HVAC systems last roughly 15 years before being replaced. Fifteen years ago, we were amid one of the industry’s greatest contractions. Why does it not seem be echoed in the replacement market?
Until 2020, the year 2005 was the record for industry shipments when 8.6 million residential air conditioners and heat pumps were shipped. After 2005, shipments contracted 40% through 2009 to a low of 5.2 million.
The 2005 record was mirrored in 2020, which became the new record with 9.3 million shipments, only to be surpassed in 2021 with 10.2 million shipments. Yet, the annual numbers hide the story. Shipments started off at a torrid pace in 2021. For the first five months, shipments were 27% higher in 2021 than the 2020 record. Wow!
In June, the momentum stopped. From June through the end of the year, shipments were flat, matching 2020. Did this portend the onset of
Shipments from the first quarter of 2022 suggest otherwise. They were up 8% over 2021.
For the replacement market, the picture is confused by new construction and the pipeline. When COVID hit, housing starts plummeted, then started rebounding as it became apparent that people locked down in central cities began seeking sanctuary in the suburbs. The rise in housing starts has continued straight through the first quarter of 2022. The increase in new construction accounts for some of the growth in HVAC shipments.
With supply chain uncertainty across the board, every distributor has been sucking up every piece of equipment available
The pipeline is also a factor. With supply chain uncertainty across the board, every distributor has been sucking up every piece of equipment available. Smart contractors have likewise been stocking significantly more. The degree to which pipeline fill is obscuring the shipment cliff is uncertain but likely significant.
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On a more macro and anecdotal level, several contractors are reporting their sales are up year-over-year. When asked about installations, the answer changes. They are doing less work, or fewer installations. So, what gives?
Manufacturers increased pricing an average of 20% in 2021.
The answer is inflation. Manufacturers increased pricing an average of 20% in 2021. Additional double-digit price increases are hitting this year, causing the price of installed systems to likewise spike. So far, the inflationary spike, combined with increases in new construction, and pipeline fills is hiding the shipment cliff.
What does this mean for contractors? If your equipment pricing increased 20% and your installation revenue did not grow at 20% or more, you are either leaving money on the table because you are not raising prices to reflect your cost increases, and/or you are falling behind.
If your pricing is not keeping up with changes in equipment, labor, and overhead, you are cheating yourself.
Equipment isn’t the only cost input to change. Except for the Service Roundtable, everything is costing more. If your pricing is not keeping up with changes in equipment, labor, and overhead, you are cheating yourself.
Despite labor and supply chain challenges, this is a golden time for contractors. We cruised through COVID. Most contractors are charging more, working less, and dropping record numbers to the bottom line. Hundreds, if not thousands of contractors are grabbing the brass ring as they are coming up winners in the private equity lottery.
Enjoy the present but prepare for the future. Bank some of the earnings so you can weather the inevitable contraction from the shipment cliff combined with a likely recession (which may have already started). When work slows, you want funds available to be able to double down on marketing, elbowing out less well financed competitors who will try to save their way to prosperity.
Bank some of the earnings so you can weather the inevitable contraction from the shipment cliff combined with a likely recession (which may have already started).
Not only will this be a time when you can pick up market share, you can pick up technicians. In recessionary times, aggressive contractors win.
Remember, the shipment cliff is still here. It is still real. It is just being masked. Take advantage of the present prosperity to store up some cash for leaner times so that you can advance when your competitors retreat.