Private labeling has emerged as a hot topic in the electrical wholesaling industry over the past few months. With several of the largest electrical distributors in the United States now private-labeling products, and certain name-brand manufacturers private-labeling products for some electrical distributors, there is much debate on this subject.
As with any decision on the product lines distributors carry, customer acceptance is key. Electrical distributors must ask themselves, “If I offered a line of private-labeled products, would my customers support it? What's most important to them about the products I sell?” Distributors ask themselves the same questions when they make major brand conversions for key products such as lamps, wiring devices, switchgear, or tools.
To find out what electrical contractors think about privately labeled products, Channel Marketing Group, Raleigh, N.C., and Allen Ray Associates, Kennedale, Texas, teamed up with Electrical Construction & Maintenance (EC&M) and sister publication, Electrical Wholesaling, to conduct an e-survey to explore the value of brands in the electrical marketplace and the exposure and acceptance level of non-branded products. Approximately 12,000 e-mails were randomly selected from EC&M's database. A 4.7% response rate was received, equating to 564 participants. To validate open-ended responses, a number of follow-up telephone interviews were conducted.
Based on this research, almost 20% of the respondents said they know at least one distributor selling private-label products. The most frequently mentioned distributors were: Rexel Inc., Dallas (19.8%); City Electric Supply, Orlando, Fla. (12.1%); Graybar Electric Co., St. Louis (12.1%); and W.W. Grainger, Lake Forest, Ill. (5.5%). While respondents mentioned independent distributors infrequently, 35% of distributors who responded to a different e-survey from Channel Marketing Group/Allen Ray Associates in November 2006 said they were offering or considering offering private-label products (“private label” could also mean no brand associated with the product; not necessarily a sourcing relationship).
To better understand the commitment of end-users to brands, electrical contractors were questioned about their purchasing habits. Specifically, they were asked if they request a certain manufacturer's products, totally rely on the distributor's choice of brands, or use generic descriptions for their needs (4-inch steel box, for example). As expected, most contractors use multiple methods, so responses totaled more than 100%. Here is what the survey revealed:
66% of respondents ask for specific manufacturer names when they order products from electrical distributors.
44% of the time electrical contractors place orders not using a specific manufacturer's name and instead request a certain type of product using generic terms.
23% of the time electrical contractors mention a specific distributor name when they order products.
Contractors frequently know which lines their distributors carry, so it was no surprise that responses were skewed toward manufacturer names. The frequency with which electrical contractors place orders by product type or in generic terms wasn't all that surprising, either. It's safe to say respondents were “brand apathetic” in these situations and that they were willing to accept any manufacturer's brand or a distributor's own brand. The product categories that scored less than 30% brand-sensitive in Table 1 are most susceptible to pricing pressure, and therefore less-expensive private-labeled products.
On the flip side, electrical contractors are quite brand-sensitive in certain product categories, and they often will request a specific manufacturer or are willing to accept a known manufacturer of a specific type of product. This includes products such as switchgear, tools, and circuit breakers. To establish the level of brand support within each product category, survey respondents were asked to rate which product categories were brand-sensitive.
For the purposes of this survey, “brand-sensitive” meant the customer requests a specific manufacturer or is willing to accept any known manufacturer. “Brand apathetic” means the customer is willing to accept any manufacturer, doesn't care who the manufacturer is, or is willing to accept a distributor brand.
Research and market activities have shown product categories that scored 30% or more “apathetic” are more likely to be considered as early private-label opportunities for distributors. A clear delineation exists between “electrified” and “non-electrified” products. Based upon the open-ended responses, it appears concerns about product liability are a prime issue. As expected, brand sensitivity or apathy depended on whether the customer's work was focused in the industrial, commercial, or residential markets.
According to the survey, industrial contractors favor brand-name products as a measure of quality but said lack of pricing competitiveness can provide opportunities for less expensive lines. When input from customers involved primarily in maintenance and repair operations (MRO) was solicited, some respondents were surprisingly willing to try non-branded products that were UL-listed or used in non-critical systems. Respondents fell into two camps on this front: those who are willing to try/use private-labeled products or those who are focused on name brands for quality and support issues. Those customers who were willing to use private-label products said specs written “or equal” are moving to non-branded products because of price considerations.
One industrial contractor who is partial to branded products said, “We specify proven products in order to provide a durable, reliable project to our clients. Non-branded products may cost less, but they may not last or perform as well over time compared to the branded product specified.”
When asked if he would use private-label products, another industrial contractor said it would depend on the application. “I place less importance on the quality of brand-name products versus un-branded for secondary (not system-critical) products like cable ties or wire-pulling lubricant,” he said. “Where the quality of brand names is more important is in the critical system material.”
Others indicated they simply choose the best brand for the job. “I sometimes get overridden by supervisors who want cheaper products that I know aren't going to last in the application,” said one respondent. “But I have to use them.”
The quality of a product has to be adequate, added another contractor. “This ensures we don't have an unacceptable rate of call-backs. As long as the items are of equal quality, price and availability become the deciding factors.”
This type of end-user, based on survey feedback, is most concerned with product quality, and would prefer to “buy American” if price is comparable. They feel name-brand manufacturer benefits include warranty coverage and population of information in contractor billing/estimating systems. However, price can still be king, depending on the product category. One commercial contractor felt that private-label products don't stay in the market long enough to be a major factor.
“Manufacturer brands have been around a long time and have established a consistent quality product,” said one respondent. “Generic products generally don't stay in the market long enough.”
These contractors are the most apt to purchase private-label or un-branded products due to price benefits, according to the survey. For the most part, they do not perceive product quality differences, and believe homeowners and their other customers (builders) don't know brands or see differences in quality. Additionally, the pricing benefits of non-branded products enable residential contractors to earn jobs and retain project profitability.
“Some un-branded products, such as recessed fixture trims, appear to be identical to branded products,” noted one residential contractor. “We will not pay for a brand-name lamp if we can find a lower-priced alternative that will give satisfactory results.”
Another contractor voiced his frustrations with the availability of new products at electrical supply houses, indicating that many new and improved products are available, but that distributors only carry what sells the most. “If you want a certain new product, it may have to be a special-order item, and no one can wait,” he said.
According to another respondent, “In this period of unstable prices, using non-branded product brings some stability to keeping our cost in line with our estimates.”
Twenty-eight percent of respondents said they were “multi-focused” (typically meaning industrial/commercial for larger contractors and commercial/residential for smaller contractors). These are core customers for many distributors. They expressed a preference for name brands due to concerns about quality, reliability, warranty, and product-liability coverage.
“I use national brands because that is what many of my customers require, and I sell the added value,” said one contractor. “I also want to be protected if there is a failure.”
Another contractor agreed. “I have serious quality concerns with un-branded electrical products and will not purchase or install them,” he said.
However, due to pricing, an increasing number are willing to install non-branded products as long as the products are UL-listed and will pass inspection.
Price matters big-time
With product quality becoming less of a differentiator, price drives many decisions. According to one contractor, “Some name-brand product quality has declined over the years, as has local product support. I suspect we get more information via the Internet than from our distributors. Although our purchase volume has gone up with specific distributors, product and sales support are waning. Good prices allowed us to get the jobs.”
Another respondent said, “We have ‘price-house distributors’ approach us all the time. For certain product groupings, they have great prices and deliver in a timely fashion. But more often than not, these same supply houses don't offer the name-brand product approved for a job. We become suspect of distributors when they substitute non-branded or products with their name without notifying us beforehand. While on most of our residential jobs, we are only concerned that the product is good for the first year, we have industrial contracts that demand certain brands, even when there is a substantial cost differential. I would say in those situations there is a perceived name value to our customer, as they are asking for it by name and part number. Outside of the industrial setting, price and delivery rule the landscape.”
Electrical contractors are seeing significant price differentials, as exhibited by their acceptance of private-label products. Based on the survey's results, they will more readily accept non-branded products at the following discount levels:
22% of respondents will purchase non-branded products if they get a discount of 11% to 20%.
26% of respondents said they need a discount of 21% to 30%.
39% of respondents expect a discount of at least 31%.
The higher discounts would effectively eliminate a manufacturer's role, providing all of the cost-savings to the contractor. Electrical distributors would maintain no incremental gross-margin percentage on a lower dollar volume per unit, hence reducing their profitability.
While some survey respondents insisted they do not allow substitutions, 84% said they knew distributors make product substitutions for either product availability or distributor profitability reasons. The top four reasons respondents allowed substitutions included:
An urgent need exists to get product.
They believe product quality is comparable among brands.
They trust the electrical distributor to make product substitutions.
They are more concerned about whom they buy from than the brand of the product.
Although it's understandable that product availability is critical, from a manufacturer's viewpoint, it's disconcerting that there is less recognition of quality differentiation and brand allegiance in the marketplace. For very fast-moving “A” and “B” items within a manufacturer's product portfolio, encouraging distributors to stock inventory is critical to capturing incremental business. However, this needs to be balanced against a distributor's interest in managing inventory investments.
At the same time, some electrical distributors routinely substitute non-branded products for their own profit reasons. Thirty percent of the respondents said they knowingly allow distributors to substitute with non-branded products. That way, the customer receives a lower price, and the distributor earns incremental margin.
Product quality and liability are also important issues. For example, when respondents were asked to rate “which manufacturer services are of value to you,” they showed the most interest (in descending order) in product quality, products made in the United States, UL/CSA certification, local sales force support, and product warranty.
“We have industrial customers who ask if the product carries a UL or CSA label, but there are smaller customers that don't seem worried about any type of certification as long as it works,” said one respondent. “Some of our customers have shrunk their purchasing departments to where there is not the same product knowledge as five to 10 years ago. So acceptance of what appears to be ‘or equal’ product by function is acceptable more times than not. Price really becomes a consideration in the ‘switch-out’ of product.”
Interestingly enough, while “made in the USA” is important, contractors typically are not willing to pay significantly higher prices for these products. According to industry sources, more than 70% of electrical materials are manufactured outside the United States. National pride is evident in a number of the open-ended responses, which is understandable given global concerns and the growth of China.
While liability is a concern for installers, it should also be a major concern for distributors. Of the 10% of respondents who have had product liability issues, 71% said a distributor was involved in subsequent legal action. Based upon invoices, all knew the distributor who sold them the product.
Source vs. brand
While much of the survey focused on the acceptance level of brands, contractors are also concerned with their sources of supply when they purchase products. Given that contractors purchase from multiple distributors, respondents were asked, “What is the most important reason you purchase from a distributor?” Respondents ranked each attribute based upon their importance level. The main decision drivers and their ratings are noted in Table 2. These findings speak to the electrical manufacturers' need to strengthen local brand awareness and identification of where their products are available.
Contractor acceptance of private-labeled products in the electrical market is growing due to pricing pressures, perceived lack of quality differentiation, and — in many product categories — indifference to brand. Private-label offerings by distributors are expected to grow due to national chain product sourcing efforts, industry consolidation, and the need by larger regionals to compete against national chains and margin pressures.
Gordon is a principal of Channel Marketing Group, Raleigh, N.C. Ray is a principal of Allen Ray Associates, Kennedale, Texas.