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Industry Needs to Accept New Normal Realism

April 11, 2011
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I love our industry - as do investors, entrepreneurs, and consultants. Unlike some industrial sectors or hardware supply wholesalers 15 years ago, HVACR isn’t going away anytime soon and has plenty of room for growth. We are what Texas A&M’s Supply Chain Laboratory calls a “pillar industry” like food service, electrical products, and medical supplies because economic gyrations and new wave technologies have a dampened effect on us compared to more volatile verticals.

I agree with all of this but also believe that overconfidence in these attributes by many within the industry, and some who analyze our industry, has clouded perspectives of what HVACR’s short and long-term outlook really is. While 2010 was certainly a better year than the abysmal 2009, I’m already seeing far too many distributors, manufacturers, and contractors project 2011 growth based on 2009-2010 comparisons. In HARDI’s press release discussing November 2010 distributor sales, we offered this counsel:

“The latest numbers from HARDI distributors are very encouraging, however, a word of caution is worthwhile given the outlook for housing, end of the tax credit, and the outlook for the commercial industry,” said HARDI Chief Economist, Alan Beaulieu of the Institute for Trend Research. “Banks are beginning to lend more commercially, but housing will be an ongoing lending issue. We would suggest that too much not be read into the numbers. A straight-line projection at this point could be disastrous.”

This year will bring growth for HARDI distributors and our industry; however it will most likely not be enough to get us back to 2008 levels. HARDI recently provided a cooling equipment market forecast exclusively to our distributor members. We will make parts of this forecast public largely to put into better perspective for all in HVACR the new normal we see. We are devoting our efforts to help our members navigate this new normal because doing so will require a change in thinking. Looking forward, I see two major landmines in our path to real, systemic industry growth. The first is assuming the last four years of central a/c and heat pump shipments is an anomaly and that we’ll eventually return to 2004-2006 volumes. The second is believing that temporary macro economic sluggishness is solely responsible for hampered growth the last two years, and those who endured the recession best will return the fastest to 2006 levels of growth and profits.

DRY SHIPPING

I’ve said repeatedly that 2010 underperformed despite real improvements in economic fundamentals and unprecedented artificial drivers, primarily from various incentives and government spending. There should be no question that our industry currently resides in a new normal now; a new normal in which we’ve allowed yet another artificial influence attempt to alter our reality.

The “dry-shipped” R-22 condensing unit phenomenon has prompted some to project a boost in 2011 industry growth; however, our forecast dug much deeper and leads us to believe that these units are more likely to cannibalize higher-margin business rather than delivering significant volume growth. Distributors and contractors were set up for some margin gains this year thanks to commodity inflation which has major OEMs hinting at multiple equipment price increases for the first time in years. However, the margin erosion that “dry-shipped” units are likely to bring could create a net-zero effect for those heavily invested.

Contractors may end up with the most to gain with faster change outs and increased refrigerant sales which will further increase demand for these units, but at what cost? It seems to me that there were already enough barriers to selling full system replacements before a new low-cost, quicker, but less-efficient, alternative was available.

Speaking of efficiency, if 2010 was the year of premium energy-saving systems in which new records were broken for the percent of shipments 15 SEER and above, 2011 is set up to be a race to the efficiency (and price) bottom. HARDI’s January unitary sales report already showed a massive shift back to 13 SEER units which we project to continue throughout the year, and several distributors have alluded to scary drop-offs in first quarter 95 percent AFUE furnace sales.

Those distributors and contractors who are best able to buck this trend will be 2011’s winners hands down. The art of up-selling is set for a revival, but I can’t help wondering how many in our industry are really ready for it, and those who are such artists currently lack a real measure for benchmarking their up-selling prowess (i.e., what percent of sales should be greater than 13 SEER?).

Leaders within our industry have the power to show the world what’s really happening with our equipment, send a message to Washington, D.C., and empower HVACR distributors and contractors to forge better purchasing and sales strategies. Being transparent about a drastic slide in high-efficiency sales would reaffirm the true demands of the current market and cement the argument for aggressive energy efficiency incentives. Letting the industry and those who follow it closely know exactly how big the “dry-shipped” R-22 unit impact really is will save millions of dollars by bringing more educated decision making and purchase planning to those trying to run more efficient and profitable businesses. Further, everyone in our industry is waiting for the impending tightening of R-22 refrigerant supplies, so what better leading indicator of R-22 demand could we have than knowing exactly how many R-22 units are entering the market?

Margin and market share protection is the first step towards margin and market share growth. These factors, and not market expansion, will define success for the next few years, but we’re all flying blind if we don’t know what’s really happening today.

Publication date: 04/11/2011
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