Electrical distributors usually do a pretty good job of watching what’s happening with other full-line electrical wholesalers. Family-owned independent electrical supply houses know what they need to do to compete against the perceived advantages national distributors have in purchasing power, national integrated supply contracts and more robust financial resources, while the nationals know they need to overcome the advantages independents often have in superior local customer contacts and their ability to make decisions on a dime instead of having to wait for approval from a corporate office miles away. But full-line independent and national electrical distributors don’t always have a good feel for what’s happening with the increasing number of alternate channels selling electrical products.
That’s why Electrical Wholesaling’s Electrical Pyramid has grown in popularity each year. It’s a tool distributors can use to think through how to best compete with product specialists, hybrid distributors, retailers selling electrical products, AmazonBusiness and other online merchants, and the many other online and brick-and mortar competitors selling electrical products. Established electrical product manufacturers use the Electrical Pyramid to fine-tune their channels of distribution in each local market area, while new manufacturers use it to create the most effective sales strategy for their particular product package.
Electrical Wholesaling first published the Electrical Pyramid more than 25 years ago, and since that time, the magazine’s editors have regularly added or subtracted “bricks” in it as various sales or distribution strategies emerge or wane. In recent years, we have added bricks for AmazonBusiness and other online merchants; distributors of reconditioned or surplus products; and specialists in solar and wind products. Each of these players represent a new channel of distribution for manufacturers to consider and a new source of competition for full-line electrical distributors. Many of them probably don’t represent a major threat to established distributors because their electrical revenues are comparatively small.
Then there’s AmazonBusiness. While EW’s editors don’t yet have a good feel for AmazonBusiness’ electrical revenues, our best guesstimate is that they easily sell more in electrical products than all but the largest 25-50 full-line distributors, putting them somewhere in the range of $200 million to $400 million in annual electrical revenues. A Dec. 2019 post on www.cnbc.com said the RBC Capital investment banking firm estimates AmazonBusiness’ 2019 revenues reached $16 billion, and that at its current growth rate, it would reach $31 billion in revenues by 2023.
With this sort of sales growth, AmazonBusiness would develop into an even larger threat to electrical distributors, but its electrical sales volume would probably still not rival a much more established alternative channel — W.W. Grainger Inc., Lake Forest, IL, which by our estimates may top $700 million in annual sales of electrical products and related non-electrical jobsite supplies. AmazonBusiness actually competes more directly with Grainger because both of them focus on the MRO needs of industrial, commercial, institutional and government customers. But Grainger attacks the MRO market (which it estimates to be over $130 billion in the United States and $290 billion globally) with a diverse array of online and brick-and-mortars sales resources, as well as an army of salespeople, while AmazonBusiness is primarily focused on being the low-cost provider. With 64% of its $11.5 billion in global revenues ($7.4 billion) coming from online channels, Grainger is the 11th largest e-retailer in North America, according to Internet Retailer.
MAKING THE ONLINE CASH REGISTER RING
AmazonBusiness and Grainger are not the only alternate channels investing big money to improve the online shopping experiences your customers can have on their websites. Home Depot considers its online product offering to be an “extended aisle” that offers a significantly broader product assortment than the 30,000 to 40,000 products one of its stores typically stocks during the course of a year. To this end, the company launched its One Home Depot experience in late 2017, which is its vision for an “interconnected, frictionless shopping experience that enables customers to seamlessly blend the digital and physical worlds.” Home Depot is now two years into its multi-year $11 billion investment program to create this experience.
Home Depot has grown its online sales by $1 billion in each of the last six years. How much of that is in electrical supplies? A quick rule of thumb is that electrical supplies and residential lighting equipment account for roughly 10% of annual sales. And while residential lighting equipment may or may not be a major point of emphasis for your company, the fact that Home Depot has sold $100 million more in electrical supplies in each of the last six years should catch your attention.
The company continues to target electricians and other tradespeople in a very big way through its Home Depot Pro program, which includes a loyalty program, exclusive product offers and business services that help contractors, such as receipt lookup and job tracking of purchases.
INDUSTRIAL VENDING MACHINES: THE SILENT SALESPEOPLE
One of the more interesting developments over the past few years in the MRO marketplace has been the explosive growth of online vending machines. Fastenal Inc., Winona, MN, has been a big believer in them since 2008, and in recent years they have become an integral part of Grainger’s KeepStock program, which offers customers a broad range of inventory management resources, including VMI (vendor-managed inventory).
Fastenal has already installed 90,000 vending machines as part of its FAST Solutions vending program. It has also installed 15,000 check-in/check-out lockers, but it believes there’s room for many more. The company says in its annual report, “We estimate the market could support as many as 1.7 million industrial vending devices, and as result we anticipate continued growth in installed devices over time. We anticipate signing 22,000 to 24,000 new devices in 2020.”
Want to guess on the targeted monthly revenues per industrial vending machine, which the company calls “product revenue devices”? How about a range of under $1,000 to more than $3,000, depending on the size and type of device. Fastenal also strengthened its commitment to industrial vending machines with its purchase this past March of certain assets of a primary vendor for these products — Apex Industrial Technologies, Mason, OH. According to an 8-K Fastenal filed on March 30, since 2008, Fastenal bought “more than 105,000 product dispensing and leased devices across 23 device types in 25 countries that generated more than $1.1 billion in sales in 2019.”
Grainger’s commitment to industrial vending machines is also evident in some data on order fulfillment it released in its 2020 Fact Book, which said that 17% of its orders are delivered through its KeepStock program — more than the 13% of orders picked up at its physical branch locations.
BUILDING YOUR OWN ELECTRICAL PYRAMID
Depending on how you need to analyze the channels of distribution in the electrical wholesaling industry, you might need to identify companies operating in specific market niches. Sources for this type of information include the Mergent databases accessible for free at many local business libraries.
While the Electrical Pyramid is a snapshot of the electrical market as a whole, it can also be used as a tool to analyze the channels of distribution in your geographic market of choice. So, get out your magic markers and whiteboards and start drawing your own electrical pyramids (See www.ewweb.com’s “10 more Ideas for How to Use Your Own Electrical Pyramid.”). EW’s editors think this article does a pretty good job of summarizing the biggest channels to market in the electrical industry. If you find other bricks that belong in the pyramid, draw them in and send them to us at [email protected]. We may include them in our next edition of EW’s Electrical Pyramid.
One other key thought to remember before you dig into the valuable exercise of building your own electrical pyramid: Remember that there really isn’t any right or wrong combination of channels of distribution. EW’s Electrical Pyramid is in some ways more like a kaleidoscope than a snapshot of the electrical channel, in that the bricks in it shift on a product-by-product or market-by-market basis.
For instance, a manufacturer that wants to grow in the New York-New Jersey metropolitan area may have entirely different Electrical Pyramids for the five boroughs of New York and suburban Westchester County or Long Island in New York and Bergen, Hudson and Passaic Counties in New Jersey because the channels of distribution and local buying influences can be very different. And the bricks in the pyramid that a local electrical distributor will build to analyze his competition for a slice of that same market will look different from that manufacturer’s pyramid.
The Electrical Pyramid is going to be much more valuable if you build your own and customize it to your own unique market needs. But like lots of things, the devil is in the details. It’s a fun exercise, so don’t be afraid. Here’s how to get started.
Schedule at least a half-day. Invite your management team and best strategic thinkers to this session. If you can do it off-site in a conference room, all the better, but if time or budget don’t allow it, find a quiet room in your building where you can spread things out a bit.
Bring the right equipment. If you are leading the discussion and are a white-board type of guy or gal, you will have fun with this assignment. Bring ample erasable markers — you will be building an Electrical Pyramid brick-by-brick and will be thinking on the fly. Or, if you aren’t into white boards, get ahold of a large roll of newsprint from an art supply or craft store and bring along a handful of markers. Other resources you should have on-hand include laptops (internet access is a big plus in this meeting); copies of this article; and sticky notes. If a PDF of this article would be helpful for the session, contact EW at [email protected]. The analysis in this article will provide a high-altitude overview of the various channels (bricks) in each tier of the pyramid. Your job in this exercise is to bring this analysis down to ground level for the market area under discussion and identify all the key players in it.
If you want to get creative and make it a fun hands-on exercise, you may even want to try bringing along some large wooden building blocks, Legos or Duplo bricks. Assign the person in the room with the most artistic talent with the job of inscribing each brick with the channel of distribution under discussion.
Assign one person to be the “scribe.” If you are going with the building block idea, you have your man or woman. But make sure you have someone who is copying down all of the ideas sure to be flying around the room.
Build your pyramid level-by-level, starting with full-line distributors. Here’s where you will need a copy of EW’s Electrical Pyramid illustration shown on page 15. You may find it easiest to start at the top with full-line electrical distributors and work your way down through the seven tiers shown in the illustration. The rest of this article will walk you through each tier:
- Full-line electrical distributors
- Product niche distributors
- Service/product niche distributors
- Hybrid distributors
- Retailers selling electrical supplies
- Distributors from other trades selling electrical supplies
- Other channels
- Web-based companies
If you are a distributor, go around the room and start listing all competitors. Group them by national chain, regional chain or local independent. If you are an electrical manufacturer or independent manufacturers’ rep, do the same thing, but you may want to group them by the amount of business you do, don’t do or want to do with them. Depending on the type of analysis you are doing, you may also want to pencil in which buying/marketing groups the distributors are in, if any.
And don’t forget to factor in the huge role independent reps play in any local market. Depending on your position in the market (distributor, rep, manufacturer, consultant, etc.) you may or may not want to list and profile all of the independent manufacturers’ reps in the market and possibly the factory-employed field salespeople who cover the market, as well.
You may find that creating an Electrical Pyramid leads to the creation of a “customer pyramid,” where you analyze your market’s key accounts by size, type of company, market focus, the level of service required and how they buy product. And remember psychologist Abraham Maslow’s “hierarchy of needs” pyramid from that Psychology 101 class, which illustrated our basic need for food, water, shelter, companionship, respect, etc.? You could draw up a customer’s “hierarchy of needs,” where you illustrate the importance of price, delivery, education, return policy, etc. And don’t forget to check out the Customer Pyramid at www.ewweb.com.
Okay, now the hard work starts. Compiling a list of distributors (or reps) in your market may unearth a few surprises and provide some valuable information. But to make this information really work for you, sketch out a profile for each of these companies and drill down to their strengths and weaknesses. The basic company profile should include key management personnel; estimated sales volume; market share; and primary market focus. You also need to get answers from your assembled team to questions such as:
- What value-added services does this company provide that we currently don’t offer?
- On the flip side, which services do we offer where we have a clear advantage?
- Who are their biggest accounts?
- With which customers are they most vulnerable?
- How has this company’s sales strategy changed because of the COVID-19 coronavirus?
- Have they developed any virtual sales or digital market strategies that we can borrow?
Full-line distributors. The five largest full-line distributors account for 39% of the market. The electrical wholesaling industry continues to consolidate, and as mentioned earlier, over the last few years the five largest national distributors have increased their market share to over a third of a $100 billion-plus market, and the Top 200 largest distributors (see EW’s June issue) account for 69% of total sales — an estimated $81.4 billion.
Product specialists. Now move down to the next tier of the Electrical Pyramid. Go around the room and get people to brainstorm about all of the niche distributors in your market area that focus on a specific product category. The biggest product specialists typically include residential lighting, lamps, wire and cable and utility products. Others include fuses, voice-data-video (VDV) products and utility supplies. You may be surprised by how many product specialists in your market area compete with you on a few product lines. Depending on how in-depth you want to go with your analysis, you may or may not want to develop company profiles for each of these product specialists.
Service/product niche distributors. Find out what ESCOs and lighting maintenance companies are doing in your market. Service/product niche distributors have a heavy emphasis on design, installation or repair. Although they sell electrical supplies, product sales may not be their primary function. These companies focus on providing a complete service solution to their customers.
Pay special attention to ESCOs, which provide the most sophisticated package of design, financing, technical assistance, audit and, in some cases, installation services in the energy market. The sale of electrical products is a relatively small piece of the overall package of products and services that ESCOs provide. Many ESCOs are looking for distributors to provide local warehousing support and logistics for their lighting retrofit projects. The National Association of Energy Service Companies (NAESCO), Washington, DC, offers some good insight into the world of ESCOs at www.naesco.org.
You should also pencil in lighting-maintenance companies into this tier of your pyramid. These companies, which typically have contracts for the maintenance and retrofit of lighting systems in stores, parking lots and other retail or commercial facilities, are emerging as skilled players in the energy game.
If you want to get a sense of how far these companies have evolved, check out the training resources at www.nalmco.org, the website for the interNational Association of Lighting Management Companies (NALMCO), Ankeny, IA. NALMCO’s training resources help school its members in the latest in energy-efficient lighting systems. Some electrical distributors are members of NALMCO, including Facility Solutions Group, Regency Lighting and Rexel Energy Solutions.
Hybrid distributors. Don’t overlook Grainger and Fastenal. Grainger and Fastenal are tough to categorize because they don’t carry a full line of electrical products. But they are definitely competitors to full-line distributors because of their intense focus on the industrial MRO and facility maintenance markets, rock-solid balance sheets and progressive internal operations. Electrical products account for more than 15% of Grainger’s total sales. But because of its sheer size, willingness to invest in its e-business capabilities, distribution network and branch infrastructure, the company is a formidable competitor. If you have a Grainger branch in your neighborhood, add a brick to your pyramid for them.
By some measures, Fastenal may be a peripheral player in the electrical market. But with almost 4.7% of its $5.33 billion in sales (over $250 million) in electrical products; more than 12,000 electrical stock-keeping units (SKUs) listed on www.fastenal.com; and 1,806 branches in the United States, you need to keep an eye on them. Add another brick to your pyramid for them.
You may also want to include Anixter International Inc., Glenview, Ill., on this tier of your pyramid if they have any locations nearby. The company, which WESCO purchased earlier this year, could also be called a product specialist because of their primary emphasis on wire and cable, but they also sell other electrical products and provide some unique customized supply chain services for customers. EW’s editors put them in this tier. With their acquisition of HD Supply several years ago, they are definitely a hybrid distributor — part wire and cable specialist, part utility distributor and part full-line distributor.
Retailers selling electrical supplies. While electrical supplies account for roughly 10% of a home center’s total revenues, over 4% of that figure is in lighting, which for the most part are largely residential and may not be of as much interest.
Distributors from other trades selling electrical supplies. That distributor down the street may be a competitor. When you have at least 1,000 industrial distributors, 1,000 tool specialist distributors, perhaps 100 specialists in power transmission products in the United States, you know some electrical sales are flowing through these often-overlooked channels. If you have any of these types of distributors in your market, as well as distributors of electronics components, HVAC equipment, plumbing supplies or other specialty distributors, they may be worth further study to see what kinds of electrical products they might be stocking.
It makes a lot of sense to get to know the distributors from other trades in your local market area. In one sense, you are in the same business but are just shipping different stuff in the boxes. Find some non-competing distributors from other trades and compare best practices in sales, warehousing, delivery, e-business and operations. You may also want to consider joining the National Association of Wholesaler-Distributors (NAW), Washington, DC (www.naw.org), which provides some terrific venues for networking with distributors from other trades and an insider’s perspective on legislative issues of interest to distribution firms.
Other channels. These are always changing but always growing. Any single brick in this level of the EW Electrical Pyramid may or may not account for a ton of electrical sales in your market. This level of the Pyramid may be toughest to track because it’s where the new and potentially competing channels of distribution first start out.
Do you have any reps in the spec-grade lighting niche selling direct? Pencil them in. And if solar is growing in your market area, find out who is selling the photovoltaic (PV) equipment. It might be a small PV contractor who is also a dealer for a limited number of lines.
Another hotly debated sales channel is the manufacturers selling direct. Outside of providing large quantities of wire and cable for massive projects in the utility market; gigantic turnkey switchgear or automation projects; spec-grade lighting packages; and now LED lighting solutions, this historically hasn’t been a widespread issue in the mainstream electrical wholesaling industry. However, we expect more lighting manufacturers to sell their customized LED lighting solutions direct to end users.
Online merchants. Depending on your market position, these bricks in the pyramid may be changing the fastest. The most obvious bricks here include www.amazon.com, www.ebay.com and online LED merchants.
Summary. After you build your own Electrical Pyramid, check out www.ewweb.com for more information that EW’s editors have posted on some of the fastest-growing alternative channels of distribution over the years. Just type “electrical pyramid” into the search engine.