assets," said David Utrata, vice president of operations and store administration at Elder-Beerman.

    Elder-Beerman was self-performing the maintenance for its 71 stores. With no system in place for preventive maintenance and planned unit replacement, on-demand service and utility costs per store were increasing at an alarming rate, and the retailer was faced with an aging HVAC fleet of equipment.

    Elder-Beerman's management looked for a reduction in spending and more control of its facilities management budgets.

    They called on Engineering Excellence.

    "We are now in the third year of the plan, and it is tracking to our vision of enhancing Elder-Beerman's bottom line with consistent cash flow and a flat five-year budget. We have also significantly enhanced the retail buying environment for our customers - internal and external," said Utrata.

    "If we had stayed with the status quo, over a five-year period, costs would have snowballed with an avalanche effect and with nothing to show except an older fleet, higher costs, and lost sales due to store discomfort - not a pretty picture."

    Engineering Excellence guaranteed its fee for replacing all of the equipment, managing operations, and performing maintenance for all of Elder-Beerman's stores for a "flat-line" cost per year for five years. Quarterly review meetings were established to re-view performance with senior Elder-Beerman executives.

    In the first year, many units required "just-in-time" replacement in addition to planned unit replacements.

    This, too, was part of the plan. Engineering Excellence's service management team used proprietary formulas for making repair versus replacement decisions as the first year maintenance tasking discovered repairs - formulas based on long experience with each type of equipment in the retail setting. When replacements were justified, new commercial units were installed as part of the customization plan.

    The Engineering Excellence plan also specified equipment to meet ASHRAE 90.1 guidelines for enhanced energy efficiency. Features vary widely on manufactured rooftop units today, presenting retailers with a bewildering array of options for reducing ongoing operating costs.

    Engineering Excellence provided answers that considered tangible concerns, such as the actual equipment lifetime operating cost savings, and intangibles such as design criteria and store comfort requirements. Working directly with the HVAC manufacturer under a specialized partnership program, Engineering Excellence was able to ensure first-year startup and parts warranty coverage, and the changes were seamless to Elder-Beerman and its internal customers.

    The five-year strategy reduced the average age of over 14,000 tons of HVAC equipment from 15 years in age to less than 10.

    Publication date: 06/13/2005

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