The housing market fed the construction industry its only hearty meal for a few years following 2001's recession. Even after the economy rebounded and other construction markets stabilized, the residential market continued its robust pace. Although today's housing market remains healthy, it shows signs of decline in the form of rising interest rates and material price increases.
Electrical distributors with a large concentration of sales to residential contractors recognize that the recent years' frenzied pace is beginning to slow.
First-quarter 2006 marked the fifth consecutive quarterly increase in mortgage rates. Nonetheless, U.S. builders started work on more new homes than expected in May, following three months of housing-start declines, according to the Commerce Department. Builders started homes at a seasonally adjusted annual rate of 1.957 million units, a 5 percent increase over April but 8.5 percent behind May 2005.
“There comes a point where people start to get a little more nervous about whether they're going to move or whether they're going to stay (in their current homes),” said Mark Jenson, president of Houston-based Key Electrical Supply, which did a sizable 76.2 percent of its 2005 $58.8 million in revenue with residential electrical contractors. “Does the builder keep building spec homes on the hope that he sells those? My biggest concern, probably, is commodity pricing and interest rates,” said Jenson.
Tad Godfrey, general manager for Peninsular Electric Distributors, West Palm Beach, Fla., echoed similar refrains. “With the interest rates going up and the price of materials increasing, it seems like the residential market has slowed a bit.”
Electrical contractors need to make adjustments for material price increases, said Godfrey. Contractors bound by yearlong contracts with home builders are having a tough time making ends meet.
Keith Gilbert, vice president/sales for Central Supply Co., Indianapolis, said electrical contractors in the three metro Indiana markets his company serves are struggling, too. “Copper has tripled in a very short period of time, and most electrical contractors have not been able to get an increase out of their builders,” said Gilbert.
With no control over interest rates or commodity pricing, electrical distributors must stick with the staple ingredients they've used over the years to keep their residential electrical-contractor customers satisfied.
Resi-Caterering Key Ingredients
Key Electrical Supply, Peninsular Electric Distributors and Central Supply Co. are among the standouts serving residential electrical contractors in terms of percent of sales, with 76.2 percent, 60 percent and 50 percent respectively. (See “Standouts Serving Residential Contractors” on page 34 for more stellar resi-contractor sellers.)
Rockingham Electric, Newington, N.H., also graces the list of residential-market standouts, but its business model differs. While Key Electrical Supply, Peninsular Electric Distributors and Central Supply Co. only deal with the electrical-contractor component of the housing-market customer equation, Rockingham Electric actively markets to and partners with builders, electrical contractors and end users through its four New England lighting showrooms.
Nonetheless, executives from these four companies agree there's no secret recipe for serving residential electrical-contractor customers.
“They're looking for service, they're looking for competitive pricing, and they're looking for inventory availability — the things that most contractors are looking for out of their electrical-supply house,” said Key Electrical Supply's Jenson.
With about half its residential sales going into single-family homes and half going to multifamily units, Key Electrical operates from two Houston locations but delivers to job sites as far away as Dallas, San Antonio and Austin (often to big multifamily jobs) with its fleet of 10 trucks.
According to Jenson, fill rate is more important than price to most electrical contractors working residential jobs. “When they go into a house, they're going to go in two times. They're going to go rough it, and they're going to go trim it. Any time they have to go back, then that's extra cost to them,” Jenson said.
Large inventory is fundamental for wholesalers serving residential contractors. “They're looking for every order to be filled 100 percent, and a lot of these guys buy in huge volume,” said Peninsular Electric Distributors' Godfrey. “Everything has to be delivered at certain times. You almost can't have any back orders.”
With just one location, more than 90 employees and $60 million in 2005 revenue, Peninsular Electric keeps 18 trucks on the roadways delivering to coastal communities 90 miles north and 50 miles south of West Palm Beach, covering about 2,800 total square miles. “With 18 trucks on the road, I can meet a lot of different needs,” said Godfrey. Many of the trucks go in and out of the 57,000-square-foot warehouse that holds 22,000 stock keeping units (SKUs) twice a day.
For Rockingham Electric, 70 percent of the company's products come through its central distribution center in Newington, N.H., but its fleet of 22 trucks delivers to the distributor's nine locations scattered across Maine, Massachusetts and New Hampshire on a daily basis. “We still like our branch locations personalizing the customer deliveries,” said Jim Pender Jr., Rockingham's executive vice president and chief operating officer.
Although Central Supply makes lots of deliveries from all four of its Indiana locations, the 104-year-old distributor of plumbing and electrical supplies is trying something new with the self-serve location it opened last year in Danville, a suburb of Indianapolis.
The Danville location's 20,000-square-feet of product aisles allow plumbing and electrical customers to pull their own orders, or customers can go to the location's traditional counter to have orders pulled for them.
“Thirty-five percent of our customers currently pull their own orders,” said Central Supply's Gilbert. “As our customers get to know where the material is, we think the percentage will reach 50 percent quickly. Most of the customers that have been serviced for many years by a traditional counter still like that concept and want to be waited on.”
The Danville location's merchandising strategy is an attempt to compete head-on with big-box retailers, which have nibbled away at the business of electrical wholesalers by feeding the need many small contractors have to pick up products fast.
“It's a constant battle for us,” said Gilbert, who believes the new quick-serve model coupled with the in-depth product knowledge and training Central Supply employees provide customers will tilt the scale back in the wholesaler's favor.
For Rockingham Electric, with 55 percent of annual revenue to residential contractors and another 10 percent in sales from its residential-lighting showroom, Pender says staying ahead of its electrical-contractor customers technologically will be demanding going forward. “There was a day that our countermen scribbled down the order,” he said. “Today, the customers want their quotes to go out electronically to desktops or to hand-held devices.
“No longer do the electricians hang around the coffee pot. They take their orders, and out they go. The customers today do not want their employees hanging around the stores. They're e-mailing or sending in their orders. We're delivering an awful lot more product than we ever have, which brings more cost to our bottom line.”
Although product delivery remains a mainstay for electrical wholesalers, soaring gas prices are taking bites from already low profit margins. (See related article, “Surging Fuel Costs,” on page 40.)
Peninsular Electric Distributors came close to instituting a surcharge on customer deliveries last fall but held off when gas prices began to stabilize. Still, fuel prices remain high. “Our fuel costs probably increased about 30 percent,” said Godfrey. “I'm still not completely against the idea of doing something. I really don't see how any good businessperson could look at me and say, ‘I can't believe you're doing this.’”
Manufacturers Partner with National Builders
In addition to the challenges of surging fuel costs, material price increases and rising mortgage rates, these distributors are grappling with the effects from deals some builders are making with product manufacturers to install particular products in the homes they build.
“We see it as the biggest change in the residential market,” said Central Supply's Gilbert. “Manufacturers have gone and cut deals with the national account builders and forced our contractors to use particular brands.”
He recalled the first instance of this happening about five or six years ago with a panel manufacturer — a line Central Supply does not carry. “They were forcing our customers to not install the product we were selling them but to install a different brand,” said Gilbert. Because Central Supply didn't carry the predetermined brand, the company lost business.
“Now we're seeing it with recessed cans,” said Gilbert. “The biggest and toughest thing for our contractors is they don't want to keep two brands on the shelf. They may have 10 home builders, but half of their business may be with a national home builder, and he's going to dictate what they're going to put in.”
Central Supply has been hesitant to try to intercede. “Most of our contractors don't want us involved with their builders, and we don't want to be involved with their builders,” said Gilbert.
Key Electrical Supply is also seeing more builders and manufacturers cutting deals. “We see the manufacturers trying to strike more national-type deals with the national builders to try to push their particular brand of switchgear or their particular brand of wiring device or their lighting products,” Jenson said. “I don't think that's a particularly great trend, but we're seeing a bit more of that.”
“With that trend in place where I'm being told what I have to sell them, I worry about the next step,” said Peninsular Electric's Godfrey. “If I'm being told that if I'm going to do business with such-and-such developer, and that I've got to sell the contractor this type of gear and this type of fixture, how long before they just say we don't really need a distributor?”
Some electrical distributors may want to reconsider their current relationships with the residential builders in their markets. If the relationship is not a strong one, perhaps it's time to begin building alliances.
“We work real closely with our builders,” said Rockingham Electric's Pender. Although few national builders develop homes in the New England markets Rockingham Electric serves, some of the area's custom builders require that specific product brands go into their homes.
“Not only are we seeing it, we're trying to drive it,” said Pender. “If we can get to these builders and design a whole-house dimming package over the standard toggle switch — something that will differentiate us and the builder — we'll be driving that business to us.”
Rockingham Electric's four lighting showrooms make partnering with builders a natural fit. After all, the builder and Rockingham share the same end-user home-buying customers.
“If we can convince the builder on the products to put into his house, then that eliminates the electrician running around and shopping the standard toggle switches and recessed cans,” said Pender.
Staying ahead of its customers when it comes to new products and technology and then educating each component of its customer base — whether it be electricians, home builders, home owners and even some specifiers — is critical, said Pender. “No matter which one of these is our customer, our customer is very educated today. A lot of that, I'm sure, is tied in with the Internet. They've already done a lot of their research. They already know what they're looking for before they get to us. They know what they want to pay. They're a very educated consumer today, which forces us to be a very educated distributor.”
In response, Pender says Rockingham is selective when it comes to the quality of employees the company brings on board today, and that its constantly training its employees. “We still want to be a knowledge base for our customers,” said Pender.
Although Key Electrical successfully plugged into the low-voltage structured-wire market more than five years ago, Central Supply, Rockingham Electric and Peninsular Electric are just now beginning to see interest in their markets.
As with most forays into a new market, education and training among wholesalers' employees and customers are basic components. Manufacturers' representatives from On-Q, Home Director and Pass & Seymour helped Key Electrical with its low-voltage market launch in the early stages by coming in and doing training. The Texas electrical contractors that decided to target structured wiring did a pretty good job, said Jenson, but he thinks some have since lost focus — perhaps because trends may be shifting toward wireless broadband technology. “It's a lot cheaper to stick a Lynksys access point in than it is to go pull Cat. 5 into every room,” said Jenson.
“We had some success, and then we realized that the A/V (audio/visual) dealers and installers were still going to go do that work, so we started to target those guys, too.” Last year, Key Electrical sold nearly $1.9 million of low-voltage products to low-voltage contractors.
For Central Supply Co.'s metropolitan Indiana markets, some electrical contractors are now beginning to show interest. “We have a lot of contractors that have not jumped into the residential side of the data market, but they are starting to look at that because they think things are starting to finally slow down,” said Gilbert. “We don't find a whole lot of them want to go out and try to sell anything more than what they're doing now — just standard wiring — but some of them are starting to jump into home automation stuff a little bit.”
Jeff Bluethmann, industrial product manager for Lester Sales Co. Inc., an independent manufacturers' rep firm located in Indianapolis, has trained folks from about a half dozen of Central Supply's electrical-contractor customers over the past year on behalf of On-Q/Pass & Seymour/Legrand and Central Supply.
Rather than bringing the various contractors' employees to Central Supply for training at the same time, Bluethmann does individual training at electrical contractors' shops. “You get more questions and answers,” Bluethmann said. “People are just a little more comfortable being trained in this manner — you don't want your competitor to think you know less than they do.”
On-the-job training may come also into play. “It can be intimidating for somebody who's never worked with low-voltage before,” said Bluethmann. “I've had to put on blue jeans before.”
In southeast Florida, Peninsular Electric's Godfrey said A/V installers tend to dominate when it comes to the residential home-automation work.
“The electrical contractors seem to not be interested in doing that type of work,” he said. “They're in the production work, and their idea is they want to get in and out of these homes as quickly as possible and that the low-voltage part of it is just going to slow them up. I think they're missing out on a huge market.”
Godfrey said although Peninsular Electric sells some structured-wiring products, it's not near the volume he thinks it could be if local electrical contractors participated with it more.
“You're not just selling a product to the contractor,” said Godfrey. “You have to sell to him the idea that he has the time and the people to do the work. If he won't do the work, you can't sell him the products.”
Top 200 Customer Segments
Among those Top 200 companies reporting customer-segment sales on this year's survey, 73.9 percent serve residential contractors to some degree. On the low end, one company reported 0.3 percent of its revenue came from residential contractors in 2005. On the high end, in terms of percent of sales, Houston-based Key Electrical Supply attributed 76.2 percent of its 2005 $58.8 million to residential contractors.
The average percent of sales to the residential contractor market is 15.2 percent for the Top 200. When eliminating specialty distributors from that mix, the Top 200's full-line electrical-wholesale companies average 19.2 percent of sales to residential contractors.
But the proportion of sales to various customer segments for a specific electrical distributor seldom conforms to national industry averages. Electrical wholesalers tend to cater to specific customer markets based on local geography, economy, industry and construction trends. Nonetheless, Electrical Wholesaling explored the Top 200's customer mix more fully this year by asking wholesalers to provide a percent of revenue for seven specified customer segments in its annual Top 200 survey. Nearly 70 percent complied, with 138 of this year's Top 200 companies supplying numbers for the customer-segment portion of the survey.
Based on these responses, the Top 200 distributors' sales average by customer segment as follows:
|Commercial Contractor:||33.4 percent|
|Residential Contractor||15.2 percent|
|Industrial MRO||11.6 percent|
|Industrial OEM||11.4 percent|
Revenue reported as “other” included sales to other distributors, retail, national accounts, voice/data/telecom, low-voltage contractors, residential lighting showroom, non-electrical contractors, builders/designers, mining, export, system integrators, utility contractors and miscellaneous.
Of the 138 companies reporting customer-segment sales, 31 were specialty distributors. When eliminating those niche distributors and looking only at the Top 200's 107 full-line electrical wholesalers that reported percent of sales, the average breaks down a bit differently:
|Commercial Contractor||40.6 percent|
|Residential Contractor||19.2 percent|
|Industrial MRO||12.6 percent|
|Industrial OEM||10.8 percent|
Nevertheless, few companies' customer-sales profiles mirror either of these middle-ground scenarios. Indeed, a number of electrical wholesalers don't sell to certain customer segments at all — 12.3 percent skip commercial contractors, 26.1 percent pass over residential contractors, 30.4 percent don't service commercial/institutional accounts, 38.4 percent leave out industrial MRO, 44.2 percent ignore industrial OEM, 50.3 percent don't service utilities, and 52.9 skip government accounts.
On the flip side, wholesalers that ignore certain markets are usually stellar sellers when it comes to other customers segments. In articles over the next several months, Electrical Wholesaling will take a closer look at some Top 200 companies that stand out when serving particular customer markets. This month, we focus on the residential contractor market.
Distributor Standouts Serving Residential Contractors
These Top 200 electrical distributors stand out in terms of percent of sales to residential contractor customers.
- Key Electrical Supply (of IES), Houston (76.2 percent)
- Evergreen Oak Electric Supply & Sales Co., Crestwood, Ill. (65 percent)
- Peninsular Electric Distributors Inc., West Palm Beach, Fla. (60 percent)
- Ralph Pill Electric Supply Co., Boston (60 percent)
- Rockingham Electrical Supply Co. Inc., Newington, N.H. (55 percent)
- Central Supply Co., Indianapolis (50 percent)
- Edson Electric Supply, Phoenix (48 percent)
- Wolff Bros. Supply Inc., Medina, Ohio (48 percent)
- Minnesota Electric Supply Co., Willmar, Minn. (46 percent)
- Yale Electric Supply, Lebanon, Pa. (45 percent)
- Hill Country Electric Supply, Austin, Texas (45 percent)
- Swift Electrical Supply Co. Inc., Teterboro, N.J. (45 percent)
- J. H. Larson Electrical Co., Plymouth, Minn. (42 percent)
- Central Wholesale Electrical Distributors Inc., Livermore, Calif. (42 percent)
Top 10 Distributors Serving the Residential-Contractor Market
Among those Top 200 distributors providing both 2005 revenue and a breakdown of sales by customer segment on their Top 200 surveys, these electrical wholesalers come out on top in terms of total dollars sold to the residential-contractor market.
|Company||2005 Revenue from Resi-Contractors||Percent of Total Sales from Resi-Contractors|
|1. Sonepar USA, Philadelphia||$543.5 million||23 percent|
|2. Rexel Inc., Dallas||$463.2 million||20 percent|
|3. Independent Electric Supply Inc., San Carlos, Calif.||$87.8 million||25 percent|
|4. Edson Electric Supply, Phoenix||$65.8 million||48 percent|
|5. Hagemeyer North America, Charleston, S.C.||$63.4 million||14 percent|
|6. Winlectric/Noland Co., Dayton, Ohio||$58.8 million||25 percent|
|7. Elliott Electric Supply, Nacogdoches, Texas||$53.4 million||25 percent|
|8. Key Electrical Supply (of IES), Houston||$44.8 million||76 percent|
|9. Mayer Electric Supply Co. Inc., Birmingham, Ala.||$40.6 million||8 percent|
|10. Dominion Electric Supply Co. Inc., Arlington, Va.||$36.8 million||25 percent|