HVACR Distributors Expect Growth in 2018
With just a few weeks left before the end of the year, HVACR distributors are turning their attention to 2018. Many distributors report a successful 2017. Heating, Air-conditioning & Refrigeration Distributors International (HARDI) cited the weather as a major factor behind its member sales in its Targeted & Regional Economic News for Distribution Strategies (TRENDS) report with fewer cooling days and two hurricanes in the summer and fall, respectively. With a colder and wetter winter weather outlook per the National Weather Service, 2018 is forecast to be a year of opportunity for distributors.
“2018 is shaping up to be a very productive year for wholesalers,” said Herb Woerpel, editor-in-chief, Distribution Center magazine. “Distributors are excited to benefit from a new tax code that hopefully includes a significantly lower corporate tax rate; a phasedown of the estate tax; the inclusion of the Last-in, First-out accounting method; and more.
“In 2017, Heating, Air-conditioning & Refrigeration Distributors International’s TRENDS report registered sales growth near 6.5 percent, and experts anticipate that number reaching 7 percent in 2018,” Woerpel continued. “With consumer confidence hovering around 90 percent and looming price increases due to the rise in raw material costs, 2018 appears to be ripe for the picking.”
If there was a single word for 2018, it would be scalability, according to Talbot Gee, CEO, HARDI.
“How do you take what has made you so good and so effective as a distributor in your market and continue to scale it, so you can do more of it better, faster, and cheaper to grow your business?” Gee asked. “There’s aspects of scalability that relate to technology, talent management, logistics, and supply chain acumen. That theme of scalability is bubbling to the top to where companies can feel they are fully able to realize all the opportunities they experience.”
The coming year will also be a big one for HARDI as it launches its new Mexican division.
“If you take all I’ve said and focus it to a rapidly emerging market like Mexico, a lot of the same principles apply, but we have a cleaner slate, so to speak, to work with,” Gee said. “It’s really exciting. We had a core group of distributors come to us, asking us to partner with them on this venture, and it’s all exactly for those same reasons I already mentioned, just a different stage of market maturity. They’re really anxious to leap frog and become worldclass distributors at a much sharper curve than we’ve experienced in the U.S. and Canada by taking advantage of all the knowledge and resources and applying it at a much earlier stage in their companies. So it’s a really exciting time.
“Our goal is to firmly be able to demonstrate to manufacturers, both indigenous to Mexico and outside of Mexico, that this really is the channel of choice, and it is the best way for them to scale their businesses in Mexico,” he added. “And the response we’re getting from manufacturers seems to indicate they’re buying into this. I do fully expect this to be successful.”
Overall, Gee said there are many reasons for optimism in 2018.
“Even the forecast for eventual cyclical slowdown in the future has been tempered a little bit,” he said. “We see no reason that 2018 shouldn’t be a strong year for those companies that really have made progress down that scalability path, taking advantage of new opportunities and really growing their business in terms of market share gains within their market as well as taking advantage of opportunities to expand their market. We really have high hopes and expectations for 2018, on top of what was a relatively successful 2017.”
When the markets are doing well and business is good, expectations, demands, and pressure on distributors from their strategic suppliers tend to increase, Gee noted.
“You could argue that there’s more pressure on distributors in really strong markets than in weak ones because more pressures are coming externally rather than internally,” he said. “However, our core members tend to be very strategic, aggressive, and forward-thinking, and I think they’re going to be in a great position to capitalize on that.”
The increasingly competitive labor market facing the HVACR industry is arguably the greatest challenge distributors and their contractor customers will face in 2018, Gee said.
“Truly being a best-in-class recruiter and employer of talent will be a major differentiator for distributors in a hyper-competitive 2018,” he said. “Conversely, those who are incapable or unable to do that are going have a really tough time finding or retaining the talent they need to achieve their growth objectives.”
Last year, HARDI introduced its rebranded education and professional development pillar under the broader header of “Talent” in order to help members through the entire employment life cycle.
“Talent is all about helping our distributors truly be world-class at every stage in the talent life cycle,” Gee said. “We help them ensure their infrastructure is world-class, so it will be appealing and attractive to incoming talent; we help them become effective recruiters; we ensure they have the best onboarding experience for new talent and not the trial by fire that many of us went through in our careers; we ensure they have a world-class development program so that high-profile candidates don’t feel they need to leave because there is no career path; and we help them with performance management so that all employees understand how they’re being evaluated and know how they can improve performance and compensation. And frankly, we’re in a time where there is going to be a lot of talent looking to exit the company, so we provide best practices to ensure the exit continues to be a positive experience for the company and team. So it’s really about the whole life cycle.”
Brian Loftus, market research and benchmarking analyst, HARDI, is predicting unit growth in the low single digits in 2018.
“I’ve been through all the variables, and I’ve got unit growth in the low single digits, and it’s because existing home sales are very low single digits,” Loftus said. “It will be the fourth year with consumer confidence over 90, and any of that leftover pent-up demand after the Great Recession has been pretty much used up. Additionally, new construction is forecast to be up about 3-4 percent, and that’s a pretty good number. So unit growth in the low single digits is what I’m expecting.”
According to Loftus, there are a number of places for distributors to find the data they need to plan for the coming year.
“The first place to look would be HARDI’s Distributor Performance Dashboard’s Annual Benchmarking Program,” he said. “The reason I say that is because distributors are in a continual race for efficiency. The clearest way of putting it is: If you only know what you are doing, then you only know half the score. Another way of looking at it is, if someone weighs 220 pounds, is that good or bad? It kind of depends on if you’re 6 feet 4 inches tall or 4 feet 6 inches. Distributors generally know their markets, they just don’t know what the definition of good is, and that’s changing.
“The most important one to watch for will probably be the HARDI TRENDS Report,” Loftus continued. “Several very successful, high-quality distributors at different times have told me the TRENDS report is their favorite benefit of HARDI membership. They take the report, look at the annualized sales growth for their region, and then compare that number to their own progress. Also, if you participate in the TRENDS report, you get ITR’s economic update on a quarterly basis, so if there’s a recession on the horizon, this gives you an idea of how close it is and if it will be more severe in some regions than others.”
Loftus also stressed that distributors should participate in the organization’s coming compensation survey for 2018.
“Until the hurricanes distorted the number in September, there were 83 consecutive months of job growth, and then there was a good job growth number in October, getting back to normal,” he said. “Unemployment is practically nothing — we’re basically at full employment. Turnover is disruptive and expensive, especially when it takes a long time to replace somebody. The compensation survey is more important now than ever. I can understand a member not doing it in 2012 or 2014, but you really need to do it this year if you think you’re employees are your most important asset. A lot of them say that, but if you really believe that, you have to do this. It doesn’t cost anything to participate, and it provides local market insight. It’s a great investment in the preservation of your organization.”
Lastly, distributors should be looking at local market data, such as permits, employment, and housing values.
“Sometimes people can get hooked into what they read about in the broader market,” Loftus explained. “I know there were several people who were excited about this concept of the ‘Echo Boom’ where 14 years or so after the peak of the housing boom in 2005, which puts you in the 2018-2019 timeframe, that there will be all sorts of demand for all the homes built in 2004, 2005, and 2006 that will need their equipment replaced. Well, the housing boom was pretty concentrated in a few areas. If you’re not in one of the areas that had all the housing construction, you’re not going to have this Echo Boom. I’ve heard a couple of guys saying they were looking forward to this surge in replacement demand, but they weren’t in an area that experienced housing construction. There seems to be some blind spots, so knowing what’s going on in your local market is important.”
LAY OF THE LAND
David Kesterton, president, Mingledorff’s Inc., Norcross, Georgia, is optimistic about 2018.
“We’re in both residential and commercial,” he said. “I think the commercial business will continue to be very aggressive and strong, and new construction is up. We’re also going to be changing some of our product line to more high-efficiency-type products, and that will create opportunity in the replacement segment. On the residential side, new construction in our area is strong and will continue to be strong. The replacement side of business coming off in 2017 was somewhat down. 2017 was a suppressed year when it comes to the weather — it wasn’t that hot in our area. So, if we can get back to a normal-type pattern in the spring/summer, I think it will be a very good year. Overall, I’m optimistic about 2018.”
Kesterton said Mingledorff’s will focus on hiring good people and enhancing its e-commerce side of the business in terms of protection and security in 2018.
“With everything you read in the paper — and we’ve been impacted ourselves — we’re heavily investing in protection with firewalls and security in general,” he said. “We’re also trying to educate our own employees with the potential issue of cyber threats and interacting with emails. You just cannot open every email that comes to you today. Getting our employees to understand that it’s not just a problem for the IT department to worry about is key.”
Steve Lazar, president, Lazco Corp., Scottsdale, Arizona, predicts 2018 will be a year of change.
“Things cannot go on with the status quo,” Lazar said. “I think distributors will need to really watch their businesses in a closer way, and, by that, I mean managing their inventories. With all the equipment changes that have gone on, through 13 SEER and Freon 22, it has created a lot of obsolescence overstock inventories.
“That’s the advantage Lazco has, by helping them turn those inventories that are sitting idle into working capital,” he continued. “These inventories are costing them. And what you find in the marketplace is, if they load up their dealers with these slow-moving surplus inventories, it will prevent them from buying current stock. They also tie up their warehouse space and their time because it’s really hard to focus on selling new when you’re still focusing on selling old.”
Distributors will need to run their businesses more proactively with more professionalism in the coming year, Lazar noted.
“In 2018, we’re going to have to be smarter on every level because I believe there will be economic challenges,” he said. “What has been happening between the political structure and the media has caused a lot of fear and confusion. And when that happens, people tend to get tighter on how they spend their money. It’s going to take more proactive selling to motivate people to make positive decisions when it comes to heating and air conditioning purchases. We’re going to raise the bar of professionalism, integrity, and honesty and begin to change the dynamics, so we can prove service is important. A lot of people are buying equipment online these days and not getting the service, so it’s important to market the distributors and contractors as service organizations.
“Basically, 2018 will require a strong evaluation of your business,” Lazar continued. “You need to look at all levels, including who your customers are and trim the ones who are not producing. All companies must learn how to be order makers, not just order takers. They will need to watch their expenses, manage their business closely, and they’re going to have to learn to be more proactive to create opportunities to expand their businesses.”
Dale Norton, vice president and director of sales, Meier Supply Co., Conklin, New York, predicts 2018 will bring decent growth for distributors.
“From what industry economists are saying, 2018 will be another year of decent growth in many of the important sectors of our business, so we are, again, budgeting for a solid growth year,” he said. “We are maintaining and building on the strong level of engagement with our customer base — it is by far the best tool we have and use. These relationships provide us the knowledge we need to have a better understanding of the individual customer’s needs.”
Kansas City, Missouri-based cfm Distributors Inc. is also preparing for growth in 2018.
“Based on what we are learning from industry economists and other experts, we are predicting significant year-over-year sales growth in the first part of 2018 with a slight slowdown in the second part of the year,” said Lauren Roberts, executive vice president, cfm Distributors. “To help us prepare for next year, we use benchmarking and forecasting tools from industry resources like HARDI, AHRI [Air-Conditiong, Heating & Refrigeration Institute], and other business analysts. We also have meetings with key vendors and customers to round out our plans.”
Troy Meachum, president, ACR Supply Co., Durham, North Carolina, said the economy in 2018 will largely depend on whether or not the tax reform bill gets passed.
“If the tax cuts go through, and they get the corporate tax rate down, there’s going to be a boom — it’s going to be rocket fuel for the economy,” Meachum said. “If it doesn’t go through, I still believe it will be a good year. I’m not sure if it will be double-digit for us. We’re planning on 10 percent, but, realistically, without the tax cuts, I think it will probably be between 5-7 percent.”
ACR Supply starts planning for the coming year every August. The company conducts an internal culture survey and operational survey, compiles the data, and sets specific goals by department.
“By Dec. 15, all 87 team members will have specific smart goals set for themselves, so they know their own goals and what major company goal they are working to accomplish,” he said. “We hold each other accountable for those goals all year long. We use a lot of the benchmarking tools from HARDI to set or lower expectations. A lot of industry information we use comes from HARDI and from our buying groups — it allows us to see and plan for the future.
“I’m excited for next year,” Meachum continued. “A lot of people are running around nervous, screaming the sky is falling. A lot of people believe Amazon is going to eat us all up. And Amazon will take some business — they have already taken some — but I do believe with all my heart that there will always be a place in the market for the local brick and mortar distributor. But, we have to bring value. The way we continue to bring value is by making sure we’re bringing the right people onto our teams. We have to create an industry that millennials and young people are drawn to. We have to create culture inside of our organizations that people want to be part of — if we’re not doing that, we may very well become extinct. But we’re [ACR Supply] not going to let that happen, and I don’t think our industry will let that happen either.”
Publication date: 12/11/2017