Interpreting the Lowe’s Investment in Recurve.

Recurve, the San Francisco Bay Area Home Performance retrofit contractor (formerly called Sustainable Spaces), took in a new $8 million slug of venture investment last week, and the big news was that round was led by big box home improvement retailer, Lowe’s. (Prior investors RockPort Capital Partners and Shasta Ventures, who already have $6 million in the deal, were also in the round.) Lowe’s is not known for early stage investing and the official Recurve press release was decidedly shy of details, so many in the home performance industry are wondering: what does this mean?

Quick background. Recurve went to the VC markets to transform itself from a regional contractor to a national software supplier. Their promising tablet-based software package is intended to take some of the human factor and complexity out of energy auditing, expedite report delivery, and help close retrofit jobs on the day of the audit. The software was formally unveiled at the ACI National Conference in April, and has 10 beta customers according to Forbes, but isn’t expected to be fully released until year end. Other than saying that it will be sold on a Software as a Service (SaaS) basis, there is scant information on cost.

Because Recurve has a standing lead generation program within Lowe’s stores in select CA locations, many writing about the investment have assumed that this means Recurve will expand it’s contracting business nationally to be able to serve all 1700 Lowe’s locations.

We have a different take on why Lowe’s would be interested in Recurve and, frankly, some concerns about the implications of this bold move by a big box retailer into the home performance arena:

A national expansion of Recurve’s contracting business is highly unlikely.

The GreenBeat blog speculates that this means that the in store marketing program that Recurve has had in Lowe’s San Francisco Bay Area stores will now be expanded to 1700 big box locations nationwide. We think this is off the mark. Though Lowe’s is different, the VC’s driving the Recurve ship are not especially interested in the fee for service contracting business, except to the extent that it gives the company brand credibility as they roll out their software. There is no sign of any hiring outside the Bay Area. And though $8 million isn’t chump change, it’s nowhere near enough to expand a home performance business on a national scale, even if they were going to do so with a more leveraged approach such as franchising.

Good news for the Recurve software.

Like most ambitious software development efforts, Recurve’s has taken much longer than anticipated and has experienced substantial cost overruns. There was significant disappointment at the the big launch at ACI in April when the marketplace learned they couldn’t buy the product until year end. Rumors spread that Recurve had run through their first round of investment capital, and with a substantial new overhead was at risk of running out of money. The new slug of dough from Lowe’s and the others relieves some of this worry.

It validates the product opportunity in Home Performance.

Research reports, such as Pike’s Energy Efficient Homes study, have predicted substantial growth in energy efficient equipment, and now one of the two big dogs of home improvement retail has validated that research. In the end, one particular objective of Lowe’s trumps all others--to sell products. And their interest is primarily in big tickets such as appliances (their #1 selling category), windows and the like. We think it is a fair bet that you can expect new product purchase recommendations to become part of the Recurve software package. This could be a great thing for encouraging upgrades to Energy Star appliances, but raises questions about whether users of the Recurve software will share in the upside of these purchases, and also whether the algorithms can remain unbiased to the low material/high labor cost actions that are most often the more cost effective solutions to a home’s energy efficiency. A brand challenge for Recurve will be making the thousands of independent home performance contractors that will be critical to that product’s success feel comfortable that the software isn’t a trojan horse for Lowe’s appliance sales or whatever other referral monetization schemes may be next.

Reselling the Recurve Software.

Beyond customized recommendations that favor Lowe’s products, what else does Lowe see in the software? The claim Recurve makes about their product is that it enables a one stop, simplified energy audit--all the data collection, analysis, cost estimating and delivery to the homeowner can be done on site a just a few hours. In theory, this lessens the need for individual expertise by the auditor so that the audit process becomes more of a data collection exercise, leaving the software to determine the specific retrofit requirements. This fits perfectly with the Lowe’s approved installer base. Lowe’s installers are all independent contractors, and most who participate recognize that it’s a deal with the devil. The big boxes generate lots of jobs, but with the store generating the lead taking upwards of a 40% margin on the project, it is most often very unprofitable work for the contractor. As a result, big box installers tend not to be the highest quality contractors in the market. We expect that Lowe’s will mandate use of Recurve software by their installers, take a share in the licensing margin, and use the tool to start expanding the auditing and home performance offerings within their store. The big question, of course, will be whether a quality experience can be maintained as home performance rolls out to the category of hungry (some say desperate), low margin contractors that have been forced by the economy to align with big boxes. The level of customer interaction required to install a dishwasher is a far cry from what's required during an energy audit. 

The commoditization of Home Performance marches on.

While big box involvement in home performance is probably inevitable, the oversimplification of the field is a worrisome trend. In the name of speed and scale (both laudable and critical objectives for residential energy efficiency), the Lowes/Recurve relationship is latest attempt to bring home performance to the masses. Inherent in that simplification, however, is the inevitable commoditization of these services. Big box retailers are the masters of this universe--their shear scale mandates that they can only sell those products that have achieved mass market volume and price maturity (which very often means they are not the best products available). The tragic CFL price race to the bottom, with Home Despot and Lowes at the fore, led to the ubiquity of poorly performing lighting, and a tarnish on energy efficient lighting that we can only hope they won’t screw up twice with LED’s. Let’s hope we don’t make similar mistakes pushing weak insulation materials (big boxes inherently orient towards productized batt styles), low cost but hard to program thermostats, and showerheads that are as low comfort as they are low flow.

Big boxes as lead generation sources.

Setting aside for a second exactly how a job might flow and to whom, aren’t the big boxes the perfect place to be exposing homeowners to the efficiency opportunity? With knowledge of the field so low now, cost of customer acquisition remains the biggest challenge in the home performance business. All the majors--GreenHomes America, MASCO’s WellHome division and Recurve--have been public about the challenge of getting COA down from current levels of $250 to $500. On its surface, it makes sense to expose the opportunity within home improvement stores. But the economics are harder to comprehend. If the goal is to reduce COA below $250 to $500, and even a good home performance contract is typically only $7500 to $10,000, a commission in the 5% range is not very attractive revenue. This, we think, exposes the fact that the big boxes only approach is to control the leads and guide them to their installer networks.

Lowe’s is Betting on HomeStar.

The other factor looming in all this is Home Star, and specifically the rebate aggregator part of the legislation, which sets up a system of private middlemen that process the rebates so homeowners aren’t out of pocket prior to reimbursement. This is an inherently complicated system, requires sophisticated backend processing capability as well as financial resources, and has been widely critiqued as favoring the big boxes. Clearly the ability to buy your Silver Star products or services directly from a store that processes the rebates on site is a big advantage.

All told, while Lowe's interest in the home performance industry demonstrates the economic feasibility of scaling the industry to the point where it needs to be, there's a danger that the big-box-style commoditization of home performance may, by definition, jeopardize the industry's primary objective - which is to improve the quality of our country's buildings. What do YOU think?