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Ewweb 4577 Lighting Industry Longtail Markets Pr 1

Long Tail Markets

April 3, 2018
The bulk of the sales in the lighting industry appears to have shifted from handful of dominant players to a constantly growing number of smaller players emboldened by the lower barriers to entry offered by LED technology and new online channels of distribution.

Long tail distributions are a relatively arcane fascination by statisticians. Roughly, a long tail mimics the 80/20 rule; also known as a Pareto distribution. But in a series of articles and books by Chris Anderson (editor of Wired), it’s clear that long tail markets have emerged as a very interesting observation of how the global culture and technology expansions have shaped consumer businesses. As a short example, Amazon has more revenue (and assumed profitability) from the long tail of its book offerings than from the Hits segment of their offering. While Amazon is the place to go to buy the latest top 25 books on the New York Times’ list of best books, the larger market for Amazon is to suggest and sell you books that are far from a “Hit.” In short, niche products sold to large numbers of buyers can be a larger and more profitable market than “Hit” products sold to far fewer buyers who must have the current “Hit.” Which brings me to the electrical industry, of course.

Technology has transformed the electrical industry, whether from direct product changes to enable smart interfaces to technology solutions to buy products, or to simply access new markets that were difficult from a pure bricks-and-mortar business model. Let’s start with lighting as it has had the most apparent impact from technology over the past 10 years.

We have more than 1,500 lighting manufacturers in the Egret Consulting database. Many of those “manufacturers” are product resellers — they buy from contract manufacturers or Asian suppliers and either private-label products or simply “distribute” them to traditional buyers, including distributors, ESCOs or others. Regardless of the complexity of defining what a manufacturer is anymore, the key is that market share and market size is opaque. When I read analysts assessments of the handful of publicly held lighting manufacturers, I grimace when they talk about “market share” as if it’s a real number. The publicly held companies all sell broadly recognized products — they all sell the “Hits,” and they also all benchmark themselves against one another as an indicator of “share gain” or loss. I think lighting has become a long tail market, where market dynamics are now supported by a distribution and availability market that belies the true market size. Long tail markets are characterized as a niche market.

Of those 1,500 lighting manufacturers, the vast majority are small companies from $5 million to $50 million. We have been tracking lighting companies more than $100 million and we’re confident there are less than 25 companies that sell more than $100 million of lighting fixtures in the U.S. market. This is an exact model of a long tail market. The United States has seen a huge increase in new startup companies over the past 15 years. Many of those companies were unsuccessful in garnering revenue due to the legacy channel structure so they created their own path. That path is the long tail market, and my suggestion is that the long tail market is larger than the short tail “Hits” market, which is largely dominated by what has become the “Big 5” lighting players — Acuity, Eaton, Hubbell, Philips and Cree.  (Although for decades GE was counted as one of the very largest lighting manufacturers, at this point I believe the company’s lighting sales may not match the lighting-only sales of these other five companies.) The long tail market appeals to the remaining 1,400-plus lighting manufacturers that no one talks about.

Technology in lighting has been transformative. First came the transition into LED, which paved the way for entry of hundreds of new companies that had the capability of supplying LED equipment. Then came controls and smart controls and now there is the integration of sensors to bring us IoT (Internet of Things, also referred to as IIoT, Industrial Internet of Things). With LED technologies of color, spectral control and digitization, new markets emerged: UV sterilization, indoor vertical farming, healthcare lighting, agriculture lighting, optical control innovations, and the enabling of building systems (direct current power distribution and integrated building applications of security, asset management, emergency response, access control and more).

With each wave of technology and the subsequent emergence of new suppliers came potentially lucrative long tail market opportunities. The concept of becoming a niche specialist is very appealing to smaller business owners. It’s more controllable, operationally simpler and more profitable. Selling fewer SKUs to thousands of small buyers is dramatically different than being an industry leader who lives and dies on selling “Hits” every day. And if you can partner with Amazon, or Grainger or Alibaba, you can create a continuous revenue stream of profitability, with or without the expense of a sales team. Long tail markets function best when they have exposure to online distribution of products.

As a side note, during a recent meeting with a client they mentioned that they do not have an Amazon relationship but a few of their reps are selling their products through Amazon.

Long tail markets exist in other electrical products as well and circuit breakers are a good example. Dozens of suppliers of breakers exist that specialize in quick delivery of any breaker manufacturer’s “C” and “D” SKUs. Their access to inventory is through buying out obsolete inventory, or project overages or manufacturer or distributor surplus inventories. The profit margins are higher and the number of customers they serve are magnitudes more than a traditional brick and mortar distributor location. The same concept also works in motor controls and automation equipment like PLCs. Smaller product segments such as cable trays, or specialty connectors/boxes would work just as easily. The long tail markets tend to work under immediate payment terms, quick transactions and small order sizes. The legacy channel burdens of rep fees, ad dollars, incentives, rebates, payment terms and extensive warranties do not apply.

In short, the electrical industry has always had a foundation of viewing products through the mindset of serving the trades. The contractor who installs the product has had a strong influence on the design and quality and availability of those products. Long tail market strategy will successfully work in construction-based markets, as the purchasing decision has already been influenced by the internet.

While contractors tend to be characterized as price-sensitive, they’re also very sensitive to time. Getting the exact solution quickly and without service issues is a cost-effective buying strategy today. Selling small orders to contractors, without incurring the burdens of legacy market forces, is a viable and profitable approach to our market — whatever the size of that market may be.

ABOUT THE AUTHOR

Ted Konnerth, Egret Consulting Group’s founder and CEO, recruits on a retained basis, helping leaders in the electrical and lighting industry identify their next C and V-level hire. He is also the executive director for the International Retained Search Associates, allowing him to liaise with skilled recruiters around the globe. To learn more about how he can help your company attract talent, check him out on LinkedIn, www.egretconsulting.com, or email him at [email protected].