Last year ended on a disappointing note for many, including distributors. The Heating, Airconditioning, Refrigeration Distributors International (HARDI) announced that average sales for North American HVACR distributors were down 12.2 percent in December, compared to the previous year. On the bright side, distributors in all U.S. regions ended 2011 in positive territory and also reported higher inventory levels than the same time in 2010.

One clear cause of the poor year-over-year comparison is the $1,500 energy efficiency tax credit that expired at the end of December 2010, causing a boost in sales as people rushed to buy units and claim the credit, noted HARDI economist Andrew Duguay. In addition, December 2011 weather was seasonably mild throughout the majority of the United States, which may have caused a minor, short-term shifting of consumer habits in heating equipment purchases.

But things are looking better for 2012 noted Chrissy Nardini, president, American Metals Supply, and past president of HARDI. “Overall we feel more optimistic than we did a year ago at this time. We are seeing a slow rebound, as multifamily housing is still active but residential is very slowly coming back. Commercial activity is also decent with hospital, university, and school work leading the way for large jobs.”

Finding Bright Spots

Indeed, multifamily housing is currently the only real bright spot in the market, noted Steve Porter, vice president of product management, Johnstone Supply. “We believe the economy will continue to be a concern this year. Right now we are continuing to center our efforts and product focus on the replacement and repair sectors of the business. Multifamily housing is the only sector experiencing growth right now, and geographically, the weather hasn’t helped the industry much either. For instance, the West has seen very moderate summer temperatures for the past three years, lowering cooling season sales quite a bit.”

While Dale Norton, sales director, Meier Supply Co. Inc., is optimistic about continued growth this year, he is also cautious. “The commercial market has been strong for us, and we expect this will continue through 2012. Residential has had some mixed results going into this year. For example, mild weather has already had an impact on furnace sales and we’re also feeling the impact from previous years’ incentive programs that had pulled equipment sales forward.”

Porter agreed that distributors are still feeling the effects of the loss of the $1,500 tax credit, as evidenced by big decreases in volume compared to the end of 2010. “The incentive helped drive sales in our industry but the impact was short lived. With the expiration of that program, sales have declined and unfortunately we don’t believe there will be any significant new tax credits in the near future.”

Another issue hanging over the industry is whether or not dry-shipped R-22 will be as much in demand this year. As Talbot Gee, executive vice president and COO, HARDI, noted, “In 2011, we predicted 31 percent of all cooling shipments would be R-22 units, while overall unitary volume would only increase minimally. Our forecast was on track until early fourth quarter when it became apparent availability issues had dampened sales of these units.”

Still, Norton believes this is a segment of the market that can’t be ignored, as a dry R-22 unit provides a solution as a less costly replacement than converting a complete system to R-410A. “As long as the availability of dry R-22 units is intact, there will be a demand that will slowly erode as new R-410A systems are installed.”

DeWight Wallace, CEO, Johnstone Supply, also noted that with the Department of Energy (DOE) and the Environmental Protection Agency (EPA) looking to manage the supply of R-22 and restrict dry units, it will challenge a distributor’s ability to manage and forecast inventory on those items.

Fighting Regulation

Another issue on tap for 2012 is that of DOE’s final rule establishing regional standards for air conditioners, heat pumps, and furnaces, which HARDI is fighting in court. HARDI sees these regional standards as “an abuse of the regulatory process and overreach of authority which resulted in a rogue decision to impose unreasonable energy-efficiency standards on distributors, installers, and users of residential heating and cooling products in the United States.”

Porter agreed, noting that the regulations are no help to the industry, and without question, the DOE efficiency standards will be both burdensome and very difficult, if not impossible, to enforce. “This is one of the worst things that could happen for both the industry and the consumer. These standards will not accomplish what the DOE intended; instead, there’s a real danger of them completely backfiring. It could result in air conditioning becoming less affordable overall by virtue of pushing distributor costs along to the end user, and consumers will then begin to look for less efficient options such as room or portable air conditioning.”

He added that the new standards will also keep older equipment in the field longer and will create a market for used equipment in Northern states, where it can be difficult or impossible to install 90 percent furnaces in many existing homes. “Some border states will even be required to carry duplicate equipment, putting pressure on their inventory carrying costs as well as their ability to economically provide adequate warehousing space.”

The timing of the regional standards is also questionable to Norton, given the current status of the economy. “It doesn’t seem to make good sense to increase the overall cost of an installation to a homeowner, possibly putting it out of reach for some. In addition, many distributors have business units that fall into multiple regions, and the new standard will force them to provide multiple SKUs and add additional stress to their already high inventory numbers. That being said, if manufacturers can somehow keep the cost of the equipment economical for all, there would be returns — the biggest one being decreased utility bills.”

Wallace noted that the effects of regional standards may be felt sooner rather than later. “With the regional regulations and government-sanctioned sell-through, by the end of the 2012 winter season, a national distributor like ourselves could find itself out of 80 percent furnaces in the North and 13 SEER air conditioners and heat pumps in the South.”

Obstacles and Opportunities

Along with the challenges listed above come opportunities for distributors. As Norton noted, “New technologies and new legislation all provide opportunities for new business. With the phaseout of R-22, we’ve worked diligently to position ourselves as the authority on refrigerant. Providing our customers with the latest updates through our electronic newsletter, the ‘Meier Minute,’ educating our team, and sponsoring regular technical training sessions all enforce our cause.”

Andrew Verey, vice president of sales and marketing, Johnstone Supply, stated that there is a real opportunity in helping contractor customers become better at “consultative” selling. “That involves showing them how to maximize face time with their own customers by asking about air quality, the condition of their water heater, or other related areas to find opportunities to increase their overall sales. Also, continuing to provide relevant and focused hands-on product training in collaboration with strategic suppliers is a paramount focus for us.”

The recession itself has also created opportunity, as some distributors have responded by cutting back service levels and people — Nardini plans to buck that trend by increasing services and personnel. Hopefully this will offset her bigger challenges, which, as a distributor of galvanized steel and HVAC supplies, are the fluctuation in steel pricing and not having a lot of inventory on hand when the price drops. “Steel fluctuates more in a year than it used to fluctuate in 10 years.”

The economy has not yet fully recovered, which means there will likely be challenges ahead for distributors. The biggest challenge for most, said Norton, is figuring out how to expand and build a profitable business in a stagnant economy, inside an industry already flooded with competitors. “All we can do is continue to train and develop our team while searching for individuals that are considered the best in our industry.”