The advent of private labeling and the growth of no-name products are creating a squeeze for independent manufacturers' representatives. Some distributors, primarily national companies, are actively pursuing private labeling to improve margins and capture market share, and some manufacturers are supporting these distributors in these initiatives. Caught in the middle are independent manufacturers' reps. They must provide some level of support to any distributors that private label for other lines they carry. But they still need to generate commission dollars — while street-level pricing deteriorates due to competitive pressures that may have been sparked by the entry of private-label products into the market.
The market is in flux and many reps are seeking solutions. Some manufacturers continue to pay commissions for private-labeled products to retain their sales organizations. Some independent manufacturers' reps are contemplating developing their own lines; others have a fatalistic viewpoint and are trying to adapt to what they consider a new realism. Others are actively strengthening relationships with distributors who support brands and are providing them with the support needed to remain competitive.
To better understand this evolving dynamic, Channel Marketing Group, Raleigh, N.C., and Allen Ray Associates, Kennedale, Texas, surveyed independent manufacturers representatives and lighting agents on private labeling. More than 150 reps responded. This rep survey follows studies our companies did on what electrical distributors, electrical manufacturers and electrical contractors think about private-labeled products. The articles we wrote about our research are available at www.ewweb.com and at our companies' Web sites, www.allenray.com and www.channelmkt.com.
The Growing Challenge
Reps have noticed a significant increase in the prevalence of private-label and non-branded products in the marketplace. According to our research, 74.5 percent of respondents know of at least one distributor placing its name on manufactured products or packaging. Additionally, 74.8 percent of respondents have noticed distributors are more frequently carrying or quoting off-brand (no name on product, off-shore brand, distributor-branded or unrecognized name) product offerings so they can offer a “price” line. Distributors mentioned most frequently as being private labelers or sellers of unbranded products were Rexel (mentioned by 47.1 percent of respondents); City Electric Supply (CES) (17.2 percent); and Graybar (5.7 percent). Several other companies were mentioned, but none by more than 3 percent of the respondents.
Unbranded sales and inventorying techniques are becoming more prevalent according to reps. Product categories most affected included lighting, cable ties, recessed cans, fasteners and tape. (See Table 1: “Private Labeling Gone Public”). Respondents said residential contractors are the most interested in private-label or unbranded products, followed by commercial contractors for rough-in projects and small projects. According to the survey results, industrials appear to be less interested, as they are more concerned about specifications, quality, compatibility with existing equipment, warranties and product liability.
Not surprisingly, electrical contractors' interest in private labeling appears to be driven by their desire to buy electrical products at lower prices. The ease of ordering product over the Web, local sources and customers' inability to differentiate amongst many product brands continues to erode market pricing.
While most distributors don't plan to sell private-label products, significant competitive considerations exist that manufacturers and distributors will need to address. As a greater percentage of industry sales migrate to unbranded or private-label products, price will become an even more prominent factor in their customers' buying decisions. In fact, additional research conducted on behalf of clients has shown that price is now the first or second reason why electrical contractors purchase from electrical distributors.
At least one rep had major concerns over the product liability issue. “Unfortunately, some of our contractor customers are so centered on price they forget the potential liability,” he said. Industrial customers are more brand sensitive as brands represent quality and service. Many respondents believe engineers and architects would be unreceptive to unbranded products for design, specification and liability reasons. See the sidebar on page 39, “Reps Speak Out” for specific comments from independent manufacturers' reps on end users' acceptance of private-labeled products.
Managing Their Businesses
Manufacturers' reps face the unique challenge of supporting their manufacturers, servicing their distributors and creating demand in their local marketplaces. The introduction of private-label products into a geographic market is essentially creating another competitor, and increases conflicts between brands and between reps and the distributors to which they sell.
The rep still needs to support the distributor, who in most cases purchases other lines from that rep. They also need to support other distributors in the marketplace on behalf of a manufacturer who may private label for a specific distributor, and they need to help the manufacturer reinforce the value of their brand — all while their commissions are being eroded.
Respondents are taking a tough stance on private labeling as you can see in Table 2 (“What Reps are Doing About Distributors that Private Label”). Many reps would like to move business to distributors that support their brands. However, reps understand that they sell other lines to the same distributor and that they need to preserve that business relationship. Said one rep, “For a few of the distributors in our area offering private or non-branded products that compete with our lines, we have developed a strategy of gradually moving the business that we want to protect to another distributor.”
Others are taking matters into their own hands and are either carrying price-oriented lines or considering private labeling themselves. According to one rep, “We have talked with our manufacturers and asked for commission where we have found that it was their product. Some pay commission, some don't. For those that don't pay a commission, it makes a great deal of business sense for us to source product, maybe with other rep firms or to even sell directly to contractors.” Conversations with several rep firms in the Southeast and Southwest revealed that some reps are banding together to offer non-branded products from a centralized warehouse, enabling them to compete based upon price. One of these organizations believes it may be able to resell product to other reps cost-effectively, and to essentially become a master distributor.
Most reps recognize they are at the mercy of manufacturers when the decision rests on price and the distributor has already decided to compete in this manner. In Table 3 (“What Reps Want Manufacturers to Do”) you will see that reps feel manufacturers should consider using pricing, marketing funds and rebates to push distributors away from private-labeled products.
Rep empathy for distributors that don't private label. When asked how distributors should respond to other distributors who offer no-name products or who are private labeling, reps responded with an array of solutions. Several reps said it depends on the product type and level of contractor or market acceptance. Said one respondent, “In some cases, they will have to offer a similarly priced product to compete. Distributors need to understand the buying motivations of their contractor or end user.”
More frequently, reps felt distributors could obtain comparable pricing from manufacturers by negotiating special pricing authorizations (SPAs); making larger one-time buys with lower price quotes; offering product training and education; emphasizing high service levels; participating in trade shows; marketing programs; and utilizing old-fashioned “wining and dining.” Additional recommendations included looking for better pricing from current manufacturers; considering second- and third-tier manufacturers; emphasizing and selling service and manufacturer value-adds; communicating a potential quality concern for unbranded products; mentioning the potential product liability issue; and reinforcing brand value, product quality, warranties and manufacturer services to engineers and architects.
Said one rep, “Private labeling does not always mean competing on price. Distributors need to create their own brand for their products: inventory, service, ease of doing business with, extending credit, etc. Only distributors can control these ‘products.’ This will make the difference and help them close the gap. Unfortunately, in the end, I have no choice but to lower price and work with agents/manufacturers to have my pricing in-line, ultimately driving down everyone's market price and commissions.”
Like others in the electrical market, independent reps are seeking answers. While the contractor market has always been price competitive, the continued erosion due to new competitors has many reps questioning their channel relationships. Trying to facilitate the needs of three “masters” places reps right in the middle of the issue, with limited ability to control their own destiny.
Allen Ray is principal of Allen Ray Associates, Kennedale, Texas. He can be reached at (817) 704-0068 or by e-mail at [email protected].
David Gordon is principal of Channel Marketing Group, Raleigh, N.C. He can be reached at (919) 488-8635 or [email protected].
Private Labeling gone Public (Most Often to Least Often)
Reps Speak Out
Contractor Acceptance of Non-Branded Products
“Reaction will be mixed depending on product category. Price-conscious contractors are more prone to accept them than specifiers or MRO.”
“Their initial reaction is positive if there is a significant cost savings. My guess is that will quickly wear off if there is a product-quality issue, or a specification issue on a job.”
“In most cases, the contractor would not care as long as the product worked and lasted for one year. The only exception would be on jobs where a brand name product was specified.”
“As long as the product functions as well as the branded product, 60 percent or better don't care if they can save some money. If a product causes them problems, they will jump back to the branded product.”
Industrial/MRO Acceptance of Non-Branded Products
“They prefer to use brands they are familiar with, and often will pay more for known brands and only use private label/non-brand products when budgets are extremely tight or when viewed as a commodity.”
“Most of our customers are in the industrial market and would not accept no-name brands.”
“MROs and industrial plants will scrutinize all things associated with a product line before buying.”
“MROs will most likely refuse a generic unless significant cost savings are demonstrated and most distributor salespeople will not do this.”
Architect/Engineer Acceptance of Non-Branded Products
“It all depends on how the products are presented. If they are sold as an “equal” or made by a brand-name company, the specifier probably will have no problem.”
“Costs are driving many customers. We need to work aggressively at the specification level to educate engineers, architects, etc., of the costs and potential risks of not dealing with manufacturers.”
“Engineers will not look at these types of products, typically, as they know they are liable.”
“Architects and engineers will most likely refuse to accept generics, except in low-end commercial projects, where a cost savings is desired, and then only on rough-in type products, not fixtures, breakers and other safety devices. I suspect many rough-in products are already substituted without any engineering approvals.”