Watsco has a “buy and build” strategy that has produced substantial long-term growth in revenues and profits. The “buy” component of the strategy focuses on acquiring market leaders to either expand into new geographic areas or gain additional market share in existing markets. Watsco employs a disciplined and conservative approach that seeks opportunities that fit well-defined financial and strategic criteria. The “build” component of the strategy focuses on implementing a growth culture at acquired companies, by adding products and locations to better serve customers, exchanging ideas and business concepts amongst the executive management teams and investing in new technologies. Newly acquired businesses have access to Watsco’s capital resources and established vendor relationships to provide their customers with an expanded array of product lines on favorable terms and conditions with an intensified commitment to service.
Strategy in Existing Markets
Watsco’s strategy for growth in existing markets focuses on customer service and product expansion to satisfy the needs of the higher growth, higher margin replacement market, in which customers generally demand immediate, convenient and reliable service. The Company responds to this need by (i) offering a broad range of product lines, including the necessary equipment, parts and supplies to enable a contractor to install or repair a central air conditioner, furnace or refrigeration system, (ii) maintaining a strong density of warehouse locations for increased customer convenience, (iii) maintaining well-stocked inventories to ensure that customer orders are filled in a timely manner, (iv) providing a high degree of technical expertise at the point of sale and (v) developing and implementing technology to further enhance customer service capabilities. The Company believes these concepts provide a competitive advantage over smaller, less-capitalized competitors that are unable to commit resources to open and maintain additional locations, implement technological business solutions, provide the same range of products, maintain the same inventory levels or attract the wide range of expertise that is required to support a diverse product offering. In some geographic areas, Watsco believes it has a competitive advantage over factory-operated distributor networks that typically do not maintain inventories of parts and supplies that are as diversified as Watsco’s and which have fewer warehouse locations than they do, which makes it more difficult for these competitors to meet the time-sensitive demands of the replacement market.
In addition to the replacement market, Watsco sells to the new construction market. The Company believes its reputation for reliable, high-quality service and relationships with contractors, who may serve both the replacement and new construction markets, allow them to compete effectively in these markets.
The Company focuses on acquiring businesses that either complement its current presence in existing markets or establish a presence in new geographic markets. Since 1989, Watsco has acquired 59 HVAC/R distribution businesses, six of which operate as primary operating subsidiaries. The other smaller acquired distributors have been integrated into or are under the management of the primary operating subsidiaries. Through a combination of sales and market share growth, opening of new locations, tuck-in acquisitions, expansion of product lines, improved pricing and programs that have resulted in higher gross profit, performance incentives and a culture of equity value for key leadership, the Company has produced substantial sales and earnings growth post-acquisition. Watsco continues to pursue additional strategic acquisitions and/or joint ventures to allow further penetration in existing markets and expansion into new geographic markets.
Joint Ventures with Carrier Corporation
Carrier Enterprise, LLC
In July 2009, Watsco formed a joint venture with Carrier to distribute Carrier products throughout the U.S. Sun Belt, Latin America and the Caribbean. This represented a transformational event in Watsco’s history. The transaction increased Watsco’s already market-leading position and expanded its product lines and brands. The Company was also able to expand its presence in the U.S. Sun Belt, where its products are of critical importance. In particular, Carrier Enterprise added product depth to Watsco’s markets with premium level residential products, commercial products and the latest energy-efficient technology. Likewise, Carrier Enterprise locations were provided the opportunity to sell additional parts, supplies and other complementary accessories through its existing operating structure, leveraging existing customer relationships and costs. Carrier Enterprise is structured similar to Watsco’s other acquisitions, with a decentralized management structure that keeps the existing management team in place; a cornerstone of Watsco’s operating philosophy. The Carrier Enterprise joint venture resulted in an expansion of Watsco’s revenues by approximately $1.3 billion in 2010.
In July 2012, Watsco exercised their option to acquire an additional 10% ownership interest in Carrier Enterprise, which increased the Company’s ownership interest to 70%. On July 1, 2014, Watsco exercised another option to acquire an additional 10% ownership interest in Carrier Enterprise, which increased the Company’s ownership interest to 80%. Neither Watsco nor Carrier has any remaining options to purchase additional ownership interests in Carrier Enterprise.
Carrier Enterprise Northeast, LLC
In April 2011, Watsco formed a second joint venture with Carrier to distribute Carrier products throughout the northeast U.S. in largely new markets for the Company. In July 2011, the Company added Carrier’s distribution operations in Mexico to the joint venture. Watsco has a 60% controlling interest in this joint venture and Carrier has a 40% noncontrolling interest. Neither Watsco nor Carrier has any options to purchase additional ownership interests in Carrier Enterprise Northeast.
Carrier Enterprise Canada, L.P.
In April 2012, Watsco formed a third joint venture with UTC Canada Corporation, an affiliate of Carrier, to distribute Carrier products throughout all of the provinces and territories in Canada. Watsco has a 60% controlling interest in this joint venture and UTC Canada has a 40% noncontrolling interest. Neither Watsco nor Carrier has any options to purchase additional ownership interests in Carrier Enterprise Canada.
The three Carrier Enterprise joint ventures employ approximately 2,200 individuals and operate from more than 200 locations in 28 U.S. states, Canada, Mexico and Puerto Rico with exports to more than 20 countries in Latin America and the Caribbean. Combined, the joint ventures with Carrier represented 61% of Watsco’s revenues for 2012.