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HVAC Distributors Predict Modest Growth in 2016

March 16, 2016

The latest report from Heating, Air-conditioning, and Refrigeration Distributors International (HARDI) showed that average sales for HARDI distributor members increased by 8.2 percent in December 2015, but annualized growth for all of 2015 registered a bit lower at 5.7 percent. This compares to the 6.1 percent gain in 2014, the second consecutive year of slower growth since a 7.3 percent increase was reported in 2013.
 
This may indicate that another year of modest growth is on the horizon.
 
“The core economic drivers for HARDI members remain positive, but a softer macroeconomic environment the first half of 2016 year means they will have to work hard to achieve aggressive growth targets,” said Connor Lokar, senior economist, HARDI.
 
MODEST GROWTH
The economy is always a concern, said Michael Meier, vice president and COO of Meier Supply Co. Inc. in Conklin, New York, and president of HARDI. “If you live in a state where oil prices are a significant part of the local economy, then things are tough right now. However, the rest of the country seems to be ticking along at an OK pace. The feds raised interest rates, which usually indicates growth in the economy along with some consumer inflation.”
 
Lloyd Larkin, president of P&N Distribution Corp. in Burlington Township, New Jersey, has seen an increase in the number of commercial jobs he is quoting, which makes him optimistic about the year ahead.
 
“We have seen improvements in the residential new construction market, particularly in the multifamily market” said Larkin. “The housing market is improving slowly, as well, and unemployment in our area has been declining. We are expecting 2016 to be a good year for us.”
 
There are reasons for confidence in 2016, noted, Alan Beaulieu, president of ITR Economics, including the fact that a majority of U.S. total retail sales sectors are positive. “A strong consumer sector will carry the economy and provide HARDI members with willing-and-able customers on the residential side of the business. U.S. housing starts are on the rise, and U.S. retail sales for automobiles are strong. These indicators help confirm our expectations of overall consumer strength and signal that consumers are willing to buy big-ticket items.”
Meier certainly hopes this is the year consumers will decide to replace their worn-out HVAC systems with new energy-efficient equipment. “Inverter technology used in unitary and ductless systems is very energy efficient, but that equipment has not fared as well in this economy. Consumers are still repairing rather than replacing. High-end IAQ also seems to remain a more elusive sale with homeowners, unless the sale is rolled into a consumer financing package. But, the attraction to Wi-Fi-enabled equipment continues to grow with consumers’ fondness for smartphones.”
 
Larkin believes the repair-not-replace mentality is starting to change, particularly in areas that are offering attractive rebates for equipment upgrades. “In New Jersey, we have a strong energy incentive program that has driven the upgrade market to higher SEER levels and led homeowners to think about their houses as a system. In order to ensure efficiencies are achieved, the contractor must seal the ductwork, fully insulate and seal the house, and perform a blower door test before and after the job to ensure the proper amount of ventilation.”
 
CONCERNS AHEAD
In addition to the economy, the future of the traditional two-step distribution model is also under pressure, thanks primarily to the online availability of most HVAC products. “Threats are coming in from all angles that continue to nip away at the current model of distribution we’ve built our business on,” said Meier. “This has caused us to put more resources into innovation and technology, which will help us to stay ahead of where the industry is going and where we need to be to continue our success.”
Embracing technology will be the key to keeping the two-step distribution model alive, noted Larkin. “Distributors need to move quickly to take advantage of enhanced technology to provide better service. This includes online ordering, vendor-managed inventory, faster deliveries, and much enhanced product information and content available on a distributor’s website. This is a large investment, and it will be a challenge to provide given a everyday pressures on margins from these other channels that are making inroads into our industry.”
 
Fortunately, distributors often play a major role in providing much needed knowledge, training, technical assistance on the job site, and additional services to local contractor customers, said Larkin, so their know-how will always be required. “I believe this is much more critical in the HVAC and hydronics industries, where the products are not plug-and-play, and professional expertise in the field is required. But, this does not mean other sales channels are not and/or will not affect our industry.”
 
Ironically, while technology is seen as the key to ensuring success for distributors, it can be a challenge for the industry, as well. Manufacturers are designing increasingly complex systems that communicate internally and externally with other devices, perform self-diagnostics, and record information about a machine’s performance and operation, said Larkin. “This is making the units very sophisticated, and the challenge will be to train all the contractors in the field on this new technology. Distributors will play a major role in this area.”
As with just about every sector of the HVAC industry, regulations are also concerning distributors. Perhaps most daunting is the implementation of the U.S. Department of Labor’s new overtime guidelines, which call for raising the minimum amount that an overtime-exempt employee must make in base salary from $24,000 to more than $50,000. “While $24,000 may be too low, raising that number to $50,000 could have a number of unintended consequences that will impact the way our organizations are structured,” said Meier. “We are also continuing to watch the implementation of the Affordable Care Act, which is a concern for all businesses. We take great pride in being able to provide our employees good benefits, and the cost of doing so has continued to rise.”
 
How these regulations will affect distributors is an ongoing concern, but Meier is also worried that continuing regulations will lead to increased costs for consumers. “While there are benefits to purchasing higher-efficiency products, I have a concern that we may price consumers out of the market, which will lead to more repair-versus-replace scenarios, denying our industry the ability to provide the best solutions for consumers.”
 
There is no question distributors face a number of challenges going forward, but that should not keep them from continuing to work to improve every part of their businesses today, said Meier. “Whether it’s customer service, pricing optimization, inventory management, distribution optimization, or any other key factor, it’s important to pay close attention to all these segments of our business as they drive the bottom line. And, if you’re a member of HARDI, be sure to utilize all of its resources — we’ve found it to be very important for our profitability and continued success.”