According to the most recent report from Heating, Air-conditioning and Refrigeration Distributors International (HARDI), average sales for HARDI distributor members increased by 3.6 percent in December 2018, and the average annualized growth for the 12 months through December was 11.4 percent.

“Furnace season got off to a great start with sales growth of 21.7 percent in October and then 12.2 percent in November,” said Brian Loftus, market research and benchmarking analyst, HARDI. “The modest growth [in December] was enough to push the annual growth rate to a new peak rate of 11.4 percent.”

“December marked a strong finish to a historically strong year for HARDI members,” said Paul Hallmann, economist, HARDI. “While economic headwinds could create some softness in 2019, strength in the labor market and a cautious FED are encouraging.”

Herb Woerpel, editor-in-chief of Distribution Trends magazine, said distributors enjoyed exceptional success — and weather — in 2018, and he is confident that momentum will continue into 2019.

“Extreme weather often leads to busy warehouses,” he said. “Last year was an exceptionally warm year. More than 62,000 temperature records were broken in 2018, per the National Oceanic and Atmospheric Association (NOAA). The winter of 2019 is off to an aggressive start as well, thanks in part to Winter Storms Harper and Maya. Regardless of the weather, wholesalers who continue to motivate the employees who stock their warehouses and sell their products will continue to find success.”

SIGNIFICANT GROWTH

At Peirce-Phelps, sales were up significantly last year. This Bell, Pennsylvania-based full-service HVAC distributor has 21 locations in the Mid-Atlantic region that provide residential and commercial equipment, parts, supplies, and services to dealers and contractors.

“Our sales were up double digits versus the prior year, and business was strong in every HVAC segment,” said Brian Peirce, president and CEO of Peirce-Phelps and chairman of HARDI. “Our forecast for 2019 is continued growth but at a slower pace than 2018. We expect a more normal growth pattern of 4 to 6 percent.”

Peirce expects to see growth in all categories during the first half of the year, particularly for commercial sales, including VRF products and the multifamily housing market. The second half of the year may be a different story.

“I believe the economy will continue to be strong in the first half of the year as corporations and individuals benefit from last year’s tax decreases,” he said. “The second half could see slowing as interest rates rise and full employment make it harder to finance growth and find the quality people needed to fuel future growth and new initiatives. Tariffs have had a strong effect on raising the price of equipment, and if these increases continue at 2018’s pace, we could see many consumers priced out of the market.”

Sales were also strong at S. G. Torrice Co. in Wilmington, Massachusetts, which is a full-service HVAC distributor with 11 locations throughout New England that provide primarily residential heating and cooling equipment, parts, and accessories.

In fact, the company broke a new record for the number of unitary compressor-bearing units (CBUs) sold.

“Percentage-wise, our increase in sales last year was probably around 10 percent for both equipment and accessories,” said Stephen Torrice, president of S.G. Torrice Co. “Predicting 2019 is a tough call because there are so many factors involved, not the least of which is an economy that is due for a slowdown. But when that will happen is the big question. We think it will be later in 2019 if not into 2020. We’re still optimistic about 2019 and are budgeting for an overall 10 percent increase.”

One concern for Torrice this year is that he is beginning to see a slowdown in single-family construction, but he is not sure if that is a short- or long-term trend. He also noted that while multifamily housing continues to be strong, he is concerned that the commercial boom may be coming to an end.

“Although commercial construction is not a big part of our business, it affects our business,” he said. “It employs a lot of people who buy houses and need HVAC. And this segment of our economy is due for a slowdown. But when?”

Illco Inc., located in Countryside, Illinois, specializes in refrigeration, HVAC, hydronics, and pipe/valves/fittings (PVF), and has eight locations throughout Illinois, Indiana, and Wisconsin. The company transitioned to a new product line in 2018, and therefore, it is difficult to compare sales. However, its outlook for 2019 is very optimistic, as it is not only carrying a new line but offers a complete residential line and a commercial line up to 50 tons.

“We are looking forward to equipment growth in both commercial and residential products,” said Bill Bergamini, president and CEO of Illco Inc. “I think Section 179 [the tax break that allows qualifying equipment to be expensed immediately] should continue to spark commercial equipment replacement. This is a great sales tool for commercial contractors and a great opportunity for building owners to take advantage of. And even though we continue to receive price increases due to tariffs, business has stayed strong. We hope this will stay that way through 2019.”

LINGERING CONCERNS

While distributors are generally optimistic about business growth this year, there are a few issues that continue to cause concern. First among them is the ongoing labor shortage that is affecting every corner of the HVACR industry.

“The labor shortage remains a top concern,” said Bergamini. “All we require is a person with a passion to learn, a desire to work, and the drive to advance themselves. The days of hoping to find people with experience are unfortunately behind us. When we are fortunate enough to find a person with drive, we will teach them our industry. I think this is where we all are moving forward.”

Torrice contends that the labor shortage will remain the biggest problem for the foreseeable future.

“As knowledgeable, blue-collar baby boomers retire, who’s going to replace them?” he asked. “It’s a question above my pay grade. As for ‘making employment more attractive to job seekers,’ we went from a buyer’s market to a seller’s market, high unemployment to practically zero unemployment, so fast I don’t think we’ve even been able to process the ramifications. It’s going to get worse before it gets better — and I’m an optimist.”

The significant growth in e-commerce is also continuing to challenge the two-step distribution model that has always been prevalent in the HVACR industry. In addition, more manufacturers are selling direct to consumers, which threatens to upend traditional distribution.

“We believe in two-step distribution,” said Torrice. “We don’t want manufacturers going around us selling to our customers, and we shouldn’t go around our customers and sell to their customers. However, in the new world of the all-powerful [Jeff] Bezos [founder of Amazon], things are going to change. Things always change — sometimes just faster.”

For that reason, distributors are beefing up their own e-commerce sites, making it easier for their customers to purchase products online. As Torrice noted, developing a good site takes a lot of time and money, as well as a continued commitment to keeping it fresh.

“It needs to be constantly maintained and updated,” he said. “But the online user has grown to expect an increasingly bigger, better, brighter, louder experience. Especially those annoying millennials — they’re never satisfied.”

Peirce added that although progress has been made in the last five years, the HVACR industry as a whole is behind in providing strong online services.

“This is partially because of the high technical nature of the business and the need for a strong level of knowledge to properly choose the many parts of a system needed to meet our customers’ application needs,” he said. “We also need a uniform attributed data set from our vendors that can be used to market and sell the thousands of items we represent. Distributors are going to need to invest in technology and people to be successful in e-commerce.”

But overall, Peirce is optimistic about 2019 as well as the future of HVACR.

“We provide products that people need and want,” he said. “We make a strong positive impact on their quality of life by keeping them comfortable and improving the quality of the air they breathe. As always, we will face challenges such as Amazon, labor shortages, tariffs, and economic uncertainty. But if we continue to keep our eyes open, focus on the changing needs of our customers, and invest in services and technology that keep us relevant and cost effective, we will all continue to thrive in the future.”

Publication date: 3/25/2019

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