Critical Time For Distributors
HVAC distributors are one group that probably finds this quote to be true. Just when they thought they had their inventories set, their ordering priorities figured out, and their customers educated, along comes a new federal mandate that changes all that.
That mandate, of course, is from the Department of Energy, which states that air conditioners and heat pumps manufactured after Jan. 23, 2006 must meet a minimum efficiency standard of 13 SEER (Seasonal Energy Efficiency Ratio). For distributors, the choices they made this fall could possibly make or break their businesses.
Consider two scenarios, both of which are currently playing out across the country. Distributor A first polled his customers in August to determine how many 10- to 12-SEER units they would require over the next six to eight months. He then placed the order, being sure to include a healthy number of additional units in the hopes that dealers will continue to buy the lower efficiency equipment through the first quarter of 2006. Distributor A is betting that the demand for less-than-13-SEER equipment will remain strong, so that he doesn't end up with a large inventory of 10- to 12-SEER equipment.
Distributor B made the decision to only order 13-SEER equipment, in order to immediately transition his customers to the higher efficiency units. Later in the fall he heard from his manufacturer that it was suspending the production of 13-SEER units until January, in order to fill the outstanding orders of 10- to 12-SEER equipment. It was too late to place an order for 10- to 12-SEER equipment, and by mid-November, Distributor B was running out of product and referring his customers to other distributors.
While many businesses fall somewhere between these two scenarios, these situations show just how difficult the transition to 13 SEER is going to be for some distributors. They are all hoping they've made the right choices, but they won't really know whether or not they have until mid-2006.
Unforeseen IssuesJim O'Mara, president, Comfort Air Distributing Inc., Denver, agreed that the industry's transition to 13 SEER is not an easy one, especially considering that the vast majority of equipment installed around the United States is below 12 SEER.
"The industry is encountering transitional problems now that produce a domino effect across the supply channel," said O'Mara. "Component manufacturers and raw material suppliers can't meet the demands of finished goods manufacturers, who can't meet the needs of distributors, who can't supply enough 10-SEER products for the contractor. We're doing our best to meet the demands of contractors seeking to increase inventory of 10 SEER, but obtaining the products they need may prove difficult."
Comfort Air Distributing Inc. announced to the field earlier this year that Sept. 30 would be the last date it would accept orders for less-than-12-SEER equipment.
Product requests made after that date provided the company with a challenge, and O'Mara estimates that it will enter 2006 with little stock of 10-SEER products because of availability.
Dale Supply Co., Nashville, Tenn., asked its customers to place advance orders for 10- to 12-SEER equipment by September as well. The company ordered additional equipment based on its own projections of anticipated demand, but what the company could not foresee was a sudden interest in heat pumps.
"Our governor and the local utilities started saying that gas prices could be going up 70 percent to 100 percent this winter, so we had a big shift in our market," said Kent Kendrick, CEO, Dale Supply Co. "People are so afraid of gas prices that they want heat pumps, and consequently, we've run out of certain sizes and brands of less-than-12-SEER heat pumps. We may find ourselves with less-than-12-SEER gas packs and condensing units until next fall and be out of less than 12-SEER heat pumps in February."
Pricing And Other ConcernsThese unforeseen issues, combined with pricing uncertainty, may leave distributors in limbo for a few more months. Kendrick noted that many manufacturers have not released pricing information or marketing strategies for the new 13-SEER equipment, which makes it difficult to tell contractors how to price their jobs.
"We're still trying to figure everything out, but dealers have projects coming up, and they want pricing. You can't order the 10- and 12-SEER units anymore, and we don't know how to price the 13-SEER equipment. I'd say for a two to four week period here, we'll be in a black hole. We'll just have to tell our dealers to be patient, but that doesn't always go over well," he said.
Warranty issues will also arise as 10- to 12-SEER products be-come unavailable, according to Tom Distler, VP of marketing, Slakey Brothers, Elk Grove, Calif. "Let's say that a 10-SEER unit goes out under warranty next June and there's no more 10 SEER available. So the contractor replaces it with a 13 SEER. The manufacturer is going to stand behind the condenser, but depending on the age and construction of the indoor coil and the system warranty,
the indoor coil may have to be changed, too, and the homeowner will be on the hook for that."
In this type of scenario, it is incumbent upon the contractor to explain to the homeowner that both parts of the system need to be changed in order to achieve 13 SEER. As Distler stated, "There's a lot of complexity with this issue, and there will be a lot of training needs. We plan on conducting a number of dealer training meetings for all our brands in order to get the word out."
Comfort Air also places a heavy emphasis on training and has a well-equipped training facility that includes a large classroom and dedicated rooms with operational equipment. "Our curriculum allows technicians to learn and understand the nuances involved in installing higher efficiency systems including the importance of matching equipment; introduction to R-410A; airflow; psychrometrics; high efficiency furnaces. Everything needed to know and understand how to install higher efficiency equipment," said O'Mara.
The Good NewsEven though there are definite concerns regarding the transition to 13 SEER, there is some good news as well. While dealers are worried about the larger sizes of condensing units and evaporator coils, this won't necessarily affect warehouse space for distributors.
"We're anticipating that our number of SKUs will drop," said Kendrick. "We're losing the 10- and 12-SEER units, and I'll probably have two 13-SEER units - the builder model and the replacement model. Basically I'll be changing two 10 SEERs and two 12 SEERs for two 13 SEERs. That's two for one, so while it's growing in size, I've got fewer SKUs to handle, which should help me."
Comfort Air Distributing evaluated its needs and concluded that additional warehouse space was not needed, because the 13-SEER products it carries are not much larger than the 12-SEER equipment. "All manufacturers' coils are larger by at least 10 inches to compensate for 13 SEER," according to O'Mara. "The larger 13-SEER coils occupy more space in closets, attics, crawlspaces, and mechanical areas in basements, though, and in some cases will be difficult for contractors to install."
Another possibility that has been bandied about is that with the 13 SEER minimum requirement, it will be more difficult to sell higher efficiency units. That may not be true, said Distler, who has found that higher utility costs are pushing homeowners to choose more efficient units.
"There were some assumptions being made that opportunities for sales of higher SEER equipment would be significantly reduced, and we're finding that may not be true," he said. "Maytag and Westinghouse brands are coming out with much higher SEERs, even in the 23 range, and with the increased utility rebates we're seeing, there may be more opportunity than we thought originally for upselling to higher SEERs. It's interesting how this is developing, and we'll see how it plays."
That sentiment is echoed by everyone throughout the HVAC industry. In six months to a year from now, we'll be able to look back and say, "So that's how it all worked out." Until then, everyone is taking a wait-and-see approach.
Publication date: 12/19/2005