Interpreting the Lowe’s Investment in Recurve. Professional content

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By Peter Troast - July 1st, 2010

Lowes CarRecurve, 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? 


Comments

I agree that this is largely a positioning move. Expect to see the Lowes brand firmly embedded in the application with a "click here for all your renovation needs" button. Is that a bad thing? Not at all. Chances are high that if someone bothers to have an audit they are considering making other changes to their home beyond energy. This is a combination of branding and lead-to-sales advertising that is increasingly common. Lowes presents themselves as a thought leader, the good guys, the ones with your interests and the environments interests at heart. All this while the Home Depot (their only real rival) continues to drown in a quagmire of negative perception from both the public and the industry. I am no fan of ReCurve or their efforts to manipulate DOE and congress to create a self serving program, but you can't really blame them for trying. No one else is doing any better. I have to ask this question though, since you raise it in blog, why does anyone think an iPad app for energy audits will take off? You still need the equipment to measure the home. The existing software options convert the data directly into a report that is easy to understand. Auditing equipment now combines IR, moisture, and real photography in one device that tags and saves the images for transfer via USB to your laptop. Ipad has no USB. It is very weak in computing power, and sucks for file transfers. Perhaps in Matt's Golden celebrity state this might seem cool, but to the rest of the nation I think it falls flat. just my $.02 Posted by Michael Anschel on Jul 1, 2010 2:01pm
I agree with Michael - I'll be curious to see whether Recurve is another product looking for a problem. Have they gone methodically through a customer discovery and validation process, or will this be another dot-com baby that feeds on VC until people eventually realize there's no value there? I'm in favor of audit "autonomation" to reduce repetition and standardize the work, but this is building science and can't be performed by 1,000 monkeys at 1,000 typewriters. They're still busy trying to recreate MacBeth... Posted by Daniel on Jul 1, 2010 3:20pm

 Michael--you make an interesting point. With annual advertising expenses of $750 million, Lowe's Recurve investment is a rounding error in their overall marketing budget. From that perspective, it might be just a positioning move, but I still think it's more strategic.

In fairness, the Recurve software is tablet based not iPad, at least for now. You're right that it doesn't replace the blower door, combustion safety, CO monitoring, and IR tools that produce the real data. It just compiles it more quickly, and in theory has some smart algorithms, so the end result--the report and retrofit spec--can be delivered on site during the audit. The core assumption is that in doing so, conversion rates from audit to project will be substantially improved. That's the value proposition.

 

Posted by Peter Troast on Jul 1, 2010 3:32pm
I wonder how this will work in states like Florida that have a state mandated software package? What about Nevada (or Austin, TX) that require a RATING on a house and spec RESNET? How will this work with the DOE RFP for a national Home Rating Standard? Posted by John on Jul 1, 2010 6:41pm
I like what Recurve is trying to do - taking the guesswork out of home performance auditing and pricing. I believe that this transformation is necessary in order to scale up the industry to the level that is needed. The industry was created and has been run by a group of very talented geeks, and what it has been missing is a professional sales and management component to make it successful. Those professionals are finally entering the picture, now that they see some big dollar signs out there. I have some of the same concerns as Peter, that the industry will become a commodity, relying on the low price subcontractors performing work for a corporate behemoth, likely resulting in uneven and poor quality work. It will be interesting to see how successful Recurve (and the rest of the players in the industry) will be in delivering high quality home performance work in volume. I do hope that the industry learns how to scale up - if it doesn't we will have lost an incredible opportunity to improve our existing housing stock. Posted by Carl Seville on Jul 1, 2010 9:30pm

 @John: I'm not sure about how they'll manage all the state specific requirements. My guess is they'll integrate them over time.

@Carl Seville: scale vs quality is the critical issue for our industry. Brings me back to John Tooley's rallying cry in his ACI keynote address--"we do what's right when no one is looking".

Still, when I look at our house, I find it very difficult to believe that any black box could determine the right retrofit solution. As you can imagine, because we have so many auditor/contractor friends, our home has been assessed repeatedly by several smart, deeply experienced, highly trained auditors. Our situation isn't atypical--cape with kneewall issues, poorly installed batts, an addition that wasn't connected very well, uninsulated basement and rim joists, 3500 cfm. Air sealing the attic and crawl spaces is where the big opportunity is, but it's going to be very subtle work, lots of little things that if done thoroughly will mean a lot. In the end it will be effective energy and cost wise because our energy auditor, DeWitt Kimball is one of the talented geeks you describe and he knows the perfect, equally talented, passionate about doing air sealing right contractor for our particular job--Josh Wojcik of Upright Frameworks. I just don't see a big box installer being able to do this right. 

Posted by Peter Troast on Jul 2, 2010 8:18am
I actually have a lot of faith in software to help make the right decisions. I have long envisioned a menu driven database with branching logic that asks questions and leads the use to a set of answers, a comprehensive scope of work and accurate pricing. I did this same thing very successfully with an estimating system years ago. The big question is, can the quality of the field work measure up? That is where the quality control happens and no software will do the job. Even a perfect program will only get us to the sale, I would like to see what the plans are for managing the actual installations. Posted by Carl Seville on Jul 2, 2010 8:45am
Peter, great post. I think it's clearly a step in the right direction that Lowe's invested in Recurve. The industry needs vastly greater awareness than it has now if we hope to address the residential efficiency opportunity at scale. When the average American spends 6 minutes per year thinking about their home's energy, we need all the help we can get. However, it seems unlikely to me that Lowe's would tinker with Recurve's algorithm. Sure, Lowe's may end up attaching a SKU list to Recurve's report output.... but that is very different than reaching into the algorithm and sacrificing optimization and brand credibility for marginal profit. It would be too easy for a measurement and verification third party to prove sub-optimal results, whether based on modeled or observed energy savings. Posted by Alex Patriquin on Jul 2, 2010 9:13am
I am looking forward to the finished product - Its a trend that energy auditing energy loss analysis will become the equivalant of car fax - do the components work at optimum levels/ document inefficiencies - its DATA acquistition and its quite a tool in that aspect SSLPro Posted by SSLPro on Jul 25, 2010 4:12pm

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