Planning For Price Increases, Delivery Woes

November 18, 2004
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A steel mill shuts down because it can't compete with its peers across the ocean. Another cuts back on production because demand is down. A foreign country experiences a building boom and an already depleted market funnels more steel to this emerging marketplace. Demand increases, but the dollar weakens on the global market.

Any one of these events may not cause too much change in the cost and availability of equipment made of steel, but taken together they can have far-reaching economic results. Equipment manufacturers in the United States have kept an eye on rising steel prices in 2004, and the effect of increased steel costs can be seen in many domestic industries, including the manufacture, distribution, and sale of HVAC equipment.

George Hall, a sales representative for Smede & Son Steel, Redford, Mich., said that over the past year, his company has seen a dramatic increase in the price of the steel that it sells to residential and commercial builders.

"Cold-rolled steel sections like I-beams are up at least 40 percent, but pipe and tubular sections are up over 50 percent," Hall said. "A year ago, we used to figure 23 cents per pound, and now I'm using 38 to 40 cents per pound."

General Motors, the largest steel consumer in the United States, is fighting back the best way it can, rejecting invoices from steel suppliers that include freight premiums and non-negotiated extra charges. But smaller companies don't carry the same clout.

In the HVAC trade, several manufacturers have announced price increases over the past year due to rising steel costs.

The News went to some of the leading HVAC manufacturers to find out how they are coping with rising steel costs, how they are preparing their dealers and customers for price increases, and how the market has reacted to increased costs for raw materials and transportation.

Jack Sinkler, vice president of marketing for Rheem Manufacturing, Air Conditioning Division, noted that Rheem works closely with its suppliers to ensure an optimal flow of raw materials in order to plan production. The company “continually seeks more cost-effective and better product designs so our customers have the right product at a competitive price,” he said.

Questions And Answers

The News received feedback from Jack Sinkler, vice president of marketing for Rheem Manufacturing, Air Conditioning Division (Fort Smith, Ark.); Dave Pannier, president, Residential Systems, Trane and American Standard (Tyler, Texas); and Matthew Peterson, vice president of sales and marketing for York International Unitary Products Group (Norman, Okla.).

Sinkler noted that Rheem works closely with its suppliers to ensure an optimal flow of raw materials in order to plan production. The company "continually seeks more cost-effective and better product designs so our customers have the right product at a competitive price," he said.

"All of these investments have paid off as we are able to produce at an unprecedented rate as we continue to grow our market share. We will, however, continue to seek better ways to proactively and reactively manage these critical functions so we can provide superior service to our customers - especially in ‘times of challenge,' as we all experienced this past summer."

Pannier affirmed that it is important to keep an open channel of communication to Trane's distributors and dealers so they are not blindsided by possible material shortages or price increases.

"If we are faced with the choice of not being able to meet the demand versus paying a higher-than-planned price for materials, we will pay the price to get the product to our customers," he said.

"Essentially, all of our distributors and contractor customers buy sheet steel from a variety of sources. They know full well what's been happening to metals pricing. We are exploring the opportunity to use some of our corporate supply agreements to leverage our buy for the benefit of our customers."

"There are financial and customer responsibility risks to limiting your supply. If you are willing to pay the going price, you can secure sufficient supply to meet your production needs. But you have to be willing to take a short-term hit.

"We don't think this is a short-term thing. The price of steel will remain high. But my perception is that energy prices will not moderate in the foreseeable future."

Peterson said that York does not expect to see product shortages because the company is paying suppliers a premium to ensure continuous flow of commodities such as copper and steel. But he does see higher prices passed along in the HVACR industry.

"We expect to pass on our material cost increases to the marketplace, just as many companies in various industries whose products contain a high percentage of steel, copper, and aluminum are passing on the cost increases to the marketplace," Peterson stated.

"We have been preparing our customers for the increase through communications in dealer meetings, territory manager meetings, distributor meetings, and letters to our distribution and internal sales force outlining the material cost situation we are all facing.

"The increased costs are real, and they do not appear to be short term. Our customers also purchase many other related products such as grilles, registers, and sheet metal, which are also seeing in-creases, so they are not unfamiliar with the situation."

Sales, Marketing Advice

When asked what recommendations his company is giving to customers on how to continue marketing, selling, installing, and servicing HVAC equipment in the face of higher prices, Sinkler said the obvious message is to market the reliability and durability of the Rheem and Ruud brands.

"Our message to our customers is continued emphasis on increased total home comfort, such as low sound levels, IAQ accessory integration, efficient total operating costs, competitive warranties, and service agreements. The total home comfort theme will be the cornerstone of success as we move forward.

"The most successful contractors will be those who discuss comfort options with homeowners, ask the right questions, listen to their needs, and respond with recommendations that provide homeowners with increased comfort at the lowest possible operating costs.

"Homeowners are now willing to ‘trade up' for additional comfort and efficiency. This dynamic allows contractors to maximize their profits by offering combined benefits to the homeowner that include high-efficiency products, indoor air quality, humidity control, quiet operation, and more healthy home environments."

Pannier also stressed efficiency. "The greatest challenge besides keeping the distribution chain supplied is a shift toward the demand for 13-SEER up to 18-SEER products," he said. "The higher efficiency models consume more steel, but this is a good challenge.

"We don't do anything dramatically different to market to our distributors. They understand the end customer benefits from more energy-efficient products. Our customers need to listen to what their customers need. We shouldn't overreact and offer the cheapest solutions."

Peterson pointed out that now is not a good time to change marketing strategy. "The marketing, sales, installation, and service strategies shouldn't change due to increased material costs," he said.

"Consumers purchase HVAC systems one to three times in their lifetime, and the cost increases we are passing on to the consumer are negligible when spread over the 15-year life of the equipment.

"Our concern is that our channel continue to ‘sell up' and sell high-efficiency equipment in lieu of a cost base for the equipment that has increased. If we continue to focus on selling high efficiency, regardless of the recent material cost increases, the consumer will continue to benefit and the payback will still be worth the investment."

Consumer Reaction

All of the manufacturers contacted for this article agreed that increased comfort, combined with efficiency, can counteract any negative impact rising prices might have on homeowners.

"In addition to product reliability, we expect that comfort, efficiency and total system value will continue to drive consumers," stated Sinkler. "The increased energy efficiency minimums to 13 SEER in 2006 will make product upgrades in efficiency a difficult sell if based upon energy consumption and payback alone.

"The most successful contractors will emphasize total home comfort versus energy payback because the energy usage between a 13- and 16-SEER unit will be much different than if compared to a 12-SEER-or-under unit."

He also pointed out the need for emphasizing healthy indoor environments. "Consumers have become more aware of air quality in their homes and consequently are more active in seeking solutions for a healthier home, improved indoor air quality, and optimized energy consumption.

"Consumers' reactions to product prices will always remain the same. It's a product you don't intend to purchase until the system stops working and/or they are not physically comfortable. However, when the system stops working, homeowners realize the importance of home comfort and will typically purchase at the level they can afford."

Pannier said consumers are not seeing higher price spikes in HVAC equipment compared to other products.

"The consumer continues to get genuine value in the products and services that our industry offers," he said, noting that price increases "may stimulate more consumer interest in energy-efficient products."

Sidebar: QSC Contractors Comment On Price Increases

Contractor members of the Quality Service Contractors (QSC), a self-supporting business unit of the Plumbing-Heating-Cooling Contractors - National Association (PHCC), commented on how equipment price increases or availability might affect residential installation or replacement sales.

Asked about the impact of higher prices for equipment, Roger Fouche of Schall Heating and Cooling, Des Moines, Iowa, said, "We try to include any of that information in our advertising to make the general public aware - i.e., ‘buy now and beat the price increases.' It is more of an informational message than a sales pitch.

"As energy prices go up, it becomes easier to sell higher-priced equipment by showing payback and return on investment - giving the customer options. Compared to other items out there that the consumer buys, like plasma TVs, cars, remodeling jobs, etc., furnaces and air conditioners are cheap. There are very few things you can buy that do pay for themselves."

Kevin Carney of Carney Plumbing, Heating & Cooling, Line Lexington, Pa., stated, "I don't think you can ‘prepare' customers for price increases and product shortages, unless you currently happen to be preparing a quote for a new system or other product.

"With the state of the current economy, the consumer expects to face higher pricing regardless of the product, be it milk or gasoline. With higher energy costs, it is an opportunity to sell higher-efficiency equipment, providing a return on investment in a shorter period of time.

"Now that these questions have been raised, it is also another opportunity to review one's files and contact those clients who have not yet made a decision to proceed with a replacement or installation one may have previously quoted."

Bryan Stansell of Fulton Services, Atlanta, did not expect businesses or consumers to be shocked by rising prices. "Price increases occur all the time in our industry," he said.

"In reality, prices in the economy as a whole increase over time. When we as contractors receive increases, whether it is health insurance, gasoline, or equipment cost increases, we adjust our retail prices accordingly and pass them on to the end user, the client."

For more information on QSC, visit www.qsc-phcc.org.

Publication date: 11/22/2004

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