As with most sectors, distributors serving the HVACR/Plumbing/PVF sector struggled through 2009. “I’ve been covering the industry for 33 years and have never seen things so bad, so across the board,” says Jim Olsztynski, editor of Supply House Times.
“Now, what passes for prosperity is that some regions have suffered slightly less devastating blows than others from the downturn.”
New government regulations on top of the general recession created an environment where many companies were forced to make significant cuts during the year. And the maturity of the market continues to dampen sales for the industry, says Tom East, president of Refrigeration Sales Corp., Valley View, OH.
As the U.S. government sought to curb pollutants, several government regulations were put into place that had a significant impact on how HVACR distributors could do business.
Some of the more significant rules implemented include the phase-out of the refrigerant known as R22 by Dec. 31, 2009. Distributors were told, via a ruling from the Environmental Protection Agency, they would not be allowed to sell already existing products using that refrigerant after that date.
Changes were also made to the Seasonal Energy Efficiency Ratio (SEER) allowed, with further changes being discussed already. If the latest proposals go into effect, distributors may have different standards for different locations, warns David McIlwaine, former president of Heating, Airconditioning & Refrigeration Distributors International.
“What little good news exists in our industry stems from the fact that HVACR and plumbing are basic necessities of modern life,” Olsztynski says.
“When something breaks, repairs have to be made.”
But even the repair/replacement market is challenged by improved durability and longer warranties on existing products, East says.
The move toward Green building has also provided some positives for the industry.
Government incentives have encouraged consumers and contractors to become more educated about environmentally friendly products and spurred growth in technologies related to geothermal heating and cooling, solar energy and water conservation.
But even with the growing interest, green spending isn’t enough to replace losses due to the recession, Olsztynski says.
“A harsh truth is that without government economic incentives, the payback period in energy/water savings is too long to get many people excited about greening up their homes and businesses.”
While most companies held back on making major expansion or acquisitive moves, other companies, such as WinWholesale, took advantage of the market to make strategic expansions. Here are some of the key acquisitions and expansions in 2009 and the first few months of 2010:
WinWholesale has long been identified for its aggressive expansion activity. While the distributor may have scaled back in 2009 compared with prior years, the distributor pushed forward with expansion at a higher rate than most of its competitors.
WinWholesale opened new Winnelson locations in Florida and North Carolina in 2009. And subsidiary Noland expanded in Florida and Virginia. In the first few months of 2010, Noland continued its expansion in Florida and opened its first Louisiana location.
“We have always emphasized to our local companies the importance of staying close to customers, to build solid relationships with them and understand their needs, then do everything possible to exceed them,” said Rick Schwartz, WinWholesale president and CEO. “That’s even more important today when business is making a comeback and the competition is strong.”
Watsco’s key expansion maneuver in 2009 came in the form of a joint venture announcement with Carrier Corp. The newly formed company, Carrier Enterprises, exists as a separate operating subsidiary of Watsco.
The move bolstered sales for the HVACR distributor, contributing $588 million in sales for 2009, more than one-quarter of Watsco’s annual sales for the year.
Activity may also be picking up in 2010, with Watsco announcing the acquisition of Tennessee-based The Bill Voorhees Company through Watsco’s subsidiary company East Coast Metal Distributors.
While acquisitions were not on the table for Johnstone Supply, the HVAC distributor focused on internal expansion in the first half of 2009 with the expansion of its Northeast regional distribution center in Lehigh, PA.
Refrigeration Sales opened two new locations over the last 18 months, one in Toledo, OH, and another in Pittsburgh, PA. “Acquisitions in our business seem to be very difficult. There just aren’t that many opportunities available right now,” East said.
There are lessons to be learned from the recession with regards to M&A activity, Olsztynski warns: “I suspect we’ll see mergers and acquisitions heat up again as recovery takes place, but this recession has been a sobering reminder of the pitfalls of financial wizardry as a business model versus the old-fashioned concept of making and selling things people genuinely need.”