New Year, New Business Climate

Jan. 1, 2012
2012 trends and insights for distributors, contractors and consumers

As we close another year and move into a new one, the HVAC industry has again proved to be resilient in challenging economic times. At the 2011 AHR Expo held in late January, the show attracted a record-number of attendees and helped instill a renewed sense of optimism throughout the industry. The momentum continued throughout the year, despite several factors that continued to impact the industry.

2011 brought us an uncertain economy, rising prices for commodities such as steel, copper and aluminum, and more government regulations. At the same time, the federal government eliminated a $1,500 tax credit for high efficiency systems at the end of 2010.

A challenging business climate is nothing new for the HVAC industry. In fact, most successful businesses in our industry are now skilled at adapting to changing economic dynamics in order to be competitive. We believe that Rheem's vantage point as a manufacturer of heating, cooling and water heating solutions provides us with some unique insights for distributors, contractors and consumers in 2012.

Inventory Management and Diversification: Key for Distributors

While today's economic environment has shown some signs of improvement, HVAC distributors will continue to face a tough business climate in 2012. The challenge always is to effectively manage inventory levels and product mix to maximize turns and avoid stock-outs. As working capital gets stretched, it is important that distributors and manufacturers communicate more effectively than ever. There must be a level of trust in the supply chain, which extends all the way back to the component and raw material suppliers. Transparency in manufacturer's supply and contractor's demand are the keys to minimizing cost in the total supply chain.

Another opportunity for distributors, especially in these tough economic conditions, is to consider selectively broadening their product offerings to grow their business. For instance, there have always been natural synergies between the plumbing and HVAC industries, and water heating products, such as tankless and heat pump water heaters, which align very well with an HVAC wholesaler's expertise. Heat pump technology — already familiar to HVAC contractors — enables water heaters to be more than twice as efficient as standard electric water heaters. And tankless water heaters use heating technology similar to what is found in a typical gas furnace; so it's relatively easy for HVAC contractors to learn how to install and service these innovative water heaters.

Contractors: Using Technology to Get Ahead

We all know that contractors are critical to the success of our industry. They are the link that connects manufacturers and distributors to homeowners. They have to balance the real-time demands of homeowners with the constant flow of new product information from distributors and manufacturers.

Going forward, it will be important to provide contractors with the right tools to educate homeowners on product features, attributes and benefits. That's because an increasing number of homeowners are preparing for major purchases by combing the Internet for information and doing comparison shopping before contacting local sales and service providers. Armed with information, consumers are likely to quickly dismiss contractors who they deem to be out of touch or uninformed in favor of those who demonstrate that they have the expertise that brings value and trust to the transaction.

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As such, in the coming year, Rheem envisions that more contractors will leverage new technologies such as iPads® in dialogues with consumers to illustrate that they can offer a comprehensive product portfolio that can meet homeowners' needs and budgets. According to eMarketer, 34 million Americans own tablets and — of that 34 million — 83 percent use iPads. Rheem has developed an Apple® iPad app that contractors use to educate homeowners while increasing their credibility. This app is highly visual and arranged in a logical, user-friendly format. For sophisticated heating and cooling products — like integrated air and water solutions or high efficiency furnaces and air conditioners — educating consumers about the advanced aspects of these solutions via progressive devices like iPads will resonate well.

Meeting Consumers' Needs for Value and Efficiency

Consumer demand ultimately drives product development throughout both the HVAC and water heating industries. In 2012, we expect consumers to seek out more energy-efficient and technologically advanced solutions that don't force them to sacrifice comfort.

The $1,500 federal tax credit for high efficiency HVAC systems that ended in 2010 helped spur greater awareness for more energy-efficient heating and cooling options. However, once this credit expired, consumers reverted back to purchasing value-oriented products. What this indicates is that the current economic climate will not support the level of higher-end sales that we would all desire. That puts a greater burden on manufacturers to develop solutions that meet these end-user demands for energy efficiency, but at a more attractive price point.

On the water heating side, Rheem recently launched a first-of-its-kind water heater that hits this sweet spot for consumers. The Rheem XR90 Extreme Recovery Gas Water Heater is an ENERGY STAR®-qualified 29-gallon water heater that has a first hour rating (FHR) of 90 gallons — meaning home-owners get three times the amount of hot water in an hour than the tank actually holds. It costs approximately 17 percent less to operate annually: only $261 versus $315 per year1 for a standard 50-gallon gas model2. The XR90 is a competitively priced product that delivers more hot water, faster and more efficiently than a standard, 50-gallon gas water heater.

Moving Forward and Innovating in 2012

From a manufacturer's perspective, it will be imperative that we work more closely than ever with distributors to better manage inventory levels; arm contractors with tools that provide the right information to close a sale; and develop product offerings that meet consumers' needs for efficiency and value.

Speaking for Rheem, we are working hard to accomplish each of these objectives, while continuing to innovate with new products. We believe that truly integrated solutions, such as our new commercial integrated air and water system, will meet the market demand for high efficiency and short paybacks. This product is designed for full-service restaurants and works by leveraging heat recovery technology to remove the heat from a kitchen and then using it as a highly efficient source for heating water.

While 2011 showed some signs of improvement, the economy will still continue to challenge even the best and the brightest in our industry over the next year. Manufacturers, like Rheem, will continue to work hard to help HVAC and water heating distributors, contractors and consumers navigate the constantly changing and evolving times.

Chris Peel is Rheem's senior vice president and chief operating officer. Peel is responsible for the growth of Rheem's Heating & Cooling and the Water Heating business units. He also oversees research and development, manufacturing, marketing, strategic sourcing and the company's replacement parts business. To learn more about Rheem and Rheem products, visit

  1. Based on U.S. Department of Energy annual operating cost figures comparing the Rheem XR90 to a standard 50-gallon gas water heater.

  2. Rheem defines a standard 50-gallon gas water heater as one that features a 40,000 Btu/h input and 0.58 EF.