America’s great social experiment, Prohibition, quickly led to speakeasies. These outlaw saloons hid in plain sight everywhere as folks gained entry with passwords spread among friends. 

Illegal booze joints have nothing to do with the HVAC industry, except as an image I thought of after trying to investigate one of the industry’s biggest contemporary trends.



America’s great social experiment, Prohibition, quickly led to speakeasies.

These outlaw saloons hid in plain sight everywhere as folks gained entry with passwords spread among friends. 

Illegal booze joints have nothing to do with the HVAC industry, except as an image I thought of after trying to investigate one of the industry’s biggest contemporary trends. It’s also hiding in plain sight throughout the country.Private-label merchandising programs have taken hold with HVAC distributors more than ever before. Yet, it’s hard to find many willing to speak on the record about it.

The analogy breaks down in that, unlike speakeasies, there’s nothing illegal about private labeling, nor are gangsters running the business. But that just adds to the mystery of why so many wholesalers are reluctant to go public with this respectable and growing enterprise. Their squeamishness may have reasons both trivial and profound, which I’ll get to later. For now, let’s analyze what’s already on the record, along with insights from a couple of wholesalers with private label programs who were willing to speak forthrightly with me as long as they remain unidentified.

Private labeling is nothing new to the industry. Various wholesalers have pursued this merchandising strategy for as long as anyone can remember. Private labeling also has been common practice for a long time among master distributors. Today, however, it seems hard to find a wholesaler of even moderate size that isn’t private labeling a few lines or looking to do so, and certain buying groups are starting to get involved with it on behalf of their members. A Web search turns up dozens of firms offering production and labeling services.

Growth

Private label proliferation is an outgrowth of the cost-cutting mentality that reverberates throughout the supply chain, as well as the continued breakdown of traditional distribution channels. Meantime, globalization has made outsourcing viable for more distributors than ever before.  

 Homebuilder consolidation also appears to have played a significant role. As builders’ purchasing clout has grown, so has the squeeze for better and better deals, which vendors and distributors pay for with smaller margins. Private-label brands made in China are a way to provide the pricing that big builders command without sacrificing gross margin dollars.  

In fact, private labeling appears to be a godsend for margin-squeezed distributors. The distributors I spoke with told me their private label brands amount to a relatively small percentage of sales - 10 percent or less - but contribute significantly more than that to profits. They also like the market exclusivity afforded by house brands. With these advantages, it’s easy to understand why so many distributors are opting for private labels. 

A few negatives prevent everyone from joining in. There’s upfront investment involved, and in some cases reluctance to upset longtime vendors. In most cases, no demand exists for private label products, so it must be created. Some customers - heating and cooling contractors in particular - need a lot of convincing before they will turn away from favored brands they’ve been using for decades.

More money

In general, I’m all for anything that puts extra dollars into the pockets of this magazine’s readers. From that standpoint, I applaud the private labeling craze.  

But it’s not without misgivings. It was stated earlier that distributors are reluctant to talk about their private labeling for reasons both trivial and profound. The trivial is their belief that they are safeguarding “competitive” secrets. I love all you folks, but have to say that most of you are deluded about what constitutes “clandestine” information. Don’t get paranoid, but almost everything you don’t want people to know about you is widely known.  

As for the profound, our industry’s furtiveness may have a little to do with an uncomfortable truth about private labels. It’s that they amount to smoke and mirrors.  

 Private labeling is a merchandising strategy, nothing more. It’s certainly not dishonorable, and if there’s money to be made, go for it. Yet, deep down we must realize that private labels add nothing of intrinsic value to the products so identified. Slapping a unique name on a furnace or condenser does not enhance its performance or make it last longer. In fact, while some private label products may be top-notch, overall it’s logical to assume that many don’t match the tried-and-true national brands in quality.  

Besides, the national vendors are not just sitting idle watching their market shares erode. They are cutting deals and coming out with their own products to stay competitive with cut-rate private labels. This inevitably shifts sales and marketing efforts away from value and toward the price end of the spectrum.  

Ultimately, private labels will be bad for the industry if they lead people to believe that business success can be achieved through marketing smoke and mirrors. The distributors who survive and thrive will be those that provide real value with the products and services they sell.