Preparing for Change: The Top Challenges of 2015
2014 was an interesting year for our industry. How many people had heard of a Polar Vortex? While I wasn’t too excited about shoveling all that snow, being in the furnace business made the winter a little more bearable. Then we had a mild summer in the Midwest and while the golf season was nice, the HVAC replacement season was a bit slow. Now we have wholesalers and OEMs stocking up on 13 SEER equipment ahead of changing regulations. In all, we saw the underlying HVAC market up mid single digits and as we head into this winter, next year is shaping up to be about the same.
From an economic standpoint, housing starts continue a slow recovery, inflation and interest rates are expected to be similar to last year, Gross Fixed Investment and unemployment rates continue to improve. The biggest wildcard this year will not be the economy.
Managing Uncertainty
Managing through uncertainties will be an overriding theme in 2015—and an opportunity for distributors who are prepared. With the drawn out winter of 2014, furnaces and heating replacement part inventories are lower than the prior year, and with normal weather we should see a nice heating season. The biggest uncertainties going into 2015 involve condensing units and refrigerants.
This past month I had the opportunity to spend a few days with our Wholesale Distribution partners and the prevailing conversation centered on pending regulations, managing inventories of refrigerant and what mix of condensing units and heat pumps needed to be purchased this fall. Traditionally, this industry has been slow to change and coming changes were easy to read on the horizon. That’s all changed.
We have faced big changes before like 13 SEER efficiency minimums and the phase-out of R-22, and we have come through these single-event changes stronger and more focused on the future. But in 2015, we are facing multiple challenges of the same magnitude all at the same time. The changes we’re facing today are huge; these shifts will not only have a big effect on contractors, but also on their customers.
These uncertainties have caused some wholesalers to pause on spending. There is uncertainty about what to order, how the business will be affected by new product costs, what will be supported and for how long. Enlightened wholesalers will dive in with both feet, invest in technology and use it to competitive advantage.
Incremental change and thinking are no longer enough to drive bigger, more sustainable growth trends. And if we’re not careful, the uncertainty surrounding these changes will become an anchor, holding us back.
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Regulation
One of the top challenges for 2015 we will be keeping up with the changing regulatory environment, including regional standards for residential unitary air conditioning and heat pump systems and part-load efficiency requirements for light commercial split, package and rooftop systems, and 2015 chiller standards.
As of mid-year 2014, an Emerson survey found that more than half of contractors weren’t even aware of the coming standards. Of the contractors who were aware, roughly half had spoken with an OEM or distributor or attended product information meetings.
On the residential side, there is still confusion about enforcement of the regional efficiency standards, and this issue is especially challenging for wholesalers on regional border states.
The upcoming residential changes and pending enforcement rulings have led to a fourth quarter build-ahead on cooling systems that is causing the normally smooth transition from cooling to heating to gyrate, creating stocking challenges for wholesalers.
The situation is simpler on the commercial side. The majority — 60-80 percent — of equipment listed in the AHRI directory already meets the 90.1.2013 standards. It’s not a situation in which every system needs to be redesigned. The 20-40 percent of systems that currently fall short of the new standards can either be shelved by OEMs or repositioned as lower-tier product offerings.
New Entrants to the Market
The past two years, we have seen a number of companies enter the HVAC space, and there’s reason to believe that trend will accelerate in 2015. These companies are potential customers, partners and threats—sometimes all at once. When it comes to the growing interest in applying HVAC to the connected home, those of us in the industry need to assert our leadership. Wholesalers can help contractors navigate the changing technologies and changing customer expectations. Training counter people, store managers and contractors will make communications with homeowners easier and enable the market to take advantage of higher end systems that connect to today’s smart home.
Tackling the Challenges
For wholesalers who embrace the change, there will be opportunities in 2015. Even with shifts in the channel and new entrants to the market, there is not only a place for the wholesaler, but alsoa dramatic opportunity to be successful and be part of this change.
Successful distributors will stay abreast of new products and technologies, invest in talent and be nimble and ready to act when 2015 uncertainties turn into opportunities.
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