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Facing Down Goliaths

May 1, 2007
Insights from Bill Weisberg show how the industry has changed for independent electrical distributors over the quarter-century since Affiliated Distributors began.

The following article is an edited exerpt from a speech given in Dallas last fall at the annual national meeting of Affiliated Distributors, the industry's largest marketing/buying group. The group celebrated its 25th anniversary at that meeting, and the editors of Electrical Wholesaling felt Weisberg's keynote remarks showed the electrical industry's evolution over that time from an interesting, valuable (and impassioned) perspective.

When A-D was started, back in 1981, independents had good reason to be worried about their future. Interest rates were high. Business conditions were poor. And during that era, the national chains were growing and taking an increasingly aggressive posture with suppliers.

The gap between nationals and independents was large and it was widening. The top executives of the national chains were boasting of their success and their future growth plans. The leading experts of the day were predicting industry consolidation on a massive scale. And the nationals were growing — both through start-up and through acquisition.

The nationals were not better companies. But they were successfully leveraging their purchasing clout with suppliers and they were cutting back-end deals not available to independents. It was with these deals and with that support that the chains had the resources to make acquisitions and expand at a faster rate than others.

Independents were not on a level playing field in 1981. The consequences of being at a disadvantage in terms of profitability and supplier support were real and threatening. A-D was created to respond to that threat on behalf of independents. And respond we did.

In less than one year, many of the strongest and best electrical distributors from across the country signed on to become charter A-D members. Forty-eight, to start, and a dozen or so more each year that followed. Slowly but surely, they found suppliers who were willing to provide them with the same financial support they gave the chains in exchange for the same collective volume. A few suppliers came enthusiastically, but most actually came begrudgingly.

Our members knew what was at stake. We had little to offer in those early days besides a willingness to shift business where we could. Difficult decisions were made. Long-time loyalties were put aside in the interest of long-term survival.

One member made 39 conversions from non-A-D suppliers to A-D suppliers within the first five years of A-D's founding. But they were not the only distributor who rose to the challenge. Were it not for the determination and tremendous personal leadership shown by those early members, A-D would never have survived.

Another critical point in A-D's history occurred in 1985, when the largest chain in the electrical industry began a boycott targeting suppliers who dared to join A-D. The first supplier they cut off was Advance Transformer. When our members learned what was occurring, they responded in force. Members who had never done business with this supplier before sent them purchase orders and told them to fill in the prices and ship them the product. It was an amazing display of solidarity, and we prevailed. The supplier hung tough — they actually gained more business from our members than what they lost — and the chain called off its boycott.

A similar threat occurred in the year 2000. This time, it was an A-D supplier, one of our largest, who withdrew from A-D without notice or warning and quietly began to lobby others to do the same. Once again, A-D members recognized the threat and rallied, shifting over $100 million of business to competing suppliers and putting aside local concerns in order to protect their group. One member moved $12 million. Once again we prevailed. In fact, it took less than three years before the supplier reapplied to join A-D. We do not seek confrontations like these. We work hard to avoid them. We pride ourselves on maintaining positive and stable relations with all our supplier partners.

Lesson One in the history of A-D is that when A-D members are truly threatened, they respond in force and they overcome that threat. Every time we have been tested, we have rallied to the cause and passed that test. And when at some point in the future we face our next challenge, I have no doubt that we will prevail. Because A-D members are leaders. And I have seen the tremendous personal leadership that our members can demonstrate anytime and every time they are ever threatened.

Those of you who have been with us since the beginning know that for many years A-D never referred to itself as a buying group because we felt the term had a negative stigma. But truth be told, there is nothing wrong with being a buying group. The power of the purchase order is sometimes required to ensure that a group's members are kept on a level playing field with the chains.

But the next critical milestone in A-D's history occurred when our members decided that it would be better if A-D was much more than a buying group. It was back in 1986, when we found that we were getting close to the point where all the conversions that could be made from non-A-D suppliers to A-D suppliers were pretty much made. We were having a difficult time attracting (some of) the truly premier suppliers. We were stuck at a certain plateau — a plateau that every buying group hits at some point in its evolution. In fact, most groups never get beyond that point.

So we gathered together the best minds in our distributor community, engaged them in a strategic planning process and watched as these members debated and developed a formal A-D mission statement and put to paper innovative strategies and sound principles that have stood the test of time. For it was in that meeting that we committed to the principle that our group would add tangible value for members and suppliers; work to eliminate waste and redundancy in the supply chain; and facilitate the transfer of innovative ideas. We wanted to do more than just shift business from one supplier to another; we would help our members and suppliers grow their business. We became “The Marketing Group,” in word and in deed. It was more than just a slogan. It was a strategic approach to fulfilling our mission that was an innovation.

In the years that followed, A-D committees developed innovative programs that were the first of their kind for any buying group. The programs helped fellow affiliates grow their business faster than the rest of industry; attracted new suppliers who saw that we could help them improve their mix and accelerate their growth; and attracted new members.

We introduced the Sales Stimulator Program which increased the marketing focus of our members. It led to Joint Marketing Agreements that increased the professionalism of their annual planning process and differentiated them in their markets. This led, 16 years later, to A-D Field Marketing Summits where our members' people could more directly participate in their companies' planning processes.

We created A-D Networks, which enabled members to share their innovations and best-practices with fellow independents. This led, 21 years later, at this very meeting, to A-D Message Boards so our members' people can communicate on-line with their functional peers at other independent companies in the same way their principles do at A-D Networks.

We created the first-ever national account program for independents, which led to more than a billion dollars of business at multiple-location MRO accounts being preserved for our members and won from the chains. This activity continues to this very day in the charter of our sister company, supplyFORCE, as evidenced by their recent electrical wins at Archer Daniels Midland, Temple Inland and Louisiana Pacific — as well as their renewal a few months ago of the $24 million Weyerhaeuser contract — a contract which A-D originally wrote, nine years ago.

Later, when national chains began to develop alliances with chains in other industries and promote integrated supply contracts, we innovated once again — this time by launching new A-D divisions in industrial supplies and in pipe, valves and fittings — so our members had access to like-minded independents with whom they could collaborate at the end-user level.

In the early '90s, when suppliers began to view North American coverage as a plus for their distributor partners, we merged with the largest Canadian buying group, Copel, and discovered that we could successfully leverage one back office to serve two groups and lower the costs of operation for all members as a result. To this day, we continue to benefit from our relationships with these great Canadian companies, helping them fight their battle with the same chains we compete with here in the United States and helping A-D suppliers cross the border, north and south, to better grow their business.

The success of our merger with Copel led, in the early part of this decade, to mergers with our major group competitor in the industrial supply market, where we learned the economic value we could bring to both groups through their combination and led later to our merger with the leading group in plumbing, which led to a merger with a group in HVAC.

From each of these mergers, we've been able to adopt best practices, increase earnings, lower costs, improve operational procedures and fund new innovations. That is lesson number two in A-D's history — a lesson that applies to any company and any enterprise in any field: It is always innovation that propels you forward to become the market leader, and it is always innovation that sustains and grows that leadership position.

If you ask what gives me the most satisfaction of anything that we have accomplished to date, I would say that it is the role that we have played to help ensure that our members no longer fear for their future. Because in the 25 years since A-D started, our members are stronger than ever, and the market share for independents has grown as well.

Back when A-D started, and back when the leading experts were predicting the demise of independent distribution and the overwhelming dominance of the nationals, the 10 largest chains of the day were: Graybar, Westinghouse, Gesco (GE Supply), CED, Amfac, All-Phase, Summers, EESCO, Cresent Electric and Nunn. Electrical Wholesaling reported that the combined market share of these companies back in 1981 was 21 percent. The balance of the distributors in the magazine's “Top 250” list represented about 17 percent of the market. Ten companies, 21 percent. 240 companies, 17 percent.

Today, if you look at that list, you will find that a very significant amount of consolidation has occurred. Many companies were sold or went out of business — including six of the top 10 companies I mentioned. Nationals and regionals from 1981 have been replaced in some cases by multi-nationals and super regionals — some from outside the industry.

Electrical Wholesaling now reports that the combined market share of today's chains is 26 percent or five points greater than what their counterparts had in 1981. But if you look at the top 190 independents who are out there today (and about half of these are A-D members) you will find that their share has climbed to 35 percent — 18 points more than what they had in 1981. Five points of growth for the chains, 18 points of growth for leading independents. And actually, the growth was greater than that, if EW counted the top 240 independents the way they did back in 1981. Let me give you a few examples to help you understand how this happened.

In 1981, Mayer Electric, our largest charter member, did $71 million in total company sales. In 2005 they did $507 million. In 1981, Independent Electric in California had total sales of $23 million. In 2005, they did $350 million. The total sales of The Reynolds Company in 2005 was $278 million. In 1981 that company did not even exist.

Most of our members do not publish their sales numbers, but let me give you a few more examples from statistics that some members did publish in Electrical Wholesaling:

In 1981 Dominion Electric had 35 employees, today they have 270. In 1981 Kirby Risk had 95 employees, today they have 789. In 1981 Border States had 223 employees; today they have 1,007 employee owners. In 1981 the combined volume of the 48 charter A-D members was $450 million. Today, the combined volume of our 150 electrical members in the U.S. and Canada is just under $11 billion.

Any way you choose to measure it, our members have grown and flourished since the day A-D started. They now receive their fair share of the back-end programs that were once available only to chains. And they have used these resources to assemble professional management teams, to expand and train their field sales organizations, to establish marketing departments, to put in place computer systems, to build distribution facilities, to open new locations and to make acquisitions.

Year after year, A-D members have grown faster than the industry as a whole. In fact, every time the national chains and the super regional companies buy someone, our members in that market realize accelerated growth. There are countless examples, in every industry we are in, of once-great companies that were bought by chains and today are no more than a shell of their former selves. Where did this market share go? It went to independents.

Every time a chain buys an independent, our members pick up new customers that miss the flexibility and service levels that the acquired company no longer provides. They hire quality people that quickly become disillusioned about the new owners and the bureaucracy with which they operate. And they soak up additional market share like a sponge.

That is the reality of consolidation in this industry. The chains buy and we grow. The big companies and their big acquisitions get the press, but the independents get the customers. Independents thrive on consolidation.

Yet, in spite of 25 years of leading independent distributors increasing their market share during a period of great consolidation, you can still find people out there predicting the imminent demise of independents and the dominance of the chains. They look at the volume of mergers and acquisitions taking place but don't notice the volume of business that leaks out after every deal. These people buy into the spin executives at these chains use to promote their value in financial markets while ignoring their company's performance in customer markets.

Well, I'm sorry. But I can see what these acquirers are actually doing in the local marketplace and the good people they are losing and I'm not impressed. I have read what they say in interviews and on their Web sites, and I find their arrogance to be offensive.

They claim that their newly created purchasing clout will enable them to get suppliers to rollover and give them a bigger piece of the supplier's margin. They say that private brands are the future and that it will provide them with a “huge advantage” as they bypass the very same suppliers who support them. They say that independents are not sophisticated enough to understand the operational inefficiencies that exist in their businesses — which these people will uncover.

Well, I say that these people do not understand this industry! They do not understand or respect this industry's suppliers or the value of your brands. They do not understand or respect independents or their value to customers. They do not understand that success in distribution comes down to local market execution. And I say that for every company that these people buy, our members will get stronger and continue to realize accelerated growth. As I look to the future, I see an industry increasingly divided.

To one side stand a few giant distributors run from their corporate headquarters by financial managers with little regard for their company's people or their relationships with their long-time suppliers and with little understanding of the realities of each local market. Their priority is the financial marketplace. On the other side stands an army of strong independents. Some are family-owned, some are employee-owned. But all are professionally managed by people who have a deep commitment to their employees, their long-time suppliers and their local communities. And their priority is the customer. It is the independents I see who will be gaining share in their local markets, attracting new customers every day and hiring more and more of the best people in this industry.

Whether you are a distributor, or whether you are a supplier, where you choose to stand will determine the future success of your company. On one side, you may find a quick buck. But the long-term consequences of that choice and the fall-out that follows will be the burden on the people you leave behind and the managers who succeed you. On the other side, you will find profitable and sustainable growth. Growth that comes from hard work but does not evaporate when someone needs to make a quarterly number. Growth that provides for the advancement and continued employment of the people who make your success possible. Growth that provides increased net profitability for you and your company, year after year. Where you choose to stand will be up to you. But let there be no mistake where A-D stands: We stand with independents.

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