How's Business?

Companies sheltered by the safety-in-numbers approach of franchise networks were best equipped to handle last year's drop in storm activity. Because these networks typically focus on a broad remediation approach, they handle a slow season better than new or independent firms. These networks, such as Paul Davis Restoration, Disaster Kleenup, and Water Out Drying, have diversified themselves to focus on restoration opportunities outside of catastrophe work. When disasters strike the Gulf and Atlantic Coasts, these companies have a presence in affected areas, but they don't rely on them each year.

“We do not necessarily put a lot of our strategic initiatives in the catastrophe arena, so we've had a very good year,” confirmed Tracy Bachtell, vice president of business development for Paul Davis Restoration. “While we certainly get a spike in volume in areas hit by major catastrophes and are prepared to respond to high-volume events, we encourage our franchise owners to call their local adjusters after a hurricane has occurred and let them know that they're not going to up and leave for the storm zone. So, no, the downturn in catastrophes has not materially impacted us.”

Dale Sailer, president of Disaster Kleenup International Services, echoed similar sentiments in regards to working as part of a network organization. He pointed out that big rain storms in Chicago, a massive snow storm in Buffalo, and heavy rains on the East Coast kept his company's bottom line in the black and offered a brief respite from the helter-skelter years of 2004 and 2005.

“The last two [storm] seasons have been large, burdensome, and stretched resources to the max,” said Sailer. “The fact that we did not have a significant hurricane season was favorable in terms of being able to spend this year refining plans for another large season. The Katrina year was so big that it wasn't until the beginning of the 2006 hurricane season that we were able to really step back and say, 'Okay, we're almost done with last year' and begin our analysis of figuring out what we learned, what we did well, what we should do differently, and what we shouldn't do at all. So, [a slow storm season] was not a bad thing for us as a corporate organization.”

Entrants Face Biggest Challenges

While a stormless season might have minimal impact on established networks like Paul Davis and Disaster Kleenup, the same might not be said for companies that entered the catastrophe restoration market in the last two years. These companies, having witnessed an unquenchable demand for restoration contractors and equipment in 2004 and 2005, could have been lured by predictions of high activity for 2006 and been tempted by a big payoff. But start-up costs can be high.

“It's expensive to do catastrophe work,” said Kelly Cressy, restoration consultant for Water Out Drying, a manufacturer of drying equipment. “You have to gear up with equipment, generators, motor homes, technicians and staff on the road for months at a time, lodging, and meals for them. We get a lot of calls from people not in the business after seeing disaster coverage on television. They don't realize it costs tens of thousands of dollars just to pull out of your driveway to go several states away to do work.”

Another result of an anticipated active season is an increase in production of water mitigation equipment. Given that demand completely outstripped supply in 2005, it's realistic to expect that some equipment companies implemented strategies to ensure they had enough product available come 2006.

“Contractors who went out and purchased a lot of equipment in preparation for a big season had nowhere to deploy it,” said Sailer. “That represents significant overhead. It means they have to figure out how to pay for it without revenue coming in. So there are potentially some contractors out there like that, although I believe this is more of an issue for new entrants to the market. It's a big deal for them, and it wouldn't shock me to hear that someone is fire-selling equipment right now because they need money.”

“Companies that manufacture restoration equipment had their sales double in 2005,” said Bachtell. “They were expecting a similar demand for their inventory in 2006, so they brought in new production lines and new assembly lines. Now these companies are sitting on millions of dollars of unsold inventory.”

But according to Cressy, networks of franchises that have experienced the peaks and valleys of hurricane seasons of past are less inclined to make rash moves when it comes to purchasing or manufacturing equipment.

“We didn't go for the bait and build hundreds of trailers to have ready,” said Cressy. “And if we had 2,000 trailers, it wouldn't have been enough for [a situation like] Katrina anyways. We've been consistent in telling our existing licensees and people considering buying our equipment to not buy it just for that one-time event. After Katrina, I had dozens of phone calls from people who didn't know this business existed, saying they wanted to buy the trailers and go make millions. But just because you're busy this year doesn't mean you'll be busy the next.”

Challenges for the New Year

What can restoration companies expect in 2007? Although many challenges confront the industry, not all of them are new ones. From finding qualified help to refining restoration methods, some concerns are shared by everyone. First and foremost, finding qualified help is priority number one.

“I think the pool is getting smaller for qualified trades people,” said Bachtell. “If you're talking about the artisan contractors — the plasterer, the finish carpenter — those are such skilled trades that while some used to follow in their fathers' footsteps, a good plasterer now makes enough money to send his kids to law school. So his kids aren't plasterers anymore, they're attorneys.” Bachtell went on to say that customers also are expecting better customer service and communication skills from the people they deal with, which makes qualifying, hiring, and training people more important and more difficult.

Another challenge seen by those in the restoration field is the documentation of remediation methods. During catastrophes, many insurance companies want their customers to be helped immediately, but once the bill comes due, they may find themselves wishing for a more itemized approach to justify sometimes astronomical bills.

“I think one thing that became obvious during the 2004 and 2005 hurricane seasons was that the restoration industry has not been very good at documenting their work,” said Cressy. “From an insurance standpoint, if you have thousands of claims to take care of, you just want a company out there doing it. You want someone out there taking care of that loss. And you hope you get the documentation to back up the bill later. I think that having one slow year after two big years really gave the insurance industry a chance to sit back and look at the restoration industry and say, 'Hmm, did we really get what we paid for?'” Cressy added that Water Out Drying franchises include an initial scope of the loss, the equipment used, progress being made, the intended goal of the job, and the use of infrared images and data-logging equipment when working restoration jobs.

But perhaps the biggest challenge to the industry is the risk of growing complacent in preparations for 2007. Most in the restoration field feel that 2006 was the anomaly, not 2004 and 2005. Given weather predictions from meteorologists that state hurricane years run in cycles — and that most believe we currently are in the middle of a high one — it's easy to understand.

“We need to be intelligently ready for a large season in 2007,” said Sailer. “That doesn't mean everybody should go out and buy lots and lots of equipment, but what it does mean is that restoration contractors should have a very concise plan for the “what if?” scenario. What if there's a slow season? A moderate one? A heavy one? It's important that we don't put all of our eggs in the basket of just one.”

“There's a lot of unresolved problems, but I'd like to think that the restoration industry and the insurance industry are working together better than ever before,” said Bachtell. “If there's a solution to be found, I think the right people are working on it.”