Change was the key word at the Heating, Airconditioning, Refrigeration Distributors (HARDI) annual conference, held Oct. 16-19 at the Hyatt Regency in Chicago.
Adam Fein, president of Pembroke Consulting, gave one of the first presentations of the conference, which was titled “Winds of Change.” He proposed that the old model of buying low and selling high is altering. “Wholesale is on the cusp - or in the middle - of a productivity revolution,” he said.
Markets are evolving faster than the channels, Fein said. Most wholesalers are more than 25 years old and their manufacturer-distributor relationships are based on tradition. This embeds extra legacy costs into wholesalers' businesses.
Fein, who wrote the study Facing the Forces of Change for the National Association of Wholesaler-Distributors, said the new do-it-yourself mentality of self-educated customers that is so visible in the auto industry where profits are down to 4% from 19% is permeating every distribution channel - retail and wholesale. Any industry has customers that say, “I'm going to do it myself because I'm going to do it better, faster, cheaper,” said Fein.
These customers are getting their information from a multitude of sources. The NAW study reports that by 2008, 32% of contractors will be exchanging e-mail with salespeople - vs. 12% in 2003, 30% will get product information online - vs. 7% in 2003, and 26% will check price and availability online - vs. 3% in 2003.
Fein said these numbers suggest customers will be less willing to pay for unneeded distributor sales and activities. Technology workers will make up the largest percentage of workers in distribution companies at 26%. Business management and finance will make up 19% and sales will make up 17%.
Another of the forces of change Fein presented was strategic sourcing. He reported Interline Brands' success in replacing price discounts with turnkey marketing tools such as custom catalogs. The Jacksonville, Fla.-based company did analyses on customers' costs and figured out how to offer volume discounts. See more on Interline in the SUPPLY HOUSE TIMES cover story, May 2004, page 38.
Logistics is another force that's playing an increasing role in the distribution industry, Fein said. Logistics companies are challenging the traditional supply chain economics. Their services include picking and packing, kitting, order fulfillment, and order entry and processing. “Take away their sales and marketing and they look an awful lot like a distributor,” he said. More than 70% of manufacturers expect logistics to be much more important in the next five years, and logistics companies will be a benchmark for efficiency in the industry.
Getting paid for the value you add is another concept Fein said most wholesalers are going to need to look to in order to stay successful. “You can't charge for services you're already offering,” he said. “But you can create new services to charge for.”
Fein recommended wholesalers sit down with their customers, forget what's going on in their own business and ask customers what they need and where their pressures are coming from. Then wholesalers can use this information to figure out what they can do to help. These fee-based services can be targeted to meet the different needs of different contractors.
The idea of service seems to be permeating other channels in the industry, as well. The HVAC Systems Council hosted a session, “Why IAQ Needs 'Total System' Approach to be Successful.” One Denver-based contracting company, Four Seasons Heating & Home Comfort Solutions, discussed its success after it threw out the old HVAC sales system and began focusing on education of the total home comfort system. As a result, the company has shown a net profit up 53% in 2004 over its 2003 sales, even when material costs are up and add-on sales are at a low.
To achieve this, Four Seasons uses a team of consultants - made up of mostly women - who act as educators. They start by creating client presentations through the company's online automated building blocks system. The presentations start with pricing information, first showing a standard system and then an enhanced system. After the closing, the company follows up with consumer-level education on the equipment with videos and DVDs and reminder e-mails to notify customers when they need to change filters and cartridges, which can all be shipped the same day through the company's online store.
Paul Goldman, business leader of GE Industrial Systems, ECM, said in 2004 his company sold 900,000 variable speed units at $300 per unit. Wholesalers can tap into this opportunity and sell a whole comfort system, rather than just selling components and competing on price, he said.
Gary Southern of Four Seasons said he is currently working on packaging his company's program for contractors around the country to use.
Ed Scott, an industry veteran, author and consultant, concluded the conference sessions with a presentation on the HVACR industry and the economic outlook.
The general economic outlook is stable, Scott said. His expectations of oil prices are that they will eventually stabilize around $40 to $45 per barrel, and won't affect the long-term outlook. The unemployment rate is not that bad either. “What most people don't remember is that until the '90s, 5-5.5% was ambient,” he said. “Now it's more around 4%.”
Scott also said for the next 20 years population growth will continue to fuel the homebuilding forecast, which is at 1.75 million new homes in 2005. This is down from 1.98 million in 2004, but there will also be a small increase in low mortgage rates in the coming year. The residential aftermarket will continue to have a larger installed base as more houses are put up than torn down each year, and consumer confidence will increase activity in remodeling. The commercial market, including lodging and offices, is up 8-10% after a slowdown following 9/11.
Despite problems such as commodity inflation, which has caused exorbitant prices for the staples of the industry, Scott said to expect expansion in both residential and nonresidential construction in 2006.
“Ours is an industry with a sound economic outlook and a role to play,” he said.
- by Ashley Anderson