Back in mid-August, I saw a press release with the headline HVACR distributors reported a 10 percent growth in June 2014. Knowing that June and July are the busiest and the best months of the year for our industry, this came as a welcome surprise. The thought of a double-digit expansion in HVACR bounced around in my head for a couple of reasons. First, most folks agree weather extremes drive spikes in business. And to my recollection, this summer has been particularly mild. Secondly, I had not seen or heard the normal jubilation that comes with double-digit growth.
The more I pondered the situation, the more I wanted to understand the rest of the story.
In the world of distribution, one of the most common greetings comes by way of the phrase, “How’s business?” Mostly, the reply is something like this, “Pretty good, not bad. It’s hard to say. How about you?” For many reasons, I thought it would be worth some additional research.
I did a “Google search” for more information and got additional details. It seems the original post was derived from the work of HARDI’s in-house Market Research and Benchmarking Analyst Brian Loftus. For those of you who haven’t kept up on HARDI staffing, Brian is the “real deal.” He came to the organization with deep experience in the investment world, where he analyzed data from various industry sectors before companies made massive financial moves. He slices and dices the numbers within the HVACR industry with the same kind of vigor.
Loftus reported, “The numbers for June were most likely high because of the extra business days in the month. The real story comes not in the month-by-month numbers, which are volatile but in the annualized growth numbers. For instance, July turned out with growth of just ½ percent, but the annual number is hanging in at 6 ½ percent.” Brian later pointed out this year’s annual growth rate is about twice that of 2012, which to me implied an overall improvement in the business climate.
To me, something had to be driving the numbers higher. I asked if new housing starts explained the growth. Loftus’ answer was eye opening:
“While new housing starts are an important part of the total, our numbers indicate that sales into this market only represent something like 15 percent of the totals,” he said. “And the 1 million housing starts are not uniformly spread across the country. A full 50 percent of the housing construction was located in the South, with 25 percent in the West, 15 percent in the Midwest and only 10 percent in the Northeast.
“The real story in this construction upturn comes as a reflection of consumer confidence. Studies from the University of Michigan show consumer confidence is at a post-recession high, actually touching up against the numbers we saw before all of the economic turmoil.”
Loftus sees evidence that consumer confidence is driving homeowners and others to invest in replacing older and outdated equipment. Consumers with concerns about future stability, things like job loss, declining home values and other factors are more likely to hold off on spending. Instead of replacing an aging air conditioning unit, heat pump or furnace, they opt for repair. Enjoying better times, they are in fact opting to make important replacement decisions.
Pushing my original thought on the temperate summer, I asked if there was an indication of summer weather working against our numbers. “We might have seen a bigger number had the summer been exceptionally hot, but I see most of the growth based on improved general economy and a bit of a pent-up demand for the future,” he said.
Intrigued by the thought that 80-85 percent of equipment sales goes into replacing existing equipment, I decided to approach Bob Labbett, vice president, marketing, Emerson Climate Technologies, Distribution Services, on how distributors (and the industry as a whole) might be affected by these new products. How might today’s products stack up against those sold 10 or more years ago?
Bob shared, “The quality of today’s products is better. Part of this comes by way of advanced electronics built into the system. Technology allows for protection, communications and even active response. It works a lot like the OnStar system in your car that lets you know of an engine or tire problem via remote diagnostics.”
Electronics are in everything these days and experts tell us the trend will only continue to grow. Even low-cost products will require some type of configuration, programming or setup. The time needed to help new installers and the end users of the product understand the nuances will most likely grow as we move into the future. For distributors, this may translate into increased demand for dealer and customer training.
Going back to my curiosity surrounding the actual business climate and how the weather plays into the mix, I asked Bob for his thoughts on the current business conditions. Bob had many good words surrounding distribution channel:
“Historically ‘The HVACR Industry’ has experienced large swings in business based on weather. Distributors today are far better at managing their inventories. They have automated the process of adding for seasonal fluctuations; their computer systems place orders to keep ahead of the demand and adjust along the way. This activity has smoothed out spikes in the supply chain.”
Contemplating this feedback, Labbett’s comments dovetail very well with those Loftus mentioned earlier. The spike may have been caused by a combination of wholesalers and some of their customers preparing for summer months by anticipating orders and building up inventory.
Moving closer to where the sales are happening, I reached out to Scott Weaver, president and CEO of Pennsylvania’s APR Supply. APR is one of the new breed of wholesaler — aggressive, technology savvy and focused on developing new industry leaders.
When asked about the mild summer and housing start situation, Weaver reported:
“Our business has been solid, but the normal weather-based addition has trimmed a few percent from our projected growth. New construction in our territory has not been a big driver since the housing bubble. At the very peak way back when, new construction might have pushed 30 to 35 percent of our business. Today [it] hovers in the 10 percent range.”
As we continued to chat, Weaver pointed to new realities in the HVACR business. The whole way the industry works is shifting: “We are selling differently today than we did just a few years ago,” he explains. “The shift has moved APR Supply from a transactional company where sales people focus on getting the right part to the customer at the right time to a consultative approach.
“Today, getting logistics is a given, but growth comes by way of helping our contractors create a better business for everyone. For instance, most contractors need help with getting the word out, upselling more efficient products and marketing in general. We have discovered the key is identifying the guys who want to work with us and helping them grow faster than the market.”
Digging deeper into this shift in selling during these times of slow, steady growth, we spoke to Wade Boelter, vice president and general manager of Minnesota Air. When asked to comment on how his organization was driving forward in the current market, he said:
“We find ourselves in a position where consumers know more about their heating and cooling systems than ever before. We and our dealers do our part to educate the market; outlining precisely why our system makes good sense in their home or business.
“Three years ago, we decided we needed to learn how to work in today’s Internet and social media environment. And, rather than just go out and hire an expert for a quick, temporary fix, we came to a couple of conclusions. First, we would be better if we grew the expertise in house. And the majority of our dealers were, and still are, struggling to get their head around much of the whole marketing deal.
“Over this time, we have gotten pretty good at this new style of marketing. How do we know? Well, for one thing, we can track activities via tools like Google Analytics and understand what’s being looked at and by whom. We are creating dealer leads and learning how to help the dealers turn leads into sales for both of us.”
As we talked, Boelter touched on a point, which I believe is salient. There is a major demographic shift in consumers. “We are seeing a whole new generation of young people moving into the customer ranks. As a 50-something guy dealing with dealers and contractors of about the same age, I believe we have to shift a portion of our thinking.” Clearly, the “next generation” is not just about the employees we hire; our customers are the next generation, too.
Before moving forward, allow me to share a few of Wade’s comments about my original ruminations on the weather. I believe they demonstrate how the weather has played a factor in this summer’s growth numbers:
“We feel like the very mild conditions in the upper Midwest had an impact on our business,” he said. “We normally see a bump in business early in the summer followed by one later in the year as the temperature turns from nice to ‘hot and sticky.’ This year’s hot burst simply didn’t come.
“For folks in Minnesota, heat in the winter is a necessity. If a furnace fails, the question is how soon can you replace it? Cooling on the other hand is a bit of a luxury. Replacing a dying air conditioner is a major expense and something they can postpone, especially when the hottest month of the year failed to break the 90 degree mark.”
During all of these conversations, one couldn’t help but notice a new world developing in the HVACR industry. Distributors and manufacturers exploring new ideas for growth where our fathers might have found none.
So what is the state of the HVACR Market?
Drawing from these conversations and a score of off-the-record discussions with distributors, manufacturers and contractors serving the market, one could conclude the industry is in a controlled growth mode. Labbett calls it a “mature market.” There is no wild exuberance; customers are taking their time, becoming better informed and making slow, deliberate decisions, often armed with knowledge gained from electronic resources.
Distributors have moved from a “how can we keep profitable” to a time of process building. Many have followed the approach used by Weaver’s APR Supply, which involves “identifying young college grads with command and control skills, putting them in charge of something and coaching them into the future leaders of the industry.”
Progressive distributors are changing their approach to the market, thinking outside the “transactional selling model.” Savvy consumers are looking for ways to improve the efficiency of the systems they operate. Contractors have understood the nuances of energy savings for years but have lacked the sales and marketing skills to promote upper-end systems to the consumer. Best-in-class distributors are recognizing this as an opportunity and helping loyal contractors bridge the gap to create a customer-centric solution.
Younger customers are moving into their first homes. Unlike days gone by, many are opting for the purchase of an existing home. The new consumers are increasingly Internet enabled and see research ahead of a major purchase as a “must do.”
A few thoughts on what we learned …
Growth in a mature market is different. Following a lengthy downturn where survival is the main driving factor, distributors can easily be distracted from making the kind of time investments critical for the future. With this in mind, I would like to share a few thoughts on the future.
I am certain many distributors have subtly shifted their selling efforts. Consultative, solutions-based selling styles are falling into place. With this change, the distributor must realize not all customers respond equally to your high-value approach. Because of the high cost in time and resources, management must refocus sales-force efforts on the right dealer, the right contractor and perhaps on the right end customer. For the dealer and contractor side of the equation, distributors have to spend more time determining which are the ones who value and are willing to pay a premium for the work done by the distributor. Targeting and focusing are critical.
Distributors must learn to manage their pricing strategy. As more effort is expended to make each sale, receiving commensurate gross margin grows in importance. In their zeal to get orders, sales teams often lose sight of the importance of improving gross margin.
Wholesalers and manufacturers alike must come to grips with how demand is created. Coordinated marketing programs are growing in importance. In addition to a big Internet splash, it takes feet on the street to close the sale. The gigantic web sellers hocking everything from cowboy hats to computerized home comfort systems lack the local touch. Distributors are positioned to close this all-important sales loop.
A final thought …
It might be hearsay, but I find solace in the slow, steady growth the industry is experiencing. Distributors and their partners are improving their games. We have money to invest. And we have time to reflect along the way. A sizzler of a summer might have felt good to the pocketbook, but I doubt the overall habits of the industry would have improved. And they are improving.