HVAC Distribution and Games Workshop

In Practise Weekly Analysis

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HVAC DistributionI very frequently get the question: 'What's going to change in the next 10 years?' ...I almost never get the question: 'What's not going to change in the next 10 years?' And I submit to you that that second question is actually the more important of the two because you can build a business strategy around the things that are stable in time. - Jeff BezosThis is one of our favourite Bezos quotes. Although we enjoy studying fast-moving industries and disruptive business models, there is something special about studying ‘boring’ businesses that have stood the test of time. Selling HVAC equipment is one of those businesses. And it just so happens that the largest player, Watsco, is part of a small group of 30 US companies that has grown 18% annually for the last 30 years. We interviewed an executive with over 30 years HVAC wholesale experience to learn more about HVAC distribution.In the US, there are ~120m installed HVAC units and shipments have grown steadily at 4% per year since 1980. This steady growth is mainly due to replacement demand which makes up 85% of installed units. Consumers replace their HVAC system every 10-15 years which creates a steady flow of demand to replace existing units.The impacts of COVID could drive higher replacement demand in the next few years. We’ve been stuck in our homes for 10 hours per day for most of last year with HVAC units running 2-3x as long as usual. Also, in March, sales of new US-single family homes jumped 20% annually to the highest reading since August 2006 and home sales in the South, where there is greatest demand for HVAC units, increased 40%. This could potentially drive higher replacement demand because OEM warranties do not transfer across homeowners. Homebuyers will typically be faced with the decision to immediately replace the HVAC unit to get a warranty. So the more people move home, the quicker the warranty expires. This drives greater replacement demand.There are also some peculiar aspects to HVAC distribution which are very different from other industrial or B2B distribution businesses. Distributors sit between manufacturers and smaller business customers that typically install or deploy the OEM’s product. So the distributor’s role is to help the contractor save time so they can complete the job and get paid quicker. This means the distributor usually needs a very wide selection of products that are always in stock, a network of branches close to contractors so they can easily drive to pick up products, and a technical understanding of the products to help contractors deploy products efficiently. This is the case for companies such as Grainger in MRO distribution, the IT services resellers, POOL Corp, and many more we’ve studied.However, this is not the case in HVAC. Distributors only carry one brand per product line. OEM’s like Carrier and Lennox demand that each wholesale distributor may only carry their specific brand in that product category. So each distributor only carries one duct and one ductless brand. In a traditional sense, this almost defeats the objective of a distributor as contractors now need relationships with multiple wholesalers for different brands.The OEM seems to own the mindshare of the end user. For example, compare the differences in the customer buying journey for plumbing and HVAC products:
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