The electrical market is at an interesting juncture right now. Business is good for many companies and downright great for some overachievers. Electrical Wholesaling's editors believe the electrical wholesaling industry's evolution in the early years of the 21st century is being shaped by a unique blend of market, technological, business and demographic factors already on the scene. Your company's future success may depend on your ability to harness the potential and overcome the challenges of the following trends.
- The Big will get Bigger.
Some people seem to think mergers and acquisitions are a recent phenomenon in this business. That's not true. Industry consolidation has been reshaping the electrical wholesaling industry for at least 30 years. Several distributors have built massive national or regional electrical empires through acquisition, including Consolidated Electrical Distributors Inc. (CED), Westlake Village, Calif.; All-Phase Electric Supply Inc., Benton Harbor, Mich.; WESCO Inc., Pittsburgh; Rexel Inc., Dallas; Hagemeyer NV, Naarden, Netherlands; and Sonepar USA, Berwyn, Pa. Indeed, Rexel, Sonepar and Hagemeyer acquired 25 EW Top 250 distributors from 2000 to 2002. During this time period, it wasn't unusual to see two dozen distributors purchased each year.
Home Depot's recent purchase of Hughes Supply, Orlando, Fla., captured the imagination and fueled the fears of many electrical distributors that yet another Goliath would gobble up smaller electrical distributors. (See “Big Orange Hits Home,” February 2006, page 12.) Home Depot may or may not purchase other electrical distributors, but it's safe to say there will always be several companies that want to build national distribution networks in the electrical market.
As you can read in this month's feature article, “Consolidation: Changing the Landscape,” (page 34), consolidation is very much on the minds of electrical distributors. This acquisition activity will be funded in part by dollars from private-equity firms that have taken serious interest in the electrical market. Indeed, according to Brown, Gibbons Lang and Co., Cleveland, last year private-equity firms acquired approximately $40 billion in revenues in the acquisitions they made of distributors of all trades. Before freaking out that some Wall-Street-funded giant is going to take over the electrical world, keep in mind three facts:
The four national distributors (Graybar Electric Co., St. Louis; WESCO; GE Supply, Shelton, Conn., and CED) together accounted for only 17.8 percent of the industry's $67.8 billion in total annual sales in 2004.
EW's Top 200 electrical distributors account for approximately 47 percent of 2004 sales.
Approximately 4,000 full-line distributors and product specialists account for the remainder of industry sales and still play a huge role in the market.
Fueled by funding from private-equity funds, a desire of business owners to “cash out” family-run businesses and the strategy of selling a business while the market is at or near its peak, the pace of consolidation will increase over the next year or so. However, there will always be room in the electrical market for savvy entrepreneurs who can outsell, out-manage and out-think competing distributors.
- Richard Worthy will Make Waves (Again).
Some people make a much larger impression on an industry than others. Richard Worthy is one of those guys. With more than 20 acquisitions and several branch start-ups, Worthy helped build Sonepar USA into an almost national presence with $1.5 billion in annual sales, 217 locations and 3,700 employees in just six years. That's the fastest any electrical distributor ever hit the $1 billion mark in sales. Although Worthy left Sonepar in 2004, you just knew that he would surface again in the electrical business once his noncompete clause with Sonepar expired. He's back in the game now. With private-equity funding, Worthy is reportedly already talking with potential acquisition candidates.
- The Hughes Supply Mega-Centers will be the Real Jewel for Home Depot.
The “one-location-serves-all” strategy that Hughes Supply uses in its mega-centers in Miami and Atlanta help the company service contractors in a variety of trades. The Miami mega-center, which operates out of two buildings on a 22-acre campus, sells six product lines: fire protection; water and sewer; water systems and irrigation; plumbing; maintenance, repair and operations; and building materials. A mega-center in Orlando, Fla., is expected to open this year.
Electrically speaking, a move to mega-centers could be huge for Hughes Supply and Home Depot. Approximately 10 percent of Hughes Supply's sales are in electrical products, and only 100 of the company's 500 total branches currently sell electrical supplies. A move to mega-centers could pump up the company's electrical presence in additional areas of the United States.
It's interesting to note that the customers Home Depot covets have been shopping for years at multi-product line branches operated by companies such as W.W. Grainger Inc., Lake Forest, Ill.; and Fastenal Inc., Winona, Minn. A large percentage of Grainger's $5.5 billion in annual sales comes from the 1 million professional contractors and other customers in the construction, industrial and facility maintenance fields that shop at its nearly 600 branches. Fastenal pumps out 500,000 products in 10 distinct product categories through its 1,750 branches.
- Big Builders will Dominate.
If you think the homebuilding industry will remain a local business, with hundreds of small builders together accounting for most of the new houses built in the United States, think again. According to Builder magazine, one in four new homes are now built by large, publicly traded builders such as D.R. Horton, Fort Worth, Texas; Pulte Homes, Bloomfield Hills, Mich.; Lennar Corp., Miami; Centex Corp., Dallas; and KB Home, Los Angeles.
Although the commercial and industrial markets command more attention when it comes to electrical distributors' sales, the residential market accounts for a very healthy 27.6 percent of the average electrical distributor's sales, according to Electrical Wholesaling's November 2005 Market Planning Guide. That percentage has grown over the past five-to-ten years, as housing starts have grown at a double-digit pace. With national builders becoming an ever-more-important factor in the residential market, distributors, reps and manufacturers should evaluate or establish relationships with these key players in the years to come. Some manufacturers already market their products directly to homebuilders, including Lutron Electronics Inc., Coopersburg, Pa.; Leviton Manufacturing Co. Inc., Little Neck, N.Y.; and Broan-NuTone LLC, Hartford, Wis.
Another key consideration in working with national homebuilders and other big players in this marketplace is the move to new residential construction in more urban areas. As the suburbs and ex-urbs on the fringes of metropolitan areas are built-out to capacity, homebuilders are reclaiming urban land for residential development. New waves of homebuyers, empty nesters and recent immigrants moving to cities often appreciate the culture, arts and short commutes that urban locations offer, and homebuilders are racing to meet this demographic shift.
Toll Brothers Inc., Horsham, Pa., is well-known in building circles for its focus on luxury suburban homes. The company, which built more than 8,700 homes last year, is now redeveloping a former coffee factory in Hoboken, N.J., into 800 luxury condominiums that offer many urban amenities and million-dollar views of the Manhattan skyline (see photo on left). Interestingly, Toll Brothers considers itself “a marketing company that happens to build homes” and is constantly researching customer tastes and new design trends and incorporating those features into its mini-palaces. The strategy appears to be working: The average buyer of a Toll Brothers home adds $103,000 in options and premiums.
- New Workforce Demographics will Change How You Manage Employees.
The workplace presents an interesting social mix these days. Although most of the World War II generation has retired or died, it's not at all unusual in family-owned businesses for the matriarch or patriarch to come in for a few hours a day to open mail or kibitz with long-time employees or customers. Their sons and daughters — baby boomers born from 1948 to the early-1960s — are usually running things by now. But demographers say two more generations are working today, each with their own desires, expertise and peculiarities — “generation X,” born 1965 to 1980, and “generation Y” or the “millennial generation,” born 1981 and after.
Some interesting social demographics define these generations. Half come from single-parent homes, and four out of five had working mothers while they were growing up. One-third of them are minorities. Both of these generations are more technologically savvy than their parents or grandparents, and they value any training their employers can provide on new computer software, as well as other skill sets that can help them advance in their careers. Raised in the post-Watergate era, generation Xers tend to be suspicious of authority and cynical by nature.
At least 20 years younger than most baby boomers, members of generation Y can have a difficult time relating to boomer-supervisors and prefer to socialize with people of their own age group. They generally don't enjoy after-hours socializing with customers or vendors, and often don't place the same importance as baby boomers on job longevity, retirement benefits and team play. Instead, they're motivated by a flexible work environment and time off. Social and environmental causes are important to them. Some companies have even developed buy-back plans in which employees can buy additional vacation time.
This demographic stew means managers must learn to motivate “cross-generationally,” as they may now have several generations working at their companies, in contrast to the recent past, when the majority of employees were either baby boomers or pre-boomers.
- Portable Information will Change How You Communicate.
“Convergence” is a point in time when several market or technological trends intersect to create a whole new ball game. We are at that point with “portable information.” Advances in computers, telecommunications and online data management and communication have created pocket-sized devices such as iPods and other high-capacity portable music and video players as well as satellite radio services that broadcast 100-plus channels. Add these relatively new innovations to multi-function cell phones and Blackberrys, Palm Pilots and other personal digital assistants (PDAs), and it quickly becomes apparent that we have never had access to so much portable data.
The iPod revolution holds some clues to just how ubiquitous portable information has become. Apple Computer has sold 42 million iPods since the 2001 launch, and iPod owners have downloaded more than 850 million songs from the company's music service. In less than six months, they have downloaded more than 8 million video segments.
Customers and potential customers are obviously very comfortable with these portable information technologies. Savvy marketers can and should harness these technologies for electrical applications.
What if electrical contractors could download three-minute videos or podcasts of installation instructions for new or unfamiliar electrical equipment? Could your salesperson use a cell phone with video-recording capabilities to record some perplexing installation problem a customer may be experiencing and then send that tape to a vendor for evaluation? Would an electrical manufacturer be able to broadcast product training tips over one of the satellite radio services like XM Radio or Sirius? Is our industry ready for an “electrical news headline service” that users could access through their cell phones? These are questions electrical distributors, reps and manufacturers should be asking now that so much portable information is in hand.
- Schools and Universities will Continue to Offer Terrific Profit Potential.
As mentioned earlier, demographics play an important role in the type of employees you manage and their familiarity with technology. Generational issues create market opportunities, too. There's no better example than with schools and universities. Baby boomers are the single largest age demographic, and their children are still entering schools and now colleges and universities in record numbers. According to the National Center for Education Statistics, more than 54 million students are enrolled in grades K-12. While the number of students entering elementary schools is starting to level off and even decline a bit, the enrollment numbers for universities are starting to increase substantially as more boomers' children reach college age.
According to American School & University magazine, from 2005 to 2007 there will be $135.3 billion worth of new construction, modernization and additions in schools and universities. Along with primary electrical power distribution systems, these facilities are usually loaded with energy-efficient lighting, security equipment and miles of voice-data-video cabling and related equipment. It's interesting to note that as a piece of the total construction pie, educational buildings are one of the largest markets. According to the 2005 McGraw-Hill Construction Forecast, the 220 million square feet of expected new construction of education buildings was one of the top three individual market segments.
- You will Make Money from Energy-Efficient Products.
Over the years, energy-efficient products have been the bran cereal of the electrical market. Everyone agreed that they were healthy, but not enough architects, building owners, general contractors, subcontractors, distributors, reps and others involved in the construction market incorporated them into their business or design mix. That may all be changing because of a perfect storm of market factors:Renewed energy consciousness
Concerns about rising oil prices and the long-term dependability of Middle East oil markets have gotten more people thinking green.Utility rebate programs are flourishing
As you probably read in Electrical Wholesaling's February 2006 issue (page 22), more than 50 electric utilities now offer cash rebates and other incentives to building owners for the installation of qualified energy-saving electrical products such as fluorescent lighting systems incorporating T5 or T8 lamps, and efficient dimmers, reflectors and fixtures; HID lighting; exit signs; occupancy sensors; motors; and drives.New federal energy legislation
According to the National Electrical Manufacturers Association (NEMA), Rosslyn, Va., the Energy Policy Act of 2005 included a new tax deduction for expenses incurred for energy-efficient building expenditures made by a building owner. The deduction is limited to $1.80 per square foot of the property, with allowances for partial deductions for improvements in interior lighting, HVAC and hot water systems and building envelope systems. The provision is effective for property placed in service from Jan. 1, 2006 through Dec. 31, 2007.LEED certification and green buildings
Although the Leadership in Energy and Environmental Design (LEED) building rating system developed by the U.S. Green Building Council (USGBC) has met mixed reviews in its first few years, LEED will be a force to reckon with in the years to come. The LEED certification system awards points to a building based on the types of energy-efficient building materials used in construction and how these products help the building save energy. The installation of energy-efficient T5 or T8 fluorescent lamps, dimming systems, occupancy sensors and exit signs are just a few of the electrical products that can score points in the LEED rating system. While critics say LEED's application and qualification process is cumbersome and tough to manage, USGBC is working to simplify the process.Rapid R&D in the lighting market
The lighting field is constantly regenerating itself with new product development. For years there's been a healthy competition among lighting manufacturers to design the products or systems that provide the best light, save the most energy and provide the best overall lighting environment. Not a year goes by when new conventional lamps like fluorescent, halogen or high-intensity discharge (HID) don't hit the market with longer lamp life and better color rendering.
The advances in traditional technologies are impressive, but there's some mind-blowing R&D going on with newer technologies such as light-emitting diodes (LEDs) that last 100,000 hours in a growing spectrum of colors, and super-efficient “light engines” that transmit light via fiber-optic cabling to application. Also on the cutting edge is some R&D being done be GE Lighting for Organic Light-Emitting Diodes (OLEDs). These thin sheets of plastic-like material emit light when powered by electricity. A 24-inch by 24-inch panel producing 1,200 lumens of light with an efficacy of 15 lumens per watt has already been developed. That light level is on par with today's 60W incandescent bulb.
- China & India will Offer Sales Opportunities.
Most people shudder at the outsourcing of jobs to low-cost manufacturing countries such as China and India. You can't discount the pain of these lost jobs. But these countries have voracious appetites for many American brands, and they are also good customers.
The population numbers are staggering. According to the best seller “The World is Flat,” China has more than 160 cities that each have at least 1 million residents, and India has more than 1 billion in population. The book's author, Thomas Friedman, believes that U.S. companies must realize that these countries have dual identities as both customers and competitors.
Friedman believes these countries are also starting to compete with the United States in other areas outside the manufacturing arena. Universities in India and China are educating thousands of engineers and computer programmers at a time when U.S. universities are seeing declining enrollment in these disciplines. U.S. companies looking to cut programming costs are already farming out some of the more tedious computer programming to India, and those Indian firms are hungry for more advanced — and more profitable — assignments.
Electrical companies will deal with the challenges that India and China present differently. Many electrical manufacturers and even some distributors and reps are already well into private-label product sourcing agreements with manufacturers in the countries. Other industry players are farming out computer-programming and call-center functions. The global market is edging closer to your business than ever before.
- Business Basics will Still Matter.
Through it all, business basics still matter in the electrical market. The two most important basics in the electrical industry remain profit and service. Electrical distributors must pump insanely large amounts of volume through their companies at extraordinarily low net margins. The Performance Analysis Report (PAR) published by the National Association of Electrical Distributors (NAED), St. Louis, says net profit for distributors increased in 2004 to 2.1 percent, up from 1.3 percent. Profit margins for high-profit distributors increased from 3.5 percent to 4.6 percent in 2004.
Some distributors can do much better. Chuck Steiner built Branch Group, Upper Marlboro, Md., from $30 million in sales in 1984 sales to $240 million in sales in 2000 — with a now-legendary 10 percent net profit before taxes, according to a presentation by Neil Gillespie, now vice president, marketing and strategic development, Roden Electric Supply, Knoxville, Tenn. Gillespie says Branch Group achieved this profitability and growth by focusing on medium-sized commercial contractors and small residential contractors and offering them high-stock availability, getting to fast-growing suburban areas first, focusing on a single-vendor philosophy in key product areas, using a central distribution center to pump products to branches, building company visibility through marketing, and soft-skills training for employees.
With net margins so low, other distributors are always on the lookout for any added edge to improve profits. IDEA, Rosslyn, Va., says the Industry Data Warehouse (IDW2) and the IDX2 value-added network (VAN) can add 2 percent to a distributor's bottom line. Indeed, companies that have fully computerized transaction processes and time-consuming back-office operations are breaking ahead of the pack.
Books have been written on the importance of a customer-service culture for distributors, and a full discussion of this topic is far beyond the scope of this article. The key concept is to find out directly from a customer what package of products and services he or she values most, and then figure out how to profitably provide that package. You can get some ideas for evaluating the package of value-added services your company sells in this month's feature article “Distributor Survival Strategies” (page 54).
Evaluating the services most important to your company and its customers is similar to the “hierarchy of needs” developed by psychologist Abraham Maslow. His hierarchy of needs has been the subject of many Psychology 101 courses. Maslow explored the core needs of all humans: physical, safety, security, ego and self-actualization (the need for creativity and achievement). Your customers and your company have basic needs, too, and you must identify and properly service those needs.
10 Trends that will Shock the Industry: Points to Ponder
While it's important to familiarize yourself with the market drivers discussed in this article, the real challenge is analyzing how or if they will impact your company, and developing the proper sales, marketing, management or operational strategies to harness or overcome these challenges. These “Points to Ponder” may help you in this analysis. Use these questions during your strategic planning sessions to spark discussion with your company's leaders and gather their ideas on key challenges and opportunities down the road.
- Who are the distributors in our market most likely to sell their businesses?
- If consolidation totally reshapes the market, what impact will it have on my business?
- (For company owners) Should I sell my business while the market is hot?
Hughes Supply's Mega-centers
- Will Home Depot and Hughes roll out the mega-center concept to many of the other 500 branches? What would happen if they put one in my market?
- Will contractors from other trades actually be potential customers for my product lines?
- Should I become a multi-trade distributor and sell a more diverse package of products?
- What is the long-range housing outlook for my market?
- Will urban new construction be a factor?
- How big a factor are the national builders in my market?
- Are any of my manufacturers actively marketing their products to builders?
New Work-Force Demographics
- What types of brand loyalty will the younger generation have, and how will it affect my business?
- Could I offer more training to younger employees on computer systems, products, or other job skills?
- Can my company be more active in “green” community charities or benefits?
- Am I willing to create a flexible work environment to attract younger workers?
- How will customers want their business information in the future?
- How can I use these technologies now to get product or application information out to end users and distributors?
- How can I use these technologies to get the “portable information” I need?
School & University Market
- What are the enrollment trends at schools and universities in my market?
- What is the climate for bond issues funding new construction and renovations?
- How solid are my contacts at the key buying influences at schools and universities?
- Am I or should I be a player in security products, VDV and energy-efficient lighting systems?
The Energy Market
- Are the electric utilities in my market offering rebates?
- Do I have the on-staff expertise to be a player in the energy market?
- Which competitors, reps and energy-service companies (ESCOs) are the key players in this business?
China and India: Customers, Competitors and Allies
- Do any product sourcing opportunities exist for me in China or India?
- What would the reaction be in my market to privately labeled products?
- How does a global macro-trend in global markets like this really affect my company?
- What tools can increase my net profit?
- Besides increasing profits and sales, what are the key elements in my company's “hierarchy of needs?”
- If I drew up a “hierarchy of needs” for the end users in my market, how would it look different? What are the most important services that my company can provide them?
If You Need More Information
This article is based on a seminar presented at the 2006 annual conference of the National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y. The attendee response from that seminar was so positive that the editors of Electrical Wholesaling decided to develop a feature article from the material highlighting these key trends. Much but not all of this material has appeared in some format in Electrical Wholesaling over the past few years. If you need to do further research on any of these trends, visit the magazine's editorial archives at www.ewweb.com. Many of the articles are provided there free of charge. Copies of the most recent EW Top 200 listing, Market Planning Guide, and Electrical Pyramid are currently available for sale at www.ewweb.com/resources.