Distributors See Slow Growth Ahead
March 14, 2011
Distributors who made it through 2009 can congratulate themselves on surviving one of the most difficult years that HVACR wholesale distribution has endured in a long time. And while business is not back to pre-recession levels, the outlook is definitely improving.
According to Heating, Airconditioning and Refrigeration Distributors International (HARDI), North American HVACR average distributor sales showed growth for December 2010 to be 17 percent over December 2009, undoubtedly driven by the impending expiration of the full $1,500 residential tax credits. The running 12-month sales improved for the fifth consecutive month, meeting the top end of HARDI’s 2010 growth projections at just over 10 percent. Four U.S. HARDI regions and Canada finished the year up double digits.
“As expected, the pending reduction of the $1,500 tax credits effective January 1, pulled early 2011 demand into December, giving our members a great close to what was generally an underperforming 2010,” said Talbot H. Gee, executive vice president and COO, HARDI. “December’s distributor sales mix of cooling equipment was nearly 50 percent 14 SEER and higher, which will most certainly not be the case in 2011.”
This prediction is based on the federal tax credit reduction, which is expected to result in a drop in high-efficiency equipment sales and consequently a lower growth rate this year. As Alan Beaulieu, chief economist, HARDI, noted, “Despite a stronger economic environment, we don’t see enough in the HVACR industry to sustain the 10 percent level of growth this year.”
Indeed, HARDI predicts a 2011 distributor growth rate of 5 percent, due to minor volume increases and lower margins compared to last year. Gee noted that distributors seem optimistic about their businesses, so he is hopeful that the growth rate will be more significant.
GROWING AND CHANGINGRichard Cook, president and COO, Johnson Supply, Houston, noted that his company’s sales increased in 2010, and he believes that growth will continue into 2011, but at a slower pace. “We believe the HVACR industry has at least bottomed out, but we do not see a big recovery in the near future. Our fiscal year is April 1 to March 31, and I believe we will see relatively slow growth during that timeframe.”
Part of that slower growth will be due to the reduction in federal tax credits, said Cook. He noted that business was very robust through Dec. 31, but there was a definite drop-off in sales after the first of the year.
Sales in 2010 grew by double digits at Gustave A. Larson Co., Pewaukee, Wis., but that was still not enough to match 2008 sales levels, said company president and COO, Scott K. Larson. “We do expect 2011 sales to grow again but probably not in the double digit range. I think our biggest obstacle to growth is the mindset that everything has to be sold at lower margins due to the recession. We are now past the stage of surviving the recession; we need to thrive, and we are selling ourselves short thinking cutthroat pricing is the way to win more business. We must win with superior service, technical knowledge, and adding value to our customers every day.”
There is no question that suppliers and customers alike have heightened expectations about sales and service, said Gee, which is why HARDI is advancing the science of profitable wholesale distribution through more detailed and thorough performance benchmarking, economic and market forecasting, and ROI-focused advancements in professional development. “We’ve brought on several new subject-matter experts so we can offer customized solutions for any distributor member company that will provide them tangible profit and marketshare growth.”
The distribution industry can also improve itself by increasing process efficiency, said Cook. “All of us in this channel - manufacturers, contractors, distributors - have to continue to be efficient and be the best value for the money. If that doesn’t happen, someone like Home Depot will end up doing this more efficiently and more cost effectively and with more value than we do, then we run the risk of becoming obsolete.”
To that end, Cook would like to see communication and infrastructure improve to a point where the manufacturer and distributor would know which products are being installed in the field on a given day. This would involve a significant investment in integrated software packages that would connect contractors to distributors, so the latter could immediately learn which parts have been sold from a truck’s inventory and need to be restocked. This efficiency would benefit everyone in the channel, contends Cook, especially the end user.
Larson also sees benefits in investing in technology in order to grow. “After experiencing the great recession, we believe now is the time to reinvest in our business for the future. The challenge is growing our business while still keeping control on our expenses. This has to be done through a focus on our customer service and keeping our processes lean. We will accomplish this by investing in new sales and marketing resources, engaging in business process improvement projects, and leveraging technology to our advantage.”
REGULATIONS AND LEGISLATIONWhile most distributors look forward to modest growth this year, they are also apprehensive about legislation and regulations that could impact the way they do business. As Gee noted, this could likely be the year of regulation since it seems unlikely that the new Congress will be able to pass any significant legislation the president would sign into law. “Regulatory affairs will be dominated by DOE standards for almost all of our products, and labor and OSHA regulations are promising to be rampant.”
Cook advises all companies to pay particular attention to actions by the National Labor Relations Board, which has proposed a rule that would require private sector employers to display a poster that notifies employees of their rights to organize under the National Labor Relations Act. “We may want to evaluate whether employers should create additional communication to employees about the impact of actions suggested in this poster.”
As far as legislation is concerned, major questions on tax and energy efficiency policy will be the focus this year, said Gee. “I don’t see a path for significant government incentives for energy efficiency improvements. However, I do see this as a great opportunity for our industry to solidify our position atop the energy efficiency priority list, since we’ve already shown the jobs benefit our industry can deliver with the help of energy efficiency incentives.”
Health care reform is a continued concern for Larson, who believes it will increase costs in 2011 and beyond. “I am concerned what will happen to the ability of private companies to provide quality health care if the bill is allowed to remain as is. Other legislation that could cause our costs to go up significantly would be any cap-and-trade type law being passed and/or EPA issuing new regulations on greenhouse gases.”
Another legislative concern for Cook is the potential for the accounting method of last-in-first-out (LIFO) to be disallowed, which would have a big financial impact on his company. “LIFO is not an approved method of accounting by international standards, so there is a lot of pressure for the industry to standardize. That makes me nervous, because LIFO is an accounting method, not a tax break, and if it is disallowed, it would be a very big penalty for us because we would have to pay taxes on our inventory reserve. That would affect our ability to invest in our people and in our infrastructure.”
While regulations and legislation will continue to be of concern in 2011 and beyond, Larson believes there is an immediate systemic issue that threatens the HVACR industry and needs to be addressed today: How are we enticing the best and the brightest people to enter the HVACR industry?
“I don’t think we, as distributors, do a good enough job of educating and attracting the next generation of talent that we will need to run our companies,” said Larson. “I suspect the same holds true for our other channel partners. We are taking proactive steps in our company to visit local schools, tech colleges, and universities to not just recruit but also educate about careers in our industry. However, we cannot do this alone in order to truly be successful. We must work in a concerted effort with our channel partners.”
This is good advice that will ensure the success of all those involved in the HVACR industry, today and in the future.
Sidebar: To Stock or Not to StockIn the middle of 2010, some manufacturers began producing R-22 equipment that did not contain refrigerant. These dry-shipped units exploit a loophole in the original U.S. Environmental Protection Agency (EPA) ruling of 2009 - designed to curtail use of R-22 - which stated that entire systems could not be manufactured and that any replacement components for aftermarket use could not be pre-charged with the refrigerant.
There are strong feelings in the HVACR industry about whether or not these units should be available for purchase, including in the world of distribution. HARDI’s executive vice president and COO, Talbot Gee, noted that some of their members are stocking these units, with several more waiting on orders to arrive.
“By an overwhelming majority, our members taking on these units are doing so only for defensive purposes and would prefer that we move on with the transition to R-410A,” said Gee. “Distributors are struggling to forecast this market; a problem exacerbated by many manufacturer requirements to place orders as much as six months before the cooling season starts.”
Scott Larson, Gustave A. Larson Co., is one distributor who would prefer that the industry move ahead with R-410A, but his company will be stocking R-22 dry-ship units in selected markets. “We really don’t believe this is the future of our industry; it’s our past, and it is unfortunate to see that the government didn’t close this loophole. In the markets where we are stocking them, those units are intended for the replacement market only.”
Gee said the fate of dry-shipped units will rest on three key equipment-related factors this year:
• How much drop-off there is in the sale of high-efficiency equipment due to dry-shipped units and the shrinking federal tax credit;
• The impact of dry-shipped units on the replacement compressor market; and
• Whether there is a noticeable reduction in volume of R-410A units.
“While significant growth in total unit volume would normally be great, I fear volume growth driven primarily by these units will be at the expense of properly matched, energy-saving complete systems,” said Gee.
Publication date: 03/14/2011