Modest Growth

At the recent HARDI conference in Phoenix, JP Morgan’s HVAC industry analyst Stephen Tusa predicted that distributors would have a good year in 2014, with revenue increasing 9 percent over 2013. “We saw a step-up in the replacement market in 2013, the economy is progressing in a decent fashion, and we don’t see it slowing down in 2014. This year, we believe that half of the growth will come from new housing and the other half will come from the continued growth in the replacement market.”

Distributors attending the conference were a bit skeptical of a 9 percent growth rate this year, with many expressing concern that the number was too optimistic.

HARDI’s new president, Royce Henderson, president, Charles D. Jones Co., Denver, believes that 2014 will be a good year, but he is anticipating growth in the 7-7.5 percent range. “We see some growth in the economy. I think we will see some movement toward replacing rather than repairing this year, and we’re seeing a sales mix of base-level to mid-efficiency equipment. We are being conservative in our plan, but the signs point to a good year ahead.”

Barry Logan, senior vice president, Watsco, Coconut Grove, Fla., noted that its major market segments are positioned for growth this year. “We are concentrated in the U.S. Sunbelt, and trends for replacement, new housing, and commercial activity have been fairly consistent. Residential growth outpaced commercial growth in 2013, although there was recovery in the commercial market during the last quarter. It is too early to know whether this trend will continue into 2014.”

The good news is that more customers are choosing to replace their equipment rather than repair it, said Logan, who saw that dynamic start to shift last fall. “The sales mix of good-better-best efficiencies improved slightly in 2013, but is still well behind the historical mix. This is probably a byproduct of the average consumer, who is still cautious, in addition to the simple fact that the jobs market has not returned to historical levels either.”

Clay Blevins, president, Comfort Supply, Nashville, Tenn., also believes that the economy is showing some positive progress in 2014. “I think the momentum and lack of inventory in the residential housing market has led to price increases. That’s a good thing for the industry, because people have more equity in their homes and those who are stuck in underwater mortgages can move if they need to. Last year we saw more people replacing rather than repairing due to pent-up demand, as well as R-22 becoming more expensive. I think the big issue this year will be getting ready for the regional efficiency standards, set to go into effect in January 2015.”

Concerns Ahead

The Department of Energy’s (DOE) latest regional efficiency standards are scheduled to increase the minimum cooling-efficiency requirements for split-system central air conditioners and heat pumps in the South and the Southwest on Jan. 1, 2015, causing distributors to worry about inventory and enforcement issues. “The last time we went through this, with the change to 13 SEER equipment, there was quite an inventory issue,” said Blevins. “Whenever there’s a change like this, it’s a very strategic time for factories and distributors, as far as inventory is concerned.”

In addition, Henderson is worried that the new efficiency standards may price consumers out of the market, as the lowest allowable efficiency that can be installed may still be too expensive for the average homeowner. “As a result, they will turn to much less efficient options, which will not be good for the industry, nor will it save energy for the country.”

Another issue that causes Henderson some concern is the rise of online distributors that are offering same-day delivery. “One of wholesale distribution’s strengths is having the right inventory in the markets they serve. We also have a very technical staff that helps contractors find solutions to their problems every day. We are working on ways to protect this model by not supplying part numbers, so contractors can’t take the information to other sources. We are also improving our online ordering system, which has been in place for three years. While it’s been somewhat successful, we feel we need to take our site to the next level.”

Blevins does not consider online distributors, such as Amazon Supply, to be a serious threat; instead, he sees them as more of a market disruptor. “People want things faster. Consumers, including contractors, are used to the design and interface of sites like Amazon, and they will come to expect that from their distributors. This will definitely have an effect on the way distributors do business.”

A New Start

This year’s new housing permits and starts will be of interest to Logan, who notes that while they can be a catalyst for growth, it is completions and closings that must happen in order for the opportunity to occur. “At the end of the day, the replacement market is far larger, and the health and spending habits of the consumer are even more important. Continued momentum with consumers may help the sales mix of higher-efficiency systems and could provide meaningful long-term opportunity.”

The recovery could be further hampered by structural changes to the economy that could dampen growth in 2014. “There are higher vacancy rates in office buildings, due to technology and a more mobile workforce; there are fewer brick-and-mortar retail spaces, as e-commerce continues to grow; the education sector is experiencing weak tax receipts and slower growth in the demographics; and in health care, there is regulatory uncertainty that is limiting spending,” Tusa said.

All these concerns point to challenges ahead for distributors. But if the momentum in the residential market stays solid, most seem cautiously optimistic about the year ahead.

Publication date: 2/24/2014 

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