Editor's note: This article is excerpted from An Electrical Marketer's Survival Guide, a book and training program Electrical Wholesaling will publish next month. For information on purchasing this book, call 800-543-7771.
The 250 largest electrical distributors and thousands of much smaller electrical supply houses are living in a jungle of competitors and alternate channels.
At the foundation of any electrical company's strategic marketing plan is an objective analysis of the trends shaping the electrical wholesaling industry and the impact those trends will have on companies of a size and customer focus similar to your own.
This article will help you analyze the macrotrends shaping the many different types of distributors and alternate channels that your manufacturers use to sell products in the electrical marketplace.
One terrific tool to help you do this is Electrical Wholesaling's "250 Biggest" listing (beginning on page 28). Each year, EW's "250 Biggest" provides the electrical industry's best reference of the largest full-line electrical supply houses in the U.S. It lets you track which companies are growing fastest and offers market intelligence such as sales and employee counts that you can use to analyze competitors or benchmark your own company against distributors of similar size.
Here are the key trends shaping the 250 Biggest and having an impact on other distributors--and alternate channels--of all sizes: Merger mania. The large national and regional chains seem to use EW's 250 Biggest as a shopping list of potential acquisitions. At least 21 distributors on the past two listings have been acquired by companies such as Consolidated Electrical Distributors, Inc., Westlake Village, Calif.; Hughes Supply, Inc., Orlando, Fla.; Rexel, Inc., Coral Gables, Fla.; and WESCO Distribution, Inc., Pittsburgh, Pa.
Branch expansion. The largest distributors in the U.S. have been starting up or acquiring branches at an amazing rate since the 1970s. Some interesting statistics support this fact. In 1970, the 100 largest electrical distributors had 936 branches, compared to the 3,379 branches the 100 largest distributors now operate. That's an increase of 2,443 locations. Another indication of this remarkable growth is that the five largest distributors today have more locations than the 100 largest distributors had 28 years ago when EW did its first listing of the industry's largest distributors.
Buying/marketing group power. Many independent distributors have joined one or another of the industry's five buying/marketing groups so they can compete on purchasing with bigger companies and gain the marketing expertise and networking opportunities these groups offer. More than 100 companies on this year's 250 Biggest list belong to one of the industry's five buying/marketing groups--Affiliated Distributors, Inc., Wayne, Pa.; Imark Group, Oxon Hill, Md.; Equity Electrical Associates, Inc., East Walpole, Mass.; EDN, Beachwood, Ohio; and United Purchasing Association, Sanford, Fla. More than 600 distributors belong to these groups altogether, and the total sales volume of all buying group members is at least $16 billion. (Not all of that $16 billion flows through the respective groups--as a general rule of thumb, about 30% of a member distributor's total sales will flow through his or her group.
Manufacturer myopia. Despite the fact that over the last decade, the 250 largest distributors have never controlled more than 44% of the $70 billion-plus electrical market, many manufacturers seem to focus their attention on these companies and overlook the other 3,500 smaller distributors that account for the bulk of the industry's sales.
There's no question that many or maybe even most of the industry's more progressive distributors can be counted among the top 250, but there will still be an important role for the smaller niche players that provide a tightly focused package of services.
Alternate channels. While full-line electrical distributors, like the companies on EW's 250 Biggest list, are the most popular path to market for electrical manufacturers, they use many other channels, as you can see in the "Electrical Pyramid" on page 46.
Your view of the strength of these alternate channels in the electrical marketing industry depends on your business perspective. An industrially oriented distributor might be well aware of W.W. Grainger, Inc., Lincolnshire, Ill., and other high-tech specialists, but not have to worry about the residential lighting fixtures sold through home centers or lighting showrooms. On the flip-side, a small distributor that depends on electrical contractors for most of his business may struggle against The Home Depot, Inc., Atlanta, Ga., and other home centers, but walk right past Grainger or automation specialists.
The need for market intelligence. In EW's March issue, we used the Electrical Pyramid to show how full-line electrical distributors can analyze the various forms of competition in their local market areas and how to develop a package of value-added services to compete with them. This article provides information on what's happening with several of the key competitors and gives updates on trends shaping many of the other alternate channels.
The "Electrical Pyramid" can help you analyze each of the many alternate and traditional channels that make up the electrical marketing industry. As highlighted in the landmark study on these alternate channels, "Facing the Forces of Change 2000," which was published several years ago by the National Association of Wholesale-Distributors (NAW), Washington, D.C., the common thread linking these alternate channels can be summed up in one word: specialization. These alternate channels all specialize in either a product area, like lamps, datacom products, industrial controls, wire and cable or motors; customer segments, like home centers; or marketing techniques, like catalog houses, or, in a different sense, buying/marketing groups. The Electrical Pyramid illustrates the profusion of different electrical product marketing channels. While dozens of individual channels exist today, the electrical marketing industry can be sorted into several major channels or layers of distribution:
*Full-line distributors of electrical supplies;
*Retail or consumer-based channels, such as home centers, super stores, catalog sellers and retail lighting showrooms;
*Service businesses that get into the sale of electrical products as an adjunct to the function they perform--energy service or demand-side management (DSM) companies, motor repair shops and lighting maintenance companies;
*Distributors from other wholesale trades, like plumbing or industrial supplies that deal in electrical products as well;
*Manufacturer-based channels, such as manufacturers selling direct and buy/sell reps;
*Other channels such as the gray market.
Within each of these layers, companies may mix and match approaches. A traditional electrical wholesaler may run a catalog business or have a factory automation division. A small lighting manufacturer may operate as a distributor as well. There are a number of smaller alternate channels, too, that really don't fall under any one category. Each of these channels has a history all its own, a different take on the manufacturer-rep-distributor-customer equation, and its own competitive problems with other channels. Let's take a more in-depth look at each of the various channels to market:
Full-line electrical distributors--
Let's start with the largest channel: Full-line electrical distributors. These distributors can be divided into different sub-channels, or types of companies, each with its own idiosyncrasies. There are four national chains; at least 10 sprawling "super-regional" chains; 100-plus regional chain (five or more branches) operations; and thousands of companies with from one to four houses.
In the full-line distributor channel, one must also consider the independent manufacturers' reps that a growing number of manufacturers rely on to take their products to market. For instance, about 1,800 manufacturers sell electrical/electronic products either partially or wholly through over 600 members of the National Electrical Manufacturers Representatives Association (NEMRA), Armonk, N.Y. There may be an additional 2,000-plus other reps of electrical products that are not NEMRA members.
Product focus: For contractor-oriented distributors, a broad line of construction-related electrical/electronic products for new construction and renovation work in residential, commercial, industrial, institutional and government applications. Industrially oriented distributors tend to have motors, drives, controls, automation systems and other products for the installation and repair of manufacturing equipment.
Primary customers: Electrical contractors, plant or building maintenance personnel, purchasing agents across a wide range of businesses.
Approximate number: 7,000 companies throughout the U.S.
National association: Approximately 700 companies are members of the National Association of Electrical Distributors (NAED), St. Louis, Mo., 314-991-9000 The introduction to EW's "250 Biggest" on page 26 and the article "50 Ways to Add Value," (EW, March 1998, p. 41) provide additional information to size up the role of full-line electrical distributors in the market.
There are several kinds of hybrid distributors in the market. Here are some snapshot overviews of two of the largest and most influential:
Anixter Brothers, Inc.--
Because of its size, with well over a billion dollars in wire and cable sales, and its position in the fast-growing datacom market, Anixter can be considered a market channel unto itself. Founded in 1957, this 5,600-employee company continues to break new ground in the datacom market. Some industry observers say this company and Graybar Electric Co., St. Louis, Mo., are the only two distributors in the datacom market with a national presence. All of the other distributors tend to be more regional in nature. While the company is well-known these days for its expertise in the datacom market, when Alan Anixter and his brother, William, founded the business 41 years ago, the company concentrated on building wire, power cable and control wiring. The company has survived the ups and downs of the construction-oriented wire and cable market and flourished in the electronic wire and cable arena.
Product focus: Virtually all wire and cable, with a particularly strong emphasis on datacom cabling products.
Primary customers: Electrical contractors and end users in all commercial, industrial, institutional and government facilities.
Number of locations: 180.
Estimated sales volume: $2.5 billion in 1996 sales.
W.W. Grainger, Inc.--
No one else in the electrical marketing industry does business quite like Grainger. From the satellite dishes on top of its 350 locations that beam orders back to its Illinois headquarters, to its sophisticated order-handling and next-day-delivery shipping systems, Grainger has embraced some of the cutting-edge technologies of our time and put them to work in the marketplace. Its Web site at www.grainger.com is one of the best efforts of any in the distribution category, with a terrific search engine and true online ordering capabilities. The company estimates that 70% of all U.S. businesses are within 20 minutes of a Grainger branch.
Product focus: Historically, a wide range of electrical, industrial, safety and related products for maintenance and repair operations for the MRO market; more recently a focus on energy-efficient electrical products and construction-oriented products.
Primary customers: Industrials and now electrical contractors.
Number of locations: 350.
Estimated sales volume: $4.13 billion in 1997 total sales.
After full-line electrical distributors, the next most visible way for electrical products to get to market is a huge alternate channel that accounts for at least $5.6 billion in sales. According to the National Retail Hardware Association (NRHA), Indianapolis, Ind., in 1998 home centers will sell about $4.3 billion in electrical products and hardware stores will add another $1.3 billion in electrical sales. Also in this channel are sales through the 3,000-plus independent retail lighting showrooms in the U.S.--as well as sales of lighting fixtures through department stores and furniture stores.
The Home Depot, Inc.--
Because of its size and stature as a channel for electrical supplies, like Anixter and Grainger, Home Depot is a distinct marketing channel. Although most electrical distributors seem to have figured out how to compete with Home Depot and the other retail competitors, this company still has a huge impact on the electrical market. An estimated 6%-8% of the company's $24.1 billion in 1997 sales are in electrical products, which would rank it among the 10 largest distributors on EW's top 250 list.
While it's true that a healthy percentage of these sales came from residential lighting fixtures and ceiling fans--areas that don't concern all of the companies in other electrical marketing channels--that's still a huge pile of product.
Product focus and primary customers: Home owners and small contractors.
Number of locations: 624 (U.S. and Canada).
Estimated sales volume: $24.1 billion in 1997; $1.4 billion in electrical products.
While Home Depot gets the lion's share of attention, the other large home centers are a significant factor in the electrical marketplace, too. Lowe's Co., Wilkerson, N.C., is a strong and still-growing player, with 446 stores and $10.1 billion in sales last year.
Some of the other large home centers have had it even tougher than electrical distributors competing with Home Depot. In the last two years, several of the largest home centers, including Payless Cashways, Inc., Kansas City, Mo.; and Builder's Square, San Antonio, Texas, have run into financial trouble. In fact, the 10 largest home centers probably sold somewhere around $3.6 billion in electrical products last year, and all estimates point toward even greater growth in electrical product sales in the future--particularly as these companies beef up their inventories for professional contractors. Sales to professionals account for almost 25% of all products sold through the 10 largest home centers, according to National Home Center News.
While the home center industry remains relatively fragmented, the large players do most of the sales, according to National Home Center News.
Product focus: According to the National Retail Hardware Association (NRHA), Indianapolis, Ind., electrical products account for 4.6% of sales in a product mix that includes building materials, lumber, hardware, paint and home decorating supplies, plumbing, heating and cooling, hand tools, lawn and garden supplies, housewares, sporting goods, automotive supplies, major appliances and home entertainment.
Primary customers: Home owners and small contractors.
Number of locations: 500-plus.
National association: National Retail Hardware Association (NRHA), Indianapolis, Ind., 317-290-0338.
Electrical products are one of the core product groups for hardware stores, and most of these retail outlets will have at least one or two aisles of the most commonly needed electrical supplies. In fact, electrical products account for 10.3% of the average hardware store's total sales, according to the NRHA. Hardware stores don't target electrical contractors and other professional contractors as much as home centers, although it's quite common to find some tradespeople in hardware stores picking up a few items they forgot or that they need for weekend jobs when they are moonlighting.
The hardware distribution industry is much more consolidated than the electrical wholesaling industry, and many local, mom--and--pop hardware stores are now aligned with one of the large chains or buying cooperatives, such as Cotter & Co., Chicago, Ill.; Ace Hardware, Oak Brook, Ill.; or ServiStar, Inc., Butler, Pa.
Hardware stores probably face more competition from home centers than any other type of business, because of the similarity of product lines. Some of these companies have resorted to interesting positioning strategies to win back their market such as moving closer to home centers to take advantage of all the customer traffic they generate. These stores often promote tool repair services, tool sharpening or propane tank refilling, some of the value--added customer services their home--center competitors may not provide for the products they sell.
Product focus: With the exception of lumber and some building supplies, hardware stores carry many of the same products as home centers.
Primary customers: Home owners.
Number of locations: Over 20,000.
National association: National Retail Hardware Association (NRHA), Indianapolis, Ind., 317-290-0338.
To be continued.