With Warren Electric's departure from the Southwest's electrical market last year, the eyes of Texas are upon the power struggle now underway.
Once a land of seemingly boundless potential where some distributors became millionaires after just one year in business, the Texas market — and specifically Houston — is being rocked by change.
The state's industrial base has eroded. Enron and Encompass, one of the nation's largest electrical contractors, went bankrupt. Texas' petrochemical business and commercial construction dried up, and after several years, are just now showing glimmers of hope. Along with the worst economy in over a decade, Texas' electrical wholesaling industry is grappling with the collapse of Warren Electric, which had been a powerhouse in the market since the early days.
In July 2002, as part of a company-wide restructuring plan, Warren Electric sold eight branch locations in the north and central part of Texas to The Reynolds Co., Dallas. After Warren Electric filed Chapter 11 in October 2002, two other distributors purchased pieces of the company, run for many years by the legendary J.R. Thompson and in more recent years his daughter, Cheryl Thompson-Draper.
Elliott Electric Supply of Nacogdoches, Texas, was one of the distributors vying to buy Warren Electric, but Allen-Bradley rejected its bid at the eleventh hour. The Reynolds Co., which had been an Allen-Bradley distributor for 16 years, picked up the Allen-Bradley franchise for locations in the Gulf Coast region of Texas and Louisiana. Reynolds had also picked up the Allen-Bradley Area of Primary Responsibility (APR) for the eight branches it acquired from Warren Electric.
Then, in a blockbuster acquisition that surprised many industry insiders, Summit Electric Supply, Albuquerque, N.M., bought Warren Electric's domestic operating assets. The deal included 12 domestic branches and one South American location in an acquisition that more than doubled Summit's locations. The deal brought Summit into the Gulf Coast area of Texas, and added locations in Louisiana and a location in Venezuela.
Sonepar bought Warren's Caribbean operations this year.
Meanwhile, Texas electrical distributors that didn't get to play the Warren-acquisition game are still coming up winners. Elliott Electric is reportedly taking some of the market share that's been up for grabs in the Texas industrial arena, but several sources say Wholesale Electric Supply Co., L.P., Houston, may be the biggest winner.
“Warren was a $120-million dollar business in this market,” says one Texas electrical distributor who asked not to be quoted. “If you look at Reynolds and Summit together, maybe they are $80 million or $90 million. So $30 million went somewhere. It got spread out a lot of places, but Wholesale Electric was probably the company to benefit the most.”
Although Wholesale Electric is picking up some of the large blanket contracts and other business that once belonged to Warren Electric, Clyde Rutland, CEO of Wholesale Electric, believes Riley/WESCO, GE Supply and Hughes Supply are also significant players in the market.
Rexel has also emerged a winner in the Texas shakeout, says John Peterson, who saw the Texas market up close when he was president of Warren Electric during the 1990s, and in his 15 years with Cooper Industries and Crouse-Hinds. Now vice president of sales, Gulf Coast region for EGS Electrical Group, Skokie, Ill., Peterson attributes Rexel's Texas success to its “very strong local management.”
Peterson says the “top-tier” distributors that have emerged all handle robust project quotations and management capabilities and national contracts. In the industrial market, he sees Wholesale Electric; the Gulf Coast locations of Rexel, run from Dallas; Dealers Electrical Supply, Waco, Texas; and potentially Reynolds as “first-tier distributors.” Dealers recently signed a contract with ConocoPhillips, Houston, across Texas and Louisiana. Winn-Lange Electric Inc., Houston, is also a key player in the industrial arena, according to several sources.
Some distributors have distinct niches. Peterson says Wildcat Electric Supply Corp., Houston, does “a great job” in the marine drilling market and with medium and small industrials, and that the Houston location of Turtle & Hughes Inc. has a niche in the engineering constructor market.
In the commercial market, he says key players include Elliott Electric and Winn-Lange. Crawford Electric is “coming on” in Houston's commercial market, Peterson says. “They weren't even in Houston five years ago. They parachuted in from Dallas and hired Jeff Metzler (company president) and some other talented people, and they're doing a great job in the commercial contractor market.”
The name of Elliott Electric Supply comes up often as a winner in the shakeout. Although Bill Elliott was disappointed Allen-Bradley didn't approve his company for the line, he still sees a lot of opportunity. As Reynolds and Summit digest their acquisitions, Elliott sees other Texas distributors grabbing new market share. Elliott says his company has been able to pick up some business from Hoffman and Crouse-Hinds, and has even serviced customer requests for Allen-Bradley products by buying equipment from other Allen-Bradley distributors and supplying it to customers.
“If you took the Allen-Bradley business and the other business that Warren wrote in total in the Houston market, they were a big influence,” he says.
Several sources say as Summit and Reynolds blend their acquisitions into their companies and get acclimated to the new market realities, they will be forces to reckon with. All eyes are upon how successfully Reynolds handles the Allen-Bradley line in the Warren branches it acquired and several new branches it recently opened.
Reynolds, which has been an Allen-Bradley distributor for almost 17 years, got the Allen-Bradley Area of Primary Responsibility (APR) for the eight branches in north Texas it acquired from Warren Electric in July 2002. In December, the company announced that it would open seven new locations along the Gulf Coast, from Houston to New Orleans, where it sells Allen-Bradley products.
In addition to opening new branches, Reynolds has had to close or consolidate some branches as part of its acquisition of the Warren branches. The company consolidated its Tyler and Longview branches into one location in Tyler, and it consolidated Warren Electric's Dallas location into its own Dallas location. It also sold a branch in San Antonio to Mid-Coast Electric Supply Inc., Victoria, Texas, in February 2003.
Acquiring the Warren locations has proved to be a challenge in a down business climate, said Walt Reynolds, president of Reynolds. He says Texas was an attractive market from the early 1990s through 2001, but since 2001, the market has fallen off significantly. “I don't think there has been another region of the country that has been affected as much as Texas. It's a good market, but it's not near what it was.”
Reynolds says there's plenty of industrial business “up for grabs” outside the Allen-Bradley products resulting from the Warren Electric change.
Summit did not return phone calls by press time, but according to several Texas distributors, the company is busy reducing overhead, condensing its company and closing some locations. “They are in a changing mood at the present time,” says Wholesale Electric's Clyde Rutland. “When they settle down in a few months, I'm sure they are going to be a factor in the commercial and to some extent in the industrial market.”
THE NEW LOOK OF TEXAS
Along with the acquisition activity, one veteran of the Texas electrical market said the current business climate is unprecedented in Texas' industrial market, and is quite different from the market's boom times in the late 1970s.
“You could open your doors and get certain key franchises and you were a millionaire within a year because there was so much demand. People were stumbling over business,” says John Peterson of EGS. In the early 1980s, he says some of the companies that opened up during the late-1970s began to flounder, and that many eventually ended up shutting their doors. Then business ramped up between 1983 and 1984, and Houston went through about 14 years of very steady growth. It was a profitable time where distributors and manufacturers got lulled into thinking the petrochemical economy on the Gulf Coast was “bulletproof,” Peterson says.
The bankruptcy of Warren Electric was the most prominent example of a distributor that thought the economy was bulletproof and was not able to make it, he says.
He says another big change in the Texas market are lower inventory levels. Electrical distributors carried much bigger inventories 10 years ago than they do today. Today, because of an increase in the number of distributors who carry a given manufacturer's line, a distributor can't afford to stock much beyond “AA” and “A” items.
Ten years ago, manufacturers were more exclusive with their lines. At that time, many of the major manufacturers had a handful of distributors carrying their line. Also, ten years ago, Peterson says Texas distributors could count on a major industrial or a petrochemical plant to have one major turnaround a year, where the plant is shut down to do critical maintenance. Every turnaround resulted in significant expenditures for electrical products, including conduit fittings, building wire and cable and lighting. For that reason, distributors could speculatively invest in “C” and “D” products. Today, turnarounds are being scheduled further and further apart because of the stress in the economy and the cost reductions at the major users, he said.
Along with the stateside petrochemical accounts, Peterson says Texas distributors and electrical manufacturers must now service the facilities these accounts have outside the Gulf Coast.
“It used to be you could focus on one or two plants in the greater Houston market and make a pretty good living. But today those same customers are requiring that you be able to service them, not only throughout the Gulf Coast, but globally.”
Peterson also says that the many Houston-based engineering firms that used to focus on U.S. petrochemical work now work on plants around the world — where Texas distributors may or may not be a factor.
“There have been a handful of distributors that have done very well with the Houston-based engineering firms that design petrochemical projects not only on the Gulf Coast, but globally. But we've seen more of the plants being built in Asia and in the Mideast and Latin America, and we're seeing the advent of International Electrotechnical Commission (IEC) standards. So more of those projects require that distributors and manufacturers be able to supply both IEC and NEC-type products. It's really challenged a lot of us to get up to speed on IEC and be able to service the global requirements today of engineering accounts,” he added.
TEXAS MARKET BY THE NUMBERS
ELECTRICAL SALES FORECAST
Texas' 2003 forecast of $6.68 billion in sales through electrical distributors is second only to California's forecast of $12 billion in sales.
Texas' estimated 66,341 employees at electrical contracting firms is second only to California, which has 93,437 electrical-contractor employees.
With 149,000 new housing units started between July 2001 and July 2002, the Lone Star state led all states in new housing starts, according to the U.S. Commerce Department.
With a population of more than 18.7 million people, Texas is the second most populated state in the United States, second to California. By 2025, the U.S. Census Department expects the state's population to grow to 27.2 million people.
Source: Electrical Wholesaling's Market Planning Guide for electrical sales forecasts and electrical contractor employment; U.S. Census department and U.S. Department of Commerce for housing starts and population.
J.R. THOMPSON'S WARREN ELECTRIC
Many of the changes in the Texas market are linked directly to the collapse of Warren Electric, which had been a fixture to the electrical landscape for more than eighty years.
Warren Electric's patriarch, J.R. Thompson, who ran the company until his death in 1989, is an electrical-industry legend in his own right. Thompson was a benevolent dictator who inspired fear and awe from anyone who survived a negotiation with him. According to a 1995 Electrical Wholesaling article on Warren Electric, when a supplier's salesperson called on Thompson for the first time, Thompson would often pull a pearl-handled revolver from a drawer and then place it on his desk. Some say the revolver reminded salespeople that Thompson's time was valuable; others believe Thompson put it there so the salesperson would know who controlled the negotiation.
Despite his sometimes gruff exterior, J.R. had a heart of pure gold and was a well-known benefactor of many Texas charities and the Texas A&M Industrial Distribution program.
For many years, Warren Electric was one of the most highly respected electrical distributors in the United States. Thompson knew what his customers needed, stocked that electrical material in quantity — and commanded a premium price for having those products in stock when and where customers needed them. With the Allen-Bradley line, Warren Electric dominated the Gulf Coast's petrochemical industry during some of its biggest growth years. The company made tons of money, and by the late 1990s it had annual sales well over $200 million and was one of the 20 largest electrical distributors in the United States.
However, time took its toll. After Thompson died, a battle ensued for the control of the company. His wife, Claude, and daughter, Cheryl, disputed the claims of two of the executors of J.R.'s estate to control the company. After winning a bitter legal battle in which they won 100 percent control of Warren Electric, Thompson's wife and daughter devoted themselves to restoring the proud company's position in the market.
But the Texas market was changing in the mid-1990s. The recession of the early 1990s had hurt the company. The oil industry boom was over, so there wasn't as much construction of oil refineries and other petrochemical facilities in the Gulf Coast. Competitors like Rexel from offshore and many in-state distributors began establishing a presence at some of the industrial and large commercial accounts that Warren previously had locked up.
Over the last few years, the company struggled financially. Last year, it sold its branches to three distributors: Reynolds Co., Dallas; Summit Electric Supply, Albuquerque, N.M.; and Sonepar, Berwyn, Pa.