The seemingly daily rate of change in lighting technology coupled with the equally fast-paced development of the internet are necessitating new and innovative ideas for manufacturers to get their products to market. The traditional model of manufacturers’ representatives building long-term relationships with distributors, who in turn deploy a sales force to capture end-user market share, is like everything else — open to question as it should be. But is changing that model the answer?
In that traditional model, the lighting manufacturer appoints dedicated representatives to move product in a few ways: through specification sales, OEM supply to other fixture manufacturers, direct sales to national accounts or through sales to authorized distributors. The last option cited provides a strong, profitable and usually long-term sales channel.
In the past, manufacturers, through their reps, built relationships with distributors who had local market resources and were prepared to stock product and pay for it regardless of whether it sold or not. By doing so, the distributors assumed the risk of selling, delivering, invoicing and collecting payment for the product.
Before we go any further, let’s look at what has changed. In 1977, the year the National Association of Innovative Lighting Distributors (NAILD) formed, commodity lighting was primarily served by the “Big Three” — Philips, Sylvania and General Electric (GE). Together, they controlled approximately 75% of the market share in the United States and many of the smaller players that made up the remaining 25% depended on them for components in their offerings. The technology that they were producing was by and large the same — filament light bulbs, fluorescent lamps and ballasts and high-intensity discharge (HID) lamps and ballasts. Such technology, being relatively stable, meant that a distributor could stock the warehouse with reasonable confidence in selling next month what could not be sold this month. There was clear demarcation between lamp and ballast business and luminaire sales.
Yes, improvements to the technology would come, driven by the manufacturers’ need to differentiate themselves from the competition. T8s would be offered as the more efficient alternative to T12s, halogen lamps would replace argon, metal-halide would improve upon high-pressure sodium and so on, but none of these improvements required much change in the way the supply chain operated. In fact, distribution was at the vanguard of bringing these changes to the end user and proved a valuable partner to manufacturers to deliver the message of greater efficiency and improved lifespans — in some cases to what many thought was to the detriment of the distributor.
When electronic ballasts were introduced in the late 1980s, they were touted as having a lifespan that was more than double that of the old magnetic ballasts. They were lighter, saved on shipping costs and reduced energy consumption in the fixture to boot. Selling a product that takes twice as long to fail as the old product, however, is not a good way to keep your maintenance, repair and overhaul (MRO) business thriving. But they did sell it and, as it turned out, market demand continued to grow.
With the 1990s came the development of the compact fluorescent lamp (CFL). Now, all of a sudden, ballasts were no longer needed. To make matters worse, the utilities, aided and abetted by the government, were paying people to use CFLs. Once again, distribution stepped up to educate the end user and spread the word about higher efficiency and longer life. Interestingly, the manufacturing landscape began to change as well. Smaller manufacturers started making inroads into the CFL market, seemingly catching the “Big Three” flat-footed particularly in residential applications, which were retailed through big-box hardware stores. This market share enabled some of these smaller manufacturers to expand their product offerings from CFLs to T8 tubes and even ballasts and fixtures, slowly chipping away at the commercial market as well.
None of this, however disruptive as it was, required huge changes in the way distributors handled business. Manufacturers’ reps still built relationships (although distributors had to deal with a few more manufacturers) and warehouses continued to stock products that had a fairly stable shelf life. Distribution also expanded as many electrical supply companies affected by the downturn in the real estate market sought to bolster sales with the relatively easy sell of utility-incentivized lighting products.
Currently, the lighting industry is in the grip of the most disruptive technology to date: the light-emitting diode (LED). True to form, distributors have once again embraced the latest technology despite dire threats of “selling themselves out of business” and “racing to the bottom.” The big difference now is that there are many more players in this market, all looking to differentiate themselves from the competition. This is very good for the end user as the competition provides ever-increasing efficacies, longer product life spans and some really cool innovations — all while prices plummet.
Here’s the thing about the “Big Three.” For the most part, they believed in the old supply chain model. They believed in it so much that they offered all sorts of incentives to distributors — marketing funds, end-of-year returns, spiffs — anything that would keep distributors happy selling their product. Distributors, in return, pulled out all the stops to keep the manufacturers happy, meet year-over-year growth targets and stock material in quantities to best take advantage of price breaks.
The reasons that they entered into these strategic partnerships are not complicated. These companies were not just involved in the manufacture of commercial lighting. They produced everything from coffee makers to jet engines with direct sales for every product line outsourced to experts in each field.
Strategic partnerships with distributors provide manufacturers with a sales channel to the end user that preserves brand integrity and provides an expert and focused sales force, logistics, off-site warehousing and distribution, centralized invoicing and consumer feedback.
The previous accounts of distributors selling new technology, even in the face of potential long-term damage to their business, are not meant to paint distributors as altruistic. These independent enterprises are designed to make profits for their shareholders, but a huge part of their value comes from embracing new technology. Any good manufacturer knows that the first, best sale is to the distributor who is going to be evangelical about the product and push it to all customers.
The development of the LED, along with the pervasive expansion of the internet as a means of distribution, has provided consumers with unprecedented access to products from just about anywhere in the world. On its face, this is not a bad thing. Free market advocates will tell you that’s how it’s supposed to work. However, we are still talking about relatively expensive products and there’s a world of difference between the best and worst fixture (or lamp) that uses LEDs. And, what about a defective product’s warranty? What happens when you find out that fixture (or lamp) has only delivered half of its advertised life? What happens when you find out that the product has been discontinued and there is no replacement? How can I tell if this is going to perform the job I need it to do? These are questions that are automatically answered by a distributor who has market-tested and recommended a product to the customer and is in a position to stand by that product.
The rapid development of LED technology unfortunately means that the way of doing business must change. Distributors are reluctant to stock lamps or fixtures that are going to be delisted and replaced with better, cheaper versions often over a span of months. With the stock-and-flow business waning, manufacturers and their representatives are increasingly turning to project business, encroaching more and more into the end-user market, hurting both specification and distribution channels in the effort. Electrical equipment distributors often include lighting at the slimmest of margins in order to win projects that will also need more lucrative electrical gear, forcing lighting distributors to cut margins to compete.
With competition increasing and margins slipping, the temptation is strong for many manufacturers to attempt the direct sales approach, using the internet to gain market access. Several offshore manufacturers have popped up with nothing but the internet as their primary distribution channel. This affects every component in the chain — in many markets, manufacturers’ reps are approaching customers directly, quoting directly and running sales through distribution at pre-specified margins. Although these margins can sometimes ultimately result in a loss to the distributor — say in the event of a costly error — there is a reluctance to turn down profit dollars, however small, to fill sockets that are going to be out of the market for a very long time.
To understand why distribution matters and why it’s necessary to preserve the supply chain, we must not lose focus on the one entity that really matters — the customer. There will always be the end user who likes to shop online and is prepared to put in the time to research and get the best price. This may work very well for shoes, but with a technical product like lighting so much information is required to make the correct choice that consulting an expert still remains a good idea.
Lighting itself is only one aspect — solid-state electronics have given us control over lighting in ways that did not exist with the older technologies. Dimming, occupancy and vacancy sensing, daylight harvesting, color tuning, color changing are all becoming options (requirements in some cases) and not particularly easy to sort out with a simple Google search.
Additionally, Power over Ethernet, Lumens as a Service and a host of other information technology-driven developments are changing the way technology is utilized and distributed, offering opportunities for additional savings that are too significant to ignore.
Analysts predict that the LED lighting market should hit $50 billion to $60 billion by 2020. That kind of market buys an enormous amount of improvement and innovation. Since these offerings come from disparate sources, distribution represents the best way to consolidate and advise how to utilize any or all of them.
As much as the end user stands to benefit from these developments, making the most of them requires the expert guidance, logistical and financial resources and market research and development that distribution offers. Thankfully, some things don’t change.
ABOUT THE AUTHOR
Robin Watt has worked in distribution for 30 years. He is currently an account executive at C.N. Robinson Lighting Supply Co., Baltimore, MD, and immediate past president of the National Association of Innovative Lighting Distributors (NAILD). Watt founded and managed an industrial hardware distributorship and has been in the lighting industry since 2011. You can reach him at [email protected].