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A Service Story

May 16, 2024

Is HVAC’s Past Its Prologue?

March 29, 2019
Tumultuous times and constant change are perennial features of the service trades.

In an interesting column about the service trades, a writer noted, “These are tumultuous times in the service trades.  The amount of change, the magnitude of change, and the frequency of change have all picked up in the past five years. And there is no reason to expect things to slow in the future.”  Would you agree?

The writer identified a series of trends. Look at the writer’s take and see if you agree with them.

Contractor Defragmentation
The first trend was defragmentation, noting that both consolidation efforts and “network groups” were on the increase. The writer commented:

The service trades have always been characterized by a high degree of fragmentation (i.e., lots of small, independent companies).  There are more than 100,000 different plumbing, HVAC, and electrical contractors in the service segment.  This probably won’t change.  There will always be plenty of contractors.  As long as any technician who can pass a licensing exam can enter the business (especially when many don’t even bother with the messy details of a license), then the barriers of entry will remain low to the formation of new contracting companies.  Certainly, too low to expect a big reduction in the number of contractors.

Okay, so how is the industry defragmenting if there are lots of contractors? The answer is related to consolidation efforts and the response of independent contractors to it. According to the writer:

Contractors appear to be gravitating towards buying groups and alliances because they must if they are to compete effectively.  At the same time, the (national) trade associations appear to be showing signs of erosion. Association membership is stagnant or declining.

So what is your assessment? Do you think there is an increase in buying groups and alliances?  Are national associations eroding?

Upstream Consolidation
With this trend, the writer claimed that manufacturer overcapacity existed in the HVAC industry and with water heater manufacturers, but noted that manufacturer reluctance to build excess inventory served to keep smaller manufacturers in the game.  The writer predicted more consolidation among water heater manufacturers and identified considerable consolidation at the distributor/wholesaler level:

Consolidation at the wholesaler and manufacturer level will continue.  It will also serve to strengthen the importance of contractor alliances.  Standing alone, the contractor will have less and less clout with his suppliers.  Contractors will need to combine forces or they will be virtually enslaved by their suppliers, who can dictate any terms desired.

This sounds a little harsh. Is there truth in it?

Branding Is All Important
In the analysis of branding, the writer quoted the president of an HVAC manufacturer who said, “Take away the physical assets of major corporations such as Coca-Cola or McDonald’s and the brand name is still worth billions of dollars more than the physical assets of competitors without brand recognition.”

The writer commented on this and said “That’s it.  The brand is all important.  After all, what is McDonald’s without its brand?  Just another hamburger joint and far from the best one in town.”

After discussing how various brands in other service industries have become household names, the writer concluded, “With branding, whoever gets to the top of the hill first tends to stay there.  Today, no one occupies the top of the hill for the service trades, with the exception of sewer and drain cleaning.”

What do you think?  Branding is obviously important, but is any single brand likely to become a household name in the service trades?

Greater Competition for Fewer Technicians
This seems pretty obvious.  Everyone is aware of the technician shortage. The writer noted:

The labor shortage afflicting all of the service trades is nothing new. The current strategy of most contractors to attract the best technicians away from competitors is a loser by itself, though it can be an element of a broader strategy. Eventually, contractors must learn how to grow and develop their own labor force. Before they can do that, they must be able to recruit them to the industry. 

While it appears that the industry must redefine itself as an attractive and opportune place to work, the likelihood is that this will never occur.  It hasn’t occurred in the past and is not likely to occur in the future. Individual companies, however, might be able to transform their organizations into recruiting Meccas. To do it, they must be able to offer prestige, compensation, benefits, and opportunity that equals or exceeds that which can be found elsewhere.

This seems pretty obvious. It is hard to disagree. Labor is the greatest challenge most contractors face. Do you agree?

Other Trends
Some of the other trends noted were retailers and utilities targeting the service trades and the potential for full coverage service agreements, which are not simply HVAC service agreements, but agreements that cover virtually every appliance in the home.  The concern raised was whether the utilities targeting the industry will begin offering these agreements.  The writer noted that, “When the utilities recognize the value of locking up the customer and tying their loyalties to them, they can act on a scale the contractor cannot hope to match” and noted the success of Canadian utilities in dominating the water heater market.

The writer offered this forecast of the future:

There will always be independent contractors, lots of them.  However, more and more will find themselves surrendering all or part of their destiny to others. Some will try to retain control by seeking out alliances and networks. Others that are financially attractive will sell out and become part of larger consolidation efforts.  Some will become captives of utilities, retailers, or other marketers who feed them business. Many will scrape by, wondering what went wrong and why the reality of independent business ownership does not match the dream. 

However, there will be some independent contractors who will thrive and prosper no matter what the environment.  These are the contractors who are seeking growth today, not for its own sake, but as a means of achieving the internal scale necessary to serve the customer adequately with round-the-clock service, rapid response, and competitive pricing.  These are the contractors who are putting systems in place to ensure they deliver the quality they promise.  These are the contractors who are building relationships with customers that are cemented and bonded over time, and will withstand the assault of any retailer, utility, consolidator, or national marketer.  These are the contractors who take the long-term view and recognize that every customer, every employee, and every relationship is precious.  They will endure a short-term financial hit to protect the profitability of a long-term relationship.  These are the contractors who are acting today to ensure they will have a tomorrow, no matter what the future holds.

So, the writer is essentially saying good businesspeople will do well and poor ones will not.  Or, is there something else in the message?  What do you think?

Maybe the Past is Prologue

Did you agree or disagree with the writer?  Do the predictions seem accurate because they are obvious?  Would your opinion change if you knew they were written and published 20 years ago this month in The PHC Profit Report newsletter? And yes, I am the writer.

When I forwarded a copy of the column to the newsletter’s publisher, Jim Olsztynski, he said, “I think Nostradamus would be proud of you, even though the consolidators never scaled the heights you and I and many others thought they would.  That's because their founders were more interested in pumping and dumping than building operational and marketing economies of scale.  Service Nation is a terrific substitute business model, allowing independence to flow while offering incredible business services to its members.”

I am interested in what you think about these predictions made two decades ago and what you see for the future, two decades from now.  Email me at [email protected].


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