Economic and industrial shifts affect every link in the supply chain. Distribution is no exception. According to the “Wholesale Market Activity Survey” conducted by Clear Seas Research late in 2006, approximately 25 percent of the 115 participants, who reported at least 50 percent of their business came from HVACR sales, believed that current industry business conditions were better than the year before. Thirty-four percent felt that conditions were about the same and 40 percent considered conditions to be worsening. Looking ahead to 2007, the survey revealed that 32 percent expected the industry to get better, 44 percent figured it would be about the same as 2006, and 31 percent expressed concerns that things would get worse.
In spite of the varying opinions and the vast influences affecting the distribution market, multiple factors have surfaced repeatedly, and distributors find themselves dealing with these challenges and opportunities on a daily basis as they endeavor to thrive - not just survive the constant changes.
HANDLING SHIFTING MARKETSThe residential new construction (RNC) market slump has caused a ripple effect altering multiple distributor strategies as contractors begin to shift to the add-on/replacement (AOR) market to compensate for the drop in housing starts. Recognizing this challenge as an opportunity, however, Joe Rettig, residential sales manager of The Habegger Corp., Cincinnati, is implementing new programs to combat the shift.
“As a wholesaler, with the RNC market being down, we have a strong focus on repair parts sales,” he said. “As part of this focus, we have introduced new parts catalogs, incentive programs for HVAC contractors, and are conducting additional customer service representative training for AOR, parts, and accessory sales.”
Beyond market shifts, high-efficiency units and minimum SEER requirements are still influencing HVAC distribution businesses. With the introduction of the 13 SEER minimum standard in 2006, unit availability caused headaches as distributors also battled with inventory ordering, stocking, and spacing uncertainties.
The cost of these higher-efficiency systems to the end user is also bringing about change, according to Mike Michel, vice president of marketing for R.E. Michel Co. Inc., headquartered in Baltimore.
“In regard to the sale of heating and cooling equipment, the transition to existing system repair and to a lesser extent, system replacement, has pushed outdoor section changeout into the historical annals of our industry,” he noted. “Repair versus replacement is being driven by the higher cost associated with a complete system - outdoor and indoor - and in some cases associated renovations required to accommodate the larger sized indoor products. All is a result of the 13 SEER minimum efficiency requirement.”
In response to this challenge, Michel’s company is closely monitoring unitary product inventory levels and concentrating on repair-related service items inventory. “Our purchases of replacement compressors from one single vendor increased over 80 percent this year,” he said.
Higher efficiency isn’t the only trend pushing distributors down new market paths. According to Talbot Gee, vice president of the Heating, Airconditioning, & Refrigeration Distributors International (HARDI), “The rapid and sudden emphasis on green products has been huge. It’s affecting product demand; marketing techniques; product and system education and training; and leading to the rapid introduction of new products.”
As distributors begin to meet these demands head- on, the industry “is still challenged to quantify the benefits of high-efficiency heating and cooling equipment, creating sales challenges at the mid and lower markets,” said Gee. “The demand, however, seems strong in the higher-end markets and such advances are rapidly being mandated at the commercial level.”
TWO-FOLD EDUCATION REQUIREDObstacles to distributor’s success, like price and product availability, aren’t always the bottom line. With higher-end systems, an influx of green products, and smart HVAC entering the market, distributors are finding that education has become a primary key to their continued achievement.
“Success with high-efficiency heating and cooling products is reliant largely on distributors’ ability to train and educate their contractor customers,” noted Gee. “Contractors need to feel comfortable with the advanced equipment and systems and be convinced of the value for their customers.”
This education process is a two-fold endeavor that not only educates contractor customers in the proper service and installation of these products, but also educates them in the benefits and the sale of those benefits to end users. According to Gee, distributors play a key role in accomplishing this contractor education. “Those who educate contractors have a distinct advantage in today’s market,” he said.
Rettig agrees and his company has won multiple manufacturer awards for the education programs offered at Habegger. “These advanced products lead to complexity and require more training,” said Rettig. “Though modern day HVAC products have become very reliable, they do require more technical knowledge to install and service. We are prepared to continue training our dealers at the high level necessary for their success.”
BUSINESS AS USUAL?Beyond the product and education challenges, the ever-changing consumer market is also affecting distributors. Although the distributor doesn’t work directly with the end user, the demands that end-users place on contractors directly affect the distributor’s business. “In today’s world, it is not business as usual,” noted Rettig. “It is business as unusual.”
Distributors are finding themselves fighting the tide as customer impatience and contractor demand threatens to kink the supply chain. “We live in an ‘I want it now society,’ ” said Rettig. “In the past, you could tell a consumer that you can install a job in four weeks and they would wait for you. Now, they will hardly wait four hours.”
This increased demand requires the HVAC contractor to have well-trained, readily available manpower on hand at all times. It also drives up a contractor’s cost structure. This, in turn, changes the demand on the distributor and on the manufacturer.
“To deliver the necessary service level to HVAC contractors, both manufacturers and distributors must have the needed products available for immediate delivery when the contractors need them,” noted Rettig. “As distributors improve their delivery processes, HVAC contractors have a tendency to stock less products. This places additional pressures on distributors to have an efficient, just-in-time inventory process along with a quick response delivery process.”
CHALLENGES ON DECKContinuing to look ahead, distributors are watching for the new trends and challenges that await them. E-commerce, downward pricing pressures, retiring Baby Boomers, and a fight for market share are just a few. “While certainly not new for the industry, several OEMs appear to be expanding their vertical channels to the market,” said Gee. “HVACR distributors have successfully competed with these vertical channels for years, but it is important that OEMs continue to recognize the unique value independent distribution adds to their products.”
Rettig considers the willingness to embrace change with enthusiasm and excitement as what will keep a successful distributor on track, in spite of the coming changes. “We must constantly upgrade our selling skills to survive and prosper,” said Rettig.
“Anyone performing the distribution function must attain and maintain a diverse skill set to effectively and profitably serve their markets,” echoed Gee.