As the sluggish economy persists, many residential integrators are grateful to have made it through 2009. Everyone in the industry is feeling the sting of the housing slump. However, smart contractors are finding innovative ways not only to survive the economic slowdown, but also to grow and prepare for a brighter future.
Over the past two years, there have been sharp changes in the market for home automation and electronics. With a reduced customer spending, contractors need to diversify their business strategies to take advantage of hidden opportunities in new market conditions. Demographic shifts, increasingly tech-savvy consumers, and the movement towards “greener” living are among the many areas of opportunity for residential systems contractors.
With the decline in new construction, integrators have seen a marked shift from new installations to retrofits. However, CEDIA’s CEO, Utz Baldwin, points out that the economy has created other unique opportunities for residential integrators. Although housing starts are down, the adoption rate of technology is up, and the commoditization of products has pushed prices down, making technology available to more mid-level consumers. Changes in the consumer market are driving demand that Baldwin expects to persist through the recession and beyond.
“The consumer is getting younger, smarter and faster. They don’t just appreciate performance, they expect it. Gen Xers and Gen Yers expect technology in the home,” Baldwin says. That, combined with the aging Baby Boomer population’s increasing demand for home security and healthcare, makes Baldwin feel optimistic about the future. While he does not expect immediate recovery, the present economy provides creative integrators with the opportunity to start preparing for these nascent markets.
Which residential contractors will survive these challenging times and which will disappear? Those who diversify their business strategies and develop creative new ways to attract and keep business during these lean times will be well-poised to become market leaders when the turnaround eventually arrives.
THINK OUTSIDE THE BOX
“We are not going to participate in the recession,” says John Goodyear, president of Goodyear Custom Audio Video, Beaumont, Texas. With that attitude, Goodyear and his team decided to not to wait to react to the difficulties the economy might throw their way. “If you’re doing business the same way you were doing it two years ago, you’re out of business,” he says.
Instead, they decided to be proactive and go out after new business. They began by redefining how they viewed their business. Instead of residential installers of audio-video systems in high-end homes, they began to look at themselves as low-voltage contractors with a specialty in audio-video. This simple mind shift allowed them to see new opportunities in education and industry. Looking to a nearby college, Goodyear discovered a need for standardization and tech support for equipment in smart classrooms. “It’s stuff we do all the time,” Goodyear describes. By rethinking the company’s identity, they opened up a new niche.
Similarly, they looked at the technical skills and equipment they already have in-house and realized that with minimal investment in some editing software and lighting equipment, they could produce their own advertising video. Video produced in-house can also be used on the company Web site or distributed on marketing CDs at a minimal cost. While his competitors are cutting advertising to save money, Goodyear has been able to expand his marketing to reach a larger portion of the market.
PLAY TO YOUR STRENGTHS
Larry Korff, co-owner of JM Resources, King of Prussia, Pa., is finding similar results in the fire protection and security business. He says that the economic downturn has led his company to reevaluate its focus and get back to its core strengths.
“Most companies have gone back to their core,” he says. He adds that in a strong economy, “It’s easy to get away from the core.” By playing to his company’s strengths, Korff is finding ways to compete for a bigger share of the shrinking pot of consumer dollars. One strategy is to take those strengths into the commercial realm. He estimates that in August 2006, JM Resources’ business was about 98 percent residential new construction. Today, he estimates the company does about 80 percent (mostly existing premises) residential and 20 percent commercial.
Korff also is finding ways for new and existing customers to enhance their fire protection and security services with new products and better training for his staff. He meets growing customer demand for greater connectivity with and control of their security systems with new products such as Honeywell’s TotalConnect, which can be accessed from an iPhone using the MyKeypad app.
Korff recognizes that focusing on core strengths means foregoing some areas where JM Resources are less competitive. He relies on alliances with contractors who specialize in complementary services. In this situation, everyone wins. The customer gets the best service in every area, and the contracting companies benefit from mutual referrals. “It shows honesty to the customer and builds customer trust,” Korff relates. “It just seems so logical.”
TAKE A BOLD LEAP
Complementary services are fundamental to Austin, Texas-based AV Design Associates’ business. In 2008, David Jasak and his partner Steve Wu worked for a residential audio-video integration company. As the economy worsened, the company began to downsize. As in many companies, the design department was drastically cut. So, in the face of the worst recession in decades, Jasak and his partner did the unthinkable: “We didn’t change our business. We started our business.” They created their own design consulting firm to serve a new niche market, a byproduct of the recession-driven cuts in design services.
As a value-added bonus, Jasak offers a matchmaking service to his clients. When homeowners and architects come to him for design services, he is able to find a qualified electronic systems contractor whose experience and skills are best-suited to the needs of a given project. The architects and homeowners appreciate the time and cost savings, and they ultimately bring more business back to AV Design.
Like Jasak, Matt Carter, CEO of Playback, an audio-visual systems provider based in Charlotte, N.C., has discovered that nurturing relationships with architects and homeowners is a key to surviving the recession. Not surprisingly, Carter, CEDIA’s 2008 Outreach Instructor of the Year, works on educating his partners. He offers two-day training sessions to architects and builders to keep them apprised of the services home integrators offer. “We’re making a real grassroots effort to make sure, as an industry, we stay relevant,” Carter describes. He says educating his partners and clients has been very effective for keeping a healthy bottom line. His priority is to make them see technology as a value proposition and problem solver. “We’re not pitching a product, but a solution.”
Carter recognizes that investing in education now is essential for future dividends, and that means educating employees as well. During the construction boom, many residential integrators were too busy to keep up with new training. But, the market slowdown provides the time to prepare for the next upswing. Carter says, “It’s a great time to really embed your company and team in training to prepare for the next wave of growth.”
TURNING TOWARDS THE GREEN
Hovsep Margaryan and his company, forTech Solutions Inc., North Hills, Calif., have decided to cultivate future business by educating clients about green technologies. He agrees that the move to greener living is inevitable, but it will be a long-term process. “It’s very challenging,” Margaryan describes. “But like everything else, if you don’t do it, you fall behind. Once customers see the savings, they spread the word.”
With rising energy costs and shrinking incomes, homeowners are becoming more receptive to money-saving alternatives. Margaryan is working to take advantage of this opportunity by providing cost-effective solutions, such as energy-, water- and gas-usage monitoring.
Like other contractors, Margaryan has found that redefining what his company does and working with its strengths has created opportunity despite the economy. As an electrical contractor, forTech began taking on smaller electrical projects. By helping customers with basic electrical needs, Margaryan’s company is discovering new client relationships, increasing both current and future revenues. Plus, these smaller projects give it an opportunity to introduce the consumer to the possibilities green solutions provide: “The more doors we can open, the easier it is for us to get our name out there.”
Margaryan is not alone. According to a CEDIA survey conducted by Dallas-based Parks Associates, 80 percent of integrators surveyed reported they are actively pursuing education about energy monitoring and control system opportunities or seeking to learn more about them.
While a complete economic recovery is still some time away, the consensus views 2010 as still slow, but a better and more stable year than 2009. As integrators look for creative ways to capitalize on their strengths and identify new opportunities, they are acutely aware that they are competing for a smaller market.
A focus on fundamentals and competing from a position of strength will be essential. Baldwin is bullish about 2010. Although the market still will be slow, he sees plenty of opportunity for innovative integrators. Baldwin believes those who have the fortitude to survive will be well-positioned when the economy recovers, saying “Companies that entered the recession and housing decline with solid business practices and good marketing campaigns and pipelines will not only survive, but likely see exponential growth.”
9 Tips for Successful Diversification
Changing business strategies inherently carries a certain amount of risk. But in a tight economy, those risks may appear to be even greater. Integrators who are finding success in their new ventures offer these tips to help mitigate risk and maximize return.
• Focus on fundamentals. Financial stability and a solid business plan are critical when venturing into new areas. Utz Baldwin, CEO of CEDIA, advises integrators to do their homework: “Focus on research, education, and a business plan before attacking an entirely new category.”
• Play to your strengths. Don’t try to compete where you are at a disadvantage. When resources are tight, focus energy and effort in areas where you will yield the best results.
• Redefine your identity. Use talents in different ways to find new ways to prosper.
• Invest in the future. Time and money spent now on educating customers, partners, and employees will pay off in the long run.
• Capitalize on new markets. Even in a weak economy, underlying shifts in the markets and technology can provide new opportunities for integrators. Falling technology costs make it easier for more consumers to buy into home technology at mid-level price points.
• Be proactive, not reactive. Anticipate change and take the lead. The evolution of green technology is underway. Establishing yourself in developing markets early provides an advantage over the competition.
• Think long-term. In a weak economy, even returns on the best decisions may not be immediate. Seek out opportunities to place yourself at an advantage when the market improves.
• Foster relationships. Partnering with architects and builders, and educating them about the benefits of home automation and security systems, can make them advocates and lead to referrals.
• Focus on value and quality service. Consumers are more cautious about spending in a tight economy. “People will spend, but they aren’t buying what they don’t need,” advises Larry Korff of JM Resources. “Value is the new metric for spending.”