Hydronic Concerns: An Interview with John E. Reed, Chairman of the Board, Mestek Inc.
Reed: First, you have to define "replacement." We find that a substantial amount of our boiler business goes to pure replacement. But if you consider the hydronic market past the point of the boiler, and take into account all the other aspects of heat distribution, then a lot of our business goes to "modernization," or "additions," in other words the type of remodeling that you really can't simply label as replacement.
PM: Is that difficult to sort out?
Reed: It's all very hard to track. About the only thing everyone can agree on is that it's definitely not new construction. If you're going to lump new construction into one category and put "everything else" in another, then three-quarters of our business would be "everything else" and a quarter would be for new construction. Regardless of new construction or replacement, we're big on the commercial side of this ratio versus residential, probably 85 percent of our business comes from commercial.
PM: Has this 75/25 breakdown changed over the years?
Reed: I don't think it has changed much. Maybe we'll see a few points up or down over the years, but not much more than that. For example, the school market in the Northeast is strong right now. Consequently, you've got a lot of boilers and other hydronics going into new construction. Overall, I think the market has grown slowly for years as the hydronic installed base has grown with the country.
PM: How has reaching the marketplace changed?
Reed: So much depends on the function of your distribution. If you have the reps and wholesalers, you will automatically get the business. Well, "automatically" may be too inclusive of a word. But what matters in this industry is your distribution - it's always either improving in your favor or going against what you'd like.
PM: If the percentage of your sales haven't changed much, then how do you go about growing the hydronics business?
Reed: Again, distribution is key. We always try to increase market share at the wholesale level. If you've got one wholesaler with 20 branches, and you can get the company to change from Brand X to our brand, that's substantial growth. Also, a growing installed base of your product tends, by itself, to increase future sales.
PM: What makes the wholesaler change?
Reed: They don't want to change! You have to provide real reasons. Demand in the secondary market is an important factor. In other words, the heating contractors of the world are demanding one of our products and you, the wholesaler, do not have it. Ability to service the branches is another major reason to change, too. Then again, some of the reasons a wholesaler would want to change are irrational - maybe they dislike the other guy. There are as many reasons as there are people, but sometimes you do get an opportunity.
PM: Of course, price is always a factor, too.
Reed: I've always been interested in what I refer to as the paradox of price. If you're a homeowner and you need your boiler replaced, you tell the plumber, "Joe, get me a boiler." The homeowner isn't going to say that he needs to put this job out to bid because the price is relatively unimportant. At the next level, when the contractor goes to the wholesaler, he does want to know if he's buying right. But if in his mind he is, he's not going to bid each individual job. But then when the wholesaler negotiates with the manufacturer, price becomes extremely important! So price is treated very differently throughout the chain of distribution. That's always been fascinating to me.
PM: In terms of growing the residential hydronics market, while you're a big commercial player, how can the industry grow this segment of the business beyond the traditional strong geographic pockets where hydronics have always been popular?
Reed: Reaching the contractor, and the builder to a certain extent, are important. Back in the 1950s and 1960s, the Hydronics Institute really put on an excellent program with its IBR schools, and the industry was growing at that time. The more contractors there are who know how to do hydronic installations, the more products will be sold.
PM: What was different about this time, and what happened to change it?
Reed: I think the industry was very aggressive back then and spent money to underwrite the IBR effort. The industry cooperated very well, and it was a good feeling. Then a lot of things happened. American Standard and then Crane, got out of the boiler business, and they were big supporters of the effort. Also, Weil McLain, which was independent, got sold. Consequently, the larger manufacturers who remained began putting on their own education programs. The industry got bifurcated. So today most large manufacturers put on their own programs. On the other hand, smaller manufacturers who can't afford to do their own programs would like to have an industry-wide effort that they leverage.
PM: Do you think the industry could become, to use your words, "unbifurcated?"
Reed: I think there are a lot of constructive things that could be done. I would support the IBR schools again, if we go into it knowing we'd all have to commit ourselves to investing a really adequate amount of money up front. I don't think it could be done on the cheap. It would help the industry; people need to know how to install these units.
PM: Are there enough radiant contractors to service the residential market as it stands today?
Reed: I think so. Education is important, however, to make sure that there is. We teach contractors at the Reed Institute, but we only teach whom we can reach. We do expand our base, but our students are mostly the ones already buying the equipment.
PM: While the up-front cost of installing hydronics in one factor, what about increasing fuel costs? Will that ever be a factor in promoting hydronic heat?
Reed: I think strides are being made to make equipment more efficient. Everyone likes to compare us with European models, but I think it's hard to draw any comparisons. Overall, they don't have the forced air competition that exists here. As a result, the hydronics market is huge in Europe. There's no question that they are more advanced than we are, but they've got that market to leverage their developments against compared to what American manufacturers have. On the other hand, their products are very costly, and our market in this country has not supported high-end products. So fuel costs have to jump very high for this to be a contributing factor.
PM: With the relatively recent popularity of underfloor radiant heat, why has Mestek stayed away from bringing out its own line of PEX and packaging all the other related equipment a contractor would need as other manufacturers have done?
Reed: We've looked at it, but my question is, is such a package really a product? Is it something you make, distribute and differentiate yourself with from the other guys? It's more an installation to me than a product.
PM: So you haven't missed out by not jumping on the radiant bandwagon?
Reed: Radiant certainly has its place. Don't forget that a house that has radiant may also have baseboard or a kickspace heater. We know it will have a boiler and a hot water heater. So I think anything that uses water to provide heat is good for the company and everyone else in the industry.
PM: Is that to stay you're happy sticking with traditional hydronics?
Reed: I'm not saying we won't have a package some day. For right now, we're used to selling products - boilers, motors and controls. That's what I call product. When we can conclude how we can add value to the process, maybe we will.
PM: And you've got your bases covered other than tubing?
Reed: We're not disregarding radiant, but we also have to consider what our real place is in the market. Just because many of your products go into hydronic installations doesn't mean you have to make everything that does. Sometimes it's better off to just determine that a particular part of the hydronic market doesn't interest you for a number of reasons.
PM: There seems to be two schools of thought on the future of hydronics: One group says there will be more controls, pumps and other related products that will make the installation more complicated. The other group says a simpler, modular approach makes more sense. In what directions do you see the industry heading?
Reed: I've always been a great believer in simplicity. If you add more and more functions, then you're always going to have to add something else to take care of those functions. But regardless of what I personally believe, manufacturers are going to have to provide both simple and complicated products.
PM: Is there any clear trend favoring one approach over the other?
Reed: No, I don't think so. There will always be developments that lead to simplification and other that will lead to complication. Manufactures have to make both, or rather provide what appears to be right at the time.