ACHRNEWS

Distributors Talk Business of Daily Practices

October 20, 2008

Contractors aren’t the only members of the supply chain adjusting their strategies to address the current business environment. In an effort to provide their customers optimal pricing, distributors are evaluating and streamlining their daily practices. Considering the housing market, materials pricing, new technology, the tightening credit market, and refrigerant issues, two members of The NEWS’ distributor panel share their opinions and strategies.

Michael Senter is the CEO of ABCO Refrigeration Supply Corp. in New York. ABCO has 16 branches across New York, New Jersey, Pennsylvania, Connecticut, Boston, and Delaware, along with a central distribution center. Kevin Morris is the parts director for cfm Distributors Inc. in Kansas City, Mo. cfm has five branches across Missouri, Kansas, and Iowa.

How are the ever-changing commercial and residential markets affecting your business?

SENTER: With the economy in turmoil, we are seeing a greater emphasis on repair and necessary replacement as opposed to planned new construction, both residentially and commercially. This trend is consistent in both the air conditioning market, residentially and commercially, and in the refrigeration market.

MORRIS: Our sales and unit numbers are up, both on residential and commercial; York’s microchannel technology coupled with their variable-speed furnaces have had a very positive impact on our business. Johnson Controls’ microchannel technology has eased the perception of pain in meeting the new SEER and HSPF standards, green initiatives, R-410A conversions, as well as addressing the cost and size of the equipment.

How are fluctuating material prices affecting your prices?

SENTER: The dramatic swings in materials and commodities pricing had its greatest impact in 2007, with changes in pricing not nearly as dramatic in 2008. One major exception to this trend is the significant increases in the price of R-22 in 2008. With economic conditions being unstable, wholesale distributors and contractors have been forced to absorb larger portions of these price increases than either would have to do in a stable, positive economy. This trend has placed downward pressure on profitability, so it is even more necessary than ever before to manage costs, expenses, inventories, and manpower with great care in order to help offset this downward pressure on operating revenues.

MORRIS: With such fluctuation we have continued to avoid long-term purchase commitments. Our customers check on construction supply items such as copper, refrigerant, etc., simply because there can be a huge price difference from one supplier to the next, depending solely on how much and when the distributor purchased. We check with our suppliers daily as well, updating our replacement cost daily.

As the market shifts, what customer attitudes are you experiencing? What strategies are you using to combat any negativity that arises?

SENTER: On the whole, our customer base in the Northeast has a can-do approach to tough times. But, all of us are aware that the marketplace for opportunities is much smaller than it was 12 months ago and dramatically smaller today than it was 18-24 months ago. With this in mind, we see contractors fighting even harder for every reasonable opportunity while, at the same time, managing expectations as they work through the tough times. We are taking the same approach. Our approach internally and with our customers is summarized in the following statement: “There is no tomorrow without excellent performance today.”

MORRIS: Customer education is imperative so that they understand that all of us - the manufacturers, the distributors, and average consumers - are experiencing consistently rising costs. This, coupled with fuel cost can lead to the perception of price gouging when in fact it is a simple cascade effect on construction inputs driving the general economy. We inform our customers of any known approaching price increases from our suppliers.

Most of the contractors have gotten over sticker shock due to the accelerating prices of steel and copper over the last few years. They don’t like it, but they have become less defensive or sensitive about them.

What trends are you seeing in product purchases?

SENTER: Customers are purchasing a great deal more replacement parts and replacement equipment. This is reflected in air conditioning in a disproportionate increase in condensing unit- only sales as opposed to the sale of complete new systems. The same is true on the refrigeration side of our business - far more replacement compressors only and replacement condensing units as opposed to complete new systems. We also see a trend in both the commercial air conditioning and in commercial refrigeration to smaller jobs as opposed to large-scale projects. This is consistent with the lack of readily available bank financing at the current time.

MORRIS: We continue to avoid long-term purchase commitments. We are working closer with our vendor partners and our Blue Hawk purchasing cooperative and continue to implement more product training. We are also focusing on vendor consolidation and purchasing contributions to our profit.

What business technologies are you currently using?

SENTER: We are working hard to develop our Web presence and to empower our customers with the resources and tools to utilize wireless communication whether via telephones, handheld PDAs such as Blackberrys and Treos, or from their laptop computers. We also are equipping all of our branches with wireless communications/computer systems so our customers can utilize our web offerings and the web offerings of our manufacturers easily and conveniently.

MORRIS: We have a VPN [virtual private network ] WAN [wide area network] networking in place among multiple other technological advancements including: Voice over IP [Internet protocol], IP-based security camera monitoring, gigabit networking, SSL- [Secure Sockets Layer-] VPN access for users, wireless access for customers, and enterprise instant messaging. We also leverage our software to send mass e-mails to groups of customers for service information and training dates, e-mail flat file document copies to customers and/or vendors, and download date files from Excel formats for customers who want their sales history. Our management team, including our branch managers and sales team, can sign onto our business system from the field to check inventory, billing, etc.

What measures are you making to protect your bottom line?

SENTER: Our greatest asset is our team of men and women who are dedicated to developing and enhancing customer relationships. Our customer service is our greatest resource in distinguishing our team’s ability in contrast to our competitions’ capabilities. Our goal is to add value to every customer purchase by providing accurate technical information, strong inventories, agile and timely delivery abilities, and sophisticated application engineering skills. Therefore, we want to protect the employment of our team members. Our outlook is long-term. With this in mind, we are seeking to hold down costs by managing inventories with even greater care, and we are being very conservative in all spending. Our hope is that we will be able to weather the economic storm without losing any of our key team members. At the same time, we are driving harder than ever to win every profitable sales opportunity.

MORRIS: We have already begun to analyze and phase out marginal opportunities, reviewing our process flow for possible improvements, eliminating unnecessary travel, and accelerating our employee training for growth potential. It is imperative that we focus on our purchasing department to buy better as well. It is always easier to buy better than raise your prices. A mere 2 percent savings on the cost of goods sold makes the same contribution to the net profit before tax [NPBT] as a 50 percent increase in sales at 3 percent NPBT on sales.

What are your economic predictions for 2008 and 2009?

SENTER: We anticipate slow or no growth in 2009 and we are preparing for a decrease in sales in 2009 as compared with 2008. With this in mind, we are reducing expenses and trying to reduce as much nonessential overhead as possible without hurting the quality of our customer service. At the same time, we are driving harder than ever to enhance existing customer relationships and to develop new customers.

MORRIS: From what I have read, we should compare inventory and production needs of 2009 to those of 1997 and budget accordingly for those numbers. Downward trends in both housing and commercial construction coupled with higher energy costs are going to put a squeeze on profits. It appears that these conditions will continue through 2009 and in 2010. Currently we see the residential market as remaining weak, but the commercial market, as well as the refrigeration segment, remaining strong for the moment. We have shifted our focus and resources to those markets.

Have you begun preparing for the R-22 phaseout? What steps are you taking?

SENTER: We are working closely with DuPont and our customers to prepare for the phaseout of R-22, yet the process is cumbersome and, with the economy weak, neither our customers nor our customers’ customers are motivated to incur the expense of changing their existing R-22 systems. We are encouraging our customers to consider R-22 alternatives, and we are providing numerous classes and seminars about the phaseout and about the alternatives to R-22 that now exist. We also are working closely with Johnson Controls/York International, Nordyne/Maytag, as well as with all of our other air conditioning manufacturers to provide timely and readily accessible information about the phaseout for our customers and our customers’ customers.

MORRIS: Yes, we have begun to prepare on the York and Coleman HVAC side and now on the refrigeration side as well. We have already begun replacing our R-22 high- and medium- temperature refrigeration inventories with R-404A from Heatcraft. We have made the decision based on the long-term well being of the contractor and his customer. With the price of R-22 closing the price gap between itself and R-410A and R-404A, it only makes good business sense for all of us.

Publication date: 10/20/2008