Editor's note: Electrical Wholesaling is updating its popular “Electrical Marketer's Survival Guide” for publication later this year. As part of this project, EW's editors will be running excerpts from it over the next few months, starting with its Market Report 101 series. This month's article will explore the residential market.
With the historically bad market conditions in the homebuilding industry and building starts at or below historically low levels in many markets, this may seem like an odd time to publish an article on sales opportunities in the residential market. But despite the still-dire picture on the national scene for the homebuilding industry, as you will see in this article, some metropolitan areas are starting to enjoy a bounce in residential building activity from the depths of the recession.
To give you an idea of just how bad market conditions are in the residential market, check out the chart on this page. In a “normal” year during the residential market's heyday, it wasn't uncommon to see single-family housing starts top one million, and in 2006 U.S. single-family housing starts topped out at 1.4 million new homes. Last year, there were only 471,000 single-family housing starts (down 68 percent from 2006), and the current 2011 forecast for total annual single-family housing starts by the National Association of Home Builders (NAHB), Washington, D.C., is a seasonally adjusted annual rate of 375,000 units — 74 percent off the 2006 peak.
While home builders in every metropolitan area in the United States suffered throughout the recession and their businesses are still probably in the doldrums to some degree, several markets are leading the recovery with surprisingly good growth, although off a low bottom. Builder magazine ranks the health of housing market by judging the number of building permits pulled; home sales; unemployment rate and decline; home price appreciation; and growth in the formation of households, median income and jobs. The magazine also offers some very insightful capsule summaries on market conditions in all metropolitan areas at www.builderonline.com. Not surprisingly, 16 of 2011's 20 healthiest housing markets are in Sunbelt states. According to its data, the 10 healthiest metropolitan statistical areas are (in descending order): Raleigh-Cary, N.C.; Austin-Round Rock, Texas; Durham-Chapel Hill, N.C.; Huntsville, Ala.; Gulfport, Miss.; Minneapolis-St. Paul-Bloomington, Minn.-Wis.; Houston; Charlotte-Gastonia-Concord, N.C.-S.C.; Naples-Marco Island, Fla.; and San Antonio, Texas.
All brutal and somewhat encouraging statistics aside, homebuilding is still a very important part of the overall market mix for electrical distributors. According to Electrical Wholesaling's 2011 Market Planning Guide, the residential market will account for 17.1 percent ($16 billion) in industry sales in 2011. The largest segments of the market include the new construction and renovation of single-family homes and multi-family housing units, such as townhouses and apartment buildings.
Every electrical distributor has a different take on the residential market. Many industrially-oriented distributors don't deal with it. And in many mature suburbs, inner cities or other areas where new residential construction is nonexistent or at a standstill, the residential market may not provide many sales dollars at all. However, in a fast-growing Sunbelt suburb, this could be a key market for a distributor.
What the market is depends on how you define it, too. For a residential lighting specialist that isn't into pipe and wire, the residential market means selling replacement fixtures to homeowners or a “houseful” of fixtures to a new home buyer who has the builder's lighting fixture allowance to spend.
The market for residential lighting fixtures sold through full-line electrical distributors, residential lighting specialists, home centers, hardware stores and department stores operates differently than other aspects of the electrical market, primarily because of the retail nature of this business and the fact that the customer is most often a homeowner. Despite massive competition from home centers in this market, distributors expect to sell billions in residential lighting fixtures this year.
Lighting may be the most visible segment of the residential market, but the wiring system hidden behind the walls of your home generates far more sales for full-line electrical distributors. The key products in this segment of the residential market include service-entrance equipment; load centers; circuit breakers; connectors; fittings and fasteners; wiring devices and wall plates; building wire and structured cabling systems; service entrance cable; and low-voltage wiring for home entertainment centers and man caves, plus security, sound, intercom, phone and home networking applications.
Newer to the potential product mix are products like backup power generators and photovoltaic (PV) systems. Solar panels are still very pricey for many homeowners, as a residential PV system can easily cost $30,000 or more and the ROI can approach a decade. But in regions of the country with high electricity rates, the 30 percent federal tax credit combined with lucrative utility rebate programs and local, county or state financial incentives can drive down that ROI to seven years or less. Some electrical distributors based in California, New Jersey, New Mexico and Massachusetts are all over the solar because of the local incentives in those states. These distributors include but are not limited to Munro Distributing Co., Fall River, Mass.; Turtle & Hughes Inc., Linden, N.J.; Warshauer Electric Supply, Tinton Falls, N.J.; National Electric Supply, Albuquerque, N.M. (See Aug. 2010 EW cover story); and OneSource Distributors, Oceanside, Calif. Check out the illustration on page 29 for a detailed description of the primary products in the residential market.
To make the most of the residential market, you will need to first understand how the residential market works. Distributors work closely with two key customers in this market. For those distributors that focus on new construction and renovation, it's the electrical contractor. Those companies with residential lighting showrooms focus on the homeowner. You also should get to know the builders in your market area. They work on a very tight production schedule, and the more you know about what they expect from their subcontractors, the better off you and your contractor customers will be. Builders also will sometimes buy bulk lighting fixtures and some other electrical products directly from distributors.
Depending on your region of the country, the national homebuilders may or may not have a major influence. According to Builder magazine, the 10 largest homebuilders (see chart on page 30) account for approximately 22 percent of all homes built in 2009. That's down from over 25 percent in the biggest years of the housing market. If you flip through the pages of Builder magazine or other publications aimed at home builders, you will see a surprising number of advertisements from electrical manufacturers promoting their brands. If they are interested in forging relationships with builders, you should be, too. Let's now take a look at how to build relationships with these customers and buying influences.
Keep your promises
Distributors don't have any great secrets in building relationships with electrical contractors. The biggest factor is, and has always been, service. Sure, contractors probably are more price-conscious than any other customers. And, yes, in the residential market they can get many of the products you sell from home centers. But for the long haul, contractors in your market need a dependable source for supplies. They need a distributor who may not always be the cheapest on each and every product, but is the most reliable supplier in town.
As much as and probably more than any other customer, electrical contractors need the electrical distributor to deliver the right products on time and in the right location. Whether that be a delivery to the job site or a pick-up at the counter, the electrical contractor depends on the distributor to come through. That's because contractors are on a tight time schedule at the job site. If they can't finish the wiring, it has a chain-reaction effect, holding up the sheet-rockers, painters, trim carpenters, and so on down the line. If the electrical contractor is gumming up the works on a new home, his boss at the construction site — usually the general contractor or builder — isn't going to be happy with him and may not use him in the next phase of the development. When this happens, you don't need too much imagination to figure out what that contractor will think of the electrical distributor who made him late.
If builders in your market area are offering home-networking systems in their developments, this adds another step in the construction process — and puts additional pressure on the time line. That's why many builders prefer to deal with one electrical contractor (and by extension, a sole source of power and home-networking supplies) to wire traditional wiring and home networking systems.
Don't underestimate the power of credit
Why do contractors continue to do business with distributors when they can buy so many of the products they sell from Home Depot and other home centers? Credit is definitely one of the key reasons. Electrical contractors, particularly smaller electrical contractors, value a credit line from a dependable supply source. They need credit to keep working, and those credit lines on Visa, MasterCard or the store credit cards they get at the home centers only go so far.
Sure, contractors can often be a bigger credit risk than other customers. And while every distributor has either heard of or has had personal experience with an unscrupulous contractor running up a credit line and then skipping town, these horror stories are fortunately more the exception rather than the rule. Why do contractors have financial problems? Most often it's because they fall victim to inadequate cash flow, the cyclical nature of the construction market, unscrupulous general contractors or poor business management on their own part.
Small residential contractors can turn into big commercial/industrial contractors
The saying, “From tiny acorns do mighty oaks grow,” applies directly to contractors. That new contractor in town doing a few residential service calls and trying to crack the new construction market may not add much to your company in the way of sales or profits today. But when these companies grow, they often expand past the residential market into the commercial or industrial markets. As they grow, so too does their buying power. They usually remember who did and didn't offer them credit when they were just starting out, or who helped them get their business off the ground.
Teach contractors about business basics
Electrical contractors may be wiring wizards, but they often have trouble running a business. Accounting, bookkeeping and budgeting are usually second-nature to many electrical distributors. But contractors with no business background may struggle with these basic business skills. Have contractors sit down with your financial manager to get some basic business tips. Contractors often have a lot to learn about marketing themselves, too, and if your company has a marketing person on staff, he or she may have advice for customers in this area, too. You should also encourage these customers to join community organizations like the Kiwanis or Chamber of Commerce. This will give them the opportunity to develop professional relationships with accountants, bankers and lawyers they may someday need to use in their business.
Be prepared to offer some technical help
Although contractors have been pulling building wire for so long they can do it blindfolded, if an unusual installation does come up, they need information from the distributor or the manufacturer's rep on that product. Providing technical assistance in newer markets like home theater, solar or home security can make a distributor look like a champ.
Get a grip on the technical basics
For salespeople and other employees new to the electrical market, or for those employees not too technically inclined, studying the residential market is helpful because the technical functions of these products are easier to understand than those in the commercial and industrial markets.
The first step in learning more about the fundamentals of electricity is to take a course or read one of the many books published on this subject. Manufacturers or trade associations also often provide training material on this area. The Electrical Products Education Course (EPEC) is a great training program offered by the National Association of Electrical Distributors (NAED), St. Louis. You can find more information on EPEC at www.naed.org. BlueVolt, Portland, Ore., also offers a ton of technical training on products at www.bluevolt.com.
Once you feel comfortable with electrical theory, the next step is to get a feel for how these fundamentals actually work in an electrical system. Home wiring is a great place to see these fundamentals in action because residential systems use relatively basic electrical circuitry.
Work with builders to alert your contractor customers to opportunities in the home-networking market
As mentioned, home builders may be looking for one contractor to handle power wiring and home theater or home networking systems for computers, home entertainment and security systems. If you can supply home-networking supplies along with traditional products, you can increase your sales-per-house.
Use what you learn in the residential market to build sales with other customers
The residential market is important to study because it offers a solid foundation in the customer-service basics that so often determine the distributor of choice in a particular market.
When dealing with homeowners, product knowledge separates distributors from home centers
The rules of the game may be somewhat different in the residential lighting market. But product knowledge is still a key value-added service that distributors can offer, whether they are selling fuses or chandeliers. This is an issue in the residential lighting market because of competition from home centers. It can be tough to compete with home centers on price for many of the basic fixture styles. To survive, many residential lighting distributors have focused on areas where home centers are weak such as the high end of the market, lighting design and on offering knowledgeable sales assistance.
Products with an Extra Edge
Many of the electrical products used in residential construction haven't changed much, but over the past few years, several relatively new products designed for the residential business have hit this market. You should make sure your contractor customers are aware of them. The most popular new products with electrical contractors these days seem to fall in three distinct categories: energy-saving products; labor-saving tools that allow them to save time, money and effort on the job site; and products required by the National Electrical Code or federal, state or industry safety regulations. Here are some examples of these products.
Arc-fault circuit interrupters (AFCIs)
To reduce the number of electrical fires caused by parallel arc faults in branch circuit wiring, the National Electrical Code (NEC) requires arc-fault circuit interrupter (AFCI) protection device in an increasing number of residential applications. The AFCI protection device must de-energize and protect the entire circuit from an arc fault, according to Mike Holt, NEC consultant for EC&M magazine. The only device that can do this is an AFCI circuit breaker. For more information on AFCIs, check out Mike's website at www.mikeholt.com, and talk with your local electrical inspectors about where they are required in your market.
Surge suppression equipment
Because so many homes are loaded with sensitive electronic equipment, your customers may be asked to install surge suppression equipment at the service entrance.
Generators and backup power equipment
Homeowners are more conscious about keeping a steady supply of power for their homes, and it's becoming more common for them to install generators or other backup power equipment.
Home networking systems
One of the most exciting new opportunities for your customers in the residential market is the installation of home networking for computers, security and home entertainment applications.
NEC Article 300.4(D) requires that building wire be placed 1 1/4-inch from the edge of the stud to protect it from drywall screws or nails.
Metal-stud boxes and bushings. In some other areas of the United States, metal-stud construction has replaced wood studs as the primary frame of the building. This has created new sales opportunities for the bushings required to protect the cable from the sharp edges of the stud and for special boxes for steel-stud construction.
Weatherproof outlet covers
NEC regulation 410.57 requires the use of outlet covers for outside receptacles to protect them from the elements.
More areas than ever in the home must now be protected by ground-fault circuit interrupters (GFCIs). These areas include bathrooms, kitchens, basements and outdoor receptacles. Check out the product offerings from manufacturers of wiring devices and GFCI circuit breakers. A related NEC rule calls for GFCI protection of portable cords, which can be a nice add-on sale.
Hard hats, safety goggles and signage are just a few of the many safety products you can sell to residential electrical contractors.
Dimmers and dimming systems offer the opportunity to sell more than just a wall switch. For instance, contractors can “sell up” on residential service calls to replace a dimmer that's burned out. Some manufacturers provide demonstration dimming systems for contractors to bring out on these service calls.
With their white, clear light, halogen lamps have become popular for downlights, track lighting and in undercabinet lighting applications for kitchens and home offices. You should also get a sense of whether or not electrical contractors and builders are interested installing LEDs in residential applications.
This product can be sold in upscale residential construction projects in the northern climates where snow and ice is a problem. Snow-melting systems are installed beneath walkways or driveways to keep these areas passable during colder weather.
Electrical distributors have good reasons to carry tools that can save time and labor on the job. Contractors have an innate love for tools and are always interested in what's new in this area. Tools are also an excellent product line to merchandise in the counter area because many customers buy them on impulse.
Solid sales opportunities abound in the residential market if you stick to the basics of customer service and explore these hot product areas.
Next month: Commercial Market 101
Key Sales Opportunities in the Residential Market
- Pole-line hardware
- Service entrance cable
- Utility meters
- Load centers
- Circuit breakers
- Panel-mounted surge suppressors & AFCIs
- Photovoltaic panels
- Building wire
- Security, coaxial, intercom, phone & computer cabling
- Portable cord
- Wiring devices & wall plates
- GFCI & AFCI wiring devices or circuit breakers
- Occupancy sensors
- Wire connectors
- Surge suppressors
Protect & Direct
- Cable fittings
- Cable fasteners
- Nonmetallic & metallic conduit
- Receptacle boxes
- Junction boxes & covers
- Weatherproof covers for outdoor outlets
Misc. Electrical Loads
- Electric heaters
- Under-tile heating systems
- Snow-melting equipment for driveways & walkways
- Central vacuum systems
- Ceiling fans
- Ventilating equipment
- Intercom systems & doorbells
- Home networking systems
- Smoke & CO2 detectors
In the Truck
- Fittings, fasteners & connectors
- Cable ties & electrical tape
- Screws, nuts & bolts
- Wire lube
- Wire connectors
- Flashlights & rope
- Hard hats & foul-weather gear
- Work clothing, gloves & boots
- County & state maps
- Water coolers & lunch boxes
Tools of the Trade
- Tool belts
- Tool boxes
- Tool buckets
- Metering equipment
- Hammers & saws
- Power drills
- Reciprocating saws
- Measuring tape
- Wire cutters
Builder Magazine's 10 Largest Home Builders
|Rank||Company||Total Closings in 2009||Total 2009 Revenue (in millions)||Regions of the country|
|1||D.R. Horton, Fort Worth, TX||18,164||$3,872||Midwest, Northeast, South, Southwest, West|
|2||Pulte Homes, Bloomfield Hills, MI||15,013||$4,084||Midwest, Northeast, South, Southwest, West|
|3||Lennar Corp., Miami||11,478||$3,119||Midwest, Northeast, South, Southwest, West|
|4||NVR, Reston, VA||9,042||$2,756||NA|
|5||KB Home, Los Angeles, CA||8,488||$1,825||South, Southwest, West|
|6||Hovnanian Enterprises, Red Bank, NJ||5,659||$1,709||Midwest, Northeast, South, Southwest, West|
|7||Habitat for Humanity International, Americus, GA||5,294||$1,400||Midwest, Northeast, South, Southwest, West|
|8||The Ryland Group, Calabasas, CA||5,129||$1,284||Midwest, Northeast, South, Southwest, West|
|9||Beazer Homes USA, Atlanta, GA||4,411||$1,006||Midwest, Northeast, South, Southwest, West|
|10||Meritage Homes Corp., Scottsdale, AZ||4,039||$970||South, Southwest, West|
|Source: Builder magazine's most recent ranking of the Top 100 Builders (2009 sales data)|