Traveling north along Interstate 5 from the Mexican border north through San Diego County and into Orange and Los Angeles Counties, or east on Route 10 through Riverside and San Bernardino Counties, a visitor sees why Southern California and its 24 million residents and thousands of businesses have so much impact on American culture in general and the electrical market in particular.
Gleaming new green office towers attest to the impact of the state's Title 24 building standard, which became part of the recently enacted federal energy law that offers tax incentives for energy-efficient building design. Miles of transmission lines and massive generating stations are constant reminders that the rebate programs offered by San Diego Gas & Electric, Southern California Edison and the state's other utilities are model programs for other power companies across the United States. The vast wind farms along Route 10 west of Palm Springs and the rooftop photovoltaic panels on new homes throughout SoCal that are part of the state's Million Solar Roofs initiative tease the imagination with visions of what could be if the rest of the United States ever gets really serious about energy efficiency.
Steve Espinosa is more than a little serious about saving energy. The livelihood of The Lighting Company, his 13-employee lighting specialty distributorship, depends on it. The Irvine, Calif.-based company provides end users, lighting retrofit contractors and electrical contractors with energy-efficient lighting products such as electronic ballasts, lighting fixtures, occupancy sensors and emergency lighting for retrofit projects throughout SoCal.
Even though many of the existing commercial, retail and industrial buildings in Southern California have had lighting retrofits rather recently, new lighting products and systems can pay for themselves in as little as two years because of how much more they can save end users faced with the tough new time-of-use penalties imposed by SoCal's utilities. The potential of this business attracts many different competitors, including lighting retrofit contractors, other lighting specialists and W.W. Grainger Inc., Lake Forest, Ill.
Espinosa saw the opportunity to serve this market while working for his father's full-line electrical supply house, Orange Coast Electric Supply (now part of OneSource, San Diego). While at an Affiliated Distributors meeting years ago, he learned how another SoCal distributor had created a profitable niche business in switchgear by hiring several product experts who could break down quotes for switchgear packages and offer customers comparable products at significantly lower costs than competitors whose quotes had products from just one vendor. He decided that if and electrical distributor could build a niche business in switchgear with this strategy, he could do the same with energy-efficient lighting products.
Another reason Espinosa started his own lighting specialist was the painful lesson he learned while calling on large industrial accounts such as Rockwell, Boeing and McDonnell-Douglas as an outside salesperson for Orange Coast Electric Supply. He was losing business from them because they were doing massive lighting retrofits and his company wasn't getting in on the action.
“One of my Rockwell facilities was buying $100,000 in electrical supplies and $10,000 to $15,000 in light bulbs and ballasts alone,” he says. “All of a sudden, I realized I didn't have any light ballast business. Zero. I went to the plant and saw that their whole building had been retrofitted. It happened in another facility and I said to myself, ‘All of these companies are going to be retrofitted. I can either participate or watch someone else do it.’
“People weren't coming in and buying T8s. We just weren't geared up for it. The pricing and ordering were different. It was a completely different animal. The Lighting Company went after that market. Orange Coast stayed with its roots.”
The Lighting Company is actually the second lighting specialist Espinosa launched. While earning a business degree at the Cal Poly State University of California at San Luis Obispo in the 1980s, he started up a small specialty lighting distributor that sold energy-efficient lighting products to the multi-family housing market. Many of the jobs involved replacing outdoor incandescent lighting with compact fluorescent lighting, which at that time was a relatively new technology.
The technology in the lighting market is now light years ahead of where it was back then, and Espinosa says the fast payback of today's lighting products make for a much easier sale than in the past. “When the products first came out 20 years ago, they weren't that good,” he says. “Now they are, and the manufacturers keep improving them. You can take out older electronic ballasts and fluorescent lamps and put back in newer program-start electronic ballast and lamps, and the customer gets a two-year payback. That's unbelievable. We have several projects underway right now where we are taking existing electronic ballasts out that have been up in the ceilings for less than five years and are putting in more efficient types. It's worth it for the customers to pull them out.
“If you look at the cost benefits, when the Big Three lamp manufacturers — GE, Sylvania and Philips — produced products 15 years ago, the cost was 50 cents and the benefit was 60 cents. Today, when they roll out products, the cost benefit is $20 and it costs you a dollar. How hard is that to sell? We aren't necessarily going to be the lowest cost, but if I can sell you a bulb for a dollar more and save you $20 in electricity, that's going to lower your total operating costs.”
The capacity woes of California's electric utilities are well-known, and the rolling blackouts in 2000-2001 made national news. The state set a new record on July 24, 2006, when power demand topped 50 million megawatts (a megawatt of power serves 750 to 1,000 homes). While the surge in demand didn't cause a Stage Three Emergency (when utilities shed loads with “rolling blackouts” by shutting down the power to different service areas), they are serious about forcing customers to cut back on their power usage to prevent future outages.
A key element of this strategy are the cash incentives and custom rebates California utilities offer for the installation of energy-efficient lighting products, motors and drives. It's cheaper in the long run for them to entice customers to slash their electrical demand through the installation of more efficient lighting systems than it is to build new power plants to service this demand. However, Espinosa says the inherent energysavings of the electrical products are the key selling features, not utility rebates. “The biggest driver is the quality of the products,” he says.
The state's utilities are testing time-of-use penalties to push end users to cut back on demand. Commercial buildings in California now have time-of-use meters monitoring when a business uses electricity. In the test areas, during the period of peak demand — noon to 6 p.m. — businesses get whacked with a $1 per kilowatt surcharge. These charges are intended to force businesses to consider operating factories before noon or after 6 p.m., says Espinosa. “If you can shift your demand, you will save money,” he says. “If you can't shift your demand, you better figure out a way to reduce it. If you are a manufacturing plant and can shift production so you can finish up by noon, you may pay a third less. If you have an office building or store, sorry. All of a sudden motion sensors look real good, as do daylighting and dimmable lighting systems.”
Financially minded property managers quickly understand the cost benefits that lighting upgrades offer. Many of these end users own or lease SoCal's regional distribution centers, the mega-warehouses that often top 500,000 square feet, and they want to trim operating costs in these buildings. The Lighting Company has found the retrofit business in this market segment to be a very active niche, because many of the warehouses have metal-halide lighting systems that can be changed out for more efficient fluorescent lighting or other lighting alternatives. A large concentration of these humongous warehouses is located east of Los Angeles in what's called the “Inland Empire,” and The Lighting Company's new branch in Rancho Cucamonga run by Marc Hayes has two outside salespeople serving this retrofit business and other accounts. “If you look at all of those warehouses, it wouldn't surprise me if 95 percent have metal-halide fixtures in them,” says Espinosa. “With our utility rates, they certainly don't need metal-halide. We are not talking about small machine shops.”
Brian Suttle, the company's Irvine branch manager, says it's not only warehouses and other existing buildings that can benefit from a lighting upgrade. He sees new installations that could benefit from more efficient lighting systems, too. “People aren't always knowledgeable enough to go in and put these other fixtures in,” he says. “A four-month-old shopping center nearby went with all metal-halide lamps. We are trying to inform contractors when they do their retrofits. Some contractors come in and are just going to buy T12s and high-bay fixtures. We will help them fill out and submit the rebate paperwork, as long as they buy the product from us. It's a win-win situation all around.”
To go after this retrofit market, Espinosa uses a sales model that differs quite a bit from what full-line electrical distributors employ. For instance, the lighting maintenance contractors that are a core element of The Lighting Company's customer mix generally work just with the inside salespeople because they are technically savvy and know which products they need. This frees up The Lighting Company's outside salespeople to focus on finding and cultivating new end-user accounts, retrofit work and national or regional accounts. “The outside salespeople are more than salespeople,” says Espinosa. “They do a lot of specification work. In most cases, they are creating demand for a product. Most people aren't asking for energy-efficient products yet, so the outside salespeople must explain these products to them. They might ask a customer, ‘You are buying 400W metal-halide lamps. Have you thought about high-bays?’ When they get business, we feed it through the inside sales.”
The company has two outside salespeople in Los Angeles County, two salespeople calling on accounts in Orange County and two salespeople in its Inland Empire territory. To allow these salespeople to focus on what they do best, The Lighting Company employs a full-time building auditor who visits potential customers to develop retrofit proposals with a customized computer program.
Future Challenges and Opportunities
While private labeling is now making headlines in the electrical wholesaling industry, it's been a fact of life in the lighting market for many years. More than most other segments of the electrical market, the lighting industry offers a two distinct types of vendors: those companies that develop their own products and promote premium brands, and those companies that focus on offering low-cost, privately labeled products that compete with the product offerings of the established players. Espinosa says many manufacturers in the lighting business are essentially sales operations that subcontract the manufacturing of their product line, and that these companies tend not to invest much in research and development and focus instead on “me-too” products. Lighting distributors that focus on selling commodities and aren't banking on the manufacturers' brands to bring in business tend to align themselves with these companies because of the cost benefits. But he says these distributors lose out when brand-name electrical manufacturers develop new products.
“I am trying to upsell that product, and it is probably going to go a lot easier with the end user with that name, than with some name no one has ever heard of,” Espinosa says. “It works to our benefit to support that brand, because vendors are introducing all of these new products. You find that the guys who are not making the products aren't introducing the products.”
The Lighting Company's strategy has been to avoid the price-commodity game and instead pay extra when necessary for new products that add extra value and try to sell them. “Hopefully, we can make more money on them,” he says. “That has been our proposition.”
Espinosa is also excited about several new product technologies lighting manufacturers are working on. He has high hopes for the electronic ballasts for high-intensity discharge (HID) lighting and is amazed at the amount of quality products coming out in the fluorescent lighting arena, where retrofits lit by T8 or T5 lamps with electronic ballasts are easy to sell because of quick return on investment they offer. “If you look at our sales last year, probably over half the products we sold didn't exist five years ago,” he says.
A little further down the road, light-emitting diodes (LEDs) will find their way into even more applications. Already common in traffic lights and emergency lighting applications. LEDs are growing in popularity in signage applications. For instance, West-Lite Supply, Cerritos, Ca, supplied Sylvania's LEDs for a signage retrofit job at Los Angeles' Staple Arena, widely respected in the sports architecture community for its cutting-edge design. Espinosa says as a privately owned facility, the arena's owners wouldn't have gone with LEDS unless they made sense financially.
One of the most interesting new sales opportunities The Lighting Company has discovered in the past few years is the recycling of fluorescent lamps. California's Universal Waste Law, enacted in February 2006, prohibits the disposal of fluorescent lamps containing mercury in public landfills and requires that they be recycled. Espinosa says taking the lamps from customers and collecting them at his facility for pick-up and safe disposal by a recycling company was a natural value-added service for his company, and one that other electrical distributors can offer, too.
“When we drop a light bulb off at a customer, we take the old light bulbs out of there,” he says. “It's a perfect niche, a no-brainer. More end users are going to do it, and we have to embrace it as an industry. It's a great opportunity. The one downside with recycling is the space issue. You have pallets of lamps.”
Brian Suttle says the company's monthly recycling business has doubled over the last six months. “Everybody has to do it,” he says. “Do I want to sell you that service or are you going to let someone else do it?”
In the not-too-distant future, The Lighting Company will give customers access to its database on their previous ordering history, which is basically a “shopping list” for all of the replaceable lamps and related lighting equipment in a building. Espinosa says fluorescent lamps account for the majority of the replacement lamp needs in typical office buildings, but that other replacement lamps are needed in applications such as lobbies, signage, elevators and parking lots. The database helps The Lighting Company maintain the necessary inventory to service the maintenance needs of its customers, and the online access will simplify ordering for customers.
“It is kind of like buying office supplies,” says Espinosa. “Your printers and copiers require certain cartridges. Our Web site will have order sheets so if you are an end user, you can see the items. It's pretty typical for lighting guys to do that.”
The Lighting Company's inside salespeople also can use these lists to suggest new energy-saving alternatives for lamps, or to spot opportunities where the company is not getting the business.
Another new twist in the light market is the project-financing now offered by three of the established players. The Lighting Company has used this financing to land some sizeable retrofit business. Philips, GE and Sylvania offer end users financing programs that break down the cost of a lighting retrofit into monthly payments. Espinosa says a large retrofit project of $500,000 is easier to digest when the end user is paying, for example, $20,000 per month — while getting the cost benefits of the installed system. “Vendors see this as another way to sell this product,” says Espinosa. “It's more important to me than rebates.
The lighting market is always changing, but The Lighting Company's employees enjoy the challenge. “You learn something new every day,” says Brian Suttle. “When we went T8 to T8 in retrofits, that boggled my mind.”
Espinosa says training will remain a key element of his company's emphasis. “To be a successful product specialist, you must have your inside and outside salespeople properly trained,” he says. “You need to invest in manufacturers' off-site and online training.
“The Lighting Specialist training program from the National Association of Independent Lighting Distributors (NAILD) has been the best training for us. It allows us to measure what our staff's lighting knowledge and covers product, sales, and operational items.”