HVAC systems last about 15 years before they need to be replaced. Fifteen years ago, we were in the midst of one of the biggest contractions in the industry. Why doesn’t it seem to find an echo on the replacement market?
Until 2020, 2005 was the record year for industry shipments when 8.6 million residential air conditioners and the heat pumps have been shipped. After 2005, shipments contracted by 40% through 2009 to a low of 5.2 million.
The 2005 record was replicated in 2020, which became the new record with 9.3 million shipments, to be surpassed in 2021 with 10.2 million shipments. Yet the annual numbers hide the story. Shipments kicked off at a blistering pace in 2021. In the first five months, shipments were 27% higher in 2021 than the 2020 record. Wow!
In June, the momentum stopped. From June to the end of the year, shipments remained stable, corresponding to 2020. Did this portend the start of
The shipments of first quarter 2022 suggest otherwise. They were up 8% from 2021.
For the replacement market, the image is confused by the new construction and the pipeline. When COVID hit, housing starts plummeted, then began to rebound as it became apparent that people locked down in central cities began to seek refuge in the suburbs. The rise in housing starts continued throughout the first quarter of 2022. The increase in new construction explains part of the growth in HVAC deliveries.
With supply chain uncertainty at every level, every distributor sucked up every piece of equipment available
The pipeline is also a factor. With supply chain uncertainty at every level, every distributor sucked up every piece of equipment available. Smart entrepreneurs also stockpiled a lot more. The extent to which pipeline infill obscures the shipping cliff is uncertain, but likely significant.
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On a more macro and anecdotal level, several entrepreneurs report that their sales have increased year over year. Asked about the facilities, the answer changes. They do less work, or fewer facilities. So what gives?
Manufacturers have increased their prices by an average of 20% in 2021.
The answer is inflation. Manufacturers have increased their prices by an average of 20% in 2021. Further double-digit price increases are hitting this year, driving the price of installed systems soaring. So far, the inflationary spike, combined with increased new construction and filling pipelines, is hiding the shipping cliff.
What does this mean for entrepreneurs? If the price of your equipment has gone up 20% and your install revenue hasn’t gone up 20% or more, either you’re leaving money on the table because you’re not raising prices to reflect your cost increases, and/or you fall behind.
If your prices don’t keep up with changes in equipment, labor, and overhead, you’re wrong.
Equipment isn’t the only cost item to change. With the exception of the round table on service, everything costs more. If your prices don’t keep up with changes in equipment, labor, and overhead, you’re wrong.
Despite labor and supply chain challenges, it is a golden era for entrepreneurs. We have been through COVID. Most entrepreneurs charge more, work less, and drop record numbers in favor of the bottom line. Hundreds, if not thousands, of entrepreneurs grab the brass ring as they come out on top in the private equity lottery.
Enjoy the present but prepare for the future. Bank some of the profits so you can weather the inevitable contraction of the shipping cliff combined with a likely recession (which may have already started). When the work slows down, you want available funds to double the marketing, eliminating less well-funded competitors who will try to save their way to prosperity.
Bank some of the profits so you can weather the inevitable contraction of the shipping cliff combined with a likely recession (which may have already started).
Not only will this be a time when you can gain market share, but you can also recruit technicians. In a recession, aggressive entrepreneurs win.
Remember, the expedition cliff is still there. It’s still real. It’s just hidden. Take advantage of the current prosperity to hoard money for tougher times so you can progress when your competitors retreat.