According to a survey of HARDI manufacturers and representatives in September 2008, there was a significant discrepancy between economic reports in the national news and the health of HARDI businesses during the previous nine months. While the media was reporting a steady stream of bad news about the housing industry throughout 2007 and the first part of 2008, many HARDI members surveyed were still doing relatively well.

This disconnect between what was observed in the news versus what was happening in different markets around the country is partially due to the national media's proclivity to search out the dark side of a story for dramatic effect. Another reason is that this is a vast economy, and the housing downturn was slowly and relentlessly moving across the country, affecting different markets at different times.

In defense of the media, there was bad news to report in 2007 — from the rapidly rising number of foreclosures and falling home prices to the first round of collapsing industry giants. It was a time of uncertainty, and over the next 12 months, concern was intensifying daily. As the days wore on, America braced itself for a bone-crunching economic collision.

By early spring of 2008, those involved with the construction of homes and commercial buildings were expecting business to grind to a halt. But in the northeast markets, most HARDI members had yet to experience a dramatic downturn. Distributors had gone through a quiet round of layoffs and a few branch closings at the start of 2008, but personally, I was puzzled. It felt like we were dodging bullets while the southern United States was getting shelled.

A few months later, there had still been no great changes in our business volume, and I was on my way to the HARDI Regional meeting in New Jersey. It was there that I found a solution to this riddle.

I heard the answers in two seminars. Alan Beaulieu, Institute for Trends Research, reaffirmed his expectation that the U.S. economy was past the peak of this business cycle and was in for Phase “C,” or the downhill section of the curve. He stressed that hard times had hit some markets, and they were barreling toward the rest of them. Joe Ellers, Consulting Associates, gave the other seminar. Joe talked about how to keep a positive attitude despite negative news reports. (I guess he missed Alan's seminar.) To paraphrase Joe, “The U.S. economy is big. Don't base your business strategy on the national media reports. Ask the people in your market exactly how their businesses are doing so you can make decisions based on the health of your local markets.”

The idea of asking my customers directly made sense, but the problem was getting accurate information from privately held corporations. It came to me that if I expanded the survey to include all HARDI members, it would give me a good snapshot of the entire country while giving the respondents the confidentiality they needed. I turned to Kim O'Neal at HARDI and Mike Dungan, the HARDI Reps Committee chair, for help.

As the vice chair of the HARDI Reps Committee, I had conducted a survey about the relationship between manufacturers' reps and distributors a few years earlier. As with that previous survey, Kim and Mike fine-tuned the questions that I had developed, and then Kim sent the survey out to HARDI reps and vendors, and relayed the raw data back to me. Finally, I could test my hypothesis.

The Survey Goal

I wanted to ask the vendor and rep members of HARDI if sales were declining as dramatically as the national news media claimed and if rising energy and commodity costs were changing they way they managed their businesses.

The Questions

We sent the survey to two separate membership categories: one to HARDI manufacturers and another to HARDI reps. There were slight variations in the questions based on the differences between their two business models. The questions were broken down into four groups:

  1. Who was taking the survey and how long have they been in the industry?

  2. How strong was their business in 2008 and what are their expectations for 2009?

  3. What are the greatest challenges facing these HARDI members today?

  4. How have energy costs and the economy changed the way they operate?

Group I — Representatives

Number of respondents: 53
Avg # of years in industry:
(lo = 10, hi = 38)
26
Avg # of lines carried:
(lo = 2, hi = 38)
14
Avg # of miles/week driven:
(lo = 250, hi = 1,000)
575

The average rep answering the survey has been in the industry for 26 years, handles 14 product lines and drives about 575 miles per week.

Sales YTD 2008

Because four out of five of these reps serve the residential market, I expected some very negative responses. While there were decreases that ranged from -5 percent to - 40 percent, only one-third of these reps reported a decrease in sales.

The startling statistic that came out of this part of the survey was that many of these reps were doing well.

Just four reps declared that their sales were flat, while 51 percent of the respondents said sales were up between 3 percent and 50 percent. The average was a 16 percent increase YTD. (In hindsight, as we witness this continuing recession, we can all see that “YTD” is a critical component in that sentence.)

Forecast 2009

Another sign that the broader economy hadn't fully impacted the residential market is that only 20 percent of these reps predicted a decrease in sales in 2009, yet 30 percent were planning for an increase. The reps pegged both the average increase and decrease at 12 percent for 2009. Half of the reps thought next year would be flat. Oh, did you hear? “Flat” is the new “up” for next year.

Challenges and Changes

The survey drew attention to the many challenges to managing a successful rep firm as agencies prepared for possible lean times ahead. Because travel is a crucial element for the HARDI rep, the focus was on getting the most out of time on the road. Some examples included:

  1. Managing territories better and concentrating on specific markets.

  2. Using technology more productively — phone, e-mails and conference calls.

  3. Lower travel budgets.

  4. More overnight trips in order to cover markets completely when on the road.

One rep even admitted that he had adjusted his driving habits — he started to drive at the posted speed limit to save fuel. Now that gas is back down below $2 per gallon, I'm guessing he's back to his old ways.

Slightly more than 10 percent of the reps reported more dramatic steps, such as layoffs and wage freezes. I think a follow-up survey next September may see higher figures in those categories.

There was some positive news for HARDI reps

Reflecting a trend seen in other industries, 20 percent of the reps had noticed that larger manufacturers switched from factory reps to independent reps in an effort to lower their head count and to have sales costs come down in relation to sales figures. It is a wonderful thing for a publicly held company to have a commission-based salesperson who is responsible for their own travel, health and retirement costs. Another bright spot was that many reps had seen healthy commission increases when they began selling energy-efficient equipment to the retrofit market.

Group II — Manufacturers

Position
CEO/President/Vice Pres.: 32
Director/National Sales Mgr.: 21
Marketing/Tech/Admin: 29
Number of respondents: 82
Markets
Residential: 55%
Commercial: 27%
Industrial/Other: 18%

Sales 2008 YTD

Nearly 40 percent of the manufacturers were up 3 percent to 50 percent, with an average increase of 13.9 percent. Exactly 25 percent were flat, and slightly more than 35 percent were down between -3 percent to -34 percent through 3Q '08. The average decrease was -13.6 percent. Again, a pretty good showing considering the news stories of the day.

Forecast 2009

Only 10 percent forecast a decrease in sales for 2009. There were 35 percent predicting flat sales, and 55 percent looking for an average increase of 14 percent.

Challenges and Changes

Manufacturers were given several issues to rate anywhere from “not challenging” to “very challenging” on a scale from 1 to 4. The top three challenges related to managing the increasing costs of the following:

#1 Raw materials

#2 Freight

#3 Energy

In a separate question, manufacturers reported freight costs soaring more than 30 percent on average in the last two years. From today's perspective, we can see that commodity and energy prices are retreating. This forces the manufacturer to question if it is time to adjust their prices downward or wait to see if these costs bounce back up.

Some less-challenging topics dealt with competition and profit margins in this order:

#4 Domestic competition

#5 Buying groups

#6 Foreign competition

I was caught off-guard by the sequence of these challenges. HARDI manufacturers in the United States still consider domestic competition to be more of a challenge than foreign vendors in the coming years. This may be due to the fact that many products have already been sourced off-shore in the past decade or that some major U.S. manufacturers have moved factories outside the United States to take advantage of lower costs overseas or that U.S. competitors are simply stronger.

(I am aware that many HARDI members are not based in the U.S., but I was told that the vast majority of surveys came back from U.S. members. I apologize for any unintended jingoism.)

Finally, I was shocked to see that “buying groups” are considered a greater challenge than global competition.

Changes

Looking ahead to 2009, manufacturers realized that even though business was still relatively healthy in most markets, they had begun to scrutinize their operations to find ways to cut costs or pass them on to their customers. They had been feeling the constant pressure of rising freight and raw materials costs, and saw an even greater slowdown in the housing market approaching. The tactics they employed included:

  1. Maximize manufacturing efficiency.
  2. Trim overall budget.
  3. Reduce inventory.
  4. Utilize strategic warehousing.

They were also looking at some new and some old ways of doing business. Examples of the old way of doing things appeared in their responses, for example, “returning to a more cyclical business” …“unpredictable demand”… and …“distributors not committing to inventory.” This is reminiscent of the early 1990s.

New ways of doing business were spelled out in answers that focused on …“green opportunities” …“moving to international markets” …and…“outsourcing their sales force.”

Insights

After analyzing the results of this survey, I discovered three important insights to remember during this slowdown.

  1. People adapt and find opportunities even in the gloomiest environments

    The people who took this survey demonstrated that change will allow them to thrive in difficult times.

  2. Gloomy environments are born more out of fear than reality

    It can affect us daily as we absorb the negative media reporting. “Harmony seldom makes a headline,” said Silas Bent, a famous journalist with the St. Louis Post-Dispatch and The New York Times in the first half of the 20th century. This survey illustrated that, despite a tidal wave of bad news, more than half of these HARDI members were doing well in 2008.

  3. Tough times can bring out the best in people

    We saw that in the optimistic forecasts but especially in a final comment from one respondent that struck me. They wrote, “Support the members and associates of HARDI. We are in this for the long haul. The market is down but it will come back. These are tough times but we must endure.” Though this person was probably in a market that was particularly hard hit early in this recession, they know that it will turn around eventually.

Before I close, I want to say that when I received the results of this survey, I believed that I had the latest opinions and information from key HARDI members; but in the eight weeks that followed, the world changed dramatically, and so our industry will continue to struggle. Two years ago, we could hardly have imagined the demise of financial giants such as Countrywide Mortgage, Lehman Brothers or Bear Stearns. Who would've even considered bankruptcy an option for General Motors?

In spite of these remarkable events, it's vital to keep in mind that change is constant, and at the next HARDI conference, we will no doubt hear Alan Beaulieu point out that there are intelligent moves to be made during a slowdown and that phase D is quickly coming to a close.

I believe it was important to understand and confirm how this economy is affecting us all and that there are some tough times ahead. I also want people to remember that, for the most part, it will be other members of HARDI that help you through this challenging time. Keep in contact with them, forget the headlines, and I'll see you in Orlando for the next HARDI Fall Conference.


Peter Gould is a manufacturers' rep in New England and upstate New York. He is vice chair of the HARDI Reps Committee. His office and warehouse are in Needham, MA. Contact him at peter@gouldhvac.com or 617/429-6045.