Distributors Doing Well But Have Concerns

March 24, 2005
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There is definitely some good news being reported about heating and air conditioning distributors. According to Heating, Airconditioning, and Refrigeration Distributors International (HARDI), 102 distributors that responded to the organization's survey in January 2005 reported that their sales were up a collective 11.67 percent for the month.

Officials from HARDI noted that all regions are showing positive median numbers, with the highest median coming from the Southeastern region with an increase of 24.89 percent and the lowest reported median from the Northeastern region at 5.42 percent. Members appear optimistic that the year 2005 will end 5 percent ahead of the HVACR sales for 2004.

Don Frendberg, executive vice president and chief operating officer, HARDI, Columbus, Ohio, is similarly optimistic, noting that there is no reason why sales should not increase this year. Distributors do have their share of concerns, however, including market conditions, foreign competition, contractor business practices, tort reform, and how to handle industry price increases.

Interestingly enough, Frendberg doesn't believe the mandated changeover in the minimum standard from 10-SEER to 13-SEER equipment in January 2006 will be that traumatic - although it, too, will pose some challenges.

Issues And Possibilities

For distributors especially, the HVAC business has been very strong during the last few years. That's mainly due to the strength of the residential new construction market, which has been spurred on by lower interest rates. As interest rates increase, however, there may be fewer housing starts, so distributors might have to look elsewhere for profits. In addition, the volatile prices of steel and copper have caused numerous price increases from the manufacturers, which can squeeze the profit margin for the distributor and the contractor.

Frendberg believes that distributors will look at several ways to cut costs and increase profits. "I think there will be a move to more centralized distribution so businesses can lower their costs and attract new business from various contractors by having price adjustments. I also think distributors will be looking in the areas of indoor air quality."

To that end, many distributors are already adding numerous products, including air cleaners, air filters, UV lights, and even residential heat recovery systems. As the public becomes more aware of indoor air quality (IAQ) issues, they will request more products, and distributors will be in a good position for their contractor-customers.

Bob McDonough, president and chief operating officer, Worldwide Heating and Cooling, Lennox International Inc., agrees that the growing IAQ market is definitely an opportunity for dealers and distributors alike.

"Controlling humidity, equipment sound levels, and introducing value-added diagnostic capabilities could also become increasingly important as dealers find ways to differentiate themselves. The most successful manufacturing companies in the future will be the ones who most effectively educate dealers, distributors, and consumers about the value of these emerging technologies."

Speaking of education, Frendberg predicts that distributors will continue to offer training programs to contractors, particularly involving new products. The benefits of this extensive amount of training are obvious: The more knowledgeable their customers are about products, the more products they'll probably buy from the distributor.

Some of those new products may start trickling in from foreign manufacturers, which may present another concern. "I think the continuing influx of offshore manufacturers and products will increase pricing pressures on the domestic manufacturers," stated Frendberg. "But it will also enhance the competition for other products."

Competition is already a big issue for distributors because some manufacturers are selling direct to contractors, bypassing the distributor altogether. As manufacturers continue to consolidate and become larger entities, that issue may become an even bigger concern in the future.

Although, as Doug Young, president of the distribution company Behler-Young in Grand Rapids, Mich., noted, "Consolidation is going to happen across the board, from contractors to distributors to manufacturers. Small distributors are acquired regularly, and one of these days, someone's going to figure out the right way to consolidate contractors."

Other Concerns

As a distributor, Young stated that his top concern is the financial viability of some contractors.

"The bulk of the contractors in our industry aren't trained business people. They get into business, they may know the technical side, but some don't understand how to make the profit they should."

Young added that some contractors are often price driven as opposed to being sales and marketing oriented.

"If you look at the quotations some contractors generate, some are handwritten and don't provide very much information to help the homeowner make a good decision. Our future, as a distributor, is tied to how we can help our core customers do a better job of those two things: Selling/marketing and making sure they are financially viable over the long term."

Another issue that Frendberg was particularly eager to talk about was tort reform, as he noted that distributors are often drawn into frivolous lawsuits.

"It's just so costly to distributors because once they're named, they have to hire a lawyer and spend a lot of money just to defend something they really have no involvement in. It is a big concern, because anything that takes away from their business is always difficult to deal with."

The new 13 SEER minimum efficiency standard that will go into effect in January 2006 is another issue that's on everyone's mind. As with any other mandated change, obviously the whole industry is going to be affected to some extent, but most believe it will not be a problem for distributors. It is possible that builders, distributors, or contractors may stockpile 10-SEER equipment, although there may not be enough margin difference to support this practice.

"There are concerns expressed on the distributors' side that the larger physical size of 13-SEER equipment will put a strain on warehouse space for some people," stated Frendberg.

"However, if you're a distributor who has been selling high-efficiency equipment for a long time, it's not going to affect you that much. If you're in a market with a lot of builder business, though, then you could end up with a lot of price pressures and inventory considerations as you get close."

Distributors will have their own strategies for dealing with the changeover based on their individual markets. Most, like Young, are already communicating with their contractors to see where the market is going and what the contractors' needs are going to be later this year. Given the volatility in the steel market and the new 13 SEER mandate, it's obvious there will be more price increases coming.

"Price increases have caused havoc for people at several levels," said Young. "Some contractors tried to absorb the price increases rather than passing them along and went out of business. For contractors who try to pass along the price increases, there is going to be push-back, especially from builders."

Frendberg is hopeful all the 13 SEER issues will be resolved by the end of the summer.

"I really don't see a dramatic impact. I think we're all very smart about it. We've gone through changes with refrigerants in this industry that have been pretty dramatic, but we got through R-22 and everybody is still doing well, so I think we'll do all right with the 13 SEER changeover, too."

Publication date: 03/28/2005

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