- Part 1 reviewed recent share price activity from 2016 to today.
- Part 2 compared Pioneering financials today vs the those prior to latest financing.
- Company is not at risk of going bankrupt, & balance sheet is solid.
- However, the question of future sales volumes is still unanswered.
When we ended our discussion of Pioneering in Part 2, the key question we were trying to answer was one of sales: can Pioneering increase sales of the Smart Burner, and when. However, to understand the sales story, we should also understand the product, why it appeals to a particular market segment, and how large this market segment is.
The product is unique. The Smart Burner is unique in that it prevents a fire from occurring, rather than setting off an alarm after the fact, or putting out the fire via an attached automated fire extinguisher or sprinkler. There are a number of safety devices on the market that do one (or perhaps even both), but one of the key points raised by end users is that prevention of combustion is far superior to an alarm or a product that extinguishes a fire after the fact. End users have highlighted that once an alarm is set off, the building may still need to be evacuated, and the local fire department may be on the way, regardless of whether or not the fire has been extinguished. When viewed in the context of an apartment building, this causes inconvenience for the residents, and may imply some cost to the building operator for each visit by the fire department. Additionally, residents & property are clearly less at risk from a situation where there is no combustion vs one where combustion occurs and is extinguished.
In addition to this, the Smart Burner is unique in that it meets the pending change to UL858 (Underwriter Laboratories) regulation, which will take effect in early 2019. The UL858 change will necessitate that all coil top stoves sold in the North American market must pass an ignition test. The test requires that an electric coil top stove, at it’s maximum setting, must be allowed to operate for 30 minutes with a pan of cooking oil on the element. The stove must operate for 30 minutes or until such time that the cooking oil ignites. If ignition occurs, then the product cannot be sold North America.
The product is meeting a distinct need. Statistics indicate that the vast majority of fires start in the kitchen, so the product has a clear application. The pie chart (below) shows quite clearly that over ½ of all residential fires start as a function of cooking. While this particular pie chart represents fires in Great Britain, data from the US National Fire Protection Association (NFPA) is consistent with British statistics (NFPA data also shown below).
This data suggests that there is a very clear niche market that is currently not being addressed. However, while it is clear that a market exists, we have to ask how large this market is.
The size of the potential market is large. Data sourced from the National Multi Family Housing Council provides the following snapshot of the US housing population:
From this data, we can quickly see that there are 118 Million households in the US that could potentially install a Smart Burner. Of this total amount, we will ignore the Owner-Occupied segment. Home owners are far more likely to purchase a stove that is esthetically pleasing (glass top, gas, induction) vs one that is utilitarian. By comparison, the 43.8 MM rental units are owned by landlords, who are typically driven by cost and functionality. If we put ourselves in the shoes of a landlord, we can see that traditional coil top stoves are an easy choice for rental units based on the following criteria:
While a landlord may ultimately put in whatever they want, for the various reasons shown above, coil top stoves are an easy choice. Coil top stoves are cheap, simple, pose no extra risk from a natural gas source, have no cooking surface (glass top) that can shatter, and do not require special pots or pans to be used. So from this data, we can say that out of the 118 Million households, the 43.8 Million rental households are the likely candidates for the installation of a Smart Burner.
With this data in hand, we then have to ask ourselves how many of these landlords will install a Smart Burner ? Again, the exact answer is difficult to pinpoint, but to answer this we will look at the implementation of another safety device – the home smoke alarm.
The first battery operated smoke alarm was available as far back as 1969. However, smoke alarms were not widely used, given that there was no law or regulation that required their use. In 1972, about 200,000 smoke alarms were sold in the United States. This changed significantly in 1976, when the NFPA (National Fire Protection Association) passed NFPA101, which was referred to as the “Life Safety Code”. This was the first document that stated “smoke alarms are required to be in every home”. By 1976, 8 Million units were sold, and in 1977, 12 Million units.
This information highlights two important consumer trends. First, if consumers are left to their own devices, the majority tend not to implement safety improvements. This is not entirely surprising. Readers who live in jurisdictions where it snows have experienced this. While snow tires significantly improve stopping in winter conditions, many consumers prefer to use all season tires in order to save money.
Secondly, when regulation finally takes effect, the purchase of the device can experience a sharp increase. While the parallel between smoke alarms and the Smart Burner is not exactly the same, we are also not suggesting that the increase in Smart Burner purchases would be this significant. What we are saying is that the change in the UL858 standard will create awareness, and consumers (such as landlords) may be more likely to purchase a Smart Burner for their rental units.
This brings us back to our question, specifically, how many of these landlords will install a Smart Burner ? Based on our smoke alarm example, we know that the introduction of regulation increased sales by a factor of 40 – but this was in 1976. To better understand what total sales of 8,000,000 smoke alarms in 1976 really means, we have to understand what the population of the US was in 1976, which (lucky for us) is relatively easy to do:
Lastly, because we are comparing “households”, we have to adjust for the number of people per household, which has changed since 1976. Again, this is also easy to find:
From all of this data, we can infer that in 1976 there were 75,432,526 total households (218,000,000 total population / 2.89 persons per household), of which 8,000,000 purchased smoke detectors after the introduction of NFPA 101, or a total of 10.6% of all US households.
This answers our question as to what percentage of landlords might purchase a Smart Burner. However, we would suggest this 10.6% to be a “pie in the sky” type of figure. The UL858 change will require that any new coil top stove sold in North America is compliant – not that any homeowner or landlord (who already owns a stove) must be compliant with a stove they already own. We would suggest that once the UL858 change takes effect, and compliant products begin to show up at retailers, consumer awareness will increase, which in turn will spur sales of the Smart Burner. Landlords, seeing that “safer” stoves are available, may want to achieve a similar level of safety with their existing coil top stoves. By reducing false alarms and potential fires, a Smart Burner may be able to save them money via reduced insurance rates, or simply decreases the risk profile of their housing units. So, some landlords may decide to purchase a Smart Burner to better equip & de-risk their housing portfolio. Like any new (or disruptive) technology, adoption does not occur “en masse”, and different people (and organizations) will take more or less time to decide to adopt a new product or methodology. This is consistent with what is known as “The Technology Adoption Curve”, which is shown below:
One can see that “Innovators”, who are early adopters of new technology, make up 2.5% of the potential marketplace. To be very clear, we are not suggesting that a safety device such as the Smart Burner is as sexy (or interesting) as an Iphone, we are simply highlighting what percentage of “innovative” landlords might be tempted to purchase a Smart Burner. In addition to this, it is unlikely that the entire 2.5% of the landlords that are “Innovators” will suddenly rush to order the product come 2019. Because of this, we would suggest that only a portion of this group will be interested in purchasing a Smart Burner in 2019. We would err on the side of conservatism, and in doing so, suggest that perhaps 25% of potential “Innovators” might purchase a Smart Burner in 2019, or 274,000 in total (43.8 MM x 2.5% x 25%).
In summary, our lengthy discussion of the potential market size (and the associated opportunity) highlights a few key points:
- For various reasons, landlords likely favor coil top stoves for their units.
- Because of this, landlords will be a very likely market for the Smart Burner.
- Landlords control approximately 43.8 Million housing units in the US.
- The UL858 standard change will create more awareness, and potentially more sales.
- Increased sales of the Smart Burner would most likely happen in 2019 or later.
- People (or companies) that are early innovators tend to make up 2.5% of the potential population, or approximately 1.1 MM of the potential 43.8 MM rental units.
- Lastly, because people (and organizations) tend to move slowly, we would suggest that only 25% of the 2.5% of “Innovators” (approximately 274,000) would be initiating orders for the product once regulation changes in 2019.
This information provides a more definitive answer to the question we were left with at the end of Part 2. When we concluded Part 2 of our review, we had determined that the “million dollar question” was if Pioneering could actually sell increased volumes of the Smart Burner, and if so, when might we see these increased sales. Having answered this question, Part 4 of our review will focus on how such increased sales might impact earnings & share price.