HVACR Contractors Diversify to Meet Changing Markets
“Don’t put all your eggs in one basket” is a great proverb about risk. Although it starts with the idea of someone carrying eggs to sell at market, it’s still appropriate in today’s economy. If all your eggs (your customers) are in one basket (market), and the bottom falls out of that basket, you won’t have any eggs left.
Many HVACR contractors know the truth behind the adage. Others are just starting to learn. “There is a new crop of contractors who were not around during the last new construction slowdown,” said George (Butch) Welsch, president, Welsch Heating & Cooling Co., St. Louis. “I serve on our pension trust in St. Louis, and over 50 percent of our guys were not in the union in 1991.”
REDUCING RISKAir Mechanical Inc., Myrtle Beach, S.C., used to be a predominantly new construction contractor. When the owners realized that market couldn’t hold up forever, they hired Shaun Leary as their new sales manager to help the company expand into service-replacement work.
“A lot of guys focused on new construction with the big builders,” said Leary. “A lot of these big builders just stopped building. If your eggs were in that basket, you’re laying people off.”
Putting all the eggs in one basket may allow a company to devote more resources to a profitable market, but it also puts the company at greater risk if the market dries up. Leary was part of Air Mechanical’s strategy to reduce risk. The contractor now offers preventive maintenance that includes thermostat calibration and duct leak checks, in addition to more standard inspections. A follow-up report points out abnormal conditions and necessary repairs.
“There is no better assurance of a year-around work load than full service agreements or contracts,” said Aaron York Sr., president of Aaron York’s Quality Air Conditioning & Heating, Indianapolis. “[Customers] pay an annual fee and we become responsible for all parts, labor, maintenance, filters, etc. We get to replace their equipment at our normal selling price when it needs to be replaced.
“If we have served them well, they seldom even get a competing price.”
ADAPT OR DIE“To me, adaptability is one of the most important characteristics a successful contractor must possess,” said Welsch.
“Virtually every market is going to have some ups and downs,” he said. “The ability to have options during the down times is extremely important. For example, even though the new residential construction market remained strong for a longer time than we all expected, it finally did take a downturn.”
Maintenance agreements, service-replacement, and light commercial work offer options for residential contractors, Welsch continued. “Unfortunately, the commercial market typically lags the residential market by 18 to 24 months, so if a contractor isn’t in that market already, by the time he would get in, it would probably be too late.”
To adapt quickly to market changes, residential new construction contractors should be farming their recently installed systems for maintenance agreement customers, he said.
“Any contractor who will not or cannot adapt their organization to the changes that are affecting the marketplace are doomed for failure,” agreed York.
There is plenty of change to keep the industry interesting. “Consider the newer, high-SEER equipment with new refrigerants; the more-complex, higher-AFUE gas furnaces; the substantial in-roads heat pumps are making nationwide, and we can readily see that it is, ‘change or die.’
“Add to these the new accessories that are coming online, such as improved and advanced humidifiers, air-cleaning and -treating systems, UV lights, duct sealing, outside air exchangers, really intelligent setback thermostats, inherent self-diagnostics, etc., and we can see that the future belongs to those who are flexible enough to train and change - or they will become part of a history lesson.”
Diversity can also refer to demographics, York pointed out. “Once again, we must adjust or die. Families today are not the traditional families we grew up with. There are many more nationalities with whom we must learn to work, communicate, sell, and service. We must learn to handle same-sex life situations, mixed families, single-person homes, and [customers] who hardly speak English.
“Like it or not, agree or not, this is the way it is. We can change, or we can change our line of work.”
TREND WATCHINGIn order to keep up with the latest market trends, York recommended constant training and keeping lines of communication open between management and field contacts. “We must make the feedback from the field much easier and desirable than it has been in the past,” he said.
Also, keep track of key indicators. “In St. Louis, new permits were down 30 percent from 2005 to 2006,” said Welsch. “There is a definite correlation between the market and available lots. If builders are taking out permits, we know where we will stand for the next two to three months. If the number of available lots goes up, that market is slowing down.”
Networking is another good way to follow trends, as well as to find new opportunities, Welsch said. “You never know who you’re going to run into. Maybe some larger facility could use some help.” He said networking is one of the keys to his company’s success, both within the industry and outside of it.
CHANGING FOCUSTo keep people working during market changes, “I recommend the boss find somebody who has a service-maintenance mentality to pull out all the files for jobs they did for the last two years and start calling,” said Welsch. “They’ve probably got a potential file of customers that won’t quit.”
In Leary’s area, for example, Hurricane Hugo came through back in 1989. “All those replacement units are starting to pop,” he said.
Welsch himself is a new construction convert. “It’s taken me a dozen years to get to the point where I am more excited about a hot day on the weekend, than I was when housing went up.”
Another way to keep working, York said, is to seriously exceed customers’ expectations. “We must make ourselves available to the end user 24/7, as well as respond with punctuality,” he said. “If we cannot get them going today, they might well expect us to provide them with a comfortable room at a motel with a free evening meal.
“Simply checking the equipment in the spring and fall will no longer cut it. We must provide them with comfort without fail. If we can’t do this, someone else will. I prefer it to be me.”
You can’t beat having salespeople who are hungry to sell legitimate work, said Leary. “It’s kind of an ego thing. We’ve been busy, but we never really stopped fishing for new work.”
REALISTIC GOALSJust because the national economy is doing one thing, it may not be true for your local economy. For instance, new construction in Myrtle Beach is still going strong, Leary said, ranging from starter houses to the high-end market. “That’s why we sell more than one [unitary] brand. There’s a place for everything.”
IAQ is still an untapped market for many contractors. “More consumers have become very well educated on mold and moisture,” Leary said. His company sells Honeywell whole- house dehumidifiers with fresh- air ventilation, whole-house air cleaners, “and a ton of media air cleaners. We also have humidity issues here in Myrtle Beach, and we are finding that the consumers are a lot more educated than they were 10 years ago.
“If anyone has an allergy situation in the home, they are interested in IAQ products. We install a lot of media filters in this area, or upgrade them to a whole-house electronic air cleaner. It’s just not a hard sell anymore.”
It’s also important not to expand beyond your staff’s capabilities. “You have to have the right staff with you,” said Welsch. Expansion into plumbing, for example, might be a good long-term goal, “but we haven’t taken all the market there is in the HVAC end.”
“The biggest problem is,” Welsch said, “you take a guy who maybe hasn’t been as successful as he would or should have been in one market, then he goes into a market that he really doesn’t know - the likelihood of him being successful there isn’t very great.”
POINT OF VIEWIs the business up, down, or simply changing? It depends on your perspective. For instance, Leary said he appreciates the IAQ advertising done by Sharper Image and Oreck. “They’ve saved the industry a lot of advertising.”
“If we allow ourselves to think that business is bad, it will be,” said York. “But if we convince ourselves there are as many, and perhaps more, opportunities today than ever before, there will be. We simply try harder and outwork the competition.
“You do not build your business when times are really good,” he said; “you build it when times are not the best.” Today’s market changes “are an incredible opportunity for the contractor,” York said. “If contractors are wise enough to continue to get the same gross margins on the jobs they sell, they will have more dollars with which to work.
“For example, if we used to sell a heating and cooling system replacement with 10 SEER and 80 percent furnace for $3,500, the new system with minimum 13 SEER and a 90-plus furnace might sell for $6,000. If we were shooting for a 30 percent gross margin, we have $1,050 on the 10 SEER sales but $1,800 on the 13 SEER sale. That gives them $750 more to work with. How can we lose? If we then become astute with accessories that the customers are demanding today, there is even better money in the pot.
“If we can convince ourselves that the consumer needs and wants us, and only us, we will provide their wants at a healthy profit,” he continued. “We will experience and exude a pride in ourselves that will build our self-confidence. We will approach each situation with a positive attitude and enjoy our jobs and lives better than ever before.
“We will proudly drive our children and families by homes and exclaim, ‘These folks are warm all winter, cool all summer, and live with less sickness because I put in their heating and cooling equipment.’ What does this do to the feelings of every member of our families? It is joy unspeakable.”
How a contractor responds to a changing market has everything to do with flexibility of mind. “The important thing is that the contractor be flexible enough to be able to remain profitable as the various markets rise and fall,” said Welsch.
Publication date: 05/28/2007