New survey marks rise in contractor purchases from big-box retailers
A national survey of 500 general contractors, electricians, plumbers, and HVAC specialists conducted by Eric Mower + Associates’ (EMA) Group B2B, Syracuse, N.Y., reveals contractors are now making nearly half of their tool and building supply purchases from big-box retailers. According to the survey results, some respondents reported purchasing accessories (49%), power tools (47%), and hand tools (46%) from big-box retailers, whereas other respondents indicated purchasing accessories (36%), power tools (35%), and hand tools (42%) from distributors.
“There’s lot of change happening in the channel — how folks are buying,” says John O’Hara, public relations director for EMA Group B2B. “There are some strong numbers for purchases from the big-box retailers across the board. Clearly, the rise of the big-box retailers is continuing, particularly within certain categories of products.”
General contractors lead the trend toward making more purchases from big-box retailers. Plumbers and electricians comprise the group that prefers the traditional distribution channel. According to the survey, electricians prefer distributors over big-box retailers for their customer service (83%), relationships (73%), knowledge (65%), and delivery (54%). “There are some strong variations with electrical contractors as far as their tending to be much more distribution loyal,” says O’Hara. “When compared to other contractor types, electrical contractors tend to be much higher as far as their loyalty to distribution.”
Yet, results of the EMA survey reveal that the responding electrical contractors report purchasing accessories (48%), power tools (45%), and hand tools (45%) from big-box retailers, whereas fewer report purchasing these items — accessories (36%), power tools (33%), and hand tools (45%) — from electrical distributors.
“It seems to me that the electrical contractors are still using the distributors for most of their electrical needs,” says Peter Bellwoar, VP of sales and marketing, Colonial Electric Supply, Inc., King of Prussia, Pa. “The electrical contractors I talk to still see distributors as having, and continually adding, value in the chain. Good distributors stay ahead of the curve and anticipate electrical contractors’ needs and address them. Distributors who don’t are falling behind and losing business to other distributors or to the big-box stores.”
According to the survey respondents, big-box retailers have certain advantages over traditional distributors. Contractors perceive big-box stores as having a better variety of products, lower pricing, and greater convenience as a one-stop shopping destination. In fact, six out of 10 responding contractors reported they believe they will find better prices at these stores, as well as a wider selection of products.
For example, Chad Hoyt, owner of Chad’s Electric, Inc., a Cedar Rapids, Iowa-based residential and commercial electrical contracting firm, buys gear and panels from his two regular electrical supply houses, but he buys all the smaller wire required for his jobs from big-box retailers. “As far as 14-2 and 12-2 Romex goes, we buy a lot of it from the big-box stores, because it’s quite a bit cheaper,” Hoyt says. “The electrical supply house can’t even come close.”
In addition, contractors perceive retail stores as more convenient than distributors, despite their belief that they can get in and out of their distributor faster. But despite these perceived advantages, Hoyt’s company still does most of its purchasing through electrical distributors. Hoyt estimates his firm does 65% to 75% of its business with the electric supply houses and 25% to 35% with the big-box store.
According to the EMA survey, distributors’ strengths are in customer service (75%), relationships (70%), knowledge (63%), and delivery (54%). “Distributors have in-depth expertise,” says Scott Benfield of Benfield Consulting, a Naperville, Ill.-based specialized consultancy for business-to-business manufacturers and distributors. “That’s why you would go to a distributor for switchgear and programmable equipment. They would have an engineer, or even several engineers, on staff.”
Only if you don’t need specialized equipment — or if you know exactly what you require — should you go to the big-box retailer. “It really depends on what level of service you’re looking for, more than anything else,” continues Benfield. “If you want a high level of personal relationship to take care of your account, then you go to a distributor. If you just want to buy parts and pieces and check them out in a fairly limited amount of inventory, then the big-box retailer will do fine, if you don’t mind picking it up yourself.”
It follows that delivery is a big incentive in deciding where to make purchases. “Electrical suppliers deliver everything,” Hoyt says. “You have to go pick it up from the big-box stores.”
If big-box retailers do deliver, it’s usually through an outside service, which may require an additional fee. “They don’t have a whole fleet of trucks like wholesalers do,” says Benfield. “If they do have a delivery service, it’s probably limited.”
In the EMA survey, distributors also ranked higher than big-box retailers for credit arrangements. Six out of 10 contractors indicated their company has a credit relationship with a distributor, while far fewer have a company account with a big-box store. However, as retailers cultivate a contractor base clientele, they may begin offering lines of credit. “One of the big advantages for distribution is credit,” says O’Hara. “Now, the big-box stores are offering credit incentives for contractors too. That is an area that distributors need to protect, if you will, because if contractors are starting to get better credit deals from retail, that’s going to be a difficult thing for them to combat.”
The nature of the bidding process favors purchasing from electrical distributors. “When electrical contractors are buying materials, specifications and bidding become more important,” says O’Hara. “Electrical contractors wouldn’t go to a retailer for a specified or bid project. It just wouldn’t happen. They’re going to go to their distributors because they have a specific product they have to get. The bid process has a big impact on this.”
For instance, certain projects, such as new health care construction, require hospital-grade equipment and materials, which are not available through retailers. However, contractors may choose to purchase the commercial electrical fixtures for a temporary construction office or a simple service call, such as a switch or receptacle. In addition, the convenience of multiple locations could bring electrical contractors to big-box stores when they’re short on an item or need other unplanned items.
“The bigger commercial contractors are the ones who are probably doing most of their business through traditional distribution,” says O’Hara. “Most likely, they’re not going to buy through retail, but that doesn’t mean there isn’t an awful lot of business that’s going to retail through smaller contractors.”
Furthermore, order size matters when it comes to purchasing decisions. Of the respondents to the EMA survey, 80% reported turning to distributors for large-volume purchases, while 63% indicated they prefer to make small-volume purchases at big box retailers. “The wholesaler specializes in the complex, larger orders and a lot of specialty products,” says Benfield. “They’re really geared for the bigger orders.”
Moreover, many distributors offer discounts on large orders. “The bigger your order, the better your discount,” says Benfield. Notwithstanding these discounts, due to the hidden costs, distributors may actually lose money on smaller orders.
“I know the economics of distribution, and I can tell you that distributors don’t make any money on really small orders,” says Benfield. “They can sell over their counter, but they generally lose money on those orders.”
According to Benfield, distributors may be experts at dealing with customers, but they may not calculate the cost of that service into their already thin margins. (For more on this topic, see “Primed for Profit” in the February 2012 issue of Electrical Wholesaling.) Many distributors are just now starting to use accurate cost-allocation models. “This whole idea about order size and how much you really make on an order is fairly new, because distributors have never really had a cost model to go along with that,” he says. “But now you’re able to look at an order size and say it’s not just about the margin percent you make on it, but how much it costs you to fulfill that order. That’s always been the problem in distribution: They never knew the fulfillment cost. They always knew the product cost; not the fulfillment cost. So the fulfillment cost can now be allocated fairly accurately to an order, and what they’re finding is that on a lot of orders, they just don’t make money.”
Benfield estimates wholesalers are making 2.5% for every $100 they sell. “So they can lose money pretty quickly if they’ve got a customer that, instead of buying 10 of something and getting a 10% discount, is buying one item at a time that has to be delivered 10 times,” he continues. “If I’m shipping out a $50 order at 40% margin, you make $20 on it, but it costs you $25 just to ship it on a truck, so you know that’s a loser. They can lose a lot of money that way.”
Still, don’t expect distributors to abandon their customer service ethic and start dropping customers. “They look at the entire business the contractor gives them,” says Benfield, who asserts that the new cost assessment also includes looking at the type and size of orders throughout the year. “If a contractor gives them large enough orders and the right type of orders that they make money on, then they’ll probably go along with shipping some smaller orders in the course of a year,” he says.
Otherwise, the distributor will look at the orders and work on helping the contractor forecast their materials needs.
“But it wouldn’t get to the where they’re not going to do business with the contractor,” Benfield continues. “They’ll either amend the relationship to help the contractor forecast better or offer a bigger discount if the contractor buys larger size orders. It’s more proactive than punitive.”
Of all the contractors who responded to the survey, electrical contractors, in particular, gravitate toward specific brand names. O’Hara refers to them as brand zealots. “By ‘zealot’ we mean a person who is very brand loyal and brand focused,” he explains. “They brand refer.”
In the survey, electrical contractors considered “delivered the best results” as the top reason why brands are important to them. “You wouldn’t think talking about brands would necessarily relate to whether they buy retail or at distribution, but it does,” says O’Hara. “If they feel like they can’t get the brand they want, that they’re used to, that they were trained on, in retail, then they will stick with distribution, because there are exclusive brands or quality that’s developed for the pro.”
According to the EMA survey, electrical contractors feel distributors are much more likely to carry the brands — the tools for professionals — they are looking for. “I usually buy tools from the distributor,” says Hoyt, who is also concerned about the UL listing for the commercial electrical items offered by big-box retailers.
According to O’Hara, this perception isn’t unusual. Electrical contractors want brands that are made for pros and not the do-it-yourself crowd, and they believe they are mostly available from distributors. “If they go to the retailers and see a lot of DIY stuff, they’re not going to buy that,” says O’Hara. “They want stuff that’s made for the pro.”
However, according to O’Hara, the big-box stores are making inroads with pro items. “There’s a lot of strength in retail with the purchase of tools,” he says. “The tool category has been strong with retailers for some time,” he continues. “There’s a wide variety available, which is one thing some of the contractors pointed out.”
Additionally, contractors perceive big-box stores as having a good price on tools. “It’s particularly important for distribution to be able to compete on price,” says O’Hara.
For all that, it’s still difficult to pinpoint where electrical contractors are buying tools and accessories. According to the respondents to the EMA survey, many of them (83%) access materials information online. “That’s definitely higher than the other contractors by far,” says O’Hara, who explains that electrical contractors use that information to compare specs and prices on brands and products.
Contractors were early adopters of mobile communications, starting with two-way phones. So it seems natural they’re now quickly making the transition to web-enabled devices, such as smart phones and tablets. “Electrical contractors are using mobile devices on the job site to look up information about products and services, compare prices, and a whole variety of things,” says O’Hara, who cites that of the contractors using smart phones, 58% of them used them to make purchasing decisions. “That’s a huge number,” he continues.
As a result, there’s more competition for wholesalers, according to Benfield, who points out that in addition to added pressure from big-box retailers, there is now also eBay, Amazon, and other online sources for tools and accessories. “A lot of contractors go online and check price,” he says. “The technology allows them to do that. Wholesalers are competing against a world where information is almost perfect.”
Consequently, the availability of online information and quick price comparisons challenges distributors’ ability to raise prices. “That’s holding the lid down on their ability to get extra pricing to cover extra service,” Benfield says. “Wholesalers do a great job and they’re really hard-working, well-meaning companies, but because of all the avenues to get product and check price anymore, it’s going to be more and more difficult for them to do everything for everybody. They’ve always been kind of sales driven, to the point that they’ll do as much for you as they can. I don’t know if they’re going to be able to do as much, to take care of a customer no matter what he buys and how he buys anymore.”