We have found the electrical market is now operating with an inefficient channel structure that will undergo five significant sea changes within the next five years. Our new study, “Sea Changes in the Electrical Channel: Technology and Multi-Generational Workforce,” devotes separate chapters to each of these macro-trends:
1. Technology: The Electrical Distributor Channel Wires a New Nervous System
2. The Multi-Generational Workforce: Future Talent is Wired Differently
3. Electrical Distributors: Consolidation, Another Rollup and Hybrid Distributors
4. Electrical Manufacturers: Globalization, Consolidation and Alternate Channels
5. Electrical Manufacturers’ Representatives: 30% Become Extinct, 30% Are New Entrants
These are exciting times for electrical distributors, manufacturers and reps, and they should view these changes as constructive disruptions and capitalize on the opportunities new technologies and the multi-generational work force will offer. In this article we will cover our first sea change: technology and the progress the electrical distributor channel is making in wiring itself a new nervous system.
Rapid technological change is on the horizon. The B2B e-commerce market will experience unprecedented growth in the channel over the next five years. Technological changes will continue to impact both how electrical distributors, manufacturers, and reps go to market and how they serve specific market segments. Face-to-face interactions will be both replaced and enhanced by transacting business online.
This coming sea change will require a continuous investment mindset that will challenge electrical distributors, manufacturers, and reps. Smaller players will have a real challenge keeping up with and delivering competitive technology solutions to their customers and the larger players may lack the vision or commitment.
Omni-channel commerce. Selling online and on mobile devices is a big opportunity for the electrical distributor channel. Technology has been a driving force in the channel over the last 20 years, but never before has the speed of technological change been as great as it is today in bringing distributors, manufacturers and reps closer to each other and to their customers.
Handheld smartphones and tablets are overtaking fixed-location computers, and this is having vast implications on how channel partners interact with each other and with customers. Customer use of smartphones, tablets and other devices will push more companies toward online storefronts. According to one rep, “Within the next 18 months I feel it will be critical for every electrical distributor to have field-based apps for their sales teams.”
Distributors are launching mobile apps and their customers, including electrical contractors, now widely use smartphones and tablets. Electrical distributors will need to invest in mobile, jobsite ordering platforms at the field level. W.W. Grainger Inc., Lake Forest, Ill., is already doing this with a mobile app that offers information on real-time product availability, voice search functionality and product reviews.
According to a recent National Association of Electrical Contractors (NECA) Technology Benchmarking Survey, 63% of NECA contractors’ first choice for trying to find online information about electrical products is to utilize a search engine. Thirty percent seek a specific manufacturer’s website for product information and only 6% search an electrical distributor’s website. According to this benchmarking survey, the top four things electrical distributors can do to make NECA contractors’ jobs easier is make their websites more user-friendly; provide 24/7 access to pricing; improve search options; and provide a library of all information needed for submittals. The technology needs from electrical contractors will only accelerate as today’s 60-year-old job foreman is replaced by a 25-year-old job foreman.
State of electrical distributors’ websites. We examined the websites of the 200 largest distributors as listed by EW and found many of the websites are inadequate for customer ecommerce needs. Many distributors told us they are making major investments to boost their online shopping presence so they can become a comparable value-added solution to Amazon Supply’s entrance as an online-only distributor.
Our previous research studies have confirmed that customers prefer to do business with electrical distributors with ecommerce capabilities over those that do not. Customers in general and young people specifically are more likely than ever before to spend time shopping when they know what they want. Therefore, the more
commoditized electrical products become, the more online-only distributors like Amazon Supply will have an impact on the electrical channel, because the simplest purchases will be made quickly and with minimal effort from a customer’s computer or mobile device.
Your customers will look for these online services, some of which electrical distributors and manufacturers are beginning to offer, to save time on their most mundane purchases. As younger people continue to matriculate into the electrical channel, this trend will continue and increase. The Internet has changed how companies research products because end users are now more informed on their potential solutions than ever before. It’s causing price to be the differentiator.
Omni-channel commerce is a multi-channel strategy for customers practiced by distributors who sell goods through both their store/branch locations (electrical distributor channel) and online over the internet channel (IC). Electrical distributors must execute omni-channel commerce strategies for the fast-growing customer base seeking a seamless shopping experience. In the future, it will be rare for any electrical distributor to rely solely on business transacted in their brick-and-motor store locations and face-to-face interactions. The biggest risk electrical distributors face is a reluctance to recognize that online-only distributors like Amazon Supply and Google have become a viable source of supply for their customers.
If traditional electrical distributors provide a comparable or superior online user experience, the impact of the online-only distributors like Amazon Supply and Google will be minimized when combined with the total value proposition of a local solution-based stocking electrical distributor.
AmazonSupply and Google will take some share from the electrical distributor channel, but the real determinant will be how electrical manufacturers rationalize their pricing to the internet channel. Since the internet channel is, first and foremost, about information, it seems likely that there could be a real challenge for companies in the electrical distributor channel should the manufacturers decide to provide pricing to the internet channel that, like the D-I-Y pricing they already rationalized, is below the levels they are willing to sell to the electrical distributor channel. The decisions electrical manufacturers make in the coming years in terms of how they price and support the internet channel and electrical distributor channel may define an inflection point in the longstanding relationships they have with the companies in the electrical channel.
Said one super-regional electrical distributor, “We are embracing online purchasing. It takes a significant investment to do it right. The national chains and super-regionals can afford to do it but the regional independents are hard-pressed to do it and the smaller independents can’t afford to do it. It becomes a differentiator for the national chains and super-regionals to capture market share.”
According to one electrical manufacturer, “There are great opportunities for distributors to act like Amazon and up their online shopping experience game. In addition to creating a superior online experience like Amazon, the electrical distributor can also provide solution and customer industry experience. Talented solution-based distribution sales teams coupled with relevant customer industry knowledge will make for sustainable high profit sales growth.”
AmazonSupply goes all-in on pure play ecommerce. “Pure play” describes a company with a singular focus. In e-business terms, a pure play is an organization that originated and does business purely through the internet channel. They are online-only distributors without any physical “brick and mortar” stores where customers can shop. AmazonSupply.com is a large pure-play company. It started out in April 2012 as an online-only distributor in the industrial marketplace with 500,000 SKUs covering 14 product categories for business and industrial customers at competitive prices. Today, AmazonSupply carries thousands of electrical products from three-dozen plus blue-chip electrical manufacturers.
The company is investing millions of dollars in massive distribution centers throughout the United States, and they plan to have up to 70 of these facilities operating within the next few years. Amazon Prime customers pay $79 annually to get free two-day delivery for orders over $50. They are also offering same-day delivery in some geographic markets at an additional cost. In addition, AmazonSupply.com offers 365-day hassle-free returns and a line of credit.
Promoting lower prices than other sources of supply, AmazonSupply.com’s intentions as an online-only distributor represents a real challenge for the electrical distributor channel. AmazonSupply.com will take away electrical distributor sales of price-sensitive commodity products that do not require any product training or special care and handling, like conduit or wire and cable. One national chain electrical distributor private labels products through AmazonSupply and a large independent regional electrical distributor told us that they sell their lighting products through AmazonSupply.com.
Said an electrical manufacturer, “The electrical distributor channel will not be able to out-Amazon, Amazon. We are not going to beat them at their business model. Amazon will lose money to outlast any significant threats to their pure-play strategy within the electrical distributor channel or any channel they chose to enter.”
Google Shopping for Suppliers gets in the game. Google has followed Amazon into the B2B market with its Google Shopping for Suppliers initiative, an extension of its successful Google Shopping site. Now in beta mode, Google Shopping for Suppliers offers manufacturers an online vehicle to sell electrical products. There is little doubt Google will expand its electrical product categories. Manufacturers can open their own storefront on Google Shopping for Suppliers and sell direct to customers. As this initiative matures, Google will control even more purchasing direction from searches and big companies will pay even larger royalties to come up first in Google-based advertising such as banners or pop-up ads.
It’s not hard to imagine a future where online retail and distributor giants like Amazon do to big box stores like Home Depot what they did to some mom-and-pop local stores — slowly drive them out of business with lower prices. And it’s also not hard to imagine Amazon and other emerging online giants slowly driving some electrical distributors out of the marketplace, too.
Amazon Supply and Google bring B2C (business-to-consumer) experience, exceptional technology, business intelligence and a broad reach. They don’t offer a high-touch service model, but for customers just looking for online access to products, they are a threat to traditional electrical distribution.
The success of Amazon Supply and Google Shopping for Suppliers remains to be seen. But these online distributors could take 10%-25% of the traditional electrical distributor channel market share over the next five years unless electrical distributors employ effective omni-channel commerce strategies. Their very existence is already a big driver of change in the electrical market. Said one electrical distributor, “Our company is investing heavily now in ecommerce solutions to be prepared for the Amazons of the world.”
One rep said Amazon, Google, and the internet have changed how buyers research products. “They are more informed on their product solutions than ever before. It’s causing price to be the differentiator,” he said.
Home Depot’s move to defend its market share against Amazon. Home Depot is busy executing a new online strategy — to seamlessly integrate its in-store, e-commerce, and mobile platforms. The company offers more than 500,000 stock keeping units (SKUs) online compared to the 35,000 SKUs it sells at most of its brick-and-mortar stores. To support this effort, Home Depot is building new distribution centers dedicated to ecommerce sales. Said one manufacturer, “The HomeDepot.com initiative is huge as they see Amazon as their biggest threat.”
Using CRM to really get to know customers. Customer Relationship Management (CRM) is a business tool for managing and maximizing the interactions their employees have with prospective and current customers. It’s hard to imagine anyone of any size in 10 years without a robust CRM system.
According to our research, the CRM adoption rate in the electrical market will continue to rise. Distributors will use CRM solutions to personalize and scale services to their customers. Reps have the challenge of living on the systems of their manufacturers, and it’s tough for them to effectively manage so many different CRM systems.
Many members of the National Electrical Manufacturers’ Representative Association (NEMRA), Portsmouth, N.H., are seeking a solution for increasing the efficiency and effectiveness of their customer interactions and for facilitating communication between reps and their principals. NEMRA will be launching a CRM tool, NEMRA Network (NN) at its annual conference in Atlanta early next month.
Respondents voice their disappointment with IDEA. One of the biggest surprises in this study was the level of respondents’ discontent with IDEA (Industry Data Exchange Association), Rosslyn, Va. Respondents were disappointed in IDEA’s efforts to provide the electrical channel with fully attributed product information to conduct ecommerce business.
Said one electrical manufacturer, “Electrical distributors want certain data that manufacturers don’t want to give up. Manufacturers don’t want their attributes collectively to be used to do cost comparisons, which tend to commoditize the products. And manufacturers want to control which electrical distributor gets their data and which distributors do not.”
To receive a copy of this research report, call Farmington Consulting Group at (860) 678-4402 or email Tom ([email protected]) or TJ ( [email protected]).