Miami, FL-based HVACR distributor Watsco Inc. has invested millions of dollars in technology in recent years – from business intelligence to mobile apps to IT personnel. And the company is reaping numerous benefits, including $4.2 billion in annual sales and second place on MDM’s 2017 list of the Top 10 HVACR & Plumbing Distributors. Following a solid second quarter, President A.J. Nahmad and Senior Vice President Barry Logan spoke with MDM Associate Editor Eric Smith about Watsco’s technology focus.
MDM: What’s the process been like over the last few years as you’ve increased your technology spend?
A.J. Nahmad: More than anything else it was opportunity. Things have been done in this industry – and this company included – the same way for a very long time. When we say “technology” that’s really an umbrella term. It’s really much more encompassing than that. It’s really people, process and technology. The opportunity was to do things bigger, better, faster using the most modern processes and most modern data and science and math and just make a better company and have a culture of continuous improvement.
Over the last few years, we were very deliberate about what we want to do, how we want to do it. We’ve done months’ worth of due diligence on various technology platforms and different strategies and who to bring on and who to engage as a third party. It’s an all-out effort that we spend a lot of time and energy on because we are quite certain that it’s good for the long term process of our business.
MDM: Does it create a real differentiation?
Nahmad: It does. We like to think that it will further widen the gap between us and our competition. Mostly along the lines of how well we can serve our customers. At the same time, what we hope it brings is the opportunity for other HVAC distributors to merge with us and leverage this technology in other geographies that we aren’t in today or markets where we don’t have sizeable share.
MDM: Is it tricky to balance people, process and technology and make sure they’re all growing in sync?
Nahmad: Truth is, you can’t do one without the other. At the end of the day, maybe it sounds cliché, but it all comes down to the people. The technology is really just to support people in their decision-making, in their analysis and how we serve our customers. These technologies are platforms for Watsco to be bigger, better, faster and more customer focused. The technology is the enabler, but at the end of the day, it’s all about the people.
MDM: Thinking about the generation gap in distribution, does a commitment to technology help entice younger people to work at Watsco?
Nahmad: Without a doubt that’s true. We have people that grew up in the startup world – software developers, UI/UX designers, entrepreneurs – who never in their wildest dreams thought they would work for an air conditioning distributor and now can’t wait to get back to work and produce and have a lot of fun working for this company because of the technology that we’re investing in.
MDM: Were there times when you thought the investment wasn’t providing the return you hoped for?
Barry Logan: If our press release says we spent $23 million on technology, the question is: What did we spend that on? The spending is largely our employees. It’s not third parties, consultants or some kind of software company somewhere. It’s the people that work here and the chemistry they’ve built over the last three or four years. It’s a great asset.The other asset that’s important is the product information that we now possess. That was one of the hardest things to create. How do we digitize every product that our industry has that is relevant to a market, relevant to a local marketplace, when that data really did not reside anywhere? It didn’t even
reside on the servers of our vendors. Just to have now almost 600,000 SKUs fully mastered and available for customers to see 24 hours a day and act on was another huge asset.
MDM: Does this mindset of investing in technology have to be driven from the C-Suite? How did you guys and Albert (Nahmad, A.J.’s father and the company’s chairman and CEO) create a culture where technology is a priority?
Nahmad: If a program like this doesn’t have support from the top, it will not work. That was never an issue here. The conversation started with ‘Well, let’s be better at technology.’ The second question was, ‘What does that mean?’ We spent a year figuring out what that meant. During that year, it was learning as much as we can, speaking to as many smart people as we can and getting a sense of where do we begin.
Ultimately, we realized that the foundation of all of these technology programs was data. Our data was largely inaccessible. Then came our BI program. I went on a roadshow and spoke to the leaders in each of our business units and explained to them what I had learned and asked for their buy-in and asked for their dollars to support this thing and to really put their money where their mouth was. To a T, they all raised their hand and said, ‘Yes, as long as I can go first.’ Everybody recognized how valuable this would be for their organization.
Truthfully, looking in retrospect, if they didn’t, they’re probably not the right leader for the business. So we had a lot of early buy-in, a lot of support. It took a lot of dollars, but it’s had a major impact on the business.
MDM: A.J., in the first-quarter earnings call, you said Watsco was somewhat insulated from Amazon because Amazon “can’t deliver a five-ton condenser by drone.” But do you see them as a threat?
Nahmad: I think it would be totally naïve not to consider Amazon a threat. It’s funny after I made that comment, I worried that I may have woken a sleeping dragon. I can see (Jeff) Bezos saying, “Challenge accepted.”
Look, a company like theirs that’s hyper ambitious, has all the capital in the world, has an unlimited license from their investors to experiment to the nth degree – it would be crazy to not consider them a threat. Now, I think we have some natural defenses in our industry, such as we sell technical products, and many of them are just so sizeable that it’s not in their sweet spot today. Although, I’m sure that’s evolving. The fact that our customers come to us to get questions answered and rely on us for customer service and marketing and financing and so on – those are nice natural moats.
These technology investments we’ve made – 600,000 SKUs, business intelligence and data analytics, much more of our business is going online, tens of thousands of our customers using our apps every day. There are a lot of things that we’re doing and investing in that should help not only with opportunistically taking advantage in the marketplace but playing defense against any threat – Amazon or otherwise.
MDM: How much of a role do acquisitions and joint ventures play in where Watsco goes from here?
Logan: I think it should play a significant role. It has in the past, and despite being our size and the strength we have, we’re still not in 20 states, for example. We still have a relatively low market share on the West Coast and our recent investment in Sigler (Russell Sigler Inc., Tolleson, AZ) built some potential into that market.
We still don’t sell two or three of the major OEM’S products on a large scale, and there are 1,300 independent distributors that are largely family businesses that will reach a threshold of family succession or some kind of threshold they have to deal with as a family. We’re actively and always seeking those great family businesses.
MDM: What are some of the challenges facing you now and in the near future?
Logan: I think the challenge is very subtle. The challenge is the guy that’s at your kitchen table saying, ‘Here’s what I recommend to you.’ Can be a small contractor trying to make ends meet, he might be a large contractor with eight or 10 employees. But that’s still a substantial portion of this market. So the challenge has always been, ‘How do we grow that customer base? How do we tie ourselves to the customer base?’
It used to be done through a very conventional way of having good salespeople with good personal relationships that built the trust to buy products in our stores. The challenge has always been how do you do more of that? And how do you protect your competitiveness to sustain that? So that’s why technology – getting beyond just the blocking and tackling – is critical.