We're Not In Kansas Anymore, Toto!
Which is, that it is an industry of small independent contractors.
Small companies have been the backbone of the PHC industry ever since it began to coalesce more than a century ago. Most other major industries are dominated by billion-dollar companies, or at least those doing nine figures worth of annual sales. The U.S. Small Business Administration defines “small business” as anything under $50 million in annual revenues. In our industry, a $50 million firm ranks as a giant. The vast majority of companies, especially in the residential service sector, handle no more than six figures worth of volume in a year.
Until recently small companies enjoyed most of the advantages in the marketplace. Neighborhood plumbing and heating firms represented trust, competence, familiarity and affordability. Besides, what were the alternatives?
Now there are alternatives. Big players in the business world are lusting after your markets like Hollywood tycoons leering at wanna-be starlets. The lechers include —
- Utility companies. They’ve always nibbled at your markets. With ongoing deregulation, they can drop the pretense that they are going at them as an adjunct to energy sales. Peddling electrons and gas molecules is a low-margin commodity business. Converting energy into useful heat offers much greater opportunities to make a buck. So almost everywhere in the country utility companies have become major players in PHC sales, installation, service and repair. It is part of their strategic vision to become more so.
- Warranty companies. These players snuck in under everyone’s radar. Suddenly we wake up to find that some 80% of California’s home sales come with warranty attachments, if you believe the Home Warranty Association of California. The trend may be moving more slowly in other parts of the country, but probably not for long. For between $350-450 a year, warranties buy home owners protection against not only PHC breakdowns, but also cover appliances, electrical systems and more. Warranty providers benefit greatly from subcontractors willing to work under conditions that resemble serfdom.
- Franchises. Companies like Roto-Rooter and Mr. Rooter are growing at a heady pace. Franchisees are basically little neighborhood companies but with access to a lot more advertising and marketing clout than their independent competitors enjoy.
- National public companies. The biggest news in the HVAC industry in the past year has been the emergence of two publicly traded national service companies, Service Experts (SERX) and American Residential Services (ARS), formed through the consolidation of dozens of smaller, mostly successful companies. Recent acquisitions have included some plumbing companies as well.
We are about to see whether the economies of scale that make consolidation pay off in other fields translates to the PHC service industry. The initial public stock offerings by SERX and ARS were quite successful. Many investors inside and outside the industry think they are on to something.
- Home centers. This is the wrong bogeyman to be running scared from. The home centers have stolen a lot of your merchandise sales the last couple of decades, but sharp PHC firms have always been able to compete against them based on their advantages in making house calls. The big home centers never have figured out how to be more than bit players in the installation and service end of the business.
The real competitive threat to the independent contractor comes not from home centers selling cheaper faucets and water heaters. The bigger battle is for total control of the customer. The utilities, warranty companies and the other big players are aiming to be the single-source supplier of every product and service related to household sanitation and energy systems and beyond. Nobody has perfected this strategy yet, but the big players are headed resolutely in this direction like elephants toward a watering hole.
Do you understand the magnitude of what is happening out there? Can you grasp how much different the PHC business is today compared to where it was even 5-10 years ago? Do you ever think about what it might be like 5-10 years from now?
We’re not in Kansas anymore.