This is a part of the 2017 Distribution Trends Special Issue. The annual feature was researched and written by MDM based on interviews with dozens of distributors, industry experts and manufacturers. MDM also conducted a survey of its readers to uncover the trends outlined in this issue.
2017 Distribution Trends Special Issue
Slower growth than previous years, but activity may be picking back up. General sentiment in this sector is that the recovery cycle of recent years wasn't as robust as it should have been but is positioned to accelerate in 2017. Among the top 10 distributors that reported 2016 sales, revenue growth was 1.8 percent for the year. However, Heating, Air-conditioning & Refrigeration Distributors International reported that the annualized growth for its members during 2016 was 5.7 percent. This compares to the 6.1 percent gain in 2014 and was the second consecutive year of slower growth since 7.3 percent was reported for 2013.
Consolidation rolls along for HVACR & plumbing distributors. The top distributor in this category, Ferguson Enterprises Inc., Newport News, VA, acquired 13 companies in 2016, outpacing the rest of the list. Other large players, like Watsco, Winsupply and F.W. Webb, also grew through acquisition in 2016. Most M&A in this vertical, however, takes place less at the distributor level and more at the supplier level, according to Talbot Gee, CEO, Heating, Air-conditioning and Refrigeration Distributors International. "About 70 percent of our distributors sell a unitary line and out of that, the majority of them have one that's got some degree of protected or limited territory," he says. "So that does sometimes make it difficult for consolidation and roll ups in our channel because competing OEM's may not authorize a distributor to carry a competing line. And there might not be an opportunity to convert a line in an area because of an incumbent distributor."
Companies hoping for reduction in regulations. A pause on regulations from the federal government is welcome relief for HVACR & plumbing distributors, according to Gee, who is cautiously optimistic for even more aggressive pro-business moves in coming months and years. "We got some very positive early movement on some labor type issues, which made employers feel a lot better," he says. "But we are still hanging onto what the new tax policy is going to look like, and, to a lesser degree, health care and health insurance. In terms of the big costs of doing business, there's still some uncertainty there. I think is everyone's pretty convinced that you're not going to see a surge in those things, but you can't be banking on a reduction quite yet."
Specifically, regulation on refrigerants and importing of refrigerants has "created a lot of volatility this year," says Mark Bray, supply chain director, ACR Supply, Durham, NC. The phasing out of R22 has been especially traumatic for distributors. "Supply is dwindling down, and so it's been an interesting couple years and definitely interesting couple months with just all the volatility there in the refrigerant market."
Distributors playing catch-up with e-commerce. A recent partnership between HARDI and MDM confirmed what Gee suspected had been the case for HVACR & plumbing distributors: "Our vertical is less mature than most other wholesale channels as it relates to digital commerce," he says. "But I will tell you the amount of time, effort and resources being put into catching up quickly in our channel is pretty spectacular. I think as a whole, distribution has a big challenge in front of it to figure out how to deliver that Amazon-like customer experience while also supporting and defending authorized distribution."
Not surprisingly, customers are looking for an increase in frequency of delivery because the "consumer is used to having it now," according to one Mid-Atlantic HVAC and plumbing distributor owner. "We're selling to a dealer who is selling to a consumer and they don't want to be without cooling or heating. And they're used to having it now in the rest of their lives, so why can't it be that way here, as well?"
Merger & acquisition highlights in 2016:
Ferguson Enterprises acquired 13 companies.
Watsco acquired a 10 percent stake in the Carrier Enterprise Northeast joint venture.
Winsupply acquired K&J Supply.
F.W. Webb acquired Lincoln Supply and State Line Supply.
Average growth for companies on the HVACR & Plumbing Market Leaders list: 1.8%