Wheeler on HVAC: The problem with growing too big
I just heard that a large supply-house chain is in some deep financial trouble, which is silly because we are currently experiencing the best and most prolonged financial boom our industry has ever seen. How can you go "belly up" while everyone around you is getting rich? Easy. One method is by gobbling up every competitor you can and growing too big to manage properly.
I actually saw this coming a couple of years ago. This huge conglomerate had bought out a couple of local supply-house chains and, although each was allowed to keep its own name, customers knew who they were really dealing with. And the fact is, with three companies in the market all owned by the same group, HVACR contractors didn't have a lot of choices when it came to buying parts or equipment. So, the guys who are in trouble today became -- and started acting like -- a monopoly in our market.
Now, a person has to understand the HVACR market well to survive and thrive in it. It isn't a very professional business simply because most of our customers are very unprofessional. And to keep this customer base, you often have to do things that well-educated people would call bad business practices. And that's the problem. Most wholesale suppliers got started in this business and grew and survived because they knew their customers well and did whatever was needed to keep them happy and profitable. When the whole thing is taken over by a corporation, however, edicts come down from the top -- rules made up by recently hired Harvard Ph.D.s and the like, that make better "business sense" -- and the local grass-roots people are now tied up in knots by the new rules.
Did I say that our customers aren't very sophisticated business people? As you likely know, most of the time that is true, but not always. There are very professional HVACR contracting companies. However, they are usually already tied into selling mainstream brands such as Carrier, Trane, Lennox, etc. The majority of the rest of the supply houses that specialize in parts rather than equipment tend to have less of a solid dealer base and concentrate more on over-the-counter equipment sales. Thus, they also tend to sell to smaller, less-professional contracting companies. And therein lies the problem.
Talk to anyone who has run a successful independent supply house for any period of time. He'll say that you have to be a little more flexible with your credit limits when you're dealing with smaller contractors. HVACR contracting is a seasonal business that is wildly affected by weather and the economy. So, this month, because it's very hot or cold, wholesalers may sell everything they can get their hands on; however, they may not get paid for everything until late next month. Do small contractors have the financial reserves or banking credit lines to pay when the bill comes due? Absolutely not! And people at local supply houses recognize this fact of successfully doing business. Yes, they occasionally get "burned," but those are the hazards of running a good HVACR wholesaling company.
Try to explain all the above to a chief financial officer who has just graduated from some eastern college, though. Oh, it's true, nobody pays attention to how the local guys run their business, until someone gets in trouble with credit at a local branch. Then the edicts come down: "All accounts must be paid within 30 days and any accounts going beyond the 30-day limit will be required to purchase on a C.O.D. basis."
Two years ago I knew a local HVACR contractor who had this type of a problem with the three chains of supply houses that were owned and operated by the conglomerate that isn't doing too well today. His was a growing and thriving company, and he bought from all three wholesalers. His company was also set up to become an exclusive dealer for one of their brands of equipment. It was a cozy and promising relationship for the contractor and the supply house alike. Then things started to go awry, due to corporate interference and bungling.
First, the particular brand of equipment he was to become an exclusive dealership for started to have availability problems. Bean counters at the top decided not to invest enough in stock, so the dealer had nothing to sell. To counter this, the dealer bought some equipment (which had a different brand but was exactly the same) from the conglomerate's other chains.
Then the 30-day credit limit edict came down from the top of the corporate ladder. Having not been paid for the work he had out, the dealer was virtually cut off from purchasing from the company he agreed to have an exclusive relationship with for all parts and equipment. In addition, he could not purchase from the conglomerate's other chains either.
I saw the contractor's billboard on the highway north of here yesterday. It has been up for the past two years, advertising that he sells another brand of equipment. Does he buy from any of the conglomerate's chains today? Only now and then, when it's convenient or when he can't find what he's looking for somewhere else. He'll buy refrigerant there when it's on sale.
So, with all the buyouts in all sectors of our industry, it's easy to come to the conclusion that the future of this business is in the hands of the big companies. That isn't true. With a booming economy, there is a lot of loose capital to purchase other companies with. However, all that large corporations add to the business is overhead. Most certainly don't bring better, friendlier ways of doing business to the market. The fact is, whenever an industry corporation buys out a competitor, the purchased company starts looking and acting like the other companies the corporation owns. And if contractors liked that, they wouldn't have been doing much business with the company that got bought out to begin with.
So, how can the big guys survive and thrive in the HVACR supply-house business? By allowing industry-savvy people to run their own branches in their own way with as little interference and as few edicts from the corporation as possible. Yes, that means there will be some mistakes and losses -- especially when the economy eventually (and inevitably) turns sour. However, that's the way the business has always been run. And in spite of all this, the wholesaling side of the HVACR industry continues to be its most profitable and stable segment.
You can't squeeze out every drop of profit --refusing to accept occasional losses as inevitable -- without killing the goose that lays those golden eggs.