It's not an easy time to be in the market forecasting business. The credit crunch, meltdown in the housing market and stock market implosion have totally transformed everyone's expectations about business prospects for the next few weeks, never mind the next year. Throw in a recessionary business cycle in the overall U.S. economy that was probably starting to smolder before all of these other wildfires started up, and you can see why many economists are torching their old predictions and recalibrating their forecasts to take into account the constantly changing and often grim realities of the today's economy.
Because of how we think this economic scenario will affect the electrical marketplace, Electrical Wholesaling's editors have decided to take a different tack with this year's Market Planning Guide. As the magazine has done in every November issue since 1978, we will be providing sales forecasts for the coming year, market data and tools that electrical distributors, independent manufacturers' reps and electrical manufacturers can use to build their own market forecasts for local metropolitan areas, states and regions; distinct market segments; product areas; and customer groups. We have also included a glimpse of the Canadian market from John Kerr, an electrical industry veteran who published electrical trade magazines in Canada for many years.
A rather large asterisk for EW's 2009 sales forecast
The big change in our 2009 forecast of the electrical wholesaling industry is that we will be providing an updated forecast in first-quarter 2009. We are re-surveying readers because the surveys for the forecast in this issue went out in early August, when respondents had no way of knowing that the credit markets would freeze up just a month later, the stock market would plummet in unprecedented fashion, or the federal government would have to step into solidify financial markets. Because of the timing of the surveys, the 2009 sales forecast in this article seem awfully optimistic to EW's editors, and we know it needs to be updated. Look for that update in early 2009.
The good news with the survey that we sent out in August is that it showed a more realistic sales forecast of 0.3% growth for 2008, compared to last year's 2008 forecast for 5.7 percent growth, which we felt was a little optimistic at the time. When it comes to market forecasting, electrical distributors are by nature a pretty optimistic bunch, and EW's editors have found over the years in their responses for our Market Planning Guide surveys that it's not at all unusual for them to shoot a little high in their sales forecasts, and when re-surveyed the following year to ratchet down their expectations by a few percentage points.
Everybody knows we are in uncharted economic territory coming into next year, but the sheer magnitude of the change is truly remarkable. Let's take a look at the commentary from several economists who track the construction market in general and the electrical market in particular. As you will read in his article on page 48, Herm Isenstein, president, DISC Corp., believes this economic downturn in the electrical market will be unlike any recessionary cycle we have seen in more than three decades. Robert Murray, vice president of economic affairs for McGraw-Hill Construction, is forecasting a seven percent decline in total construction for 2009, but says that relatively mild rate of decline (compared to some of the numbers you see in the housing market and other market sectors) will only hold up if the federal stimulus package works. If it doesn't, he sees much more trouble. “The basic assumption is that the extraordinary steps to deal with the credit freeze will be successful with time. If not the numbers will be lower,” he says. He doesn't see any sustained momentum revving up the construction market until the second half of 2009.
The language economists use to describe market conditions in the housing market isn't as carefully nuanced. At the 2009 McGraw-Hill Construction Forecast conference, Kermit Baker, chief economist, American Institute of Architects (AIA), said, “By any measure, this is shaping up to be the worst housing market in the last 50 years.” David Seiders, chief economist, National Association of Home Builders (NAHB), said the situation in the housing market is worse than any economist anticipated six months ago. “The economy is weakening more than we expected,” he said. “It's a new world. Forecasting in this environment is extremely difficult. Uncertainties are unprecedented and risks have never been higher.”
Mark Zandi, the chief economist for Moody's Economy.com, pegged the housing crisis long before other construction economists. He called the housing bust “unprecedented” and said the government and banks must work through the 3 million mortgages now in default and what he called 15 million other “very sketchy” loans. “The job market is a mess and will get worse,” he said. “The next six months will be extraordinarily painful.”
John Mothersole, principal, industry practices, Global Insight, is probably the nation's foremost authority on construction material pricing. He used a similar tone to describe the situation in the copper market. “The collapse in copper prices has been as spectacular as any I have seen,” says Mothersole. “We haven't reached the floor yet. The price decline has moved so far so fast it's head-turning.”
Assuming the federal government's remedies for the financial freeze help thaw credit markets, most economists agree that while 2009 will be a very tough year, business should pick up in 2010. No one quite agrees on the degree of increase, but it's somehow comforting to know that this probably isn't the mother of all recessions and that the business cycle will probably start moving toward some sort of “new normal,” in the next year to 18 months. Distributors, reps manufacturers, electrical contractors and other end users know how to survive “normal” recessions that historically linger no more than a year-and-a-half. It's painful, but it's doable, and electrical companies know the drill. It always has been and always will be a cyclical business, and as long as this business cycle keeps within the expected parameters, the eventual recovery should play out as they have in the past. In this market environment, it's tough to find positives, but economists generally agree that this recession will actually lay the groundwork for a healthier economy. It's expected to drive many of the unhealthy excesses that first got us into this mess out of the U.S. economy. Look for tighter control on Wall Street, blue-chip bargains in the stock market, a return to conventional mortgages in the residential market and more affordable housing. This is all big-picture stuff. Let's see how all the changes in the U.S. economy and overall construction market directly impact the electrical wholesaling industry.
Sales of electrical products through electrical distributors will increase by approximately $5 billion next year. This forecast puts U.S. sales for 2009 at $94.5 billion, a five percent increase from the current 2008 estimate of $90 billion. Electrical Wholesaling's revised estimate for industry sales in 2008 is a 0.3 percent increase over 2007.
Our forecasts are based upon responses to Electrical Wholesaling's annual Market Planning Guide (MPG) survey. Each year, the magazine asks electrical wholesale firms for their previous year's final sales results, sales predictions for the current year, and predictions for the following year. It also asks respondents how sales for the first six months of the current year compared with the first six months of the previous year. This year, Electrical Wholesaling mailed 6,386 surveys (both by mail and via e-mail) and received 324 useable surveys for a 6.2 percent response rate. Respondents reported an average sales-per-employee number of $541,872 for 2007 — very close to the $519,215 average sales per employee for the 109 respondents to this year's Top 200 survey who provided both sales and employee figures for 2007. Regional sales-per-employee numbers are provided on page 28. Be sure to check how your company's productivity compares with the national and regional averages when it comes to sales-per-employee.
The market-planning data is divided into nine regions of the United States. For each region and state, you'll find sales forecasts for this year and next year, along with the three prior years' sales. In addition to the sales forecasts, which are prepared by Electrical Wholesaling's research department, you'll also find an economic snapshot of the region and employment statistics for four of electrical wholesalers' major customer groups: electrical contractors, the commercial market, the industrial market and government.
The employment numbers help develop forecasts for customer buying potential. There's a slight change to the way this year's numbers are reported. In the past, we used employee estimates for electrical contractors from the U.S. Census Bureau's County Business Patterns, but the most recent data was several years old and Electrical Wholesaling's editors found more current data available for employment of electricians on the Bureau of Labor Statistics' website. If you're looking for sales breakdowns for full-line distributors' key customer and market segments, you'll find the Customer Mix and Market Mix on pages 43 and 46, respectively. The Customer Mix data was updated this year.
The Product Mix data found on page 44 gives valuable insight into the product areas that have the most mind share with electrical distributors. This data was updated last year, and some of the product categories have been consolidated or eliminated because their contribution to electrical distributor sales were consistently less than 1 percent over the years. See the text accompanying the chart for a full explanation of the changes.
Getting the full picture on a market area isn't that difficult. When developing any market forecast, gathering some basic data on the size and makeup of the market is the first step. Let's take a look at some of the ways you can crunch the numbers we've provided to tailor them to your specific business and market.
How to Use EW's Market Planning Guide
There's a ton of information here. Here are some ideas on how distributors, reps and manufacturers can use EW's Market Planning Guide.
- Assess market size.
- Determine market share.
- Document market penetration.
- Identify market boundaries.
- Justify new branches.
- Determine areas with the greatest sales potential so you can concentrate your salespeople's efforts in the most productive directions.
- Keep on top of changes in the market area (customer make-up, business volume, product needs).
- Direct advertising and promotion to the places where it will have the most impact.
- Target untapped customer types or industries.
- Identify new accounts.
- Spot new opportunities in products or technologies.
- Determine necessary product line additions.
- Estimate the rate of purchase or usage of a product over the next year to anticipate inventory requirements.
- Document to suppliers or potential suppliers why they should do business with you.
- Explain to suppliers what they can expect from you in the way of market coverage.
- Verify or challenge what suppliers expect from you in sales.
- Set sales quotas for salespeople, territories or product lines.
- Calculate the number of salespeople needed to cover an area.
- Compare how well salespeople in different territories are doing with the same product on the basis of market potential.
- Evaluate salespeople.
- Set up a call pattern to contact customers productively.
- Back up intuition.
One of the most common uses of this resource is for developing a business plan, whether it be for internal use as your guide for next year or for a presentation to an investor or banker. You will need something that states the size of the local market, and these sales figures are a documented source you can use “as is.”
This data will also be helpful in establishing a sales forecast for your company and your region, comparing nearby or far-flung markets with an eye to opening or closing a branch, and evaluating promising areas of new business. One question distributors should ask themselves — and suppliers will be asking — is: “Are our sales into the market at the level they should be?” Look at the estimate of the overall sales in your market in comparison with your company's sales.
In addition to sales forecasts, employment numbers make up a large part of the regional profiles. The number of people employed by a company or in an industry tends to rise and fall with the volume of business it's doing. Employment figures, therefore, act as a gauge to business prospects and conditions in end-user markets.
With the employee counts from each market, you can compare the relative sizes of various end-user groups in your area.
You can also compare the makeup of one market area to another, and consider new customer markets or ones that you could be serving better.
If you track the employment figures for each market over time, you'll see broad economic trends unfolding in your market.
You can also use these employment figures to make your own multipliers or you can use the national multipliers we've already calculated.
Each multiplier is a dollar figure that represents the average amount of electrical products that electrical distributors sell to each particular type of customer, on a per-employee basis or other “economic factor.” (See Electrical Wholesaling's National Multipliers on page 27.) When used with the employment figures in the regional profiles, the multipliers help you establish the amount of business electrical distributors could do with major customer groups in your area, and in total.
For instance, you can go into greater detail by using locally available sources of information on employment or other measures in end-user industries. The professionals at the nearest business library should be able to direct you to a source for the numbers you need. These multipliers are also a good option for determining sales in an area of the country not covered in the list of major metropolitan areas in the regional profiles. The same approach applies if you want to look at one county in an MSA that covers six counties. You would have to obtain employment figures or economic factors from local sources.
For instance, to find the number of electrical contractor employees in a place like Addison, Ill., a city not detailed in the East North Central regional profile, you could contact the local Chamber of Commerce, a nearby union chapter, the state university, the state's department of commerce or the local library to track it down.
These multipliers come in handy if you want to approximate the amount of sales available from a particular account. For example, if a manufacturer employs 300 people, by applying the national multiplier of $615, you would expect the facility to purchase about $184,500 worth of electrical MRO product.
You can also estimate the size of the market with multipliers by building up sales potential piece by piece. According to the Bureau of Labor Statistics, there were 3,220 electricians working in Salt Lake City, Utah. If you multiply that number by the multiplier for electricians ($54,471), you get $175.3 million in potential sales. You would do the same for each of the other customer markets electrical distributors serve to reach a grand total for Salt Lake City. The electrical contractor multiplier should be used carefully because of a change in the employment data published this year. In the past, we relied on government employment data for electrical contractors, and electrical contractor sales estimates from EW surveys. Because we now also offer the more current electricians employment data for the reasons mentioned earlier, it's not an exact apples-to-apples match. However, for the purpose of a basic market estimate for sales from this important customer group, it's close enough. If you need something more exact, create your own multiplier by taking the annual sales you get from an electrical contractor in your market and then divide it by the company's total employees.
Using multipliers results in a dollar figure for market size that tells the level of business electrical wholesalers in the area could do if every potential customer there bought a typical amount of product from them. It tends to be a larger number than actual distributor sales.
2009 SALES FORECAST
(Forecast for 2008. Average percent change from 2007.)
While the Canadian electrical market is generally estimated to be about 10 percent of the U.S. electrical market in an ever-more global economy, you can't overlook what's happening in Canada. The largest electrical distributors in the United States and the world all have locations in Canada, and most of distributors' largest vendors have Canadian sales efforts. To give Electrical Wholesaling's readers a glimpse of Canada's 2009 economic forecasts, we asked John Kerr, a veteran of the Canadian electrical market and president of IP International Group's Canadian Division, about what he sees for Canadian electrical distributors, reps and manufacturers. Kerr is well-known throughout Canada for the years he spent with his family's publishing business, Kerwil Publications, Toronto, which published electrical business publications for the Canadian electrical market, and his marketing experience in the automation and control, computer, fiber optics and machine-tool industries.
Says Kerr, “Canada continues to march to its own tune for the most part out of step with what's happening in the United States. Government surpluses coupled with continued tax reductions on both personal and corporate levels have provided a base for a relatively stable electrical environment. Not immune to ever-changing commodity pricing, however, Canada does risk losses looking forward in capital spend on the resources side, and possible cutbacks in exploration projects offshore in the Atlantic region. This may soften as oil drops to below $70 U.S. per barrel and will potentially lower the overall electrical spend somewhat in 2009 and beyond.
“That said, Canada's well-balanced economy — between its natural resources and up to now its strong manufacturing base — is showing some weaknesses. Ontario, which used to be the engine of growth and prosperity, has shrunk considerably in influence, mirroring the malaise affecting Michigan, Illinois and Ohio. British Columbia and Alberta continue to outpace their eastern counterparts. Looking forward, housing starts will soften in 2009/2010 to approximately 209,000 units, while non-residential construction may get a boost from a calculated increased government spend as some will dip into deficits to stimulate growth. The Canadian dollar seems to be losing steam, dropping back to 80 cents versus the U.S. dollar, making electrical equipment imported into Canada more expensive than in recent years.”
If you need more in-depth information on the Canadian electrical market, check out the Canadian Pathfinder report published by Kerr and Paul Eitmant, president of IP Group International. You can contact them by e-mail at [email protected] or [email protected]. Look for their contributions to Electrical Wholesaling's upcoming cover story on the Canadian market in the May 2009 issue.
Back to the 2009 Market Planning Guide