2008 Market Planning Guide - Electrical Wholesaling 07 Nov

The electrical industry in 2007 is beginning to show the effects of the slowdown in the overall economy due to the contraction of the nationwide housing market and the credit shortage sparked by the collapse of the sub-prime lending market. But the results of this year's MPG research show that electrical distributors do expect product sales through distribution to continue growing, albeit at a slower rate.

With the Federal Reserve Bank forecasting inflation of less than 2 percent in the coming year, and growth forecasts for the overall economy in the range of 1.8 to 3 percent, electrical distributors' aggregate expectations of sales growth of 5.7 percent may seem a bit optimistic, though some of the increase may come from rising materials costs.

Although the growth this year and next may be smaller than the double-digit annual growth the industry saw from 2004 to 2006, it's a small increase on a huge number, meaning there's still plenty of work to be done and plenty of money to be made in the electrical market.

The MPG is a source of aggregated expectations — it shows how a cross-section of electrical distributors expect the market to behave over the coming year. The forecasts are only as accurate as those distributors' expectations. At the time of last year's study, distributors were expecting to see the industry grow 10.5 percent in 2007. With the benefit of hindsight — and distributors' responses to this year's survey — we know the real figure will be around 5.8 percent.

Some in the industry who use the MPG strategically find they get the most value from combining its estimates with their companies' internal data and forecasts from other sources.

Francois Chatin, vice president of marketing and communications for Sonepar USA, Philadelphia, combines the MPG forecasts and the multipliers presented here with data from other sources to develop a sense of where the market is going and plan for changes accordingly. Chatin uses data from DISC Corp., Orange, Conn., and from suppliers such as Sylvania, Danvers, Mass., combined with EW's MPG data to develop his own estimates of future sales in the various U.S. markets where Sonepar does business.

“We use the projected sales figures and the multipliers to plan for our various companies,” Chatin explains. “We combine it with the DISC figures we have to see if it's comparable or not. At the same time, we come up with our own estimates, but we want to make sure that we are consistent year-by-year.”

Chatin uses the figures primarily to develop overall corporate strategy, but wants to roll out more data to managers at the local branch level. “We want to go further, to the branch managers, and we are on the way to a plan to organize that,” Chatin says. “That's our 2007-2008 focus. We want that to be used by the branch managers as a selling tool and an organization tool. We want them to analyze their markets according to the sales they have by customer segments, calculate the market share they have according to customer segments, and then they deploy their strategy, branch-by-branch. We cross that information with population growth, building permits, renovation, all the information we get.”

The Forecasts

Sonepar USA also uses the figures to help evaluate areas for potential expansion, though Chatin says the company's acquisitions depend on more than sales growth projections in local markets. “We use the information we get to analyze potential markets for acquisitions as well, but those opportunities are always disturbed by the opportunities that are available to you, so it's always very relative.”

Sales of electrical products through electrical distributors will increase by about $5 billion next year. This forecast puts U.S. sales for 2008 at $94.2 billion, a 5.7 percent increase from the current 2007 estimate of $89.1 billion. For 2006, Electrical Wholesaling's revised estimates industry sales at $84.3 billion, an 11.5 percent increase over 2005.

The forecasts are based upon responses to Electrical Wholesaling's annual Market Planning Guide (MPG) survey. Each year, the magazine asks more than 3,000 electrical wholesale firms for their previous year's final sales results, sales predictions for the current year, and predictions for the following year. It also asks respondents how sales for the first six months of the current year compared with the first six months of the previous year.

This year, Electrical Wholesaling mailed 3,096 surveys and e-mailed another 1,768 (for a total of 4,864 surveys sent) in August and September to all of its subscribers in the United States with the title chairman, president or vice president. Each survey packet included a postage-paid return envelope and a crisp $1 bill. The e-mail surveys offered a chance to win one of two iPod Nano music players. The mailing garnered 447 usable surveys for a response rate of 9.9 percent. Fifty-five surveys were returned by the post office, 293 e-mail surveys bounced back, and 18 were returned incomplete.

Respondents reported an average sales-per-employee number of $400,000 for 2006. Contrast that number with $640,910, the average sales per employee for the 139 respondents to this year's Top 200 survey who provided both sales and employee figures for 2006. Regional sales-per-employee numbers are provided on page 30. How does your company's productivity compare with the national and regional averages when it comes to sales-per-employee?

For the full-year 2007, 60.1 percent of the respondents expected their companies' sales to increase over 2006, 18.8 percent expected sales to stay the same, and 19.1 percent expected to see sales decrease. If electrical wholesalers' 2007 and 2008 forecasts for increases of 5.8 percent and 5.7 percent, respectively, bear true, then 2007 marks the end of a three-year run of annual double-digit revenue growth.

Looking ahead at 2008, 59.3 percent of electrical distributors expect their sales to increase over 2007, 9.3 percent expect sales to decrease, and 27.1 percent forecast that their sales will remain the same from 2007 to 2008.

Still, DISC Corp., a leading electrical industry market analysis and forecasting firm, expects total industry sales in 2007 to increase 3.9 percent over 2006. For 2008, the firm currently anticipates growth of 1.4 percent over 2007. (See page 46 for more DISC forecasts.)

Some of you may be asking yourselves, “Why do the DISC and Electrical Wholesaling forecasts differ?” Electrical Wholesaling and DISC Corp. take different approaches to forecasting electrical distributor sales — DISC through quarterly projections based on economic indicators and Electrical Wholesaling by obtaining consensus predictions from electrical distributors via its annual survey. Both begin with the Census Bureau's Economic Census of Wholesale Trade, which is taken every five years. Both methods are acceptable means of forecasting sales, but each method reaps different results.

Another difference between the two forecasts is that EW does a survey of what distributors think will happen, while DISC develops its forecast by analyzing performance of the economic indicators that directly impact electrical distributor industry sales. DISC evaluates each major segment/customer type separately. In most years, the forecasts are separated by a few percentage points. But EW’s editors have found that its survey respondents are often a bit optimistic, when their forecasts are compared to the following year’s sales data. This may be the case this year, and that the actual growth in 2008 will be in the low single digits. That’s lower than the 4 percent to 8 percent growth that the industry has averaged over the past 20 years.

Through the MPG, Electrical Wholesaling is simply reporting the net result of the separate forecasts its readers have provided. Although the editors of the magazine feel quite comfortable with the margin of error for the national forecast numbers the magazine provides, we'd like to caution readers when using the regional sales forecasts. Because the regional forecasts are often based upon a small sample size, they come with a greater margin of error.

Some folks in the industry have questioned the data provided in the Product Mix, the Market Mix and the Customer Mix. Again, Electrical Wholesaling's editors feel pretty good about the national numbers, but we caution individuals when using the regional breakdowns for the Mixes because of the smaller sample size.

Ultimately, though, the numbers are the best ones available. The only way they can be better is if more electrical distributors respond to Electrical Wholesaling's annual survey.

How to use the Market Planning Guide

The market-planning data is divided into nine regions of the United States. For each region and state, you'll find sales forecasts for this year and next year, along with the three prior years' sales. In addition to the sales forecasts, which are prepared by Electrical Wholesaling's research department, you'll also find an economic snapshot of the region and employment statistics for four of electrical wholesalers' major customer groups: electrical contractors, the commercial market, the industrial market and government.

The employment numbers help develop forecasts for customer buying potential. A slight change to the way this year's numbers are reported: In several of the MSAs listed, the data on electrical contractor employment have for years been reported as a range — sometimes a bafflingly broad range — and in past years, we've reported those markets as “not available.” This year, after some consideration, we decided to report those ranges as we found them. Based on local-market intelligence, electrical distributors in those markets should be able to judge where in that range reality falls. The basis for employment data comes from the Bureau of Labor Statistics or the Census Bureau.

If you're looking for sales breakdowns for full-line distributors' key customer and market segments, you'll find the Customer Mix and Market Mix on pages 43 and 46, respectively. Both were updated last year.

The Product Mix data found on page 44 gives valuable insight into the product areas that have the most mind share with electrical distributors. This data was updated this year, and some of the product categories have been consolidated or eliminated because their contribution to electrical distributor sales were consistently less than 1 percent over the years. See the text accompanying the chart for a full explanation of the changes.

Getting the full picture on a market area isn't that difficult. When developing any market forecast, gathering some basic data on the size and makeup of the market is the first step. Let's take a look at some of the ways you can crunch the numbers we've provided to tailor them to your specific business and market.

Sales estimates

One of the most common uses of this resource is for developing a business plan, whether it be for internal use as your guide for next year or for a presentation to an investor or banker. You will need something that states the size of the local market, and these sales figures are a documented source you can use “as is.”

This data will also be helpful in establishing a sales forecast for your company and your region, comparing nearby or far-flung markets with an eye to opening or closing a branch, and evaluating promising areas of new business.

One question distributors should ask themselves — and suppliers will be asking — is: “Are our sales into the market at the level they should be?” Look at the estimate of the overall sales in your market in comparison with your company's sales.

Employment in major customer markets

In addition to sales forecasts, employment numbers make up a large part of the regional profiles. The number of people employed by a company or in an industry tends to rise and fall with the volume of business it's doing. Employment figures, therefore, act as a gauge to business prospects and conditions in end-user markets.

• With the employee counts from each market, you can compare the relative sizes of various end-user groups in your area.

• You can also compare the makeup of one market area to another, and consider new customer markets or ones that you could be serving better.

• If you track the employment figures for each market over time, you'll see broad economic trends unfolding in your market.

• You can also use these employment figures to make your own multipliers or you can use the national multipliers we've already calculated.

Multipliers

Each multiplier is a dollar figure that represents the average amount of electrical products that electrical distributors sell to each particular type of customer, on a per-employee basis or other “economic factor.” (See Electrical Wholesaling's National Multipliers on page 27.)

When used with the employment figures in the regional profiles, the multipliers help you establish the amount of business electrical distributors (could) do with major customer groups in your area, and in total.

For instance, you can go into greater detail by using locally available sources of information on employment or other measures in end-user industries. The professionals at the nearest business library should be able to direct you to a source for the numbers you need.

These multipliers are also a good option for determining sales in an area of the country not covered in the list of major metropolitan areas in the regional profiles. The same approach applies if you want to look at one county in an MSA that covers six counties. You would have to obtain employment figures or economic factors from local sources.

For instance, to find the number of electrical contractor employees in a place like Addison, Ill., a city not detailed in the East North Central regional profile, you could contact the local Chamber of Commerce, a nearby union chapter, the state university, the state's department of commerce or the local library to track it down.

These multipliers come in handy if you want to approximate the amount of sales available from a particular account. For example, if a manufacturer employs 300 people, by applying the national multiplier of $838, you would expect the facility to purchase about $251,400 worth of electrical MRO product.

You can use the multiplier approach to tailor your own multipliers. You might want to do that if you feel your area differs significantly from the national or regional average.

The multipliers are useful if you want to assess the relative size of various customer markets in dollars in the defined area. You can go on from there to do such things as select markets for new or increased sales efforts, advertising and promotion.

These forecasts give you handy ballpark figures for your business plans and general thinking.

Estimating the size of the market with multipliers is a process of building up a sales potential, piece by piece. Electrical contractors in Salt Lake City, Utah, employ around 4,109 people, so the potential market for electrical contractor sales there would be 4,109 times the electrical contractor multiplier of $43,743 for a total of $179.7 million in potential electrical contractor sales. You would do the same for each of the other customer markets electrical distributors serve to reach a grand total for Salt Lake City.

Using multipliers results in a dollar figure for market size that tells the level of business electrical wholesalers in the area could do if every potential customer there bought a typical amount of product from them. It tends to be a larger number than actual distributor sales.

2007 NATIONAL MULTIPLIERSMarket Economic Factor Multiplier Contractor Number of electrical contractor employees $43,743 Commercial/Institutional Number of people employed in professional and business services, retail trade, financial activities, educational and health services, leisure and hospitality, and other services $133 Industrial MRO Number of manufacturing employees $838 Factory automation Number of manufacturing employees $194 OEM Number of manufacturing employees $570 Utilities Number of metered customers $33 Government Number of government employees $140 Mining Number of employees among mining companies $702 2006 SALES-PER-EMPLOYEE BY REGIONRegion Mean Median New England $515,662 $433,620 Middle Atlantic $390,314 $357,500 East North Central $495,777 $392,308 West North Central $358,195 $402,000 South Atlantic $530,535 $400,000 East South Central $339,768 $265,000 West South Central $467,491 $290,000 Mountain $780,986 $529,000 Pacific $428,666 $426,915 Multi-Region $538,122 $448,530 No Answer $800,000 $800,000

NATIONAL SALES-PER-EMPLOYEE

Year Market Planning Guide Top 200 2006 $400,000 640,910 2005 478,413 593,506 2004 394,892 540,638 2003 319,704 469,536 2002 326,400 472,167 2001 326,400 505,386

DISTRIBUTORS' FORECASTS FOR MAJOR BUSINESS SECTORS
(Forecast for 2007. Average percent change from 2006.)

Residential Industrial Commercial Institutional Government Utilities New England -8.3% -0.7% 5.5% -1.4% -1.4% -1.4% Middle Atlantic 0.4% 3.4% 7.6% 3.1% 2.7% 0.9% East North Central -8.6% 3.4% 7.3% 3.5% 2.4% 0.7% West North Central -4.8% 3.8% 6.3% 3.5% 2.4% 1.3% South Atlantic -1.2% 0.5% 5.1% -1.3% 5.3% -0.5% East South Central 6.2% 5.4% 9.1% 0.2% 1.0% 4.4% West South Central 1.8% 12.9% 16.6% 2.0% 2.7% 0.8% Mountain -11.9% 9.1% 15.8% 0.3% 6.1% 0.2% Pacific -1.5% 9.8% 8.8% 2.9% 2.1% 2.1% Multi-Region Companies -2.8% 5.6% 4.7% 2.3% 2.1% 4.8% Total -3.1% 4.9% 7.6% 1.9% 2.9% 1.8%