HVAC Residential Market / HVAC Commercial Market

Distributors Take Wait-And-See Approach

March 18, 2013
Trans

Heating, Air-conditioning, and Refrigeration Distributors International (HARDI) recently announced that while HVACR average distributor sales declined 1.8 percent in December 2012, they increased 5.6 percent for the year. This is the highest reported sales level since October 2011, signaling further growth may be more likely in the coming months.

“Now that the American Taxpayer Relief Act (ATRA) has been passed, we expect some of the hesitancy businesses felt to fade as they resume investments in equipment and repairs,” said Andrew Duguay, senior economist, ITR Economics, which provides economic forecasts for HARDI. “The down side of the ATRA is a 2 percent tax increase on average for consumers in 2013. It will take a couple of months to see what sort of impact that has on the confidence of consumers and the momentum of market participants, as the important spring selling season approaches.”

Many seem to be adhering to this wait-and-see approach, noted Russ Geary, regional vice president, Geary Pacific Supply, Orange, Calif. “I know there is pent-up demand in the market, but I think people are waiting to see what happens in the middle of the year. It doesn’t seem like consumers are ready to run right out and write a check.”

Economic Uncertainties

Brian Cobble, president, G.W. Berkheimer Co. Inc., Portage, Ind., and president of HARDI, agrees there is pent-up demand in the market, but that too many headwinds may keep consumers from making large purchases.

“The economy is going to continue to be a concern this year,” said Cobble. “I think we’ll be lucky to hit 5.6 percent growth again this year. There’s a lot of uncertainty in the market, and in our area, there’s still a fix-it mentality. Unemployment is still high, and people just aren’t spending the money for new systems. Money is tight, and I keep hearing from contractors that their customers are struggling to obtain financing. I think it’s going to continue to be tough.”

John Rynecki, senior vice president of sales and marketing, Sid Harvey Industries Inc., Garden City, N.Y., noted that six months ago, he would have predicted 2013 to be a break-away year. “But it’s not shaping up that way. The unemployment rate, concerns over the ‘fiscal cliff,’ and just the sentiment in general on the part of consumers is not evolving to a point where we think we are going to see above-average results.”

These less-than-optimal results have directed the company to consider a more conservative approach over the next few months. “We already planned to open one or two branches this year, embark on a few remodels, and hire some specialists in different regions, but we’re not adding new projects for 2013,” said Rynecki.

As for the near future, it seems that repairing equipment will continue to trump replacements, in most markets. For those consumers who do opt to buy new equipment, many are choosing the lowest-efficiency equipment available, in order to save money. Geary noted that approximately 75 percent of residential consumers are buying base-efficiency units, while commercial customers are only buying lower-efficiency equipment.

Greener Pastures Ahead?

There is virtually no demand in my area for green technologies such as solar and geothermal, said Geary.

“A very small minority of our contractor customers are specifying geothermal systems for custom homes,” said Geary. “Residentially, it’s usually the very high-end, multi-
million dollar mansions that go that way. It’s not a big trend. I wish it were, because we have a line of geothermal products that we’re very proud of, but there’s just not the money to write that big check.”

Rynecki acknowledged that he has experienced minimal demand for geothermal or solar systems as well, a trend he credits to the slowdown in residential new construction.

“We’re not currently enjoying any significant sales increases in green technologies,” he said. “However, we are investing in education and trying to position ourselves as a bigger player in the green market once housing recovers. However, in real sales right now, it’s not materially bigger today than it was a year ago.”

Cobble also has not seen much demand for green technologies, even in lieu of a 30 percent tax credit for geothermal systems available until 2016. “It’s a high-end solution, and it takes somebody who’s willing to spend some serious dollars.”

Dry-Charged R-22/Ductless Distribution

Cobble said he does anticipate a stable growth in dry-charged R-22 units this year, although he expects those sales to start decreasing soon.

“We have reached the psychological tipping point, which means there are a lot of contractors out there who can’t, in good conscience, keep selling R-22 systems,” said Cobble. “The economics are still in the favor of a dry-charged system, but psychologically a lot of the contractors have reached the point where they’re only going to sell R-410A systems. The percentage of dry-charged sales last year was down from 2011, and I expect to see another slight decrease this year.”

Geary still sees strong demand for dry-charged units, although sales dropped a little last year. “The year before, sales of dry-charged units saved our bacon. They were one of our shining stars, but I think sales will start to cool down a bit. There will definitely still be a demand this year for those who absolutely have to replace. They seem to be leaning toward the bare minimum on everything and will strive to stick with R-22.”

One bright spot for all three distributors is the increased sales of ductless systems. Cobble is seeing double-digit growth in the mini-split market as the technology becomes more mainstream, while Geary noted that they, too, are seeing an uptick in ductless sales.

Over the last eight or nine years, Rynecki has reported tremendous ductless sales growth. “We’re enjoying a very aggressive sales increase year after year, and I’m not anticipating a slowdown for the foreseeable future,” he said. “These sales reports indicate, to us, a pretty strong trend.”

Looming Issues

Uncertainty about the future seems to be the biggest issue on the minds of distributors, with Geary noting that he “loses sleep over what the government is going to do next and what the banking system is going to do. Customers are waiting, too. They’re in window shopping mode, and I’m not sure when that’s going to change.”

For Rynecki, uncertainty about the future of oil heating weighs heavily on his mind, as this sector comprises about 15 percent of his business. “We’re in the Northeast, so it’s a regional thing, but the business is changing dramatically. There is more natural gas available, and new pipelines are being built. Consumers see the difference in price and are frequently converting from oil to gas, either natural or LP. So far we’ve seen a gradual decrease in sales, but maybe we’re reaching a point where it falls off more dramatically. There’s not much we can do about it other than keep an eye on it and be available to help the dealers who are most affected by the change to find new revenue sources.”

Cobble is very concerned about the continued rate of high unemployment, which hinders any kind of a robust recovery. “When people don’t have jobs, they’re not spending money. With Obamacare coming and higher taxes already kicking in, people have less discretionary income, which is another reason why I don’t think we’ll see much growth in the economy this year. As a result, we’re playing it very conservatively. We’ve put some expansion activities on hold, and we’re not actively recruiting potential acquisition candidates.”

With consumers and distributors alike playing it safe, it may be that the economy is entering unchartered waters. “Historically after a downturn in the market, pent-up demand would lead consumers to quickly rush to replace aged equipment — a recoil effect,” said Rynecki. “It could be that we have a different paradigm now. Maybe what we experienced in the past isn’t going to happen in our present environment — maybe we need to adjust to a new normal.”

SIDEBAR: What About Regional Efficiency Standards?

The Department of Energy’s (DOE) regional efficiency standards are still a big concern to Brian Cobble, president, G.W. Berkheimer Co. Inc., Portage, Ind. Even though a proposed settlement vacates the nonweatherized furnace standard, which would have mandated 90 percent AFUE furnaces in the North, Cobble is not convinced that the standard is gone for good. “People are running around saying, ‘the witch is dead, the witch is dead,’ and she’s not. She may be on life support, but she is far from dead.”

And the proposed settlement — if it is accepted by the D.C. Circuit Court of Appeals — only addresses nonweatherized furnaces. Starting Jan. 1, 2015, the standards for cooling equipment go into effect, along with weatherized furnace standards, which means consumers will essentially have to purchase higher efficiency equipment upon replacement.

“I think those who are pushing for these standards are being pretty shortsighted. They don’t want to be confused with the facts, because their minds are made up. They’re stuck on their position that you have to have high-efficiency equipment, no matter what,” said Cobble. “They don’t care that it’s going to result in a more expensive solution, and what will happen is consumers will simply repair their systems rather than replace them.”

This is exactly what occurred when the DOE raised the energy efficiency standard for air conditioners from 10 to 13 SEER in 2006, contended Cobble. “In the 10 SEER days, when a compressor went bad, we would replace the whole condensing unit. Contractors rarely changed out compressors, because it usually cost less to install a new condensing unit. When we went from 10 to 13 SEER, the units were more expensive, and what happened? People started repairing 10 SEER systems. Where’s the efficiency gain that we were going to get from 13 SEER? It didn’t happen, because people started fixing 20- and 30-year-old systems.”

If the circuit court of appeals accepts the proposed settlement, Cobble believes it will only be two to five years before there will be another push to raise the efficiency standards for furnaces. “My fear is that people will be fixing 70 and 80 percent efficient furnaces, because they can’t afford to install a 90 percent furnace. If the parties involved would say something like, from this day forward, all new construction must be 90 percent, that’s okay, because no one is getting hurt. But this notion that it’s illegal to install an 80 percent furnace in any situation is just ludicrous and shortsighted.”

Publication date: 3/18/2013 

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