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Distributors and manufacturers of HVACR products in Mexico have not shared the best of relationships for the last 20 to 30 years. The two-step distribution model has been broken, especially in the air-conditioning industry and there is a lot of mistrust among both groups. It is normal for a distributor to work with more than four or five manufacturers of the same product in a 10-year period. It is also not unusual for distributors to sell three to five brands of the same equipment to try to keep manufacturers in check.
It is a very inefficient way to manage a relationship that should be based on trust and for the mutual benefit of all parties but instead is based on mistrust to the point where data is not shared and prices are driven down. Usually, the same product sold in the United States markets in Mexico for 20 percent less. The industry is becoming less profitable to the point where HARDI Mexico is getting requests from manufacturers to help them improve margins and obtain committed distributors for their brands.
The issue started back in the 1980s when manufacturers wanted to expand beyond their current sales levels and growth prospects. Also, new country managers were changed every few years and had unrealistic goals to increase market share and sales at any cost. This started to rupture the two-step distribution model that was in place locally, just as it was in the United States.
Today, the model is almost totally broken on the air-conditioning side of the equation, with manufacturers selling to any available project and distributors not wanting to share data on potential projects since they have been burned previously by manufactures quoting directly. The refrigeration side of the equation has some “sticky” situations but, overall, it is in much better shape than the AC side.
One of the most important goals for HARDI Mexico is to help the market understand that the two-step distribution helps create more loyal customers, more professional development and differentiation with contractors not dependent on price only. Mexico needs a lot of education in this area and more loyalty from customers for training provided by distributors and manufacturers at reasonable costs.
After two years of HARDI Mexico starting to educate the market on the need for benchmarking metrics, best practices for all market participants and a higher emphasis on education and professional development, we are starting to see the first signs of improvements. Our goal is to be able to say in three more years that the Mexican HVACR industry is in better shape than it was when HARDI arrived.
First Signs of Change
We recently completed the first certification for Efficient Distribution with 32 participants from distributor and manufacturer members. The course included more than 80 percent of the best practices of the industry. It was interesting to see how many manufacturers did not understand the business their distributor customers participate in. The first step in establishing a great relationship with your customer is to understand his business and how you may help him improve that business.
At the same time, many distributors did not know what best reports were the best to share with manufacturers to ensure appropriate inventory levels and correct locations for customers to access products at the lowest possible cost to the entire supply chain.
The 1 1/2-day training provided clear guidelines for both industry players to understand how they can work together to help their mutual clients. It also offered better ways to analyze which products and customers are more profitable and which ones provide a better return on investment. As practical examples were shared and attendees worked together to solve them, they realized that the right reports and data were vital for them to work closely together.
We finished the session by shooting a video we later published on our LinkedIn account; more than 1,150 people have watched it. In it, both distributors and manufacturers agree that they now understand better what they need to do to grow and improve using the best practices of the industry.
Obviously, all these ideas will take several years to implement, but just distributors’ understanding of the “hits report,” which should be shared with their suppliers and managers to improve their inventory management, will produce great results for the industry in the next few months.
Thirty-two members do not make a market, so we knew HARDI Mexico needed to reduce the educational divide in the country between those who have access to education and those who do not. For that reason, HARDI Mexico recently started the first Digital Expo in the HVACR industry. Our goal is to bring content from manufacturers to the different stores of all their distributors and online for the whole country.
Now, for one entire year, a manufacturer may show new trends, products and even technical education with all the attendees to the expo. Our goal is to attract 1,000 to 2,000 contractors for the Digital Expo to see live and recorded content directly from our manufacturers. So even if we do not have a physical presence, we can go to the whole country.
By projecting the content into the distributor’s stores, we can bring the digital world to the physical world since contractors will be able to ask to see the product described online in all the stores.
HARDI Mexico will complete the other side of the educational divide by providing sales, marketing, costing and managerial updates to contractors so they can improve the part of the business they know less about.
Other Signs of Change
We recently received a request from one of the primary AC brands in the country to help with its positioning among its distributor customers so it did not have to compete on price alone anymore. We showed the manufacturer how it violated the two-step distribution model and how it affected its relationships with its distributors, which are less loyal for that same reason.
The brand now understands that it needs to protect its distributors for them to take the risk of carrying a large amount of inventory. Protection of territory is more important than price when distributors can count on the manufacturer to help them market their products and better train their techs. The relationship is built on value, not price.
Mexico and LATAM need to understand why the model in the United States works better for all parties involved. It is time for the U.S. brands to start asking, “What is it that our country managers are doing with our distributors?”
Now, distributors are not all altar boys in Mexico. Many of them had to start their own contractor business to provide a “turnkey solution” to specific clients since there are many small contractors that do not have the expertise or financial background to provide the necessary peace of mind to a large supermarket chain, for example. This also breaks the two-step model by making contractors warier of distributors and manufacturers alike.
One of those other signs of change is the biggest distribution companies that also do contracting work now understand they need to separate their businesses and to provide guarantees for their contractor customers that they are not going to compete with each other.
The Best Signs to See
One of the best signs to see is the change in the business model, where most distributors in Mexico depend on counter sales vs. the United States. We have started to change the tide to show them we need to rely on a professional salesforce that targets contractors and listens to their needs before they go to the counter.
More and more distributors realize they cannot rely on a reactive model vs. a proactive model. The more distributors rely on their sales teams, they can plan better and not have to promote cheaper products to bring contractors in the door. Cheaper products produce cheaper results and end up hurting our customers.
Our consultative sales model is widely implemented and our sales manager certification is the new standard to help sales managers control results proactively by determining outcomes based on activities organized by them. It is a total change from the old model of advertising low prices online and in social media to bring in contractors from other distributors.
Some managers have achieved a 200 percent change in sales volume compared to previous years by changing the way they manage their salespeople. Others have improved their sales by changing their commission schedules from a sales basis to a gross margin basis. More companies are also starting to share KPIs with their top managers. Others are providing incentives to their lower employees to boost performance in critical areas such as inventory management.
There is much to be done still, yet we feel the first signs of change are visible. If manufacturers and distributors work together, share critical inventory data and reports among each other, then more changes will come to our industry in Mexico.
Now it’s time for you to decide. If you want to help the industry change, if you are looking to improve your performance and profitability, and if you need a competitive advantage, then perhaps it is time for you to join us at HARDI Mexico.