As a result of strong construction and manufacturing activity, in first-quarter 2006 the electrical industry enjoyed one of its best quarters in more than five years. We closed 2005 with the highest annual increase since 2000 when industry sales charged ahead by more than 11 percent. Last year's sales were not as robust as 2000's, but 2005 did bring a healthy 7 percent increase. In addition, DISC Corp. expects total industry sales to advance about 8 percent this year.
For first-quarter 2006, many distributors saw sales increase well into the double digits. It's not unusual to hear companies are growing by 10, 15 and even as high as 20 percent or more, but not all companies are sharing in this recent boom. It depends on the geographic market and the typical customers an electrical distributor serves.
Most businesses with sales increasing at double-digit rates believe they are picking up market share, but not everyone can be growing market share. The saying, “One man's meat is another man's poison,” might apply.
And don't forget to measure apples with apples. If you've acquired another business in the past year, don't include that in the measurements of how your business performed over the last year. Instead, measure same-store sales to determine the correct growth in your own sales.
If you measure share against the overall industry, which is what I call the broad market, you need to be increasing your sales about 10.5 percent overall in the first quarter just to maintain share. On the other hand, if you are measuring performance in the contractor market, you would need to increase your sales by at least 10 percent. Finally, if comparing your sales to performance in the distributor-served industrial market, you need a sales growth of more than 12 percent just to maintain share. But remember, these comparisons are at the national level. The numbers will be different depending on the area of the country and the specific trading area.
I want to make three points here, but not necessarily in order of importance. First, the economic drivers of the current industry expansion are not uniform. This is particularly interesting when looking at the broad indicators that determine the direction of the overall industry in comparison with the strength and direction of sub-segments in the drivers. Second, industry performance, especially in the first quarter, is not uniform across the country. Finally, you should enjoy this year because I do not believe we will see a repeat performance next year.
Let's take a quick look at recent performance of economic drivers. Total construction put in place in March (the last data point available as of this writing) was up 9 percent from a year ago, according to the Census Bureau. Residential building was up more than 8 percent, including improvements. New multi-family construction was up 24 percent, and new single-family building was up more than 13 percent.
But residential construction has been strong for the past three years. In addition, residential construction overall is less important as an industry driver than nonresidential construction, so this is not a revelation in terms of overall industry gains.
We've seen strong residential construction growth over the past few years, but the overall electrical industry market has more closely followed nonresidential construction, which traditionally has been weak. Nonresidential construction was up more than 9 percent in March. That is significant because it's finally beginning to behave the way we want it to.
However, increases of 8 to 10 percent in residential and nonresidential construction cannot generate distributor sales increases consistent with the growth some manufacturers and distributors are seeing in the first quarter.
If we open up the detail of nonresidential construction, we can account for some distributors' and manufacturers' sales gains on the order of magnitude in the 15 to 20 percent range and higher. For example, office construction was up 11 percent. Although that is not a comparatively huge gain, it's important because office building construction has been in the doldrums for too long following the last downturn.
Commercial construction was up 8.7 percent, which is certainly nothing to write home about either. But here's the kicker: multi-retail construction, which accounts for about 40 percent of commercial construction, is up 37 percent. What's multi-retail construction? It's the bread and butter of large-project construction. Shopping centers, which comprise a quarter of commercial construction and nearly 60 percent of the multi-retail segment, is up 59 percent year over year. Shopping malls are up 40 percent.
Hospital construction is up almost 30 percent, and factory building is up more than 12 percent. Within the factory construction category, the chemical industry is building to the tune of 64 percent. Chemical construction is about 25 percent of total manufacturing construction and is by far the single largest component of industrial construction.
So what do we make of all this? The broad categories are growing but not at rates that explain why some distributors and vendors are growing at 15 percent and more. The broad categories are the industry drivers and explain overall growth. Businesses experiencing much higher performance are those that clearly thrive in the niche explosion taking place now. Also keep in mind there are businesses participating in the niche growth, but they are the “outliers.” They get some of it, but they are not the average or above-average businesses, so they do not share in the strength completely.
The final point I want to make is about the differential growth we see in a number of different trade areas. Remember, we are commenting on the broad market, not the niches.
DISC tracks 150 metropolitan statistical areas (MSAs) from which I have selected 10 areas showing exceptional gains in the first quarter. (See Figure 1.) Remember, we lag the actual by one quarter, so this is still a forecasted quarter. These are large areas in terms of dollar volume. In general, these MSAs are growing at about twice the national rate in the first quarter. So there are many other areas in the low double-digit growth and high single-digit growth range.
Figure 2 shows DISC's current forecast for how we think this year will finish compared with last year. At this point, I believe the electrical industry will peak in 2006. We are not predicting gloom and doom, but DISC is forecasting a slowing rate of growth for 2007.
Herm Isenstein is president of DISC Corp., Orange, Conn., a market analysis and forecasting company for electrical distributors and manufacturers, and a frequent contributor to Electrical Wholesaling. You can reach him at (203) 799-3673 or [email protected]. Web site: www.disccorp.com
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