Delegates attending the 48th General Assembly of the European Union of Electrical Wholesalers (EUEW) held in Oslo, Norway, spent considerable time speculating about the future of two of the major international players — Rexel and Hagemeyer — and deciding what to do about the candidacy of a Sonepar executive as president-elect of the 13-nation organization.
The plans of Pinault-Printemps-Redoute (PPR) to sell Rexel have been widely reported, and the parent company has continued to make the sale as attractive as possible. According to sources at the meeting, this includes increasing the capitalization of Rexel by offering current shareholders the opportunity to buy additional stock at a premium.
But on the ground in the United Kingdom, Rexel has shut down the central distribution center it constructed at Lutterworth near Leicester, a move regarded in the industry as tacit admission this was a distribution model that simply would not work in this market.
Meanwhile, Hagemeyer has suffered financially over the past year, with its stock-price plummeting, sales off significantly and apparently no promising news on the forecasting horizon.
Sonepar has managed to maintain itself in its markets, but it endured a political rebuff at the Oslo EUEW meeting when the CEO of its German operations, Frank Lakerveld, withdrew from running for the incoming president-elect slot. It had become apparent he would not receive a majority of the national votes, including proxy ballots assigned by absent countries in an unusually highly charged internal political contretemps within the organization.
Interestingly, the new president-elect of EUEW is Markku Nihti of Elektroskandia, a subsidiary of Hagemeyer in Finland.
Given the pervasive dismal outlook throughout the industry in Europe over the past few years, more focused attention is being paid to distributor-manufacturer relations.
EUEW has taken an aggressive approach to expanding and enhancing contacts with the manufacturing community by instituting a Supplier Relations Committee, chaired by Bob Fawcett of Edmundson Electrical Ltd. in the United Kingdom, a subsidiary of CED in the United States.
Since its inception in 2000, the committee has visited with 23 major manufacturers that supply 80 percent of the electrical product going to European installers.
“One troublesome situation that our committee has uncovered has to do with the nature of personnel changes resulting from supplier mergers and acquisitions,” said Fawcett. “In many cases, the executives and managers who have been promoted to supply chain decision-making positions come from a background in direct sales, DIY sales, or working with utilities. Now they are in charge of liaison with wholesalers, an area in which they have little or no experience. It's our mission to communicate with these people and get across to them the fact that in some countries 80 to 90 percent of electrical business goes through electrical distributors, and to make them aware of the wholesaler's power in many local markets.”
A BETTER SUPPLY CHAIN
In a discussion of how better to manage the supply chain, Dr. Hanspeter Fässler, group senior vice president of wholesale channel management at ABB Automation Technologies in Switzerland, targeted three areas needing improvement: speed, cost efficiency and profitability.
“With regard to speed, the physical flow of material along the supply chain will only improve with demand-driven manufacturing and a minimal number of stocks throughout the supply sequence,” he said. “This will require improved information flow throughout the chain using e-business to make information instantly available.”
In terms of cost efficiency, Fässler noted three possibilities for cost optimization:
- Minimize capital tied up along the chain.
- Eliminate all links that don't add value.
- Suppliers should stay away from small-order customers, and distributors should stay away from small-volume suppliers.
As far as improving profitability is concerned, he said an early warning system of communications must exist between distributor and manufacturer. The expectations of both must be aligned so both can become aware of deviations at an early stage and joint corrective actions can be initiated immediately.
Finally, with regard to mergers and acquisitions, he said consolidation can only increase profitability if the companies involved are healthy and can be integrated efficiently. He noted that this activity seems to have come to a halt, at least temporarily, possibly because it has been recognized that in difficult times such as the present, small players can often perform better in local markets than larger organizations, especially because there is no homogeneous market in Europe, and there probably never will be.
Presenting a general European economic overview, Nijls Furunes, chief economist of the Union Bank of Norway, said only minimal growth could be expected throughout Western Europe for the rest of this year, averaging about 1 percent.
Of the four major economies, the United Kingdom is expected to fare the best, with a GDP growth of 2 percent. Italy should follow with 1.1 percent, France with 1 percent, and Germany with 0.6 percent.
Real growth potential continues to lie to the east in the former Soviet bloc where an annual growth rate of 3.5 percent to 4 percent is expected over the next 18 months.
In terms of balance sheets in the European electrical wholesaling industry, there was a decided lack of good news. Most of the national federations reported slowdowns in construction, a stalling of business investment and no expectation of improvement in the electrical wholesaling sector until sometime in 2004.
Yves de Coorebyter, executive secretary of both EUEW and the Belgian federation, ICGME, provided these summary points as an introduction to the individual national reports:
- Sweden and Switzerland have experienced minimal decreases of about 1 percent.
- Belgium, Germany, Ireland and the United Kingdom have seen serious declines of 4 percent to 5 percent.
- Portugal and Austria have suffered most, with sales drops of 7.7 percent and 6.2 percent, respectively.
- In virtually every European country, construction activity has fallen off considerably.
Reports of the individual executive secretaries of the EUEW member federations follow.
The Portuguese economy is expected to grow at approximately the same minimal rate as 2002, about 1 percent or perhaps less, according to José Valverde, of AGEFE. This reflects a general lack of domestic demand, which is impacted by uncertain international economic trends.
The construction sector is in a slump.
For 2002, electrical distributors' general turnover was down 7.7 percent. Hardest hit was the technical electronics area, which was off 12.5 percent. Cable sales were down 11 percent, with installation materials off 7.9 percent. Lamps and lighting declined 5 percent, with domestic appliances, heating, ventilation, air-conditioning, and miscellaneous products all down 3 percent.
A troublesome international situation and problems with the domestic economy including weakened consumer confidence, tax increases, and poor corporate profitability set the backdrop for a difficult period for electrical wholesalers, said Nigel Ellis of EDA.
Sales in the sector are down 5 percent, both when comparing with the similar period last year and also in the rolling 12-month analysis.
This year will continue to be troublesome for a variety of reasons:
- United Kingdom industry generally is still downsizing.
- The financial services sector is suffering from a global downturn in demand.
- United Kingdom housing supply is restricted and running behind demand, with additions now at 120,000 per year compared with 150,000 in the early 1990s.
- Brand loyalty continues to weaken.
- Price erosion continues to undercut turnover.
Following a minimal 0.9 percent GDP increase in 2002, it's expected to rise to 1.7 percent by the end of 2003, reported Barbara Anton of VEG. Manufacturing production last year was a virtually flat 0.3 percent, and employment was off 2.7 percent.
The electrical wholesaling sector itself suffered a 6.2 percent decrease in turnover, with only technical electronics showing a positive result at a minimal 2.1 percent.
The federation is working on a study concerning the interaction between national chains and specialized suppliers, and the significance of brand name recognition.
It's expected that consumer caution and the absence of signs of any real recovery in investment spending will restrain economic growth in Ireland for the rest of this year, in the opinion of Derek Pollard of AEW.
GDP growth for this year is forecast at 1.2 percent, and unemployment will probably reach 5.7 percent by year-end.
Electrical wholesalers are generally pessimistic. Government spending cutbacks on hospital and educational building programs, coupled with a significant reduction in private sector projects will have an adverse effect on business.
In addition, federation members face increased costs for labor and services, particularly regarding insurance.
In summary, falling turnover and increased expenses are eroding profit margins.
The critically important building sector decreased 1.5 percent in 2002 and is expected to do the same throughout 2003, said de Coorebyter of ICGME. Improvement in this area is not expected until next year.
Electrical wholesalers experienced an overall turnover decline of 4.3 percent in 2002. Figures for the first months of 2003 show a general decline of 3.3 percent with major product sectors such as cable and electrical apparatus both down 17 percent, and lighting off a little less than 1 percent.
However, heating materials were up 18 percent, small electronics equipment advanced 7 percent, and industrial installation materials advanced about 3 percent.
General conditions in the German economy are still not good, according to Dr. Horst Beckers of VEG.
Construction continues to be a significant point of weakness, with apartment construction at only 280,000 units in 2002 as opposed to 600,000 five years ago.
Little improvement is expected for the near future because political leadership is perceived as weak and unable to inspire confidence in potential market partners. The number of people unemployed is forecast to soon reach 5 million.
The situation in the electrical wholesaling industry largely reflects this negative scenario.
Costs are still prohibitively high, reaching on average 21 percent of turnover, and personnel-related costs stand at 14 percent. This means that gross margins are on the average only 0.2 percent higher than total costs.
But members of the federation continue to seek ways to overcome these difficulties through structural reorganization and cost-cutting strategies. Some of the larger companies have opened centralized stocking locations in an attempt to bring their costs to less than 15 percent of turnover.
Due to weak economic conditions domestically and abroad, the increase of GDP in Switzerland was slightly less than 1 percent. Import and export activity both decreased, and the unemployment rate stands at 2.8 percent, reported Jörg Reimer of VES.
Activity in the construction sector was down 3 percent in 2002, with the residential building area especially weak.
Forecasts generally call for more of the same, with the possibility of some recovery in the latter part of this year.
For the first time since 1997, the turnover of VES member companies showed a decrease in 2002, even though it was a marginal one of 0.3 percent. Hardest hit was the technical electronics area, which dropped 13.7 percent.
In addition, the cable sector was down 8.4 percent, due in part to price reductions. There was, however, a positive report from the installation materials sector, which showed a growth rate of 2.5 percent. Little overall change is anticipated for 2003, with some wholesalers expecting further decreases.
The Finnish GDP grew 1.6 percent in 2002, and is expected to grow 2.3 percent this year, observed Tarja Hailikari of SSTL.
While construction start-ups in 2002 declined by 9 percent, total building volume was only off by 1.3 percent. Industry sources look for an increase of 1 percent for overall construction in 2003.
Turnover for Finnish electrical wholesalers was down 2.3 percent in 2002, which improved early this year only by 1.9 percent.
Toward the end of 2002, wholesale prices had slipped 0.3 percent in comparison with the prior year. In general, industry expectations are moderate at best for the remainder of 2003.
It's expected that GDP growth will be a flat 0.5 percent this year, but an increase of 2.5 percent is forecast for 2004. This would represent the long-awaited turnaround from the decline that set in late in the 90s due to a strict monetary policy, salary increases, increased unemployment, and a cutback in investment in the oil industry.
Total sales of electrical wholesalers declined slightly by 0.3 percent in the past year, and this slippage will probably continue through 2003. One positive market sector was installation materials up 3.5 percent. Cable, lamps and lighting, and technical electronics were all down.
The construction industry has seen continuing declines in business and lower employment, said Björn Högborn of SEG. Order rates are low throughout business and industry. A recovery is not expected until after the end of this year.
But in the manufacturing sector, some optimism exists. Firms report an increase of orders, a production increase over the early part of this year, and projections for new orders are more positive than earlier.
However, employment prospects remain dim, the unemployment level stands at about 5 percent with further cutbacks expected. Inflation is steady at 2.5 percent.
Impacted by the overall construction and manufacturing trends, electrical wholesalers do not expect any improvement until year-end, with estimates reflecting a decrease of 1 percent in business compared with a year ago.
After the economic plunge of 2002, industrial investment remains seriously curtailed and is expected to continue while uncertain international conditions remain unresolved, said Michel Nicolas of FGMEE.
Also, inflation in France rose to 2.3 percent, the average of the European Union, as opposed to the traditional lower rates experienced domestically in the past.
During the early part of this year, unemployment in France reached a rate of 9 percent. In addition, construction is in a serious decline, at the lowest level nationally since 1975.
Consumer spending is on hold for the foreseeable future due to global economic uncertainties.
Finally, forecasts for a GDP growth of 2.5 percent in 2003 have been cut back to 1.5 percent at a maximum.
John Paul Quinn is a free-lance writer and international communications consultant based in Stamford, Conn. He can be reached at (203) 323-9850 or via e-mail: [email protected]