It’s a tough crowd of consumers out there these days, and the uncertain economic climate is certainly playing a role in their behavior. According to distributors, consumer behavior is leading to a drop-off in the replacement market, as well as a drop-off in the high-end market. Yet despite these worrisome trends, distributors are still seeing areas of growth and employing smart tactics to keep their businesses in good shape.

CURRENT CHALLENGES

The hardest part is simply “getting consumers to get off their wallets and purses because they are very conservative with their money right now,” said Brian Newport, residential sales manager, Habegger Corp. (Cincinnati).

Other distributors also commented on this trend. Scott Morgan, regional manager, Gemaire (Houston), agreed that the “economic conditions with consumer confidence at very low levels” are creating the greatest challenge for distributors today. He added, “There are 70 million compressor bearing units that are 10 years old or older.” This statistic ties into the trend toward repair over replacement.

Clay Blevins, president, Comfort Supply (Nashville, Tenn.), added, “The replacements market is falling, as consumers are changing out parts rather than replacing equipment.” Additionally, he noted, “Since the reduction in the amount of the federal tax credit for high SEER equipment, we are seeing a drop in demand in that market.”

Newport also confirmed that consumers are opting away from higher-end equipment toward more standard 13 SEER units and standard 93-95 percent furnaces. “The variable speed with two stage and modulating burners are certainly seeing a decline in business right now,” he said.

And these challenges are not relegated to the residential market. According to Michael Senter, CEO, ABCO Refrigeration Supply + Solutions (Long Island City, N.Y.), “The greatest challenge in the market is larger scale commercial opportunities where bank financing is essential to support growth. Owners and developers are hesitant to commit large amounts of capital because of two primary reasons: one, bank financing is difficult to obtain, therefore creating significant demands on the owner/developer’s own capital and two, owners and developers perceive a great deal of consumer insecurity so committing a larger proportion of their own capital is fraught with risk. These factors together have created lethargy in large-scale commercial development.”

BRIGHT SPOTS IN THE MARKET

While the large commercial sector and high-end product mix may be down, distributors are seeing strength in other types of applications and equipment.

“The most significant strength we perceive in the end-user market is small and mid-sized opportunities involving both residential and commercial air conditioning opportunities as well as commercial refrigeration opportunities,” Senter said.

As for equipment, one area of growth involves the controversial dry-shipped R-22 units. “We’re seeing a strong market for dry R-22 products,” Blevins said. “I think that the resurgence in dry R-22 products is a mistake for the industry. These products lead to a lot of mechanical failures, and are essentially pulling the industry back five years.”

On a more positive note, Blevins said he is seeing the greatest strength in the mini-split market - and he’s not the only one to notice this trend.

“In the commercial and the large-scale residential unitary air conditioning market, we are participating in a large number of conversions from traditional ducted solutions to Mitsubishi City Multi multiple-evaporator ductless solutions,” Senter said.

In the residential market, however, Senter is seeing growth in ducted systems. “Interestingly, we have experienced growth in the sales of Mitsubishi ductless solutions and Luxaire ducted solutions. Since the recession certainly is here in force, we attribute this growth to an increase in market share based on our ability to provide a wide range of practical, cost-efficient solutions for contractors to offer their end users,” he said. “The use of ducted systems in the single-family house residential replacement market has increased significantly with the availability of dry-charged R-22 residential condensing units, providing creative contractors with multiple ducted solutions for residential homeowners.”

KEY METRICS AND TACTICS

In the midst of all the challenges presented by the economy, distributors are returning to the basics to monitor and ensure the health of their companies.

“We are tracking our revenue and focusing on DSOs [Days Sales Outstanding] and on-hand inventory and turns,” Morgan said, adding that he is also paying attention to slow-moving inventory. “It is more important than ever to more quickly respond to consumer needs and make sure we forecast right.”

Senter noted that ABCO is tracking cash flow, accounts receivable, inventory levels, and market share of growth. “These measurements always are important. They are imperative in challenging economic times.  And, of course, they all are connected,” he said.

Blevins said, “We have found that retail sales seem to be directly correlated with the residential replacement market. Also, the ability for people to obtain home financing and overall credit availability in general is a good indicator for our industry’s profit outlook.”

At Habegger, Newport said, “We review income statements and profit/loss reports monthly. We also track share of market with our factory, Carrier Corporation.”

He continued, “We have had to tighten the inventory levels quite a bit, and also have pulled in the reins on dealers that are getting too far past 30 days for payment. We have also reviewed and adjusted pricing on the lower tier products to ensure that we are priced properly and remain very competitive in the market.”

Morgan noted that his company has placed more emphasis on training contractors “to better serve the end consumer in assisting them in the buying process.” In addition, he said that Gemaire expanded its class offering to include more finance courses “to help contractors to better manage their resources in lean conditions.”

At ABCO, Senter is also focused on strengthening relationships with contractors as well as manufacturers. “We must be the very best we can be whenever our customers need our services and products,” he said. “Our customers are under this same pressure from their end users. Teamwork with our manufacturers and our customers is more important than ever, and it always has been paramount.”

At Comfort Supply, Blevins said he is looking toward the future. “Instead of trying to stabilize our distribution business, Comfort Supply has done the opposite and continued to hire talented people and expand,” he said. “Of course for this tactic to be successful, we have to closely monitor expenses so they don’t get too high in this volatile market. Comfort Supply makes the whole team part of that process, so everyone is aware and accountable of our company’s fiscal position.”

When the economy picks up again, the distributors poised to capitalize on it will be those who successfully navigated through the present challenges.

SIDEBAR: DISTRIBUTOR-MANUFACTURER RELATIONSHIPS

One key for distributors is maintaining healthy relationships with manufacturers, and both sides need to respect each other for the relationship to succeed.

“We are fortunate to have a very good relationship with Carrier/Bryant. However, with all relationships come some bumps in the road,” said Brian Newport, residential sales manager, Habegger Corp. “I think it is very important the there is mutual respect between the distributor and manufacturer at all times.” According to Clay Blevins, president, Comfort Supply, “Lately, we have seen manufacturers trying to control and set prices for their distributers, which we feel is the wrong direction. Distributers understand their own markets, and need to have control over prices. It would be helpful if manufactures looked towards distributors more as business partners.”

Michael Senter, CEO, ABCO Refrigeration Supply + Solutions, noted that the basis of a good relationship begins with strong financials. “In other words, we are determined to win and sustain the confidence of our suppliers by consistently paying our bills in a timely manner. Strong manufacturer relations also depend greatly on effective communications,” he said.

Published: January 2012