Looking at the electrical construction market from a distributor's perspective can help make your company more profitable
Electrical contractors and electrical distributors have always had a love-hate relationship. Electrical contractors love to complain about distributors' late deliveries, high prices, and pushy salespeople. Electrical distributors gripe about contractors who pay their bills late — or not at all — and shop their prices with their competitors.
Although some electrical distributors and electrical contractors may argue like siblings, in reality they can't live without each other. Just like quarrelsome brothers and sisters must learn to make the best of their time together living under the same roof, contractors and distributors should learn to make the best of their business relationships.
Don't underestimate the clout you have with electrical distributors. Electrical contractors make up the average electrical distributor's most important customer segment. According to Electrical Wholesaling's November 2003 issue, electrical contractors account for 40% of the total sales of electrical distributors. With this much “mind share,” you have their attention.
Another factor that adds to your clout as an electrical contractor is that distributors must compete for your business with the other sources of electrical products, such as home centers, W.W. Grainger, and online merchants. Although electrical distributors have watched Home Depot, Lowe's, Grainger, and other alternate sources of supply nibble away at their market share, they're here to stay. More than 70% of all electrical products are still sold through traditional, full-line electrical distributors.
These distributors do business a little differently, depending on their size (Sidebar below). These distinctions are most obvious in how they purchase products, warehouse their inventory, train and groom personnel, and in the complexity of their management information systems (MIS). Identifying these “character traits” for each distributor in your market will help you work more effectively with them.
Get a list of the ‘preferred vendors’ from each distributor. The largest distributors have tremendous buying clout with their vendors. They will focus their sales and marketing efforts on the product lines of the “preferred vendors” that offer them the most lucrative incentives. That's why you see the big distributors push certain product lines.
To compete with the volume-purchasing agreements that their larger competitors enjoy, many small electrical distributors have banded together into buying/marketing groups that pool their purchasing power and benefit from their combined marketing smarts and networking capabilities. The key buying/marketing groups in the electrical business are Affiliated Distributors (A-D), King of Prussia, Pa.; IMARK Group, Oxon Hill, Md.; and the recently merged Equity Electrical Associates/EDN, East Walpole, Mass. On average, buying/marketing group members purchase 30% of their products through the vendors associated with that group. Find out which distributors in your market are members of these buying/marketing groups, and ask them about the electrical manufacturers in them. Vendors in the buying/marketing groups frequently run product specials to drive sales, so it's important to check frequently with distributors to see if any special marketing programs are in effect.
Compare the order-fill rates of your local distributors. Larger distributors often rely on a combination of regional distribution centers (RDCs) and local branches to stock products. They stock their local branches with the most commonly ordered products and use the RDCs to warehouse the less-popular products, ready for delivery within 24 hours to any local branch. In contrast, smaller distributors stock their branches with fast- and slow-moving products. The key here is to find distributors — whatever size they might be — that have the products you need, when and where you need them. That's why it's important to compare the order-fill rates of distributors in your market area.
Identify the companies that offer the best product and market expertise. In an age of mergers and acquisitions in the electrical wholesaling industry, local market expertise has become an ever-more valuable commodity. Many of the larger distributors have built up their distribution networks through the acquisition of smaller competitors. The acquired locations and personnel may be blended into the acquiring firm, or they may operate relatively independent of the parent company and maintain their independent identity. Follow mergers carefully and track any movement of key personnel. Employees don't always like the new company's culture and may move to other distributors in the market or start up their own distributorship — taking their product and application expertise with them.
Sometimes larger distributors lose local market expertise when they use local branches as training grounds for their best employees, who are promoted out of the local market to district, regional, or national positions. In contrast, key personnel at smaller distributorships tend to stay in place in local markets.
Ask all distributors about how their computer systems can help you save time. A technologically advanced distributor may offer electrical contractors online access to order status, a well-developed Web site with information on new products and company contact information, and links to product application information on manufacturers' Web sites. On the other hand, some distributors still use their computer systems for little more than internal inventory management and basic back office functions, such as bookkeeping and accounting. However, more distributors are using their MIS capabilities to differentiate themselves from competitors.
Find all of the additional services the electrical distributors in your market offer. The best distributors are always trying to differentiate themselves with value-added services. As long as you pay your bills on time, you deserve access to a distributor's full range of value-added services. Any decent distributor should provide basic services like local stock of the most commonly ordered electrical supplies and reasonably fast access to special orders, dependable jobsite delivery, fair credit terms for honest customers, and knowledgeable salespeople. The better companies provide much more. For instance, you need to find out which distributors in your market offer in-depth product training for new products, customized packaging and delivery options, online access to order status, tool rentals, 24-hour and weekend access to salespeople, and access to vendors' reps or factory salespeople for technical questions.
If you're a small contractor still learning the business side of operating an electrical contracting firm, there's another service that some distributors can provide: assistance with your business operations. Electrical distributors are savvy businesspeople, and are well known for their ability to run profitable businesses. Don't be afraid to ask for tips on accounting, bookkeeping, marketing, and other business management skills.
A popular saying in the distributor world goes, “Whoever is closest to the customer wins.” You can use that business philosophy to your advantage.
Sidebar: Electrical Distributors by the Numbers
With a few exceptions, the 4,000-plus electrical distributors in this country can be grouped by size of company.
- National chains. Graybar Electric Co., St. Louis; WESCO Distribution, Pittsburgh; Consolidated Electrical Distributors, Inc. (CED), Westlake Village, Calif.; and GE Supply, Inc., Shelton, Conn., are the four national chains that have branches in virtually all of the largest markets. Together, they have a combined market share of 16.9% of the $70 billion-plus worth of products sold annually through electrical distributors.
- Large regional chains. The next tier of distribution includes companies that have branches throughout the United States, but aren’t in all regions. These companies, each of which has more than 100 locations, include Rexel, Inc., Dallas; Sonepar USA, Berwyn, Pa.; and Crescent Electric Supply, Inc., East Dubuque, Ill.
- Smaller regional chains. At least three-dozen large regional distributors with more than $100 million in sales operate throughout the United States.
- Independent, family-run companies. While the regional and national chains have the highest sales volumes, well over 3,000 distributors of electrical supplies exist with sales in the $10 million to $20 million range. These companies, which include specialty distributors that focus on niches like lamps, fuses, motors, residential lighting fixtures, or industrial controls, run about 12,000 total branches, and sell more than $70 billion worth of electrical supplies annually, according to Electrical Wholesaling magazine. However, the 200 largest electrical distributors account for more than 40% of those sales.
Sidebar:Top Tips for Selecting a Distributor Partner
Not all electrical distributors are the same. They all have their strengths and weaknesses. But the best distributors should all rank high when you evaluate them by the following measures.
- Reputation. The company should have an exemplary reputation.
- Fair and consistent pricing. The distributor must consistently deliver fair and consistent pricing and value.
- Performance. Look for how the distributor helps solve problems and how salespeople live up to their word regarding on-time deliveries and other commitments.
- Product availability. A first-class distributor always has the products you want, where and when you need them. First-in-class suppliers and product lines. If the distributor focuses on best-in-class products and services, great. If not, he’ll probably offer second-grade products and a less-than-first-class business relationship.
- Value-added services. Look for added value in the way of electronic invoicing, EDI, warehousing, distribution, financial services, and other value-added services.
- Proper certification. Ask about the distributor’s qualifications to sell and service the products they offer.
- Customer service. Ensure the distributor offers 24/7 availability by phone or via the Web. A live voice is always better.
- Inventory control and management. Ask how a distributor will help manage the order and delivery of needed products to ensure delivery times work to your advantage.
- Financial intangibles. Some companies offer leasing on high-dollar items, financial services like lending for projects, and frequent buyer programs to minimize your cost of doing business.
– Arnold Kelly, director, construction market, Graybar Electric Co., St. Louis.