I wasn't a good French student during high school, but one phrase that stuck with me is “raison d'etre” — loosely translated as “reason to be,” or what the French call the purpose that justifies a thing's existence.
Because the electrical industry is at a historical juncture right now, it's going to be more important than ever for distributors, reps and manufacturers to get a better sense of their core purpose. Yes, business has bounced off the bottom, but it's far from booming in any market areas or business segments. Any growth the industry sees will be part of a long, hard climb back to the sales levels of 2005-2007, and when you adjust for inflation, it's will be an even longer hike back to that mountaintop.
Business conditions aside, another reason to get a better sense of self right now is what I see as the early rumblings of some potentially tectonic shifts in the channels of distribution. I am hearing more discussions than ever about manufacturers taking products direct (particularly in the photovoltaic and LED markets); distributors bidding on projects and subbing out the installation work; manufacturers building up their engineering solutions/turnkey product solutions business; and distributors acting as energy-service companies.
For the past few decades, distributors of electrical supplies accounted for at least three quarters of the sales of electrical products in the electrical channel and direct sales were less than 10 percent. That's because the sweet spot for traditional full-line electrical distributors — commercial/industrial electrical products sold to local electrical contractors and plant facility personnel — has accounted for close to half of all electrical products.
Manufacturers have always taken some big project business direct, particularly trophy projects like new sports stadiums or heavily specified industrial jobs where they are providing a huge portion of the product content, as might be the case with a large factory automation job. But I do wonder how much product is now be sold direct by manufacturers, particularly in the distribution equipment segment, through their own engineering services, turnkey product solutions and energy retrofit business units, and what role distributors play in these efforts.
Channels of distribution are a lot like water in that they both find the fastest, most efficient path to where they need to go. When a piece of business needs a distributor's touch to break bulk, warehouse products locally, provide local sales support or offer credit, it will flow through an electrical supply house. But the cold, hard fact of business life in the distribution industry is that when a manufacturer upstream doesn't need an electrical distributor to provide any of these services, the products will flow directly to end users. We will be taking a more in-depth look at these potential changes in next month's issue, when we will publish an update of our Electrical Pyramid.
While putting together this year's Top 200, it quickly became apparent that even in the worst recession in a generation many progressive companies had taken these challenges into account, analyzed the souls of their businesses, and invested in their raison d'être instead of battening down the hatches and waiting for the storm to pass.
Warren Buffett gets lots of credit for living by the investing philosophy of Baron Rothschild, an18th century British nobleman credited with the quote, “The time to buy is when there's blood in the streets, even if the blood is your own.” If Buffett and Rothschild were distributors today, they would be among the companies that invested in their businesses while the recession was raging.
As you will read in our analysis of this year's Top 200 (page 16), in a year when the average decline in sales for Top 200 distributors topped 20 percent, some companies were still making investments like:
Building new headquarters' locations and distribution centers.
Launching new divisions that focus on energy solutions and training employees on the green market.
Opening new branches and, to a much lesser degree, acquiring companies.
Installing ERP systems.
Hiring employees with great customer contacts who have been laid off by competitors.
There is an interesting confluence of factors that could change how some slices of the electrical market are serviced. Maybe it's “just” the recession, and there's a mad scramble for sales of any sort. But I think the more likely scenario is that it's the start of an evolution in the channels of distribution. It's a trend EW will be analyzing in future issues.