When you walk into the counter area of your favorite electrical supply house five years from now, it may be a very different experience from what you are used to. The products for sale won't be all that much different, although you can expect the distributor to be selling voice, data, signaling and telecom products, if he isn't already doing so. When distributor salespeople call on you in the future, expect them to be armed with instant access to information on inventory levels, pricing and order tracking downloaded off of the company's intranet via a laptop. You may not even have to deal with salespeople at all, or make as many visits to that company's counter if they start offering an online purchasing option. Let's look at some other changes that will probably occur in how electrical distributors do business over the next few years.
The urge to merge The surge in mergers and acquisitions, where national and large regional distributors are purchasing smaller family-owned businesses, may mean the name on the sign outside the distributorship you have bought from for years is different. Acquirers are looking for instant access into a marketplace, and they know a strong, well-run family business with customer contacts going back for decades will often out-serve a new branch of a national chain headquartered hundreds of miles away.
Over the past decade, owners of dozens of family-owned electrical supply houses have sold their businesses to large national and regional chains, such as All-Phase Electric Supply Inc., Benton Harbor, Mich.; Consolidated Electrical Distributors Inc., Westlake Village, Calif.; Hughes Supply Inc., Orlando, Fla.; Rexel Inc., Coral Gables, Fla.; and Wesco Distribution, Inc., Pittsburgh, Pa. Every distributor who has sold a company has his or her own individual reasons for selling the family business, but chances are the reason or reasons are among the following:
They don't have a son, daughter or other family member who wants to run the business in the future;
The financial offer was too darn good to pass up and he or she decided to cash out;
Or profitably perpetuating the business would require a major infusion of cash into a new computer system or other major capital expenditure.
Despite all of these acquisitions, the smaller electrical distributors still do the bulk of the business in the electrical wholesaling industry. In 1997, the industry's four national chains-Graybar Electric Co., St. Louis, Mo.; CED; GE Supply Inc., Shelton, Conn.; and Wesco-accounted for $9.9 billion (15%) of total industry sales, and the largest 250 electrical distributors together accounted for $29.9 billion (44%). The national chains' market share will probably increase if CED, GE Supply and Wesco continue their acquisition strategies. But their clout pales in comparison to that of national chains in the other distribution-based industries, such as the pharmaceutical and electronics markets, where a handful of companies control most of the business. There are still more than 4000 other distributors of electrical supplies that are viable purchasing options for end users.
Although many more of these companies will sell out to larger firms over the next five years, most industry observers expect the electrical wholesaling industry to remain highly fragmented for years to come. More companies will join the 40-plus electrical distributors that have reached the more-than-$100-million mark in sales, a milestone reserved in the past for a handful of the distributors. Companies with this amount of critical mass gain cost advantages in purchasing, warehousing and other key operating necessities over their smaller competitors. Industry observers agree there will always be a place for smaller niche distributors that focus on particular markets or product groups; it's the mid-sized distributors that are neither very large nor very small facing the toughest challenges in the future.
It's a wired world, more and more Like electrical contractors and other end users, some electrical distributors make investments much faster than others in new computers, software and related equipment for their businesses. There's always a group of pioneers who quickly attempt to adapt the latest new technology to their operations, with the hope of using it as a tool to slash their operating costs and improve profits. At the other end of the spectrum are the slackers who see a visit from a business system provider as worse than an appointment with an IRS auditor, and avoid investing in computers as much as possible.
Most electrical distributors are somewhere between these two extremes. The "average" electrical distributor is now into E-mail and has a Web site. His or her salespeople travel with laptops. They know computers will play an increasingly important role in their business, and have seen the miracles and heartaches they create. They will invest in new technology, but they don't want to be the guinea pigs.
For electrical contractors, facilities maintenance personnel and other end users, electrical distributors' progress in all things computer-wise brings with it several exciting possibilities. Look for more companies to offer remote-order tracking via the Web, computerized tool crib management and on-line catalogs. Some distributors on the leading (some would say the bleeding) edge of technology, like W.W. Grainger Inc., Lincolnshire, Ill., and GE Supply, already offer customers the ability to place orders over the Internet, 24 hours a day, seven days a week.
There's a new development on the scene that may tie together many of these electronic ventures: the Industry Data Warehouse (IDW). The IDW will enable distributors, manufacturers and reps to access mountains of synchronized pricing and product information from one central resource using standard browser software. The information will all be in one agreed-upon format, so users can read and use it without the annoying crosstalk that stunted the growth of other initiatives in electronic communications.
Single-sourcing of product lines You may have noticed distributors pushing a different manufacturer's product line than they used to push, or perhaps you've noticed they don't carry as many different vendors in a product category. Expect these trends to continue because they are caused by two industry-wide movements: the growing power of buying groups and the popularity of vendors' bulk purchasing programs such as T&B's Signature Service, Pass & Seymour/Legrand's Cornerstone, and Bussmann's BussPlus.
In purchasing programs, when distributors commit to buying certain amounts of specific products, they get volume discounts on pricing and additional marketing support. This support may include funds for advertising and promotional extras such as merchandise racks for their counter areas, assistance with direct-mail campaigns aimed at getting end users to buy more of that manufacturer's products or help with setting up counter days.
Manufacturers like this arrangement because it locks up a higher percentage of a distributor's business. Indeed, if a distributor took advantage of the one-stop shopping offered by Thomas & Betts Corp., Memphis, Tenn., through its Signature Service program, they could fulfill 20%-plus of all their product needs. Few distributors are willing to tie themselves so closely to a single vendor, but it's a distinct possibility in the future, as many distributors have already cut their product portfolio to a first tier of 8-12 primary vendors and a secondary tier of 80-90 vendors to fill in the gaps.
Savvy electrical distributors like these programs. They know it costs more to stock similar products from overlapping product lines than it does to stock one manufacturer's products in a specific product category because of the paperwork, training of sales personnel and inventory costs that carrying each product line entails. Going with more than one line in a product category isn't very cost effective for electrical distributors when you consider the average distributor stocks 10,000 to 15,000 stock-keeping units (SKUs) from 200-300 different electrical manufacturers, but 80% of the company's sales usually comes from only 20% of these items and manufacturers.
Buying/marketing groups help their members pool their purchasing power for volume discounts or annual rebates; improve their marketing and management skills; and learn about the latest sales, management, and marketing techniques from top-flight instructors. It's not unusual for a distributor to channel 30% or more of its sales through a buying/marketing group. About half of the 250 largest electrical distributors belong to one of the industry's buying/marketing groups. With this type of popularity amongst the largest distributors, it's easy to see how buying/marketing groups have changed the way the electrical industry does business.
Electrical Wholesaling magazine, a sister publication of CEE News, estimates about 600 electrical distributors with a combined total sales volume of $16 billion are members of one of five buying/marketing groups that focus on the electrical industry. These groups are Affiliated Distributors, King of Prussia, Pa., which has 184 electrical distributors with a total sales volume (not all through A-D) of more than $8 billion operating 1560 branches in the United States, Canada and Mexico; IMARK, Upper Marlboro, Md., with 175 electrical distributors, 800 locations and about $6 billion in combined member sales volume; and Equity Electrical Associates, East Walpole, Mass., with 159 members operating 267 locations and members' sales volume approaching $2 billion United Purchasing Association (UPA), Sanford, Fla., and Electrical Distributors Network (EDN), Beachwood, Ohio, are also recruiting electrical distributors as members.
Service with a smile In the future, electrical contractors, facility maintenance personnel and other end users will probably find the best distributors will be even easier to deal with. It's not because distributors want to be nice guys. If you are a good credit risk with lots of growth potential, they want their unfair share of your business and are willing to go to great lengths to get it.
The more progressive electrical distributors are working to develop ever-tighter working relationships with their best customers. This means taking the total sum of all of the resources at their disposal and using it to win your business. They aren't underestimating the importance of pricing as a key consideration influencing where you and other end users buy electrical/electronic supplies. But these companies realize they can't build a business on low pricing alone and if they have survived to early in the 21st century, they have probably done so because they have invested in robust inventories strategically located where you need it, dependable delivery, and knowledgeable technical assistance. The best-in-class electrical distributors know they won't survive in the future by being a middle-of-the-road player in a lot of different markets-they must become the top players in carefully selected business segments to continue to grow their businesses.
The companies that survive for the next five years and into the 21st century will do so because they have decided the distributor closest to the customer wins, and they want to be that distributor.