Recession? 10 Tips to Help HVACR Distributors Avoid One

You may remember the phrase “it was the best of times; it was the worst of times.” Well, the past two years have had both. And, for that matter, this year for many may encompass both with strong sales in the first half of the year and the rate of growth slowing significantly the second half … especially if you factor out price increases. It is leading to the question, “Is a recession on the near-term horizon?”

The best of times for distributors and manufacturers can best be exemplified by looking at your sales and gross profit dollars. Price increases generated from increased demand, reduced supply (supply chain issues) and commodity pricing accounted for much of this.  Additionally, the resilience of your work force to adapt and serve customers during trying times should be recognized. When has your outside and inside sales team ever had to follow-up so many times with suppliers on orders? Let alone the labor issues caused by retirements, turnover and hiring challenges.

But rather than rehash the past, let’s look forward.

If we listen to the economic and media pundits, the worst of times, as summarized with the R word (recession) may be coming. No one knows when but, in the words of Larry Summers, former Federal Reserve chairman on a recent Bloomberg television interview, “sometime within the next two years.”

Many distributors are reporting lower month over month sales growth rates and, when they look at their order books are noticing that stock sales are declining more rapidly (as measured by orders and lines) and that back orders being filled are a higher percent of sales.

Many believe some level of a recession is coming due to high inflation and rising interest rates which leads to “demands” for higher wages, higher product costs and a slow / declining economy … especially in markets driven by a strong residential market.

It’s our belief that there will be a national recession based upon the traditional definition but that it will affect certain regions more than others and certain market segments more than others. The end result is that there are opportunities to avoid a recession.

The question then becomes, what to do?

There are three ways of operating a business in a recession:

1. Cut expenses to manage to the sales / profit stream

   

2. Hope for better and muddle through, hence typically absorbing a loss, or
3. Manage well, be aggressive, take share and grow your way out of it.

It’s all about management choice and business philosophy. Decide to participate in it or not.

The good news is that, for most, business is currently “good” (it can always be better). This enables companies to profit when times are good. To gather their resources. To make desired, albeit prudent, investments and consider how to build a moat around customers while selectively targeting new opportunities.

Here are ten ideas to help you weather your personal recession (and decide to opt-out of the national one.):

1. Seek ways to improve gross margins by taking advantages of opportunities in your pricing files. Supplier price increases are opportunities for profit optimization. Customers that are very small, and probably unprofitable even at 25-30% gross margins, are your low hanging fruit, but there are other price-driven strategies to enhance margin … and remember, it’s about margin dollars, not margin percent. A tool like White Cup can help you sharpen the pencil to drive profits.
2. If suppliers are providing SPAs / ship and debits, take advantage of them.
3. Invest in it, especially operationally-oriented technology to automate processes wherever you can to enable you to do “more with less” while having a stable cost structure. This also has long-term labor cost implications.
4. While on the technology topic, identify tools that add value to your customers. As customer buyer demographics evolve, they want to interact with you electronically but, more importantly, they want self-service and ease. We call this providing omni-service. Some things to consider include:
   • A robust website, even if it only has an online catalog. Adding commerce helps, but sometimes you need to take one step at a time. Don’t let perfection be the enemy of progress and timeliness. Want a cost-effective, easy to implement website? Consider ES Tech Group or talk to CartFuze who can help. Need content? Talk to Distributor Data Solutions who has HVAC content and also syndicates content for manufacturers.
   • eMarketing … if you have the in-house skills, consider a tool such as HubSpot or make better use of your email marketing tool (they have engagement functionality.)
   • Text communications (and talk to ProKeep)
   • Electronically connect with customers
   • What modules does your ERP offer that are customer-facing that you are not using? Image capture? Delivery signing? Others
5. Supply chain issues may get better, but the emphasis is on “may”. If you have the cash, stock up on A and perhaps some B items. Nowadays you never know what the supply chain will do. In a recession, cash is king, but you cannot generate cash without something to sell.
6. Speaking of selling, review your sales metrics and ensure that your salespeople are salespeople and not account managers. (The most effective companies use tools such as those from White Cup and Sales Management Plus, both of which are distribution-oriented.) Accountability is key. A key distribution metric is gross margin dollars / invoice. It is all about profitable sales. Other key metrics relate to market share of a salesperson’s account base, the percent of their business coming from key customers and new account (and sales) development. Salespeople remain vital to customer retention, as the HVAC/R industry is a relationship business.
7. Customer insight can drive performance. Ensuring customers are satisfied means more than talking to key customers. A well-crafted survey solicits input while making them feel that their input is appreciated. Well-run companies take this input and act upon it to make their company better. This goes beyond an NPS score, this gets to root issues you can act upon. Channel Marketing Group’s Customer Satisfaction Index helps you identify what is important to your customers and how you perform on those key business attributes.
8. Data analytics help but remember that they are rear-view window oriented. They inform but are not deterministic, especially in project-oriented businesses. Use the information to gather account level and conduct a salesperson level gap analysis. Targeting existing customers to increase account penetration is the fastest, and most profitable, way to sales growth (but your salespeople may need training and you need to market to the gaps.)
9. Marketing is a core complement to sales as marketing is a salesforce multiplier. Good marketing can be a business differentiator, a messenger, and an auxiliary salesperson when your salesperson is not present and to accounts that sales does not call on. You need to invest in an integrated marketing strategy, inclusive of thoughtful eMarketing. And marketing should be supported by key suppliers but not be designed to be a profit generator from suppliers. Using other people’s money (OPM) is viable as common goals exist. This is where pre-planning (by distributors) and joint planning (with suppliers) is essential.
   1. Speaking of marketing to existing customers, make sure you have a technician strategy. These are the people who can drive discretionary business to you … and typically that is very profitable business.
10. Part of your marketing strategy can be a loyalty and incentive initiative. Not loyalty as in “give them points” (that wastes valuable funds in a recession), but loyalty as in “what activities signal their loyalty and what do they value?” It requires customer research and understanding the buying journey. Incentives can work for independent contractors to help take market share, but they do not work for all audiences. Consider how to build a moat around your customers with the guiding mantra of “how can I make my customer WANT to do business with me?”

Research shows that companies that invest in cost-saving, productivity enhancement and revenue generation initiatives come out of a recession sooner and at a greater growth rate … and some never participate in the recession! Given that today there is only talk of a recession, take the opportunity to strengthen your business. Make prudent investments with today’s cash so that you can gain market share, sales, and profits longer-term.