In one of the Harry Potter movies, Potter is on the “Night Bus.” A talking, shrunken head warns to hang on because it’s going to be a bumpy ride — just before the bus shotguns forward, narrowly evading disaster after disaster. It might be a metaphor for the HVAC industry in 2024.

Over 2023, the replacement market felt the impact of the shipment cliff. This is a reflection of the 40% contraction in industry shipments that occurred from 2005 to 2009, with 2010 remaining flat. It should be no surprise that AHRI reported double-digit declines in air conditioning and heat pump shipments through October. Replacements declined for the simple reason there were fewer systems installed 15 years ago.

Adding complexity, the general inflation that hit the nation is mild compared to the escalation in HVAC replacement pricing. It started with manufacturer price jumps during the supply chain disruptions of COVID. Then, we had SEER2. Prices jumped again.

Another factor is the private equity impact. Private equity jumped into the industry with both feet after witnessing the industry’s phenomenal growth during 2020. Superficially, it appeared that HVAC was immune to decline. People had to have HVAC. We had a record year when the country was shut down. Private equity has dry powder sitting on the sidelines that they wanted to invest. HVAC looked like a no-brainer. The land rush to acquire good contractors was on.

The finance guys driving most private equity funds quickly realized that the bigger money was in change outs. Accordingly, they pushed their general managers to pursue them aggressively. At first, it worked like a charm as deferred COVID replacements from 2020 spilled into 2021 and price increases hid the initial impacts of the shipment cliff in 2022. Fewer change outs for more money resulted in top line growth and less installation labor. Record profits resulted.

There was nowhere to hide in 2023. Contractors who joined the private equity world were under intense pressure to sell more replacements. Digital advertising was bid up. The rest of the industry saw more, fierce competition for few replacement opportunities. 2023 was a tough year.

Guess what? 2024 will be even more challenging. Equipment prices will jump again with new refrigerants. Even with the better financing vehicles available today, many consumers will cough, sputter, and opt for repairs over replacements. 2024 will see the chaos and uncertainty of a presidential election in a deeply divided America. Most non-government-supplied economic indicators are screaming recession.

The pressure of private equity general managers will intensify. At the same time, the founders who sold their companies are beginning to leave. When they leave, some of the best techs will walk. With the need to refinance debt at higher interest rates, some private equity funds will seek an off-ramp and sell to bigger, better financed firms. Others might fail outright. Private equity will begin consolidating.

So what about the independent contractors? As long as they don’t panic and try to save their way to prosperity, they will be fine. The truth is independent contractors can handle an economic downturn. A deep recession is a 3% decline in economic output and typically short-lived. Contractors handle bigger swings in demand every year as part of normal seasonality. They can weather the storm.

While a service-centric approach is unlikely to be taken by most private equity ventures, independent contractors can focus on making money from service. It will lower marketing costs and lead to more repeat business, ultimately leading to higher-margin replacements.

Independents can also run rings around larger competitors in their markets. They can do it by ingraining themselves into the community. They can join service and civic clubs, building networks among community centers of influence. Most of these meetings are over lunch or breakfast. If a contractor is going to eat, why not eat with the most connected people in the community?

Independents can also advertise in unconventional ways with affinity marketing where, for example, donations are made to a charity for every service call, provided the charity markets this to its patrons. Independents can utilize radius marketing and other direct mail programs that are out of favor with the digitally inclined millennials running centralized marketing efforts with private equity.

Independents can also work on their culture. As management guru, Peter Drucker noted, “Culture eats strategy for breakfast.” Great strategy must be executed well to be effective. Great culture is self-executing.

Another opportunity for independents is to expand their offering by adding satellite operations for geographic expansion, adding new products like connected home products, and so on. If they have not already done so, this is the time to roll out performance pay and other incentive programs that reward people like they were owners in the business.

There is no question that 2024 will be challenging. Stay out of the polarized political fighting to avoid alienating half of the buying public. Watch overhead and cut only fat, not meat. Look to acquire new technicians from private equity owned companies that lose their founders. Finally, do not panic. It will be a tough year or two, and then the replacement market will begin a decade-long run where every year is better than the year before it.

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