Although industry executives are bullish about 2006, they are still skittish about additional price increases for copper, steel and other raw materials.
A healthy commercial construction market and some activity in the industrial business will help propel the electrical market in 2006, according to an exclusive Electrical Wholesaling survey of electrical distributors, electrical manufacturers, independent manufacturers' reps and association executives. While most respondents gave an enthusiastic thumbs-up to the overall business climate in 2006, they were concerned about further price increases in steel and copper, the state of new product introductions in the electrical market, and the evergreen problem of poor communication between electrical manufacturers and their business partners.
Some Sanity May Return to Copper Prices.
Many respondents are concerned that any increases in the cost of copper and steel could once again mask real industry growth. While few industry executives expect steel and copper pricing to continue on another wild ride through 2006, they wouldn't predict any substantial price declines. Veterans who have watched the copper market for a lifetime said they stopped trying to predict copper prices years ago.
In another life, Bob Snyder was a senior marketing executive with Carol Cable and lived day-to-day with the cyclical nature of copper prices. As vice president of the Equity Electrical Associates/EDN marketing group, he still watches steel and copper pricing but says his experience in the wire and cable industry taught him that it's “next to impossible” to predict the price of a commodity.
“Typically, supply and demand dictate prices, but financial markets sometimes can create a price level,” Snyder said. “In addition, today we compete with consumption on a world-wide basis. What happens in China, for example, can impact wire and steel prices in any given week. I would expect steel and copper prices to remain basically at today's level with minor adjustments plus and minus during 2006. Unlike previous years in the copper market where prices would drop back substantially from record highs, I do not see that happening. It's somewhat analogous to gas prices.”
Snyder said high steel and copper prices can create a false impression of growth. “In order to measure true growth, a distributor must secure from his vendors the real story in the form of pounds purchased compared to a previous period,” he added. “A big increase in dollars is always fun to review, but it does not tell the true story.”
One building wire manufacturer who requested anonymity expects copper prices to soften and move down to more reasonable levels this year. Any change will impact building wire most because copper represents 75 percent of its product content, he said. He expects prices to range between $1.60 and $1.80 per pound in 2006.
“There will be additional worldwide copper production coming on line next year, so the question is demand,” he said. “I predict demand to be similar to this year, so inventories should begin to build. It's all a guess!”
Electrical contractors have been hit hard by higher commodity prices, particularly when they have already locked in on a bid price. Bob Baird, vice president of apprenticeship and training, standards and safety, Independent Electrical Contractors Inc., Alexandria, Va., says contractors' profits have suffered because of the pricing situation.
“Copper prices have driven cable and equipment prices significantly beyond levels anticipated when jobs were bid,” he said. “Contractors will be seeking to include materials cost escalation clauses in contracts.”
Equity's Snyder said manufacturers are finding it “difficult if not impossible” to quote long-term jobs involving conduit and wire. He says when a contractor asks for a large quote on pipe and wire to be shipped in four months, if the vendor is interested in providing pricing, they may request a “metals escalator” clause in the quote that may come into effect at the time of shipment if prices have increased.
Reps are stuck in the middle on the pricing issue. Said Larry Keating, principal, Electrical Products Co., Omaha, Neb., “It costs us dearly. We are no longer able to sell on merits of product. It's just who has the lowest price.”
Bob Powell, principal, Kunz-Powell and Associates, Malvern, Pa., sees the wire pricing issue from both the perspective of a rep and as a wire manufacturer from his days with Hatfield Wire and Cable. He says electrical distributors in the Philadelphia market seem to be more willing to accept copper increases than on other commodities, but he believes that if international demand stays high, there will be no downward pressure on pricing.
“New home construction will slip a bit in 2006, but not enough to cause a drop in copper,” he said. “Contractors have been hurt where they have been locked into a price and a completion date. In other cases, they have tried to delay starts to see if the market cools. Many projects had been put on hold when the economy was struggling. Now that it's improving every month, I think they should continue to break.”
Bill Devereaux, president, R/B Sales Corp., Marion, Iowa, said steel pricing has been difficult to predict for the last two years. However, he expects that steel prices will be flat to slightly down over the course of 2006. He believes that because of market demand and production pressures, copper prices will continue to slowly trend higher over the first six months of 2006 and stabilize in the third quarter. In the fourth quarter, he expects a slight decline in pricing.
Devereaux says rising prices for steel, copper prices and other raw materials have increased the workload of reps and created pricing chaos for manufacturers, distributors and end users. “A manufacturer has to decide if and when to take a price increase,” he said. “The distributor must be aware of price increases and pass the pricing on to the customer. End-users must be aware of price increases and how prices could impact a project bid. Discussions with key customers over rising product costs have been difficult but necessary. These discussions for those courageous enough to have them create an opportunity to discuss other options for improving business in a ‘win-win’ fashion.”
Gary Brusacoram, principal, Andrews Johnson Brusacoram, Minneapolis, said compared to what's happened with PVC pricing in the past year, the price increases for copper and steel look minimal. But in looking at the big picture, he is concerned that U.S. businesses have “surrendered to the oil/gas industries and the Chinese and Indian economies as an influence on pricing. What the dot-com was to the last decade, they are to this decade,” he said. “Regardless of price levels on commodities, the market needs price stabilization. The contractor or developer can't continue to plan with the current uncertainty.”
The Low Success Rate of New Product Introductions Frustrates Manufacturers, Distributors and Reps.
Why are some new products smash hits in the electrical market while others sputter on the launch pad? That question apparently touched a nerve with survey respondents, and they weren't shy about voicing their opinions on the situation.
When asked what percentage of new product launches are successful, most survey respondents pegged the number at 25 percent or less. That would seem to be a shockingly low percentage, when one considers the millions of dollars that electrical manufacturers invest in new product research and development.
Yet distributors and rep respondents traced the high failure rate to what would seem to be some market basics — not enough time spent listening to end users and business partners, inadequate market planning and communication and insufficient quantities of product-launch materials available to distributors' and reps' salespeople on the front lines introducing products in local market.
Manufacturer and rep members of the National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y., see the need for more effective product launches, said Hank Bergson, president, and the association will soon release its “Guidelines for Marketing Promotions and Product Launches,” which were jointly developed by NEMRA and its NEMRA Manufacturers Group (NMG).
Equity Electrical Associates' Snyder says new product launches today should be no different than they were years ago, and actually should be easier because more marketing tools are now available.
“There is a lack of true selling effort and a lack of professional salespeople,” Snyder said. “There are a lot of lazy folks in the field at all levels. Some factory sales managers do a great job. They educate their reps, carry samples at all times, and know how to motivate their audience as well as ask for the order. Unfortunately, these folks are in the minority. Many factory sales managers entered into their positions after college and really never gained the experience of true selling. How does one expect to train the sales force, including reps, and distributors if the sales manager is weak?
“How many field salespeople carry samples, literature, and can perform a motivating ‘dog and pony’ show? Selling is selling, and one needs to put a little show biz behind the effort in addition to knowing the product and applications.”
Paul Suzio, executive vice president, Bridgeport Fittings Inc., Stratford, Conn., says successful product launches are a matter of focus on the part of reps and distributors. “Too many reps and distributors feel it's too costly (time and effort) to introduce new products to the market because they are most interested in big-ticket, large-volume orders that produce little to no gross margin.”
One rep who requested anonymity said many recent product launches have really been relabeling efforts or changes in sourcing of products, and were not ground-level product development efforts with marketing input and customer needs in mind. He said others seem to be imitations of existing products. “Many of these products are creating conflicts among reps and distributors as they decide whose product to sell or stock,” he said. “The products that address labor-saving ideas have been the most successful. Specification product upgrades are also of interest, but line extensions are not moving.”
Gary Brusacoram of Andrews Johnson Brusacoram said new products are critical to his company's market growth, and that they generate excitement in the sales force, demand shelf space, can be great new income producers and can be used effectively as a management tool. But for a new product to be a winner, he says manufacturers have to have the proper resources available.
“There aren't any problems with launching a viable new product or presenting a promotion when the sales force is given a total packaged kit in a reasonable time,” he said. “New-product-launch marketing kits should become a stock-keeping unit (SKU) so the sales force can order them as that market mandates. Our little market has 300 distributor sales personnel and too often, we get one sample or promo sheet for our eight salesmen.”
Distributors believe manufacturers need to plan out their launches more effectively. Doug Borchers, vice president, Dickman Supply Inc., Sidney, Ohio, said distributors' salespeople do a better job of selling new products when some type of spiff is available.
Bill Elliott, president, Elliott Electric Supply, Nacogdoches, Texas, says it's critical that manufacturers and their selling partners focus on end-user benefits. “When we are selling time-saving products, we can appeal to contractors. But when we sell to homeowners, manufacturers need to advertise to people who will own these homes. We need to plan ahead for product launches. Frequently, manufacturers spring promotions on us with less than 30 days notice.”
The Basics of Good Relationships Still Count.
Some of the key challenges facing electrical distributors, manufacturers and reps don't change much. When asked what he would tell his customers if he had all of them in the same room for 30 minutes, Ronald Sangster, sales manager, Centrex Electrical Supply Corp., St. Louis, said, “We intend to increase growth by being really good listeners. Helping you, the customer, achieve your goals is our primary concern.”
Said John Matthews, area manager, Southeastern Electrical Distributors, Greenville, S.C., “Bring us your needs for products, pricing and availability. We will work together with you to accomplish a satisfactory solution. Your problems and/or needs are our opportunity to grow.”
Powell of Kunz-Powell & Associates says his rep agency works with distributors of all sizes, from small, residentially-oriented supply houses to sophisticated independent distributors and chains. “Their hot buttons are as numerous and varied as entree selections at a New Jersey diner,” he said. “A constant desire is to get everyone to understand that price is not cost.”
10 Tips Toward a More Effective Product Launch
It seems like everyone in the electrical channel is frustrated with the lack of communication and effort regarding the introduction of new products. Respondents weren't shy with suggestions about how to make the situation better. Bob Snyder of Equity Electrical Associates/EDN said the salespeople who do the best job selling new products aren't afraid to get “dirt under their finger nails” and put in the necessary effort to turn on customers to new products. He says they always carry clean literature and samples for “show-and-tell” opportunities and carefully select a target list of the best prospects to solicit. After the call, they follow up with a letter to the person to whom the presentation was made with a copy to the distributor involved, if applicable. “Get back to basics,” he says.
Here are 10 more ideas that surfaced in Electrical Wholesaling's ElectroForecast 2006 survey:
Focus on new products that meet market needs, innovate, save time and cost less, instead of those that just meet the dreams of product managers.
Use product launch teams to manage all aspects of the new product cycle, from focus groups through production planning to markets and distribution channels served.
Market new products with hands-on demonstrations when possible, and don't rely solely on published marketing materials to tell the story.
Make sure new products are compatible with previous versions.
Provide incentives and spiffs for outside salespeople to get on board with the launch.
Provide a complete launch package to distributors.
Eliminate some of the risk of investing in new products.
Compensate reps and distributors for the “missionary work” they do in creating demand for new products.
Make new-product launch and marketing kits an SKU so the sales force can order them as that market mandates.
Give electrical distributors sufficient time to plan a new product marketing campaign instead of just notifying them 30 days before the launch.