At QSC’s Power Meeting in June, PM Editorial Director Jim Olsztynski spent almost two hours reviewing the consolidation movement in the PHC industry. He identified as “players” in the consolidation movement not only the four public or soon to be public companies scrambling to buy up PHC service firms, but also Sears Home Services, franchises such as Roto-Rooter and Mr. Rooter, home warranty companies and the utility companies.

Here are some key excerpts from Jim’s presentation:

What’s Driving The Consolidation Movement?

“The answer to that question is me. I am driving the industry to consolidate.

“Know who I am? I represent the average consumer. I have 50 years of experience as a consumer and have been a homeowner for more than 20 of those years. During that time I’ve dealt with dozens of home repair firms of every kind, and the vast majority of those experiences have been awful.

“I’m sick and tired of not knowing when the repair person is going to show up, or even if he will show up. Then when he does show up, I’m sick and tired of him looking like he’s been sleeping in the streets. I’m sick and tired of dealing with service people who can’t talk to me in any language except technobabble. I’m sick and tired of lousy service, and there are millions of homeowners out there who feel just like me.

“So it’s not Wall Street or the management of these companies who are causing all this consolidation. It’s being driven by millions of homeowners fed up with the way home repair services are delivered in this country. The consolidators simply recognize this as an opportunity.”

Why HVAC?

“Consolidation is taking place mostly in the HVAC sector so far, for the following reasons:

• “Greater revenues per sale than plumbing.
• “More potential for economies of scale in purchasing, due to big ticket equipment.
• “Less DIY retail competition.
• “HVAC firms tend to have a lot of service contracts.

“This last reason is very important to the national consolidators. What I hear talked about more and more is this concept of ‘owning’ the customer. It represents a new paradigm in the PHC service business.

“The industry’s old marketing paradigm was, ‘How can we get people to call us when they have a problem?’ The new paradigm is, ‘What can we do to make sure they won’t even think about calling anyone else?’ Service contracts help you lock in business, help you to ‘own’ that customer.

“Some plumbing companies are already being bought by the consolidators and I expect this to happen more and more as the pickings get slimmer in the HVAC sector. Plumbing is a natural area for expansion by the national public companies, along with electrical and other home services.

“In fact, I predict that in years to come you will see an evolution toward a total home services concept. Once again I am talking not as someone with inside knowledge of the business, but as an expert consumer. From my perspective, it makes no difference whether my roof is leaking, my toilet is stopped up, I have no heat, my lights are out or termites are eating my house. The technical details are irrelevant to me. All I know is I have a big problem, and I hate playing Yellow Pages roulette trying to find a reliable company to fix my problem. I’d love to be able to call one company that I trust to handle everything. I’d have its phone number memorized in no time.

“Take a look at the names of the national consolidators — American Residential Services, Service Experts, GroupMAC, Comfort Systems. Their founders did not pick those names out of a hat. Rest assured that a lot of deliberation went into choosing names that could accommodate many different types of home services.”

Advantages Enjoyed By The National Consolidators

• “The ability to raise BIG money by going public.
• “Using that money to grow through acquisitions.
• “Bigger size means economies of scale and purchasing clout.
• “Name recognition and prestige, especially if and when these large companies start doing national TV advertising.
• “The ability to attract top management and service personnel.
• “The size and resources to support big league training.

“This may be the most important asset of all in the long run. Nobody in the industry is doing what needs to be done in the way of training residential service technicians. The big national consolidators will have funds available to put on training programs comparable to the construction trade unions.”

Potential Weaknesses of The Consolidators

• “The bigger they are, the harder they fall. It’s easier to mismanage a large public company than a small privately held one.
• “Wall Street is fickle. Right now the consolidation executives are geniuses because their stock prices have doubled in a year. However, everyone on Wall Street is making money in one of history’s greatest bull markets. Watch how fast those same executives turn stupid if the market hits the skids or if our industry suddenly falls out of favor with Wall Street insiders.
• “Consolidating all these companies into one corporate culture is not an easy task. The companies they’re buying were started by a bunch of independent-minded contractors who couldn’t stand working for someone else. Let’s see how well they adapt to the corporate world.
• “What happens when the management contracts of the former owners expire? How many will continue to stay on? Will the consolidators start hiring MBAs to replace them? And if so, how well will that work?
• “Right now, the public consolidators are flying high strictly on the basis of gobbling up existing companies. They’ve yet to prove they are capable of making money via operations, as opposed to Wall Street maneuvering.
• “Sooner or later, they may run out of good companies to buy. This may already be happening. Some of the prices I hear being offered for PHC service firms are astounding. At some point they risk overpaying.”

Utility Competition Is The Industry's Biggest Threat

“The biggest threat to the independent service contractor comes not from the national consolidators, but from the public utility companies who are buying up or starting their own service subsidiaries. Preparing for the era of deregulation, virtually every utility company is looking to get into home service in a big way. They have formidable advantages by way of name recognition, consumer trust and cross- marketing opportunities.

“Utility deregulation is going to happen within the next few years. What’s critical for your sake is how the rules of deregulation get written. It will determine whether independent contractors can realistically compete with the utility subsidiaries for service business. It is, in my opinion, the most important legislation ever to arise for the PHC service industry. Keep on top of it.”