What Happened This Past Year?

Gee began by recounting market trends from this past year in the distribution industry.

“Demand was clearly greater than expected this year,” he said. “It was pretty dark, doom, and gloom in February and March when we had the shutdowns. There was a lot of concern over whether there would still be demand for our products. The numbers overwhelmingly showed that not only did demand exceed those low expectation, demand this year — especially on the HVAC side — exceeded even what would have been a normal year’s expectations. “

In addition to this, consumer spending and replacement rates were stronger than expected throughout 2020, especially on the residential side. As e-commerce rose during the shutdowns, some predicted that COVID-19 would cause the final shift toward a market where e-commerce dominated. While some of that happened, Gee said, the e-commerce advantage was shorter-lived and less-than expected; the “return to normal” occurred faster than many predicted.

Gee explained that customer demand far exceeding industry expectations resulted in a large gap between supply and demand of products. Citing statistics that HARDI had gathered from 2020, Gee showed that everybody in the supply chain — manufacturers to distributors to contractors — were caught off guard by the disparity between predicted and actual customer demand. Plus, because of social distancing measures, many manufacturers could only operate their factories at partial production levels. This led to long delays in the fulfillment of product orders.

The benefit of this large gap is that it allows manufacturers to recover from shutdowns and partial production levels rather quickly.

“Sectors where our manufacturers tend to live — HVAC and plumbing — are recovering rather quickly, because they’re needing to ramp up so much,” said Gee. “We’re still going to have a capacity issues because of the distancing requirements, but the health of the manufacturers in our industry is very strong given what we’ve had to go through.” He explained that while nationwide manufacturing has decreased noticeably and raised economic concerns, that isn’t exactly the case with HVAC/plumbing manufacturers.

Why Did Demand Remain High?

After examining market trends, Gee shifted to a discussion of why demand remained elevated. He explained that the shutdowns in early 2020 resulted in a bifurcation within the consumer market.

“For a lot of the upper-middle or upper class customers on the residential side, they had to work from home, but their income didn’t change dramatically, their employment didn’t get hit dramatically hard, and many were spending a lot more time at home,” Gee said. However, the lower-middle and lower classes were hit extremely hard, often losing employment and income outright. Still, the CARES Act and its stimulus checks provided funds that kept these classes afloat.

“What everyone is watching now is whether the expiration of those enhanced federal unemployment benefits start to take a hard hit on overall consumer spending,” said Gee.

What’s Ahead for the Industry?

Gee also discussed predictions and expectations for the distribution industry in 2021. Barring another round of shutdowns, Gee said that he is “cautiously optimistic” that the economy will continue to get back on track after a tough year. However, he explained that a 2021 recovery is a slippery slope, since state/local government budgets have been cut and nonresidential construction declined, meaning that commercial markets have been hard hit and may experience a slower recovery.

“You’re going to see a very slow recovery on the non-residential side because the demand for the space and facilities is not going to be what it was,” said Gee. On the HARDI side, Gee says that HARDI expects to see low single digit growth on the distributor side over 2019 at the end of 2020. Although higher-wage earners are likely to replace their systems in cooling systems, lower-wage income earners will be much less likely to replace, leading to an overall predicted reduction in residential replacements following the heating season.

What Have We Learned?

Michael Adelizzi also spoke about how the supply chain weathered 2020. He explained how many distributors have put in place measures that are common across the country — protecting workers through social distancing and working from home (for certain positions), limiting or eliminating travel, and reducing touchpoints on deliveries.

“We were extremely surprised at how creative and nimble our industry is as we worked through these disruptions,” said Adelizzi. “Our products are in extremely strong demand — we are very pleased and surprised by that.” Similar to Gee, Adelizzi said that ASA was positively surprised at how quickly the economy snapped back after the initial shutdowns in the beginning of 2020.

He said that the timing of a return to normal in the distribution industry depends largely on the timing and availability of a vaccine. In addition to this, he predicted that lead times and disruptions to the supply chain will likely exist at least through the first quarter of 2021, although inventory and supply issues will eventually level out.

Adelizzi said that ASA has spent time looking at the largest trends that distributors should be aware of. “Obviously, talent acquisition is one of them,” he said. “Another one is technology — what’s going to be the next Amazon?” In addition to this, an increasing number of contractors are considering moving to non-traditional channels of distribution (online, big box stores, etc.), explained Adelizzi. Plus, consumers are now able to research products online and order them directly, and then find an installer, bypassing the usual distributor/contractor channel. These represent disruptions to the distribution industry that will challenge them to grow going forward.