Last year proved to be tumultuous, but with the first quarter of 2010 almost in the history books, HVACR distributors are continuing to evolve their business strategies and adjust to the new business terrain. Political uncertainty, customer relations, business practices, and changing trends all present distributors circumstances to deal with and opportunities to learn from as they advance their distribution practices in 2010.

POLITICAL UNCERTAINTY

Distributors are not isolated from the changes being made on Capitol Hill, and the again shifting tide is demanding a readjustment in strategies. Cap-and-trade, for instance, is making its way to the graveyard hoping to be revived later in the form of Environmental Protection Agency (EPA) regulations.

“I hope it stays dead,” said David Williams, vice president of Gateway Supply in South Carolina. He explained that his business relies on consumers having the money to repair and/or replace their HVAC equipment.

“Cap-and-trade would create a huge expense for most utility companies across the United States. This expense would get passed on to the end user, once again diminishing their working capital.”

The fate of the health care bill seemed much the same as cap-and-trade, but with a recent influx of life, President Obama’s revised version of the bill is working to make another heated appearance in Congress. According to Kevin Morris, refrigeration product manager for Horn Distributing in Lenexa, Kan., there are some concepts that need to be addressed in order for this reform to be successful and beneficial to the country and to the HVACR distributor.

“Major reform must be broken down into a separate bill, considered individually, and moved through the process with enough time for a thorough vetting by all interested parties,” Morris explained. “I also believe the tax deductibility of employer provided health insurance should be maintained and expanded to cover individually purchased policies. A large percentage of companies would alter or eliminate their insurance programs if the tax deductibility of that expense was removed.”

Eliminating state barriers for insurance purchasers also made his list of health care concepts required for success.

“Most HVAC distributors have branch locations in more than one state,” he said. “I don’t believe the industry should support any reform legislation that would undermine or weaken the Employee Retirement Income Security Act.”

CUSTOMER RELATIONS

Customer relations are always key in any business, but when the economy is faltering, finding new ways to foster the relationships can become even more important. Facing diminished demand for traditional distributor roles, some HVACR distributors pushed the limits to provide for their individual customer’s needs more effectively. Instituting longer store hours, more user-friendly credit terms, and improved freight terms, are a few examples of adjustments distributors made.

Adding new services became an increasing trend as well.

Williams’ company began providing more ways of doing online business with its current customers.

“We are going as paperless as possible with online billing through e-mail,” he said. “We provide limited access to our system so customers can check inventory levels.”

The company is also working to diversify its product offerings while staying within its general scope and reach.

“One area that we have entered is crawl space encapsulation,” he explained. “Right now, very few HVAC dealers are doing this work, but we thought that conditioning a crawl space is still conditioning, and HVAC dealers should be a factor in this business.”

Geothermal’s rising popularity spawned new business opportunities for distributors as well. Habegger Corp., based in Cincinnati, implemented a geothermal drilling division in its company. They purchased a new drilling rig and related trucks and trailers, as well as hired the necessary staff to operate the new machinery.

BUSINESS PRACTICES

Most HVACR distributors, as with most every other business in the country, reported down numbers for 2009. Some niche offerings provided minor relief pushing decreased numbers slightly upwards to a flat standing, but overall, 2009 hit hard. One thing that many distributors agree on is that 2010 is going to produce improved numbers. Already registering a slight uptick in the first quarter, HVACR distributors are continuing to hope for further improvements as they streamline their businesses and protect their bottom lines.

Inventory control is a significant factor in the profitability of HVACR distributors, and minding SKUs is becoming increasingly important.

Still housing some of its R-22 units and SKUs, Gateway Supply has not seen a drastic change in its inventory levels as of yet. The company is, however, seeing a fluctuation on the commercial SKU side of the business.

“The commercial side of the business held out until the very end with R-22 units, so we are looking at a virtually complete new line-up with the R-410A units,” said Williams.

The age-old repair-versus-replace battle waged on in 2009, but the victory leaned heavily towards the repairs and parts business. “Replacement parts sales are up around 20 to 25 percent,” said Morris. “Inventory floats along with these same numbers, yet we are keeping a close watch on our turns and not bringing in any new vendors at this time.”

CHANGING TRENDS

As new practices and old processes jockey for distributors’ attention, changing trends often spark controversy and debate. Taking both sides of the aisle, so to speak, the distribution apparatus of the HVACR industry works to bring amicable solutions to these debates, providing optimal business and customer service opportunities.

One such debate mounting is the further introduction of foreign equipment in the HVACR marketplace. “I don’t think distributors are more interested in carrying foreign brands, not on all products and certainly not on major lines,” explained Morris. “When it comes to mini-splits and PTACs, however, I believe the trend will continue to increase.”

Brian Newport, residential sales manager for Habegger, primarily agreed with Morris.

“In some cases, we are more interested in carrying foreign brands,” he said. “If you are a distributor today and don’t have a good product line to support your sales, you will be forced to look at foreign brands.”

Another debate that continues to resurface is the HVACR manufacturer’s role in distribution and whether or not it should take part of the distribution apparatus in-house.

Newport offered that in some cases, such as underperforming distributors, the manufacturer has no choice. Morris and Williams offered different viewpoints concerning this trend.

“Distributors are designed to distribute and manufacturers are designed to manufacture,” said Morris. “I have not seen when combining the two have proven profitable. Unfortunately, that being said, I believe the trend will continue.”

Williams offered a different perspective. “Actually, I see this trend going back toward independent distribution,” he said. “It seems to me that manufacturers are always concentrating solely on the bottom line, and while independents do the same, there are instances that the bottom line has to take a back seat. I am banking that independent distribution will always be a factor.”

THE DAYS AHEAD

Upcoming challenges will continue to change and define HVACR distributorships and their business practices. Looking toward the near term, concerns for the economy remain at the forefront. Employee retention, shrinking customer bases, interest rate hikes, higher health care and energy costs, and rising fuel prices continue to make distributors’ top 10 list as well.

Despite these trials, distributors are finding ways to be profitable, run lean, and form new business models that push the company from surviving to thriving.

Publication date: 03/15/2010