New construction and service in the broad Detroit market
The markets they serve are also distinctively different. The “rural” contractor targets new home construction, while the “neighborhood” contractor relies on the add-on and replacement business. About the only thing they have in common is their geographic location — metropolitan Detroit.
In this final installment on Detroit-area contractors, we’ll look at the courses that two contractors have charted and what the future holds for them in the burgeoning southeast Michigan economy and urban rebirth.
Andy's statewide/servicemasterTo say that the past couple of years have been hectic for the people at Andy’s would be an understatement. The buyout of the company by ARS resulted in some disgruntled employees. The recent purchase of ARS by ServiceMaster has helped smooth things over. Add to this the rapid growth in new home construction throughout its market, and the atmosphere has become very interesting.
District manager Mike Bloom, who oversees the business located in Orion, a northern suburb of Detroit, prefers to focus on the road ahead rather than the road behind.
“We did have some post-acquisition problems [former employees starting competitive companies] and had some initial losses, but things are beginning to grow again,” he said. “I think ARS would have made it in the long run, but it would have taken a lot of time.
“Once the stock dropped below $5 per share and stayed there, I suspected it was a matter of time before a large corporation bought the company.”
Former owner Andy Opaleski, who started the business in 1979, sold to ARS in August 1997. Bloom said that Opaleski, who remains as a consultant, sold the business because he was looking for a way to leave behind the day-to-day headaches. ARS gave him that opportunity.
Bloom came on board as Andy’s district manager in May 1998. He was familiar with the business through his work on the ARS initial public offering (IPO). Bloom worked with ARS in its corporate headquarters shortly after the company went public.
“Consolidation of the hvac industry seemed to afford a good potential for growth,” said Bloom, whose background as a financial analyst made him a virtual newcomer to the trade. “There are a lot of fragmented businesses and we can bring some strong operational management in to grow our business.
“We [Andy’s] are looking to significantly expand revenues in the service area. We are looking to acquire smaller add-on/service contractors doing business in the $2 million to $4 million range.”
Growing the service businessBefore its acquisition, ARS was in the process of looking to acquire an add-on/service contractor in the area to increase Andy’s market share. But with current revenues approaching $12 million, the company has been able to weather the change while laying the groundwork for future acquisitions by ServiceMaster.
Historically, Andy’s has been averaging 85% to 90% of its revenues from new construction. But that is changing.
“We will do anywhere from 1,800 to 2,200 new homes a year,” Bloom said. “In the last year and a half we have focused on accelerating growth in our service business and are now about 75% new construction.”
Bloom projects that his add-on and service business will grow by 30% this year. He wants to expand into other markets, too. “We are looking to grow our light commercial business in the area,” he said. “We also want to get into retail plumbing.”
The benefit of its affiliation with ServiceMaster should help it start up a plumbing business. ServiceMaster owns the Rescue Rooter business and currently does not have any plumbing operations in the Orion area.
“We will either start up our own plumbing operation or will more likely purchase a local retail plumbing operation,” Bloom said.
The flexibility to make such a move is largely possible through the company’s union with ServiceMaster. “It was a positive change to join ServiceMaster,” Bloom said. “They have always been successful and they will help us grow as a company.”
Andy’s figures to be in a good position to take on new competition from utilities. “From an operational standpoint in the hvac business, we have a lot more experience [than utilities],” he said. “Being with ServiceMaster, we will be able to offer multiple services to the consumer other than gas and electricity.”
Bloom cited another reason why his partnership with ServiceMaster will prove to be beneficial in the long run — attracting and keeping qualified workers. “A consolidated company offers a career opportunity,” he said. “You can come into a company like ours with little or no experience, start at the bottom, and work your way up through the ranks to running the business one day.
“We can provide benefits and training that workers might not find from other contractors in our industry.”
As the Detroit economy continues to boom, Bloom will be looking for new ways to penetrate the market. He is cognizant of the fact that there is a lot of price competition in the market, which has actually brought down prices. However, the labor shortage provides a problem for keeping prices low.
“The tight labor market means wages are going up,” he said. “Everyone is offering higher wages to attract the workers. But on the other hand, prices are coming down.”
That may put a crunch on profits, but the opportunity for businesses in this market is greater than it has been in recent memory.
“Detroit is becoming a much more attractive market to be in.”
Reckinger Heating & CoolingIf longevity is a trademark of doing good business, then the Reckinger family has been doing something right for many years. They have become a fixture in their Dearborn neighborhood, a community bordering the southwest side of Detroit.
Reckinger Plumbing was founded in 1922 by Walter Reckinger Sr. He turned the business over to his son, Walter (Rex) Reckinger Jr., in 1946. The younger Reckinger established hvac services next door to the plumbing company. He saw the opportunities with many homes converting from coal to natural gas heat after World War II.
Walter Sr. continued the plumbing portion of the family business until his retirement. He sold the plumbing business to his son-in-law, John F. McCarthy, and the two businesses continue to run side-by-side to this day.
Today the hvac company is run by third-generation owner Walter (Pete) Reckinger III. He has presided over the company since the death of his father in 1994.
Reckinger has seen a lot of changes on his block over the years, but his company has remained loyal to the neighborhood. It has been able to keep up with technology while maintaining its small-town ambience.
“We do a large walk-in trade with people who buy filters and replacement parts,” he said. “We like the neighborhood.”
The company has maintained a business in the block-long row of buildings for over 70 years. It could have moved to larger digs and sought more lucrative markets, but that wasn’t the family philosophy.
“We made a decision not to grow into a larger commercial business and eventually into industrial work,” said Reckinger. “We used to be into heavy commercial, but we have pulled back to focus in on our strengths — add-ons and replacement in the light commercial and residential markets.
“We prefer to do more work closer to our business, although we still service the entire tri-county metropolitan area. We have decided to become a dominant residential contractor in the Dearborn area.”
While the exteriors and expansion philosophies have changed very little, Reckinger has been making steady changes in his company for over 30 years.
“I started an energy management division in 1968-69 and we’ve been developing building automation systems ever since,” said Reckinger. “We are certified by the National Energy Management Institute.”
Labor pipelineThe company’s work with NEMI has strengthened its ties with the local Sheet Metal and Air Conditioning Contractors’ National Association (SMACNA) chapter and the Sheet Metal Worker’s International Association (SMWIA). Reckinger said his close contact with these groups is vital in maintaining a pipeline to qualified technicians in the Detroit market.
With the building construction boom in downtown Detroit, Reckinger has seen employees defect to other contractors and he has lost some, too.
“I’ve been robbed from and I have also robbed from some other guys,” he said. “We are getting more service work because some of the bigger contractors have gone after the bigger jobs. I could have gone after more business too, if it weren’t for a lack of people.”
One local contractor shut down its residential service and some of the former employees applied for work with Reckinger. But he still sees his share of applicants who aren’t able to cut the mustard.
“You have to wonder about a person who walks into your office in the middle of a hot July, looking for work.”
Reckinger has been working at spreading the word about hvac as a career choice. He has served on the advisory committee of hvac school of Dearborn’s Henry Ford Community College.
He has talked to high school students during career days and has spoken with high school counselors, showing them alternatives to typical college technical courses. And he has participated in recruitment days through his work with the Michigan chapters of the Air Conditioning Contractors of America (ACCA) and SMACNA.
“We look for non-traditional routes to bring people into our industry,” he said. “Our local SMACNA chapter has also established a $10,000 scholarship at Ferris State University [FSU, Big Rapids, Mich.] for a person entering the hvac program.”
Tech certificationReckinger said he believes in the education of techs and he also is a firm believer in “credentializing” the people doing hvac work.
Recent news about the merger of the ACE and NATE certification programs has him bristling, however.
“I think ACCA and FSU were doing it [certification training] right,” he said. “The deal to merge with NATE was a terrible disservice to our industry. It will fail and subsequently, technician certification will fail.
“The NATE program is sponsored by utilities and manufacturers and it should be separated from them. ACCA sold out the ACE program to our most threatening rivals in the hvac industry. Now they stick their heads in the sand and don’t want to respond, hoping that the problems they’ve caused with membership will eventually go away.”
Reckinger obviously has strong opinions about utility competition.
“Where utilities are selling service, they are cross-subsidizing,” he said. “This is bad for the industry as a whole and will eventually drive out competition and smaller contractors. They are still using their names to market their services, which is a very valuable asset.
“I don’t think they can support their level of overhead without raising prices, but I haven’t seen any immediate advantages to competing with them.”
One way to compete, however, is to offer an attractive service agreement program.
“Our service agreements cover such things as compressors and heat exchangers, where the local utility typically does not,” he said.
“We also have a plan that will credit customers a dollar amount toward the purchase of a new unit, rather than being subjected to expensive repairs of an existing unit, which is typical of a utility service agreement.”
Looking to woo a consolidator?While some contractors are looking to merge to fight off utility competition, Reckinger is looking to merge in order to make his company more attractive to a national consolidator.
“I have thought about consolidation and I see it as the best way to maintain continuity,” he said. “We want to continue to grow and be attractive to consolidators. We have no family succession plan, but I would like to keep the business in the family.” (Reckinger has brothers and sisters involved in the business.)
He sees a lot of changes in the near future involving acquisitions, consolidations, and mergers. He wants to make sure his company is in a position to change with the industry.
“Five years from now the market will be completely different,” he said. “There will be fewer wholesalers and suppliers. I see manufacturers being more competitive in the future. They won’t be solely interested in moving boxes.
“I see Lennox and other manufacturers making more defensive moves to maintain market share. It is going to shake the whole relationship.”
Reckinger has also taken a risky move to go along with his expansion plans — he has pulled the plug on Yellow Pages advertising.
“We have worked hard to establish word-of-mouth advertising. With 70 years of stickers on furnaces and condensing units, we have built up a good base of business which we will continue to develop and maintain.”