When the HVAC Systems Council met at the annual HARDI conference, talking about change wasn't unusual. New developments permeate such sessions every year. What was different this time, however, was the convergence of forces that seem to have an effect on most wholesalers: the impending transition deadline to R-410A, the heightening insecurity over the financial markets and python-like squeeze on credit, a downward cycle of consumer spending and a new administration. You almost catch your breath enumerating the variety and forcefulness of the changes.
For Tom Roberts (pictured), chair of HARDI's HVAC Systems & Equipment Council and president of Kansas City, MO-based cfm Distributors Inc., two red flags and one bright green one stood out as he assessed the meeting and its aftermath.
One major element was the unsettling feeling that some distributors hadn't yet planned for the change from R-22 to R-410A systems. Some distributors had not faced up to the reality that they need to be in control of their own R-410A transition plan, according to Roberts. “Have they decided when they are going to make the move and include evaporator coils, txv's and packaged units in their planning? And more importantly, how are they communicating this information to their customers?” he said.
Having a plan in place means more than creating a sheet of paper with a to-do list on it. It's a matter of who controls the destiny of your business — you or other forces. “The most important part of this transition is for distributors to pick a date and optimize their own distribution plan rather than let the manufacturer dictate exactly what happens and when,” says Roberts. “If you don't determine the timing, you lose control of your business's ability to supply your customers with complete systems, while at the same time risk huge obsolescence costs.”
While the transition to R-410A systems might cause a headache for distributors, it's very similar to a pain they have suffered in the past transition to higher SEER levels. The other change that causes Roberts concern is one that fewer distributors have battled and very few have yet considered: the deflation of commodity prices.
Distributors think they're good at managing price and profitability in an inflationary market, and they probably are, Roberts says. They might complain about price increases, but you end up with far more gross profit due to appreciation of inventory. In a deflationary market, it is extremely difficult to keep your inventory short enough so that your true inventory costs leave room for expected gross margins at declining market selling prices without running out of inventory.
“I see distributors completely reversing their ordering and inventory practices over the next one to two years, as inventories go down and decline to their lowest levels in the past 10 to 20 years,” Roberts says. “This may become a required skill in order to maintain both margins and adequate supply in a market that drifts downward due to these deflationary pressures.”
“The additional problem this creates for some distributors is that it may greatly accelerate their tax burden. Those distributors who utilize LIFO [Last In First Out] accounting, at least, will see accelerated taxes due to higher taxable profit in a deflationary world, as they sell their lower cost (last in) goods first and see their profits appear to rise due to LIFO.”
If Roberts seems like he's a pessimist, it would be the wrong interpretation. Recognizing a difficult patch doesn't automatically brand the person as a cynic. In the world of green, Roberts sees a “green tsunami that will allow distributors to sell like crazy.”
“Before green, we were mostly hook fishing. Now we're going to be net fishing,” Roberts says, referring to the vast opportunities of green-laden HVACR that are emerging. While we are seeing some settling of the energy markets now, the volatility and disruptions caused by $4-a-gallon gasoline and high natural gas prices will remain fresh in the consumer's mind for a while. We have a convergence of people seeking environmentally responsible behavior, people wanting to send less money to foreign oil-producing nations and those who just want to save money. For all those reasons and more, investing in energy-saving HVACR systems is gaining in popularity like never before.
Tom Peric' is the editor of HVACR Distribution Business magazine. Contact him at 856/874-0049 or [email protected].
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.
Source: Investopedia — A Forbes Digital Company