Two-step distribution — where manufacturers sell to distributors and distributors sell to contractors — has proven to be an effective HVACR business model for decades.

However, the emergence of e-commerce has ushered in a new way to shop. Once available strictly through wholesalers, HVACR equipment may now be purchased by any one at any time and is prevalent on popular online marketplaces, like eBay and Amazon.

Manufacturer to contractor/consumer transactions come in numerous forms, including the sale of equipment in big-box stores, resale websites that deliver HVACR systems directly to homeowners’ doorsteps, factory-direct manufacturer storefronts, etc.

While some argue these trends are part of the industry’s natural evolution, others insist there are many dangers and consequences in adopting this methodology.

In Step with Two-step

Consumer-direct sales was a cornerstone topic of Heating, Air-conditioning & Refrigeration Distributors International’s
(HARDI’s) 2017 Annual Conference, where discussion centered on warranty, safety, and quality issues. At the conference, many HARDI members, who largely embrace the two-step distribution model, insisted a move toward consumer-direct sales would be a detriment to the industry.

And while most distributors agree there isn’t one sure-fire way to combat this threat, most acknowledge its presence and insist they can’t sit idle and watch e-commerce steal away their livelihoods.

“It’s pretty much the Wild, Wild West out here right now,” said Troy Meachum, president, ACR Supply Co. in Durham, North Carolina, and current HARDI board president. “Everything we sell can be purchased online. A lot of times, the homeowners or contractors making these purchases can’t tell if they’re buying from manufacturers or some benign online retailer. This approach is absolutely a threat to the way we do business.”

Michael Riley, president, Riley Sales Inc., Philadelphia, said placing HVACR equipment in the hands of untrained individuals may prove to be extremely dangerous.

“A homeowner can replace a toilet if he’s so inclined,” he said. “Worse comes to worse, he gets a little water on the floor. However, if a homeowner screws up a gas furnace, there’s a chance he could blow up his house, or worse yet, he could wipe out an entire city block.”

Paul Neustadt, president, NEUCO Inc. in Downers Grove, Illinois, said consumer-direct HVACR sales is evident in nearly every hardware store you visit.

“Big-box stores are a growing sales medium for thermostat manufacturers,” he said. “Additionally, media conglomerates, like Comcast, AT&T, etc., are now bundling thermostats and security systems with their media packages. Someone can put in a thermostat incorrectly, and it simply won’t work. However, if someone improperly installs a gas valve, there can be severe and dire consequences.”

A Value Proposition

How do distributors overcome this threat? That is the question.

Riley said distributors must aim to demonstrate their value to consumers through every transaction.

“Distributors know the part changers from the quality technicians,” he said. “We know our geographical areas, the seasons, the training requirements, local codes, and who pulls permits and who doesn’t better than anyone else. We can get the product where it needs to be when it needs to be there complete with all the ancillary products. I’m concerned some of the manufacturers and resale websites getting involved in this won’t know who the good installers are.”

Neustadt said distributors need to demonstrate their value with their vendors as well.  

“We host an internal, face-to-face meeting every year with our manufacturers to strengthen our relationships with them,” he said. “During these meetings, we discuss what each party has done well and what each could do better. These interactions have been a vital part of our success.

“A lot of manufacturers absolutely get it, and I believe many of them will never sell direct to consumers; however, there is a big difference between selling thermostats and selling gas furnaces and refrigerants," Neustadt said. "Nearly all brands of thermostats can be found in big-box stores today. That said, items like gas valves and refrigerants should only be handled by professionals, in my opinion.”

In an effort to strengthen its customer interactions, Meachum said ACR has added two additional outside sales people.

“We have a successful online tool that a lot of people are using,” he said. “The role of our reps is to maintain personal relationships with those who are using that tool. We reduce our cost to serve when customers buy online, because it cuts down the transactional price, but we’re working harder than ever on the back end to maintain relationships with those who choose to buy in that manner. Our team is still meeting, talking, and training with these customers, and we feel this is helping to develop a deeper rapport with them. We’re not only keeping the human touch in place, we’re emphasizing it greater than ever before.”

Additionally, Meachum said distributors must stress the importance their knowledge brings to the industry.

“We provide the last mile in our industry,” he said. “Resale companies can’t do that. They simply fill an order, and that’s the end of the sale. HVACR distributors' knowledge is priceless. For example, one customer can call or come in and request a valve plate for a Copeland compressor made in 1989. The next customer is looking for an O-ring for a 1979 pneumatic controller. Yet another guy needs a repair kit for an Erie valve made in 1995. A lot of guys walk in with old, rusty parts, and they want you to figure out what they are. It’s difficult, but we wear all those hats. Because of the training we do with our people, we’re equipped to help them solve these problems. It’s going to be difficult for an e-tailer to replicate this because there are so many variables. This knowledge can’t be grown overnight.”

Manufacturer Perspective

HVACR manufacturers are cognizant of the internet’s budding role in HVACR equipment sales and recognize how e-commerce is changing the way consumers purchase HVACR equipment. Accordingly, many are developing policies and procedures to protect themselves and the HVACR supply chain from any potential dangers.

Rheem recently announced it will be implementing an online sales policy that, among other things, specifies select online eligible products, sets an internet minimum advertised price (MAP) policy, and requires dealers to meet specific authorizations before HVACR equipment can be sold online.

“We recognize that the internet has become the preferred method of many consumers for conducting HVAC brand and product pre-purchase research,” wrote Randy Roberts, vice president of sales, air division, Rheem Mfg. Co., in a letter sent to Rheem’s distributor partners. “In addition, we’re aware of the emergence of businesses using the internet to advertise, promote, and offer HVAC goods and installations. Since HVAC products are part of applied systems, we continue to believe in-home sales of HVAC products by professional contractors is the preferred way to provide an exceptional experience to homeowners. That said, we recognize that e-commerce continues to grow in all sectors and that customers expect Rheem to participate in the online sales channel.

“Rheem’s online sales policy sets clear guidelines for the online sale of Rheem's HVAC products in a manner that will protect Rheem's reputation and provide a good experience for online customers,” continued Roberts.

Jeff Underwood, vice president of marketing, Goodman Mfg. Co. LP, said the company does not support HVAC sales direct to consumers from a manufacturer. Goodman has had MAP policies and pricing for more than two years; however, MAP does not fully address how millennials are going to purchase HVAC equipment in the future, he said.

“Longer term, we want to support the industry with challenges around how younger consumers prefer to gather information and make choices about HVAC buying decisions,” he said. “To be responsible to our distribution and dealer customers, the Goodman organization will be active to help our customers compete in an online world.”  

Underwood believes the internet is not going to replace regional distribution or local, independent contractors.

“The logistics and professional services provided by HVAC dealers are absolutely essential for consumers to have quality installations and necessary post-sale, follow-up support,” he said. “Distributors play an essential role. Equipment still needs to be available on a regional and local basis; parts, supplies, and accessories still need to be available from local sources; and service and post-sale support still needs to be available. Distributors need to help train their customers on how to build better, interactive websites; how to participate in social media; and how to add additional value to homeowners.”

Navien has vowed to only support wholesale distribution of its equipment strictly to licensed professionals and has even placed consumer-warning labels indicating the equipment's warranty is void if the unit was purchased via the internet.

“Navien is committed to preserving the authenticity and integrity of the trade by ensuring all its products are only available to and installed by professionals, which ensures better served installations and, thus, satisfied consumers,” wrote the company in a 2017 press release. “Sales of Navien products over the internet do not afford the authenticity and protection that Navien expects. Navien has issued, and will continue to issue, stop notices to violating vendors and e-commerce channels and is prepared to pursue its remedies at law.”

Factory Direct

Riley said distributors need to be very upfront with the manufacturers they do business with. If manufacturers are interested in bypassing the distribution channel, distributors need to decide if they are willing to support their products, he said.

“This is a tough message for distributors to embrace; however, if we don’t do something, we’re going to find ourselves on the outside looking in,” he said.

Consumer-direct sales occur offline as well, Riley said.

“When manufacturers run their own distribution, they have to operate factory stores and have dealers come directly to them,” he said. “These factory stores are most concerned about selling their equipment. That makes sense, but when they add air-side products at discount prices, which are the products HARDI distributors count on to make their stores profitable, that is a problem.”   

As difficult as it may be, Riley said distributors must be open and honest with their manufacturer partners.

“We have to take a long, hard look at what the future holds,” he said. “And we have to have these difficult conversations with our manufacturers. Whether we like it or not, consumer-direct sales are here, and whoever perfects this model first is going to own a great deal of market share.”

A Budding Option

Born and raised into a family of HVAC distributors, Chris Rush is well-versed in the HVACR supply chain. Today, he’s the CEO and founder of MyEZInstall, a network of licensed HVACR contractors designed to provide service to customers after they’ve purchased HVACR equipment online. Rush believes MyEZInstall could help bridge the gap between consumer-direct sales and two-step distribution on behalf of the professionalism that exists today in the HVACR industry.

“We’re allowing contractors to retain all their install fees, quote their own prices on every job, and grow their service bases for free,” he said. “In return, homeowners get a product that’s sized and installed correctly, and HVACR manufacturers get to keep their warranty promises. The websites win, too. Every segment of the industry can benefit from this solution.”

Rush said MyEZInstall is still operating in a beta phase and is working to establish a national network of licensed contractors. Once the network is built, he intends to attach the site’s search engine to the checkout portion of manufacturer-approved resale websites in hopes of connecting purchasers with licensed contractors.

“We want manufacturers to share our site with their contractors as an opportunity for them,” Rush said. “It’s our goal to list their premium contractors first. If someone is buying Brand X, we’ll list Brand X’s factory authorized contractors first, which is beneficial for the buyer, the contractor, and the industry as a whole.”

Rush acknowledged that HVACR distributors are absolutely essential to MyEZInstall’s success.

“HVACR distributors exist because they’re great at what they do,” he said. “They have excellent training, lots of space, and well-stocked shelves. They’re the experts when it comes to sending and receiving equipment. Online resale shops don’t have space for HVAC equipment or the expertise to stock, purchase, and ship this equipment properly. It’s our aim to preserve the traditional supply chain. Our model is specifically designed to make the consumer-direct sales channel more profitable for HVACR contractors as well as manufacturers and distributors.”

Time to Step Up

While e-commerce has established a new alternative for equipment sales, HVACR distributors acknowledge they must band together and identify how they fit into America’s new internet sales arena.

“We have got to step it up,” said Meachum. “The big-box world is causing HVAC equipment to become a commodity. We have to ask ourselves, ‘What are we bringing to the supply chain to keep this from happening? What support are we offering? Are we doing a great job in our markets? Are we doing a great job supporting our contractors?' Big-box stores and resalers can’t do what we do; they can’t handle that responsibility.

“Collectively, we have to come together and insist that we’re not going to let some e-commerce conglomerate eat us up,” Meachum continued. “We’re going to rise above this; we’re not going to let this happen – not without a fight.”