Distributors had two good back-to-back years in 2004 and 2005, with total industry sales up 6.3 percent and 7.2 percent respectively. It's clear the electrical industry's business cycle is now in the upturn phase.

Over the past 30 years, electrical industry cycles have lasted anywhere from six to 10 years measured from trough to trough. We've had a few mini-downturns, but only four major recessions: 1975, 1981, 1991 and 2001.

In terms of severity and length, the 2001 downturn was the worst since 1975. The last year of the recent downturn was 2003. If history repeats itself, we still have until 2008 at the earliest before the next downturn or slowdown.

Let's take a look at what DISC expects to happen for the rest of this year and through 2007. If the economy performs as we expect, then it's a straight shot for industry sales to grow close to 9 percent this year and 6 percent in 2007. We would then have a three-year string of increasing growth rates: up 6 percent in 2004, 7 percent in 2005 and almost 9 percent this year, or cumulative growth of more than 20 percent over that time frame.

Looking ahead through 2009, DISC expects industry sales to continue to advance but at a slower rate in the 2008-to-2009 time frame. In particular, we are forecasting unexceptional increases of less than 1 percent in 2008 and 2009. This sounds like the cycle is running out of steam.

But keep in mind we are trying to “divine” the business cycle, and that's not a safe bet. We are examining our best historical experience and pushing it forward. In the absence of anything else, it gives you a sense, not of possibilities but of probabilities. Anything is possible, of course, but we are giving you likelihood, not certainty.

At the end of the day, we are confident that industry performance will be solid through 2007. However, DISC forecast data indicates industry sales will become sluggish by the second half of 2007 and flat thereafter.

At this point, you may think your service levels should be back to where they were when the market turned down — levels consistent with real market demand, right? Not so fast. Interestingly, real demand for electrical supplies and apparatus is still below the levels of 2002. In fact, our analysis shows that the market is looking for about $40.8 billion worth of supplies from distributors in 2006, net of inflation, or about 7 percent less than sales in 2002.

If you have built your service levels back to where they were in 2002, then you may be over-resourced. What this means in plain language is that the required inventory and human-resource levels, measured against the industry average, are still below what they were three or four years ago.

Furthermore, if our analysis is on target, as an industry we won't get back to the real demand levels of 2002 until 2008. We are addressing the industry overall, so some individual businesses are performing better than the average, and other businesses are not performing as well.

How do you know where you are in the overall scheme of things? You need to measure your sales performance in terms that remove the effects of inflation. If your sales in 2005 (after inflation is removed) are higher than your sales in 2002 (after inflation is removed), then you are outperforming the industry.

To take it one step further, you want to evaluate how much sales-per-employee is delivered now compared with the sales-per-employee delivered in 2002. Make sure you remove the effects of inflation before you try to make this calculation; otherwise all you are doing is measuring inflation.

I want to shift gears for a moment and make some industry comparisons from the recently released Census of Wholesale Trade. There is a lot of interest in how much in product sales moves to the end customer through the distribution channel, compared with the volume of sales moving directly through manufacturers' sales offices. This question has come up a number of times in the last few months.

In the 2002 Census, total dollar volume of electrical supplies and apparatus was $82 billion. Of that, 70 percent (or $58 billion) was through electrical distributors and 30 percent (or $24 billion) was through manufacturers' sales offices.

Let's go back 30 years, to the 1972 Census of Wholesale Trade, when the numbers were almost reversed. Of the total sales from distributors and manufacturers, fully 66 percent went to the end customer through manufacturers' sales offices and 34 percent was through electrical distributors.

The current information is an unsurprising but convincing piece of evidence that electrical distributors perform an extremely and increasingly valuable service to end customers. An arena of this size and performance will attract lots of competition that Home Depot and others are trying to penetrate. I think they have a steep learning curve ahead of them.

Here's another interesting statistic along the same vein. If electrical distributors are threatened by firms trying to enter the electrical distribution channel, who should feel most threatened? One would think smaller firms are most endangered, if anyone is endangered at all.

The average productivity of all firms (measured by sales-per-employee) in the electrical distribution channel is about $400,000 per employee. But the average productivity of the four largest firms is $540,000 per employee. The average productivity of the top 50 firms is more than $535,000 per employee. So the largest distributors are more efficient and productive, implying lower cost operations and higher profitability. It's hard for any competitor to knock these comparatively efficient guys off the hill. But as we know from Home Depot's Hughes Supply acquisition, many ways exist to penetrate an industry.

I also want to graphically show you what we expect industry growth to look like over the next few years, and why. Look for nonresidential construction to finally rebound this year with an 11 percent investment increase. At the same time, DISC expects the residential sector to dip below zero growth. In combination, this should drive the distributor-served contractor market to an increase of better than 9.5 percent.

The distributor-served industrial market is still enjoying robust performance, and DISC's outlook is for another year of high single-digit growth, fed by a solid increase in investment in equipment, excluding business spending for computers and software. All in all, for the next 18 months we should see smooth sailing, and with a little luck, even beyond.




The author is president of DISC Corp., Orange, Conn., the leading industry forecasting company in the electrical business, and a frequent contributor to Electrical Wholesaling. He can be reached at herm@disccorp.com or (203) 799-3673. Visit the DISC Corp. Web site at www.disccorp.com.