The ‘Make Do’ Phenomenon

A couple of weeks ago I attended HARDI’s annual conference, and at the HVAC Systems & Equipment Council meeting I listened to distributors lamenting that the premium sales had dropped from 70 percent in the era of the tax credits to less than 30 percent. So, what’s going on here?

Not Opening the Wallet

Luckily, I heard a voice of reason at that same council meeting when Jerry Troke spoke up. Jerry is the vice president of marketing and product development for Heat Controller, and he said this year’s market is not “repair versus replace,” it’s “repair versus make do.” That statement made a lot of sense to me.

And Jerry is certainly in a position to make this kind of observation, because Heat Controller has a very comprehensive product line including ductless mini-splits and window air conditioning. He knows firsthand what has gone on in the market. Heat Controller experienced softness in unitary sales contrasted by a significant strength in window air conditioners and mini-splits, which he characterized as reactionary and “spot solutions.”

Many industry observers have looked at the last two years as “repair versus replace” due to the underlying softness in the economy. The heat this summer would have historically meant record sales, but that just didn’t happen.

According to Jerry, “When confronted with a repair bill — let alone a replacement bill — for their central air conditioning system, many people opted to do something else. People decided ‘We are not going to sweat in the bedroom, but we are going to sweat everywhere else.’”

I’m with Jerry. This makes a lot of sense. Consumer confidence was down so low that people decided to “make do.”

To support his claim, Jerry indicated his company’s sales of mini-splits and window units were up well over 25 percent but unitary sales were weaker than he expected. I asked about the influence of the increased costs of central air conditioning because of the regulations (R-410A and 13 SEER minimum efficiency). What about the sticker shock of having to come up with $6,000 to $10,000 to heat and cool a house? He agreed that was a factor but countered that lack of confidence in the economy has made homeowners unwilling to invest in new systems.

Consumer Confidence

Jerry and I both heard keynote speaker Steve Tusa of JP Morgan Equity Research talk about pent-up demand that continues to grow through the era of “make do.” Tusa, a Wall Street analyst who focuses on the HVAC industry, indicated in a normal year 40 percent of the pool of 10- to 12-year-old air conditioning units would be replaced, especially in a hot summer, but in the last two years only 20 to 25 percent of that pool was replaced.

“This ultimately represents a huge opportunity, but we haven’t seen it yet,” Tusa said. “There are a percentage of units out there that have been fixed or left broken.” He estimated this pent-up demand represented at least 2.5 million units.

So there’s your answer if you are trying to predict the market in 2013. It’s not the age of the installed base of product out there in the market. It’s not the Farmer’s Almanac predictions of mild winters and hot summers. It’s consumer confidence.

Sure, you should keep your eye on the election in November and the extension of the Bush tax rates. But the real thing to watch is the level of consumer confidence.

If the consumer confidence levels go up next year along with the temperatures in May and June, then Jerry thinks the industry will have an absolutely great year. I think he’s absolutely right.

Publication date: 10/22/2012