Marketing Indoor Comfort: The HVAC Landscape Is Changing. Are You Ready?
What is about to happen in less than a year has been a known fact since Jan. 13, 2004. It was at this time that the courts ruled that the U.S. Department of Energy (DOE) did not have the power to enact its 12 SEER standard.
To be more accurate, on this date, the 2nd U.S. Circuit Court of Appeals ruled that the DOE, in enacting the 12 SEER standard after the original 13 standard had been approved, "failed to effect a valid amendment of the original standard's effective date, and as a consequence, was thereafter prohibited from amending those standards downward."
Sure, the industry could have challenged such a ruling, but it opted not to, due mainly to the timing. On March 17, 2004, the Air-Conditioning and Refrigeration Institute (ARI) announced that the trade association withdrew its challenge. While ARI was seeking a 12 SEER standard, time was just not on its side.
"Due to the likelihood of a long and uncertain legal process, ARI will no longer pursue litigation ... so manufacturers can prepare for a new 13 SEER national minimum efficiency standard for residential central air conditioners and heat pumps," said ARI President William Sutton.
... And off went manufacturers, scrambling to make sure they would meet the Jan. 23, 2006 deadline. In other words, the current 10 SEER standard, which went into effect in 1992, is the national minimum efficiency standard, but that comes to a screeching halt on Jan. 23 of next year. Equipment manufactured after that date must meet the 13 SEER standard.
For all of you procrastinators, that means this: If this is March 7, 2005, then there are 322 days to get your act together.
What's going to change? Plenty - and that's for everyone in the business.
Different Selling Landscape Ahead"There's no question that the HVAC landscape will change as we move forward into the post-13 market," expressed Drew Fitzgerald, vice president of marketing, Residential and Light Commercial, Nordyne.
"The changes will bring about a number of adjustments in the way manufacturers, distributors, and dealers sell - everything from the products we offer to the way they are packaged will be affected."
In Fitzgerald's estimation, the market will move more toward total home comfort.
"That includes not only the traditional air conditioners and heat pump products that are the foundation of the industry, but will grow to include electronic air cleaners, humidifiers, air purification devices such as HEPA filers and UV lighting, as well as zoning products," said Fitzgerald. "The key to success in the future will be how well we can treat the whole living space envelope and keep our customers comfortable.
"The new market will not just revolve around energy efficiency and lower heating or cooling bills. Other variables such as air purification, operating sound levels, and efficient air distribution will become more important among consumers. Contractors who will prosper will address all these areas of home comfort."
Matt Peterson, vice president-sales and marketing, York International, believes change in the industry will be significant "and will happen sooner rather than later."
"Today, roughly 65 percent of the industry sales will be at the entry-level efficiency of 10 SEER and 35 percent are above 10 SEER. When the minimum becomes 13 SEER, there is a possibility that over 90 percent of the industry sales will be at the entry-level efficiency, and no industry is as healthy as it should be when such a high level of shipments are at the entry level of its product line," he said.
"We, as an industry, must find ways other than SEER for consumers to â€˜step up' in our product lines and buy higher featured product.
"Unfortunately, our industry as a whole has relied too much on selling up based on efficiency rather than consumer-focused features. There are other industries that serve as a parallel for where we need to go. As an example, people do not buy a sub-zero refrigerator because it is more efficient, or a BMW 700 Series automobile because it gets better mileage. They buy these products for other reasons.
"I believe if we focus on consumer-driven features for our products, and IAQ is certainly near the top of the list, we will continue to be a viable, profitable industry. If we focus solely on reaching higher efficiencies, we will not provide enough of a reason to the consumer to â€˜step up' outside of just selling a more efficient unit, and we will become a commoditized industry, lacking in profitability."
Translation: When 13 SEER becomes the standard, contractors should not just focus on the numbers.
"As an industry, we have spent far too much time and effort debating and worrying about mandated efficiency standards and â€˜selling on SEER,'" said Tom Huntington, president of York International's Unitary Products Group.
"Meanwhile, consumers are telling us they are not only concerned about efficiency but also the environment, about indoor air quality, and about the comfort and peace of mind our industry's products and services can provide. These trends are most telling in the growth of the residential replacement market and the success of many of today's progressive dealers."
The time is ripe for growth and profitability for contractors, said Huntington. The key, in his estimation, is not to allow a minimum-efficiency standard to translate as the maximum value offered to the consumer.
"That approach will relegate central heating and cooling systems to the status of commodity products," he said. "The winning approach for contractors is to raise the entire value proposition for premium home HVAC appliances and services, recognizing that energy efficiency is simply one necessary element of the complete retail package."
Huntington may be the first to admit that the 13 SEER standard poses the most challenges for contractors who have been following "the traditional sales approach" where the good-better-best story has been 10, 12, and 14 SEER. In a sense, contractors have been programmed thus, encouraged by manufacturers "who provided hip-pocket tools for payback calculation." Now that the minimum SEER is higher, Huntington said, "We arrive at a technical and marketing crossroads."
"Unit cost will increase exponentially for equipment above 13 SEER," he said, using, as an example, that two-stage compressor capability is needed above 14 SEER. "This deflates the traditional return on investment/payback sales pitch, as fewer homeowners will secure significant payback on energy efficiency.
"So, in the new era, we either commoditize the product or we learn to sell prescriptive solutions to IAQ and comfort. Many contractors are not prepared for this because they have been so tightly focused on efficiency."
Times Are A' ChangingWhile it's true that many contractors have been locked into the good-better-best selling scenario for so long, now is the time to get out of that rut, said John Gibbons, vice president, strategic accounts sales, Carrier Corp.
"Contractors will need to know how to sell total comfort as opposed to just selling increased efficiency," said Gibbons. "I'm talking about variable-speed air handlers, indoor air quality, etc."
Gibbons is optimistic. He believes most contractors will be making the move to 13 SEER earlier rather than later.
"Similar to the switch from 8 to 10 in 1992, most contractors don't want to be the odd man out selling products that have already been legislated out. Proactive HVAC dealers will begin advising their customers and end-users about the legislation and the benefits to the new products well prior to the Jan. 23, 2006 manufacturers' date.
"Those dealers that aren't ready to make the switch will surely be unprepared in the eyes of the consumer," he added. "I look for the market to make a speedy change to 13 SEER. It will be too hard to sell against the â€˜I'm getting something legislated out?' concern."
Unfortunately, while the energy savings of a 13- vs. a 10-SEER unit were hailed in arguments supporting the higher-efficiency level, they don't have much of an impact in areas where cooling loads are moderate. And, yes, this is a big concern with contractors in those mild-climate regions. For example, energy costs aren't significantly impacted by higher-efficiency equipment in Eugene, Ore., said Mark Milligan, owner of Priority One Heating and Air Conditioning. The difference between operating costs of a 10 SEER and a 13 SEER in his area is about $25 a year, he said.
"You'll never get your money back out of it," he said. Still, "most of what we're installing is 13- and 14-SEER equipment already," he remarked.
"Most of what we do is Energy Star-rated, and [the 2006 deadline] isn't going to change what we do. The contractors it's going to hurt are the guys who like to do the cheap stuff - we sell upper-end equipment."
In Des Moines, Iowa, the concern is the cost of the 13-SEER units. According to Jerry Johnson, sales manager for retrofit residential at Wycoff Industries, rental, apartment, and other multifamily property owners may feel the pinch of higher equipment prices.
"The 13 SEER minimum is going to significantly increase the cost of that part of the business," said Johnson.
In his estimation, the sticker shock of some high-efficiency units may drive some of those rental property owners to "shop us out at that point," he said.
The cost difference between a 10-SEER and a 13-SEER package is at least 30 percent, and 40 percent on most jobs, he said.
On the other hand, individual homeowners who plan to stay in their homes can be upsold to the 13 or 14 SEER range, Johnson believes. Another factor that may influence efficiency choices is utility rebates. Johnson noted that right now in his area, efficiency rebates are being paid on 12-SEER units.
"If 13 is going to be the standard, they may not start their rebates (in the future) until 14 or more," said Johnson.
In Wichita, Kan., Boyd Pope of All Seasons Cooling and Heating, Rose Hill, foresees some economic pinch for farmers and other rural customers. As the 2006 deadline passes, he may hold back some less-than-13-SEER units to help those who are hurting.
"Otherwise, I'll probably sell the 13-SEER units to the majority," he said, adding that with higher-efficiency equipment, "you make more money. It takes you about the same time to install. I very seldom even bid 10 SEER."
Pope wondered if pricing of 13-and-higher-SEER units might come down, as that becomes the standard. He said that happened when the 10 SEER minimum went into effect.
"It was almost like the price dropped down to what the 8- and 9-SEER units had been selling for," he said.
In This TogetherThe 13 SEER landscape will affect not only contractors and manufacturers, but also consumers, wholesalers, and builders.
"A 30-percent increase in efficiency savings will surely get the consumers' attention," said Gibbons. "But this savings comes with strings. The increase in efficiency for consumers will change the entire value proposition of our industry. More emphasis could be placed on repair rather than replacing a unit for the short term.
"There will also be a need to increase a home's comfort through improved humidification, air quality, and temperature control as consumers want their homes as comfortable as possible. Contractors will need to capitalize on this need to keep their installers as busy as their service techs."
Peterson pointed out that for most consumers, often their largest investment within the home is their HVAC system. Now that baby boomers are hitting peak income years, he said, they want to spend their money on their homes.
In the past, "We have not given consumers a good reason to replace the product before it dies. We have built brown boxes that heat and cool."
A York-commissioned consumer preference study confirmed that only 20 percent of the market is price driven. "This means 80 percent of the market represents the opportunity to sell up," said Peterson, adding this can be accomplished by using value-added sales.
In addition, the study showed that "The consumer still wants to buy from an independent dealer," said Peterson. The consumer's perception of the dealer-contractor is at least as important as the perception of the brand, he said.
As consumers become more and more brand conscious, they will be relying on the value and reputation of the brand of heating and cooling equipment, said Fitzgerald. And, that suits Nordyne just fine, he added. "Our lives these days are so busy that brands create a mental short-cut to help us decide which products we want to buy," said Fitzgerald.
"The well-known consumer brands we offer such as Maytag, Frigidaire, Westinghouse, and Tappan give our dealers instant recognition and a promise of credibility that helps ease some of the concerns consumers have with HVAC replacement experience. Our dealers then deliver on that promise through their own integrity, service quality, and reputations. It's a winning combination.
"Great products, well-known consumer brands, and superior warranties add to win the customer's confidence. We've seen dealers who, after adopting a branded sale strategy, have seen their sales increase by as much as 30 to 35 percent. There is a significant value in consumer brand recognition and we've seen it work time and time again."
As manufacturers, Fitzgerald said it will be in everyone's best interest to make sure the end customers are enthusiastically pleased with their products. "It is up to our dealers to bring the message to consumers and the 13 SEER initiative can be the catalyst to help bring some very positive market changes," he said. "Since we're already going to be selling higher-efficiency equipment, let's go the whole way and sell a better indoor environment."
Space May Be A ProblemWholesalers and distributors are battling a totally different issue: space. Recognizing the larger footprint of 13-plus SEER units compared to those of 10- and 12-SEER equipment, distributors are expanding warehouse space and already computing the effect of trucking changes. The larger units will mean fewer systems shipped per truck load. Size might even affect what an installer can haul to a site.
Gerald Hazel, general manager of Staten Island (N.Y.) Heating & Cooling Supply, said his firm will stockpile some 10- and 12-SEER units; "I think a lot of people will." He attributes that to a very competitive, somewhat closed market with a lot of price-driven selling in his borough of New York City.
"We've seen some selling of 13-and-higher SEERs," he said.
Frank Raue, operations manager at Equipment Sales Corp., Mobile, Ala., believes a lot of consumers and business owners are going to be shocked when they see the price difference between 10-SEER and 13-SEER systems. His company felt it would be better to "educate them now rather than getting a cold glass of water in the face in January of 2006."
Like Hazel and Raue, Doug Young, president of The Behler-Young Co., a Bryant distributor with headquarters in Grand Rapids, Mich., said the logistical impact of the change is the hardest to swallow.
"The 13 SEERs are about 80 percent larger than 10s in cubic footage," he said. "That means we need nearly twice as many trucks, nearly twice as much space in our distribution centers.
"The dealer can fit fewer units in his trucks, and installers will have to make more trips to take the same number of units to jobsites."
Young believes selling quality features beyond energy savings can help the industry avoid the pitfalls of price-only "commoditization" when 13 SEER becomes the new industry minimum. Quiet operation, ease of service, unit diagnostics, and a better appearance should be emphasized to appeal to customers when presenting higher SEER equipment, he said.
Should a distributor stockpile some sub-13 SEER units?
"That's something we all want to know," answered Dan Hinchman, vice president of corporate operations and marketing, Airco Supply, Savage, Md. "Our plan right now is to wait and watch a little. We also believe we'll start seeing 12- and 13-SEER product pricing drop. The market's going to push it that way."
"I think most contractors will be more inclined to sell higher-efficiency product if the pricing differential is not as great as it is now," said Hinchman. "We have some price-sensitive customers who would probably like to deal sometime before the end of this summer on buying a bunch of 10-SEER product to save money going forward.
"What we've found in the past, however, when the move was from 8 to 10 SEER, that advantage didn't really materialize because the price of 10 SEER got down close to where 8 SEER was anyway, so no one really needed to do that.
"If the pricing differential stays high," he added, "yes, I think people will buy a lot of 10-SEER product this year and stock up for at least six months or a year."
But stockpiling is costly for many contractors, and the average distributor isn't going to carry a year's worth of inventory, Hinchman pointed out.
A bigger issue looms with warranty concerns. "Say a guy buys a brand-new 10-SEER unit in September and it fails the following February," said Hinchman. "He can't get a 10 anymore; he has to get a 13, and the problem is will the 13 match up with his existing air-handler unit or will it give him any other problems?"
More Cost For Builders?As far as builders are concerned, the big news in the construction market is the 13 SEER minimum efficiency standard.
"Right now the new construction market is kind of in flux," said Mike Owens, senior sales consultant, Dealers Supply, Forest Park, Ga. "From the builders' standpoint, the concern is pricing. The builder goes into a project trying to control costs; 13 SEER is a substantial upgrade. It's going to change the price structure. Whatever pricing they get from their installing contractor would be the determining factor."
Will that make for a more cut-throat, competitive contracting market? Not really, said Owens. "In my opinion, it can't get much more competitive than it is right now, especially with production builders, who are extremely competitive."
Owens said that, in new construction, it's mainly the size of the price tag that will matter, not so much the size of the equipment â€“ as long as the builder allows enough space for it. "The costs will, of course, have to be passed on to the home buyer. It will affect the entire U.S. new home market."
Residential builders will have to face potential changes in size. Both internal and external units could take up valuable space for landscaping or closets, said Gibbons. "The size of the new higher-SEER units will also affect how a particular house sits on a lot," he said.
Perhaps a more difficult task lies in making sure the customer gets proper performance from the installed system. Many things, little and big, could reduce the installed efficiency.
Higher-efficiency systems have "less tolerance of screw-ups," said Glenn Hourahan, P.E., vice president of research and technology, Air Conditioning Contractors of America (ACCA). "Occupants really don't care about efficiency as much as they do about being comfortable and healthy. To ensure occupant comfort and satisfaction, system sizing and zoning are most important."
In order to get a high installed efficiency, it's critical that installing contractors make sure ducts are tightly sealed and well installed, he said. Airflow and good air distribution, good duct design with no high external static pressure (ESP), and minimal duct leakage are all vital when it comes to making sure an air conditioner reaches its installed efficiency potential, said Hourahan.
"Uninsulated duct and high leakage will negatively impact the system's ability, wasting energy," said Hourahan. If the duct system is drawing in unconditioned air through a leak, it compounds the problem, he added.
Peterson was just as emphatic regarding installation. "One critical area of the transition to 13 SEER will be the quality of contractor installations," he said.
"High-efficiency systems are so much more sensitive to small errors within the installation process. These areas include running extensive load calculations for proper sizing, ensuring a correct refrigerant charge, minimizing duct leakage, and the need for zoning in some high-efficiency applications. A focus in these areas will ensure the consumer receives the benefits from investing in a higher-efficiency system."
Bottom line? Gibbons maybe said it best.
"For a dealer/contractor to succeed in 2006, they will need to start embracing the change as soon as possible," he said. "Couple the 2006 change in efficiency with the 2010 refrigerant change, and dealers will be challenged to sell on a far greater plateau than ever before."
Fitzgerald had good parting advice, too.
"We have an added opportunity to sell the benefits of whole-house comfort and we believe the market is ready for it," he said. "Higher consumer awareness of the dangers of mold and other air impurities sets the stage for the HVAC industry. Air filtration and purification can offer significant benefits for allergy sufferers. Reducing mold through proper duct cleaning, ventilation, and use of UV lighting delivers real health benefits. As an industry, we have a responsibility to make sure consumers are offered the choices.
"Consumers want better indoor environments and we are uniquely poised to offer it. Certainly the delivered costs to the homeowner will be a bit higher, but so will the comfort and health benefits. But, we can't wait. This is something that we need to start offering now."
In our next issue: Marketing Indoor Comfort will examine selling the value of comfort vs. levels of efficiency. We will explore why contractors can't rely on selling energy savings in 2006, why a change in marketing and selling strategies is a must, and getting upscale comes from comfort features, products and systems. Look for the next Marketing Indoor Comfort report included in the April 25, 2005 issue of The News.
Publication date: 03/07/2005