Hydronics According to Grundfos
No matter what business you’re in, it’s important to recognize and capitalize on opportunities when they arise. In my business, a grand opportunity presented itself at the 2008 Convention & Trade Show of the National Association of Oil Heat Service Managers (NAOHSM), held May 18-22 in Hartford, CT. Grundfos was among the exhibitors and its presence was accented by the appearance of the top two Grundfos executives in North America. It’s not often a trade journalist gets a chance to chat face-to-face and in depth with such high-ranking VIPs, so I took advantage of it.
Jes Munk Hansen was recently named CEO of the North American Region for Grundfos Pumps Corp., spanning the U.S., Canada and Mexico. Hansen joined Grundfos eight years ago as a group business manager and in 2002 became senior vice president of the Dosing Business Unit, which he grew profitably into a $95 million enterprise. Hansen has also been leading the Innovation Intent project within Grundfos, with the goal of setting a 20-year innovation vision for the group.
Also attending the NAOHSM event was Dennis Wierzbicki, president of Grundfos U.S. Wierzbicki came to Grundfos four years ago and served as director of sales before being named U.S. head last year. He is a veteran of more than a quarter-century in the pump industry, having served in senior positions with WICOR/Pentair Industries, DeZURIK, Sta-Rite and Goulds Pumps before coming to Grundfos.
Here’s how they responded to my inquiries about the hydronics marketplace and Grundfos’ plans.
Supply House Times: Give me your general assessment of the hydronics marketplace in the U.S. and North America, and what are the biggest challenges you face?
Wierzbicki: Two significant things are going on in the hydronics market. First, old traditional cast iron boilers are giving way to condensing boilers and instant hot water, with smaller units coming out. Also, there have been big changes on the control side. For a long time the U.S. hydronics market moved slowly, but now we’re seeing variable speed technology, packaged systems and so on starting to take hold. That’s been the European way for a long time, and we’re seeing it take off here because of the need for energy savings and an increased focus on sustainability. It originally started on the commercial building side, but people are starting to pay more attention to energy usage in their homes as well.
Hansen: One of our biggest challenges is developing the distribution channel in light of consolidation. Our goal is to develop independent wholesalers with a targeted approach to the right people.
How do you view the distribution channel in your marketing efforts?
Wierzbicki: The professional wholesaler is here to stay. In fact, the DIY channel is starting to back away from contractor products. The only way the big boxes will gain the professional market is if wholesalers let them. If they say, I’m going to reduce my services and my professionalism, then they’ll lose it. But as long as they keep doing what they’re doing and add value to the service as good ones do, that’s the market we as a manufacturer want to concentrate on.
Grundfos is known for premium products, and that’s what has enabled us to attract more wholesalers. At a time when everybody is commoditizing, wholesalers are asking what they can take to market that’s different and can be sold profitably. If a product becomes commoditized, it’s the manufacturer’s fault for not doing something to add value. As manufacturers, we must continue to differentiate our products.
Hansen: We do not have the cheapest pumps in the market. What drives our business is new technology, and we’re taking it to a new level. Right now we’re a $400 million business in North America, and we plan on doubling that in the next five years based on the same 16-18% annual growth rates we’ve developed in the last four to five years. That’s been driven by adding new technology and selling to more and more wholesalers. We intend to continue being the technology leader and build strength in distribution.
Hansen: Europe is a much bigger hydronics market and more mature in terms of players on both the vendor and distribution sides. They have been four to five years ahead of the U.S. technologically with both pumps and boilers. North America had been relatively conservative, but now all of a sudden has been infused with new technology related to electronics, software, new materials and so on. It’s a very exciting time for us, because advanced technology is Grundfos’ strength.
Wierzbicki: In the U.S. you see more zoning. In Europe they typically have a single large pump and good controls with variable speed technology. They don’t use zoned systems as often. But now we’re seeing more new homes using a single header pump with sophisticated controls, and older homes will transition over time. It will be very interesting to watch the U.S. market adapt this way, and this will present a great opportunity for us.
Hansen: Another difference is that several years ago in Europe, all major suppliers of pumps got together on a voluntary basis and made a classification system for energy efficiency. It’s similar to the Energy Star program in America, just a little more sophisticated and accepted by the public. That has driven an enormous change in the market, not only in the pump business, but with home appliances in general.
Ask the average homeowner in America how much energy his pump uses or the efficiency rating of his boiler, and he wouldn’t have a clue. That will change. It will be interesting to see how the labeling system will develop in America.
As North America becomes more sophisticated, are we likely to see the technology differential reduced from that four- to five-year gap?
Wierzbicki: I think Jes is being generous in saying we’re four to five years behind Europe. I think it’s been more like six to 10 years. Energy Star took six years to develop, for instance.
I think that’s going to change because of the way Americans act. Once we see something as truly needed, we jump on it quickly. My experience on the well pump side with completely integrated controls and constant pressure was that it took six to eight years for people to understand it, but once they got it, the advanced technology really took off. With the price of energy today, I think changes on the hydronics side will also happen very quickly.
Hansen: As a European player, Grundfos has focused on product development and engineering. It used to be that European technology was brought over here, but now we intend to develop product for the American market and produce it here. I think that will reduce the speed at which North America and the U.S. adopt new technologies.
In the U.S. we have factories in Fresno, a new one in Mexico, a significant launch in Indianapolis, and with the acquisition of Peerless, a facility in Allentown, PA, plus a Paco plant in Houston.
That’s the production side. Grundfos’ product development used to be basically a Danish operation, but we decided a few years ago to increase our product development dramatically in North America. We now have about 30 people developing relevant products for the North American market, and we’re also developing technologies here that sell in other countries.
Wierzbicki: Clearly we will take advantage of technology developed anywhere in the world, but we will also develop technology specifically for the U.S. market. For instance, we now offer the leading hot water recirculation system with or without the need for a dedicated return. Our proprietary valve was fully designed by our hot water research group here in the U.S.
Our product development team is based in our Kansas City (Olathe, KS) headquarters, which we’re expanding. Construction will start on a new building in 2010 and we need to be moved in by 2011.
We’ve tripled out presence in Allentown in order to expand distribution and, most important, training. Allentown is located in the eastern hotbed of hydronics and is an easy drive from most of our eastern markets.
Hydronics in this country was a dying market until it got a big boost from radiant heating in the last couple of decades. Do you have a sense that radiant has also expanded the market geographically?
Wierzbicki: Without a doubt. We’ve seen the migration of hydronics into Southern California and south of the Mason-Dixon line with radiant and hot water recirculation. It’s gotten to the point where in many of the better homes being constructed, even in places like Phoenix, people seek floor warming just for the comfort of having warm tile.
Hansen: It’s fair to say a lot of this has been brought about by new technology.
What’s your reading on the economy?
Wierzbicki: Certainly the housing slump has hurt the hydronics market, but we’re making market share gains. Our first quarter was up 16%. Growth is still happening in the commercial and industrial markets, but on the residential side I think we’re in for a tough ‘08 and ‘09, though I’d like to be surprised. I hope we’ve flatlined, but I don’t see any signs of it turning around this year and probably not in 2009.
Hansen: We’re still projecting a 16-18% percent growth rate long-term, but that could involve some back and forth with the economy. Overall we think we can still achieve it based on being the technology leader, and with our strengths in distribution.