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Big Times for Small Firms

July 1, 2003
Prospects are bright for small specialty distributors in the electrical industry.Looking at the changes wrought by consolidation in his market--and concerned

Prospects are bright for small specialty distributors in the electrical industry.

Looking at the changes wrought by consolidation in his market--and concerned about his own company's future--a distributor recently posed this question to me: Is there a place for the small specialty firm?

Whether the emphasis lies on "small" or on "specialty" the answer comes out the same: Absolutely. A specific company may, of course, struggle due to any number of internal and external factors. But the evidence points to the need for and continued presence--even growth--of small, specialized firms.

Electrical products are needed in hundreds of thousands of buildings of all sizes and in an incredible array of products. In many geographic markets, however, the total amount of available business fails to meet the criteria that large chain distributors go by to select a branch site. Yet these markets still need electrical products. They remain ripe for small distributors, specialized or not, who provide local stock of fast- and slow-moving items and technical knowledge.

There will always be small customers with annual purchases too small to interest large chain distributors. These firms will provide the bread and butter of small distributors, specialized or not.

In any market, unique or unusual customer needs in product, knowledge or service will provide a healthy niche for a small company that focuses on them. Small distributors can also have the edge over the branch of a large competitor due to flexibility, creativeness, focus, dedication and numerous other strategic advantages.

There's hard evidence of small distributors' successes, too. According to the national financial norms released by the Electrical Manufacturers Credit Bureau, Torrance, Calif., for 1996 (the latest available), the smallest distributors finagled higher gross profits than any other size distributorship--and they were able to hang on to it. Their net profit was "high" (for the industry). The largest distributors were able to work on smaller gross profit and, through reduction of internal costs, bring it through to a similarly high net profit. It's the distributors in the middle who are getting clobbered.

Some observers have posited that our industry is advancing toward a shopping-center model. A typical mall has large anchor stores (the big chain distributors), with numerous specialty shops in between (the specialists).

I see the continued growth of specialists, both from observation and from our list of the 250 biggest electrical distributors. We have no way to count full-line versus specialized among small distributors; but we can for the "250 Biggest," and that group reflects the nature of the industry overall. Fully 20% of companies on the 1998 list are specialized, and their numbers and types have been growing steadily.

You must also consider that the average size of an electrical distributor location (specialized and full-line) was a bit over $3 million in sales and 11 employees at the time of the 1992 Census of Wholesale Trade. That may have increased to $4 million in sales by now.

Nonetheless, it shows that the typical electrical supply house may not be all that big. If it's a branch, it may have considerable resources behind it, but the effectiveness at a local level depends on how well the big company marshals, directs and redistributes those resources. The big company may or may not have an advantage over a smaller or specialized competitor. Upwards of 13,000 electrical distributor locations existed at the time of that Census; only 4,000 or so were part of a chain distributor. The small firms with one or a handful of location firms are in the majority.

Small and specialty firms will continue to thrive in the electrical wholesaling industry.