Coleman and Luxaire distributors from around the country converged to network, as well as hear various speakers talk about everything from human resource issues to upcoming marketing promotions. A small trade show highlighted the latest product marketing offerings, and as can be expected, many discussions revolved around inventory and distribution.
One of the more interesting discussions involved the announcement that Johnson Controls’ corporate goal for UPG is to double its business by 2010. Herb Batrouny, vice president-business development, took questions from the group concerning how this goal could be reached. Distributors had many ideas concerning distribution locations, dedicated sales personnel, comprehensive training, and new products.
SOURCE ONE CHANGESSpeaking of new products, Frank Kern, director, Source 1™, the aftermarket arm for the residential HVAC brands marketed by Johnson Controls, addressed the group about precisely that issue. New product lines are being offered that will help boost sales in the areas of IAQ, zoning, and thermostats. Other issues he covered included order management, operations, and marketing tools.
Source 1 moved its headquarters to Wichita in 2004, which gave the company three times the dock capacity under one roof. Kern said that Source 1 is focusing on its core competencies, as well as what distributors want.
“We’re looking at the customer, the distributor price, and market price, and making some hard decisions,” said Kern. “For example, we found it just didn’t make sense for us to carry flex duct. It’s not a core competency, and it’s expensive to ship.”
Kern noted that products they will be focusing on are line sets, pads, whips, disconnects, and thermostats, which are essential installation-related products. “Those products experienced a 98 percent growth in 2005 and 2006. In addition to continuing to promote these products, we’re also excited about our new IAQ products, residential zoning, and branded thermostats.”
The initial IAQ product line will include three humidifiers; including a 120-V version with a humidistat, four steam humidifiers, energy and heat recovery ventilators, dehumidifiers, HEPA air cleaners, single- and dual-lamp ultraviolet air purifiers, and two MERV 10 media air cleaners. Each product is available with the Source 1, York, Coleman, or Luxaire logo. All are currently available. Kern also noted that an electronic air cleaner will be available in June.
Four new branded thermostats are also being offered. All models are dual-powered, and the programmable models have a backlit display. Prices and features target the residential new construction market, and contractor custom labeling is also available. Kern noted that an additional three residential thermostats and three commercial thermostats will soon be offered.
Kern rounded out his speech by discussing the Source 1 Ideal Store, which is a program that provides HVAC parts distributors with a common look to promote and consistently merchandise the Source 1 offering of wholesale, nonproprietary parts for the Luxaire, Coleman, and York equipment lines.
The monthly specials kit offers distributors a complete marketing program, including product, customizable postcards, hanging signs, promotion stand signs, a back-lit sign, and premium items. He noted that Source 1 distributors who do not participate in the Ideal Store program are still able to take advantage of the monthly specials.
HARDI UPDATETalbot Gee, vice president, Heating, Airconditioning & Refrigeration Distributors International (HARDI), gave an eye-opening presentation about what distributors should be doing to increase their profits. He stated that distributors have experienced five consecutive years of growth, however, the average net profit is only 3 percent. “It’s hard to sell your son or daughter on taking over your business, when they could earn a higher interest rate on an account at ING,” said Gee.
He stated that distributors need to take a hard look at their businesses to make sure they’re being smart about operating costs. As he noted, “The difference between a typical and high-profit distributor is 8.6 percent return on assets and 2 percent in operating costs.” He noted that 14.8 percent of hours worked in the warehouse are spent receiving and/or verifying supplier shipments - an incredible amount of time that could be better spent on sales. “If you use personnel more wisely, you can reduce operating costs.”
To that end, Gee stressed that distributors need to make sure their personnel are properly trained. This includes having a home study program for new hires and offering advancement and recognition for existing employees. Gee suggested that distributors themselves learn more about strong leadership and management techniques and also pay attention to distribution trends and strategies if they want to become more successful.
He also noted that some of the biggest challenges for distributors are succession planning, margin erosion, and rapidly changing markets. Lack of knowledge concerning regulation and legislation is also an issue. Gee pointed out the current gross receipts tax in Illinois as something every distributor should be concerned about (see sidebar).
“There are constant assaults on distributors, especially from a tax standpoint, and you need to know what’s going on outside your four walls.”
Sidebar: Illinois Tax Can Affect YouIllinois’ governor has proposed replacing the current corporate income tax with a gross receipts tax (GRT), which is touted to be a neutral, broad-based, low-rate business tax applied to all product or service sales at any level within the state.
It is being advertised as a simplification of a loophole-ridden corporate tax code, but the Heating, Airconditioning & Refrigeration Distributors International’s (HARDI’s), Talbot Gee, vice president, noted that it doesn’t simplify anything.
“The GRT usually results in an equally confusing and hard to enforce tax code with rates only as low as the state’s need for revenue.”
Since the GRT applies to all product or service sales, the costs of producing a product are not taken into account. Basically, it would not matter whether a company is profitable, so those companies with lower profit margins (e.g., distributors) would probably have the most to lose, noted Gee.
Many opponents to the GRT note that its biggest problem is “pyramiding.” In this arrangement, an Illinois manufacturer would pay a tax on the product it sells, and any Illinois company that supplied materials to the manufacturer would also pay a tax. As Gee stated, the advertised GRT rates compound as products pass through production and distribution channels within the state, creating the pyramiding.
Other states are interested in implementing a GRT, and HARDI “vigorously opposes” the introduction of such a tax in any state.