Private labeling has become a hot topic in the electrical wholesaling industry over the past few months, and Electrical Wholesaling's series of articles on this topic has stimulated a healthy dialogue on this important issue.
Several of the largest electrical distributors in the United States now private-label products. Independent electrical distributors are debating how to compete with competitors that private-label. In some cases, they are private-labeling or seriously considering making a move toward this strategy. Name-brand manufacturers are private-labeling products for some electrical distributors. The industry's buying/marketing groups are discussing their role in the private labeling arena with their distributor members.
Electrical distributors are particularly interested in the impact privately labeled products can have on profitability. They are also looking at how they can use these products as a “price play” to capture increased market share, or use private labeling as a branding initiative to increase exposure for their companies. Manufacturers talk about privately labeled products as either a revenue source or as a competitor to their lines.
As with any decision on the product lines distributors carry, customer acceptance is key. Electrical distributors must ask themselves, “If I offered a line of private-labeled products, would my customers support it? What's most important to them about the products I sell?” Distributors ask themselves the same question when they make major brand conversions for key products such as lamps, wiring devices, switchgear or tools.
To find out what electrical distributors' customers think about privately labeled products, Channel Marketing Group, Raleigh, N.C., and Allen Ray Associates, Kennedale, Texas, worked with Electrical Wholesaling and its sister publication, Electrical Construction & Maintenance (EC&M), to conduct an e-survey that would explore the value of brands in the electrical marketplace and the exposure and acceptance level of non-branded products. Approximately 12,000 e-mails were randomly selected from EC&M's database. A 4.7 percent response rate was received, exceeding traditional blind e-survey response rates of 2 percent. Respondents were offered a copy of the survey results and, at their option, an entry into a sweepstakes for one of four high-definition televisions. To validate open-ended responses, a number of telephone interviews were conducted See the Web version of this article at www.ewweb.com for more information on the end users who participated in this survey).
Almost 20 percent of the end-user respondents said they know at least one distributor selling private-label products. The most frequently mentioned distributors were: Rexel Inc., Dallas (19.8 percent); City Electric Supply, Orlando, Fla. (12.1 percent); Graybar Electric Co., St. Louis (12.1 percent); and W.W. Grainger, Lake Forest, Ill. (5.5 percent). While respondents mentioned independent distributors infrequently, 35 percent of distributors who responded to a different survey from Channel Market Group/Allen Ray Associates survey mailed in November 2006 said they were offering or considering offering private-label products (private label could also mean no brand associated with the product, not necessarily a sourcing relationship).
To better understand the commitment of end users to brands, electrical contractors were asked about their purchasing habits. Specifically, they were asked if they request a certain manufacturer's products; totally rely on the distributor's choice of brands; or use generic descriptions for their needs (4-inch steel box, for example). As expected, each customer utilizes multiple methods, so responses total more than 100 percent. Here is what we found out:
66 percent of the respondents ask for specific manufacturer names when they order products from electrical distributors.
44 percent of the time electrical contractors place orders not using a specific manufacturer's name and instead request a certain type of product using generic terms.
23 percent of the time electrical contractors mention a distributor name when they order products.
Distributors' customers frequently know which lines they carry, so we weren't surprised responses were skewed toward manufacturer names. The frequency with which electrical contractors place orders by product type or in generic terms wasn't really surprising, either. It's safe to say respondents were “brand apathetic” in these situations and that they were willing to accept any manufacturer's brand or a distributor's own brand. These product categories are most susceptible to pricing pressure, and therefore less-expensive private-labeled products.
On the flip side, electrical contractors are quite brand-sensitive in certain product categories, and they often will request a specific manufacturer or are willing to accept a known manufacturer of specific type of product. To establish the level of brand support within each product category, survey respondents were asked to rate which product categories were brand sensitive. For the purposes of this survey, brand sensitive means the customer requests a specific manufacturer or is willing to accept any known manufacturer, and brand apathetic means the customer is willing to accept any manufacturer, doesn't care whom the manufacturer is, or is willing to accept a distributor brand. (See sidebar on this page). Research and market activities have shown that product categories that scored 30 percent or more “apathetic” are more likely to be considered as early private-label opportunities for distributors. A clear delineation exists between “electrified” and “non-electrified” products. Based upon the open-ended responses, it appears concerns about product liability are a primary issue. As expected, brand sensitivity or apathy depended on whether the customer was focused in the industrial, commercial or residential markets.
Industrially oriented installers
Industrial contractors favor brand-name products as a measure of quality but said lack of pricing competitiveness can provide opportunities for less expensive lines. When input from customers involved primarily in maintenance and repair operations (MRO) was solicited, some respondents were surprisingly willing to try non-branded products that were UL listed or used for non-critical systems. Respondents fell into two camps: willing to try/use private-labeled products or focused on name brands for quality and support issues. Those customers who were willing to use private-label products said specs written “or equal” are moving to non-branded products because of price considerations.
One industrial contractor who prefers branded products said, “We specify proven products in order to provide a durable, reliable project to our clients. Non-branded products may cost less, but they may not last or perform as well over time compared to the branded product specified.”
When asked if he would use private-label products, another industrial contractor said it depends on the application. “I place less importance on the quality of brand-name products versus unbranded for secondary (not system critical) products like cable ties or wire pulling lubricant,” he said. “Where the quality of brand names is more important is in the critical system material.”
These end users are concerned with product quality, and would prefer to “buy American” if price is comparable. They feel name-brand manufacturer benefits include warranty coverage and population of information in contractor billing/estimating systems. But price can still be king depending upon product category. One commercial contractor said private-label products don't stay in the market long enough to be a major factor.
These contractors are the most apt to purchase private-label products due to price benefits. For the most part, they do not perceive product quality differences, and believe homeowners and their other customers don't know brands or see differences in quality. Additionally, the pricing benefits of non-branded products enable residential contractors to earn jobs and retain project profitability. Said one residential contractor, “Some unbranded products such as recessed fixture trims appear to be identical to branded products. We will not pay for a brand-name lamp if we can find a lower-priced alternative that will give satisfactory results.”
Another contractor voiced his frustrations with the availability of new products at electrical supply houses. He said many new and improved products are available, but that distributors only carry what sells the most. “If you want a certain new product, it may have to be a special-order item, and no one can wait,” he said.
Twenty-eight percent of the respondents said they were “multi-focused” (typically meaning industrial/commercial for larger contractors and commercial/residential for smaller distributors). These are core customers for many distributors. They prefer name brands due to concerns about quality, reliability, warranty and product-liability coverage. However, due to pricing, an increasing number are willing to install non-branded products as long as the products are UL-listed and will pass inspection.
Price Matters Big-Time
With product quality becoming less a differentiator, price drives many decisions. According to one contractor, “Some name-brand product quality has declined over the years as has local product support. I suspect we get more information via the Internet than from our distributors. Although our purchase volume has gone up with specific distributors, product and sales support are waning. Good prices allowed us to get the jobs.”
Another respondent said, “We have ‘price-house distributors’ approach us all the time. For certain product groupings, they have great prices and deliver in a timely fashion. But more often than not, these same supply houses don't offer the name-brand product approved for a job. We become suspect of a distributor when they substitute non-branded or product with their name without notifying us beforehand. While on most of our residential jobs we are only concerned that the product is good for the first year, we have industrial contracts that demand certain brands, even when there is a substantial cost differential. I would say in those situations there is a perceived name value to our customer, as they are asking for it by name and part number. Outside of the industrial setting, price and delivery rule the landscape.”
Electrical contractors are seeing significant price differentials as exhibited by their acceptance of private-label products. They will more readily accept non-branded products at the following discount levels:
22 percent of respondents will purchase non-branded products if they get a discount of 11 percent to 20 percent.
26 percent of respondents said they need a discount of 21 percent to 30 percent.
39 percent of respondents expect a discount of at least 31 percent.
The higher discounts would effectively disintermediate manufacturers and provide all of the cost-savings to the customer. Electrical distributors would maintain no incremental gross-margin percentage on a lower dollar volume per unit.
While some respondents insisted they do not allow substitutions, 84 percent of the respondents knew distributors make product substitutions for either product availability or profitability reasons.
The top four reasons respondents allowed substitutions are:
An urgent need exists to get product.
They believe product quality is comparable among brands.
They trust the electrical distributor making product substitutions.
They are more concerned about whom they buy from than the brand of the product.
While it's understandable that product availability is critical, from a manufacturer viewpoint it's disconcerting that there is less recognition of quality differentiation and brand allegiance in the marketplace. For very fast-moving “A” items and fast-moving “B” items within a manufacturer's product portfolio, encouraging distributors to stock inventory is critical to capturing incremental business. However, this needs to be balanced against a distributor's interest in managing inventory investments.
At the same time, some electrical distributors routinely substitute non-branded products for profit reasons. Thirty percent of the respondents said they knowingly allow distributors to substitute with non-branded products. The customer receives a lower price and the distributor earns incremental margin.
Product quality and liability are important issues for customers. Respondents were asked to rate “which manufacturer services are of value to you.” Respondents are most interested (in descending order) in product quality, products made in the United States, UL/CSA certification, local sales force support and product warranty.
Said one survey respondent, “We have industrial customers who ask if the product carries a UL or CSA label. But there are smaller customers that don't seem worried about any type of certification as long as it works. Some of our customers have shrunk their purchasing departments to where there is not the same product knowledge as five to 10 years ago. So acceptance of what appears to be ‘or equal’ product by function is acceptable more times than not. Price really becomes a consideration in the ‘switch-out’ of product.”
Interestingly, while “made in the USA” is important, installers typically are not willing to pay significantly — or any — higher prices. According to industry sources, more than 70 percent of electrical materials are manufactured outside the United States. Nationalistic pride is evident in a number of the open-ended responses, which is understandable given global concerns and the growth of China.
While liability is a concern for installers, it should also be a major concern for distributors. Of the 10 percent of respondents who have had product liability issues, 71 percent said a distributor was involved in subsequent legal action. All knew, based upon invoices, the distributor who sold them the product.
Source Versus Brand
While much of the survey focused on the acceptance level of brands, installers are very concerned with their sources of supply when they purchase products. Given that installers, and especially contractors, purchase from multiple distributors, respondents were asked, “What is the most important reason you purchase from a distributor?” Respondents ranked each attribute based upon their importance level. The main decision drivers and their ratings are:
These findings speak to the electrical manufacturers' need to strengthen local brand awareness and identification of where their products are available.
Contractor acceptance of private-labeled products in the electrical market is growing due to pricing pressures, perceived lack of quality differentiation, and in many product categories, indifference to brand. Private-label offerings by distributors are expected to grow due to national chain product sourcing efforts, industry consolidation, the need by larger regionals to compete against national chains and margin pressures.
Name-brand manufacturers need to compete both at the distribution and customer level by reinforcing product attributes, focusing on quality differences, increasing brand awareness and encouraging distributor inventory. While price is important, each manufacturer will need to consider which market segments — and sub-segments — it wants to compete in. They then must price accordingly with either their standard brand, a “value” brand that may offer different services, or through different pricing strategies with distributors based upon support.
Many distributors have focused on their own brand through promotional, advertising and merchandising initiatives, and some are using private labeling and packaging similarly. But for most manufacturers and distributors, the key to success will be jointly working the market to deliver on customer expectations and jointly building brand identity. The loss of brand identity encourages product commoditization and price erosion unless manufacturers differentiate their products.
While electrical purchasers may prefer brands, they are more partial to getting the job done and purchasing products that meet customer demands at the lowest price to enable them to maximize their profitability. Name-brand manufacturers need to show end-customers how their brand can help achieve the purchasers' goals while delivering incremental margin opportunities to electrical distributors.
Allen Ray is principal of Allen Ray Associates, Kennedale, Texas. The firm helps companies improve profitability through effective pricing strategies and streamlining business processes through e-business utilization. Ray can be reached at (817) 704-0068 or at [email protected].
David Gordon is a principal of Channel Marketing Group, Raleigh, N.C. The company develops strategic and marketing strategies for manufacturers and distributors. Gordon can be reached at (919) 488-8635 or [email protected].
Your Customers Speak Out on Private Labeling
Industrial Installer Responses
“I choose the brands best for the job. But I sometimes get overridden by supervisors who want cheaper products that I know aren't going to last in the application. I have to use them.”
“Most of the time private-labeled products are just as good and of the same quality or better. There is always a risk, but the difference in cost usually makes up for the risk.”
“Quality of a product has to be adequate to ensure we don't have an unacceptable rate of call-backs. As long as the items are of equal quality, price and availability become the deciding factors.”
“We specify proven products in order to provide a durable, reliable project to our clients. Non-branded products may cost less, but they may not last or perform as well over time compared to the branded product specified.”
Commercial Contractor Responses
“Manufacturer brands have been around a long time and have established a good and consistent quality product. Generic products generally don't stay in the market long enough.”
“We would try different brands if they proved reliable, but we would rather pay more for the reliable product.”
Residential Contractor Responses
“In this period of unstable prices, using non-branded product brings some stability to keeping our cost in line with our estimates.”
“I use national brands because that is what many of my customers require, and I sell the added value. I also want to be protected if there is a failure.”
“I have noticed products are no longer of the same quality as 10 to 15 years ago, no matter what the brand. Most brands now are made overseas. On certain products, brands that used to be the best are about the same as non-brands.”
“I have serious quality concerns with unbranded electrical products and will not purchase or install them.”