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Consolidation comes to New England

Dec. 1, 2003
Mergers and acquisitions are changing the landscape of the electrical industry in New England.Some maintain it's a national trend that has finally made

Mergers and acquisitions are changing the landscape of the electrical industry in New England.

Some maintain it's a national trend that has finally made its presence known in New England. Others say it's the inevitable quest to achieve economies of scale, or point to the graying of the industry that's causing some independent electrical distributors to be gobbled up by larger entities. Whatever the cause, the fact remains that the pace with which national-and even international- chains are acquiring electrical distributorships in New England has never been faster (See "Market Snapshot" on page 51). And according to distributors, reps and industry observers in the area, there may be more to come. But rather than concentrating on what has already happened, exploring the why of what has occurred proves to be an interesting exercise.

A combination of trends, timing, the economy and even evolution have joined forces to yank the six-state New England market into line with what has already been occurring in the rest of the country. Geoff Dent, president, Dent Electrical Supply Co., Danbury, Conn., says he's not sure he knows the exact reason why consolidation is now happening so quickly in New England. "I'm not sure if the pace is any more intense here than in other parts of the country," he says. "Of course, this activity will have an effect on independent distributors and their customers. The new, larger players have economies of scale that are a cause for concern for the rest of us."

More than one person interviewed for this article said acquisitions have been occurring for some time throughout the U.S., and perhaps it was just a matter of time before that activity manifested itself in New England. Says Neil Gillespie, president, Infinity Strategic Consulting, Pittsburgh, Pa. "New England was one of the last bastions of independent strength, and the region could stand some distribution consolidation to get some scale for distribution efficiencies." Bob Compagna, president, CLS, Hartford, Conn., agrees that New England might be coming a little late to the party. According to Compagna, the New England market has always been very conservative and among the last to move on various things. "Right now, you might say we're catching up," he says.

Another contributing factor offered by Compagna was the reluctance of some distributors to make the necessary IT investments in their businesses to compete in the future. "There is a driving need today for distributors to invest in the hardware and software needed to run the day-to-day operations of their businesses," he says. "Many distributors in the $10-$40 million range don't want to, or know how to, make the necessary investment."

Byron Brewer, Northeast Marketing, Wallingford, Conn., believes another key factor is distributors' desires to achieve critical mass. "Part of the thinking among electrical distributors is that they feel unless they can be major players, they can't stay in the game," he says. "As a result, they are selling out."

Industry observers say there's more to this M&A trend than achieving scale. Another factor could simply be estate planning. "A lot of the distributorships in New England have historically been privately owned," says Brewer. "The owners are now looking for ways to capitalize on their investments, and there may be no better time than the present to achieve that goal."

One manufacturers' representative who also has spent time on the distributor side is Barry Enegess, president, Yusen Associates, Inc., Woburn, Mass. Looking across more than a quarter of a century in the industry, Enegess points to the aforementioned estate planning or generational reasons, combined with a healthy economy, as reasons for the recent spate of acquisitions. "Number one, you have to look at the ages of many of the owners of distributorships when discussing this issue," he says. "Second is that many people are thinking their businesses are at peak value right now, and it's very logical that they look at where they are with their lives and consider selling. It's a simple evolutionary process."

Finally, it's the sheer number of independent distributorships in New England that makes it fertile ground for acquisitions, says Jonathan Levine, president, MarLe Co., Inc., Stamford, Conn. "My view of the world isn't necessarily as grand as others," he says. "But looking at New England, there have been, and are now, more independent electrical distributorships here than in any other part of the country. I think that's what makes it so ripe for this kind of activity." Levine has an insider's perspective on the acquisition trend, as he sold his company earlier this year to Sonepar Distribution USA, Berwyn, Pa.

Steve Helle, president, Granite City Electric Supply Co., Inc., Quincy, Mass., thinks the economy might be playing a role in this glut of New England acquisitions. "My instincts tell me that there a few buyers flush with cash who want to vertically or horizontally integrate themselves into the marketplace," he explains. "At the same time, they've decided that because our economy is performing so well, New England made a good target."

How does all this acquisition activity impact the independent distributors in the region? Depending upon the distributor's position, it puts them in a reactive or proactive mode. For instance, Dent Electrical Supply's Geoff Dent maintains that when the larger competitors enter the market, they enjoy economies of scale and the buying advantages their size provides them. "But I've never seen it fail," he asserts, "that when a large chain comes into a territory, there is a decline in services, and more subjectively, there's a loss of the personal service that customers have become used to."

What this all means is that smaller, independently owned electrical distributors must continue to work harder. These companies are constantly threatened with the danger of becoming dinosaurs, compared to larger competitors. If a smaller distributor wants to survive, he must continue to emphasize that he's the one who truly knows the market and the needs of the customers.

Phyllis Godwin, CEO of Granite City Electric, believes M&As haven't had any specific impact. "What there has been," she says, "is an impact on our minds, that we should be feeling more than we are." She explains that one reason why consolidation hasn't made more of an impression on her company is that six out of the firm's eight branches are located in small towns, thereby limiting their exposure to what's going on elsewhere.

Steve Brand, president/CEO, Standard Electric, Wilmington, Mass., has a different opinion. "We're not just going to stand by and let others pick off distributors in our area," he says. "I see independents like ourselves constantly looking for acquisition opportunities."

Speaking to the same point, CLS' Compagna says that, like Standard Electric, his company is in an acquisition mode. CLS currently operates 15 branches throughout New England. "The major impact this has had on us is to spur us," he says. "We have to get bigger. We need the same economies of scale that larger distributors are seeking. If we don't achieve that goal, that means we're not concentrating on what has to get done. We must get bigger."

And as distributorships get bigger and their numbers smaller, what will the eventual impact be on reps and distributors' customers in New England? While Yusen's Enegess is uncertain about this trend's long-term impact on this market, he doesn't believe the entrepreneurs who have always been such an integral part of New England's electrical marketplace will become extinct.

"While we're going to see this continued polarization between the large and small distributor firms, there will definitely be plenty of room on the dance floor for the small wholesale supply houses serving niche markets," he says. For reps, Enegess believes that there will be fewer purchasing influences in the market and fewer purchasing locations. "We'll even begin to see influences located outside of our territory," he says. "That means the rep must concentrate on what we do best-sales and marketing and specifying. These functions have always been there,but now they are more important than ever."

Overall, according to Northeast Marketing's Byron Brewer, this evolutionary process and the resulting changes of this channel to market in New England will help end users. For instance, he says services that the smaller distributor could not provide, such as integrated supply and JIT delivery programs, will be available to customers. "Remember that these chains are logistically savvy," he says. "In general, they will be very competitive and the end-user customer will be able to get product when and where he wants and needs it."

Taking a slightly different tact is CLS' Compagna, who says that not a lot of the larger players are especially good on the customer side of things. "Many of them focus more on wringing all they can out of the vendor," he says. "What this does is push us to continue with our customer-relations efforts. If you ask me about our top 50 customers, I'll tell you that I know them and they know me. They can call me if they have a problem. That's not always what the 'manager of the week' with a larger chain will be able to say."

Granite City's Godwin agrees, and says the customer always looks to go where he knows the people. "If these acquisitions result in huge turnovers of personnel and more procedural and bottom-line orientation, then the customer gets put off," he says.

One of the more active players in the acquisition of independent distributorships in New England is Sonepar USA. While ready to admit that economies of scale and generational issues serve as contributing factors to the changing landscape, two Sonepar executives offer additional explanations. "I grew up in and know the owners of the electrical distributorships in New England," says Justin Cirrone, president, North East Electrical Distributors (NEED), a division of Sonepar Distribution US, Inc., Stoughton, Mass. "At the outset, I'd say that the New England market hasn't changed. What has changed is what has attracted people to us. We're a family business just as they are. And as a family business, we let the managers run their businesses at the local level. The point is that we are independent distributors. We are not a chain. We don't have a standard approach, nor are we centrally run."

Echoing that view is Richard Worthy, president and CEO, Sonepar USA, Berwyn, Pa. "Strategically speaking, we bring the resources of a $6-billion company together with a local-company, common-sense approach to the business."

Cirrone says that is especially important in the New England market. "I would have to say that New England, perhaps more than any other part of the country, is run on relationships and trust," he says. "You can be the largest organization in the world, but with no relationships or trust at the local level, you'll enjoy very little success. One of our strengths is that we constantly emphasize those local relationships. That's the magic of what we have."

But that's not all. The importance of keeping up with technology is also a driver for change that Worthy maintains is an important part of the mix. "There's a backroom information technology (IT) expenditure here that electrical distributors everywhere, not only in New England, are aching over," he explains. "You need scale to achieve state-of-the-art IT. You need it in order to relate on the front-end to customers and at the back-end with manufacturers. That's what Sonepar offers. There's a "sticker shock" associated with gaining that state-of-the-art IT, but with customer and business demands, not to mention Y2K, you just can't put it off any longer. This has caused many electrical distributors to find a home with us where they serve as a piece in the larger puzzle."

Worthy adds that MarLe Co., Stamford, Conn., is a good example of what he's talking about. "The beauty of it is that we have the best of both worlds here," he says. "We can provide all the needed resources while maintaining local relations."

What does the future look like in New England? Cirrone maintains that the impact of this acquisition activity on manufacturers' representatives in New England will be positive. "The reps we've heard from are excited about what's going on," he says. "They see us as a professional organization with lots of resources and we, as well as several other larger distributors in the region, are educating our sales staff to provide reps with the tools to go out and perform functions that they had to perform for themselves in the past."

Worthy says he wouldn't bet against the entrepreneur. "No matter what the future holds, there won't be just three or fewer distributors left in New England," he says. "There will be a far greater number than that." Worthy believes similarities exist between what has happened in the banking industry and what electrical distribution is going through. "Everyone has predicted that there will eventually just be four banks left," he says. "But that's not going to happen. There are as many local banks today as there were in the past." He explains that what has happened is that the mid-tier banks are gone. "If you really want to go up against the big players, you've got to get into a massive investment-type of game to attain scale," he says. "People tend to intellectualize this process a lot faster than it can happen. What they miss is that there are still many larger distributors out there who have the same kind of critical mass that Sonepar possesses. They will survive."

In addition to the large distributors, Worthy sees plenty of room for the smaller niche players. "There are many different reasons why people are in business today," he says. The financial measurements you need to maintain to ensure long-term viability change, relative to the size of the distributor. If you're an independent distributor serving a segment of the market and you have equity in a building, you can't be counted out."

He adds the cautionary words, however: "Remember the New England market is strong right now, but it's always been a very volatile market. It could change in a blink of the eye."

Long the home of many proudly independent distributors, New England has seen as much and possibly more consolidation than any other region of the U.S. in recent years. Here's a quick look at this market in transition.

Key distributor acquisitions. WESCO's purchase this year of Coghlin Electric, Westborough, Mass.; Graybar Electric Company, Inc.'s 1999 acquisition of Frank A. Blesso, Inc., Hartford, Conn.; Sonepar's purchases in the past two years of MarLe Co., Inc., Stamford, Conn.; Eagle Electric Supply Co., Inc., Norwood, Mass.; and several locations of All-Phase Electric Supply Co. and Branch Group, Inc., in New England.

Five largest independent distributors. CLS, Inc., Hartford, Conn., $109 million in 1998 sales, 240 employees, and 16 locations (#41 in EW Top 250); Standard Electric Supply Co., Inc., $107,120,000, 263 employees and seven locations; (#42 in EW Top 250); Electrical Wholesalers, Inc., Hartford, Conn., 230 employees, 15 locations (#59 in EW Top 250); Holmes, Distributors, Inc., Portland, Me., $31 million in 1998 sales, 77 employees and three locations (#187 in EW Top 250); and Rockingham Electrical Supply Corp., Newington, N.H., 102 employees and seven locations (#209 in EW Top 250).

2000 electrical sales forecast for New England states. $3.8 billion (+5.4%) for total region; Connecticut, $1.3 billion (+5%); Maine, $189 million (+5.5%); Massachusetts ($1.63 billion (+4.5%); New Hampshire, $356 million (+5.5%); Rhode Island ($152.2 million (+5.5%) and Vermont, $163.2 million (+5.5%).

Source: Sales figures and market forecasts from Electrical Wholesaling's 250 Biggest listing, June 1999, and the November, 1999 issue's Regional Factbook.

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