Over the past year, we've written extensively regarding the advent of private labeling in the electrical industry. We've surveyed and interviewed distributors, manufacturers, manufacturer reps and customers in an effort to understand the impact that is being, or will be, felt within the industry. Throughout our research, as chronicled in a series of articles for Electrical Wholesaling, we have shared our research and tried to present others' opinions in a coherent fashion.

While some predict that private labeling will become a significant component of the electrical industry and that a plethora of distributors will undertake such initiatives, we've concluded that private labeling may not be the growth engine that many predict and fear it will be.

Yes, private labeling can provide distributors with opportunities to compete, enabling them to sell lower-cost products to gain market share and potentially generate significantly higher gross margins. And yes, there will be distributors who will develop their own brands, especially regional and national distributors. But it will not become a strategy of choice for a vast majority of distributors.

The challenge to private labeling is that to effectively develop a private label initiative requires:

• The ability to forecast product demand

• A willingness to manage potential product liability

• Enhancements in supply chain logistics

• Treating procurement as a strategic asset and seeking sourcing relationships.

• Development of brand identify for the product offering. This brand may differ from the distributor's name (i.e. Wal-Mart offers Great Values as one of its brand names). Some distributors are adroit marketers, others are “challenged” and would need to invest in people or outside resources.

• Potentially becoming involved in product development or, at a minimum, commiting to continuously identifying and sourcing product needs.

• A significant financial investment in product design, inventory and marketing.

  The private labeling topic has been masking three potentially more important issues:

• The desire to reduce procurement costs, especially in light of the fact that many manufacturers openly tout that they source products.

  Large distributors have the financial ability to purchase from the same or similar sources as name-brand manufacturers. Smaller distributors are seeking alternatives to remain competitive.

• Manufacturer brand equity is at an all time low. Our research confirmed that in many instances, customers are brand agnostic. In the words of Sara Lee CEO Brenda Barnes, in commenting about private labeling in the grocery industry in a recent Wall Street Journal article, “The challenge for a branded company like ours is that you have to be No. 1 or No. 2 in your category, because why would a retailer want to carry 10 products in a category?”

  If a manufacturer can not engender brand preference among influencers, contractors, end-users or consumers, their products are a commodity. Assuming comparable quality, price will win.

• Price, as a component of the buying decision, is more important than ever. Some of this is due to the fact that the buyer does not perceive significant product differences. Some is caused by over-capacity within distribution, where the purchasers know they can leverage one distributor against another to get a lower price. Another reason is a distributor's need to generate cash flow to keep their doors open. In essence, manufacturers and distributors seek ways to reduce prices to their customers, and the customers willingly take advantage of the opportunity.

While some predict that up to 33 percent of electrical distributors (about 1,000 distributors based on an estimated 3,200 full-line distributors in the industry) will offer private labeling by 2012, our contention is that no-name or unbranded products (generics) will become more of a threat to the industry than private-label products.

Consider that there are currently only 200 distributors with revenues greater than $25 million in the electrical industry. For the 33 percent prediction to come true, this would mean that 800 small distributors would develop their own brands.

Marketing groups represent approximately 1,000 electrical distributors. Unless the marketing groups become involved in private labeling, the odds of many of their members individually undertaking this initiative with its expense and liability is unrealistic.

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© 2007 Penton Media, Inc.