Material costs are at an all-time high, and customers watch prices down to the penny. Customers perceive the product as a commodity, so players must be creative with the value-added services they offer. Competition is fierce, and consolidation keeps reshuffling the deck of vendors.
Does this sound like a market you would like to dive into? Welcome to world of specialty wire and cable distributors, where today the “four Cs” — copper, commodity, competition and consolidation — reign supreme. Wire and cable specialists have carved out a niche in the electrical wholesaling market because they do a better job of handling the hundreds of varieties of wire and cable than full-line electrical distributors do. Although electrical distributors will always need to stock the “A” fast-moving wire and cable items to service basic customer demand for wire and cable, they have come to rely on wire and cable specialists to ship “B” and “C” slower-moving items within 24 hours to their warehouses or to their customers' job sites. This allows them to invest in the inventory their customers need everyday, and to only invest in slower-moving wire and cable on an as-needed basis.
These specialists survive and thrive because wire and cable is so darn tough for full-line electrical distributors to stock, track and manage. That's why the wire and cable racks in an electrical distributor's warehouse are sometimes called the “black hole.” Wire and cable is much harder to handle than most other products full-line electrical distributors stock. Fittings, boxes, lighting fixtures, lamps and some other typical products must be handled carefully so they aren't broken, dented or dinged, but at least they are usually packaged in sturdy, stackable corrugated boxes and can be moved around a warehouse with a forklift or hand truck. Humongous cable reels are an absolute bear to handle, and they can require specialized warehousing equipment. Selling wire and cable can give a full-line electrical distributor fits for several other reasons:
The lengths of the cable on wire reels are always changing because customers usually order by the foot instead of buying an entire reel.
In today's crazy copper environment, the value of wire and cable inventory is always changing.
Conventional distribution software packages have a hard time tracking and managing wire and cable because of these constantly changing parameters.
Approximately 200 distributors of specialty wire and cable exist in North America. Most are very small companies and specialize in a narrow range of wire and cable products. Although it's a relatively narrow niche, it accounts for some big-time sales dollars. The U.S. Census Bureau says 2004 shipments of specialty wire and cable were roughly $7 billion in 2004. For full-line electrical distributors, wire and cable accounts for an estimated 12.2 percent of sales, according to Electrical Wholesaling's 2006 Market Planning Guide (November 2005, p. 34).
The largest wire distributors are Anixter Inc., Glenview, Ill.; Houston Wire & Cable Inc., Houston; Communications Supply Corp. (CSC); Carol Stream, Ill.; Industrial Electric Wire & Cable, New Berlin, Wis.; Omni Cable Corp., West Chester, Pa.; and Priority Wire & Cable Inc., Little Rock, Ark.
Other large wire distributors in Electrical Wholesaling's Top 200 listing included A.E. Petsche Co., Arlington, Texas; Calvert Wire & Cable, Brook Park, Ill. (recently acquired by CSC); Electrowire Inc., Wood Dale, Ill.; JCH Wire & Cable, North Las Vegas, Nev.; Windy City Wire, Hillside, Ill.; Ace Wire & Cable Co., Woodside, N.Y.; and World Class Wire & Cable, Waukesha, Wis.
According to Electrical Wholesaling's Top 200 sales data, at least two of these companies have grown at phenomenal rates over the past five years. Leading the pack is Priority Wire & Cable. Founded just 13 years ago, the company's 2005 sales were $104 million, up a whopping 271 percent over 2000. Ranked as the 208th largest electrical distributor in EW's 2001 Top 250, the company is now ranked at No. 61.
Over the same time period, Omni Cable Corp. was up 85 percent. While raging copper prices have pumped up these sales increases, this growth is still impressive.
A major differentiating factor in specialists' operating strategies is their customer focus. Some companies sell only or primarily through full-line electrical distributors, while other wire and cable specialists compete with distributors for the business of electrical contractors and other end users.
Houston Wire & Cable was founded by Terry Hunt in 1975 and was the first of the wire and cable specialists to focus on electrical distributors as a primary customer segment. Omni Cable Corp. is also proud of its distributor-only sales focus. Anixter sells directly to end users, but its Wirexpress subsidiary, based in Mount Prospect, Ill., focuses on electrical distributors.
It drives Jeff Siegfried, president, Omni Cable Corp., crazy to hear about electrical distributors who buy wire and cable from companies they have never heard of just because they have a rock-bottom price for an odd lot of cable, but who will evaluate a new supplier of another type of product for months before doing business with them.
“Some wire companies buy cable, put it in a warehouse, send out an e-mail or a fax and hope for an order,” he says. “Electrical distributors should evaluate the wire and cable specialists they deal with, just like they would evaluate someone who sells motor controls. They should deal with someone who supports them and does not sell to their customers. They also have to make sure a company has insurance and sells new material.
“An electrical distributor's inside salesperson could write a $150,000 order to a wire and cable guy who has something he needs and not even have to get approval from his manager. It's a product that doesn't get scrutinized at the purchase level. They will let them buy from anyone.”
The Right Mix of Products and Services
Houston Wire & Cable has 2,600 customers and carries 20,000 stock-keeping units (SKUs) in specialty wire and cable. It serves many large distributors, including most of EW's Top 200 distributors. WESCO Distribution Inc., Pittsburgh, its largest customer, accounts for 11 percent of sales. National chains as well as several of the 50 largest full-line electrical distributors are also key accounts for the company. At press time, Houston Wire & Cable was preparing an initial public offering (IPO) to offer 8.5 million shares at a range of $12 to $14 per share. A private equity firm, Code Hennessy & Simmons LLC, Chicago, holds a majority stake in Houston Wire & Cable.
James Pokluda, the company's vice president of marketing and merchandising, says a wire and cable specialist must have the right product mix and a broad customer base to maximize its inventory investment. “If you don't have the right mix, you are not going to provide the turnkey value your customers need,” he says. “It doesn't do you any good to provide a customer with only one of the four items he needs. He needs four of the four items.
“You don't want to create short lengths of wire and cable that would be undesirable for purchase in the marketplace. There is a very big downside if you don't manage it correctly. Unless you have a broad enough customer base to buy your broad array of wire and cable, you can't leverage the investment. We do create shorts and have some undesirable lengths. But we also have a very broad customer base that needs that product. Unless you have a big enough customers base, you won't be able to use all of your inventory. If a wire and cable specialist with a very narrow customer base had all of our inventory he would die.”
The Large Role Logistics Plays in Wire World
Customers need more than just speciality products from wire and cable distributors. They want to manage their wire and cable investment more effectively, and they are looking for help from wire specialists to do it.
Steve Riordan, CEO, Communications Supply Corp., has a slightly different perspective on the wire and cable market. His company provides datacom wire and cable for large network installations to contractors, other end users and management information systems (MIS) departments. Riordan says CSC has a project-management focus because large customers are looking more than ever at the total ownership cost of buying and installing wire and cable. Some of the value-added services the company wraps around its core product expertise include staging products for delivery, kitting products (packaging related products together), shipping to multiple sites and managing storerooms.
“These are ways of cementing our relationships with the customer and making ourselves indispensable,” Riordan says. “Quality service is really nothing more than good people doing the right things with controls in place to make sure it happens day in and day out. That's really all we do for a living. We bring stuff into the channel and get it to where the customer wants it, when they want it and at a fair price. Customers know the applications at 10,000 feet, but they really want us to be an expert from a product standpoint and solve their pain point.”
Omni Cable's Siegfried says logistics management has become an increasingly important service for his company because savvy electrical distributors want help maximizing their investment in wire and cable. “Cutting-edge distributors are figuring out what wire and cable they can get out of their inventory and outsource,” he says. “It doesn't act like a box of condulet. It doesn't fit in a distributors' inventory model, and it doesn't do well in their computer system. If a distributor wanted to stock everything his customer wanted, he would have nothing but cable and nothing but problems.
“What do we really do for a living? We don't sell a product — everybody's cable is pretty much the same. We handle the logistics, all the things a distributor stubs his toe on. We can do it more efficiently because that's all we do. We stock what distributors use infrequently, don't want to inventory, is very expensive to inventory or is hard to handle.”
Prices gone Wild
Complicating matters for specialists and full-line electrical distributors are the ever-changing copper prices. At press time copper prices still hovered at uncharted heights near $3.54 per pound, and industry insiders said anyone who says they know where prices are going from here are downright foolish. Siegfried refuses to speculate on copper pricing. He says the copper futures market does point toward lower prices sometime in the future, but that it's impossible to say when or by how much. Siegfried says it's more difficult than ever to forecast copper pricing, in part because China is now a huge consumer of copper, and its demand patterns are extremely erratic. “They buy real big and then go away,” he says. “It has completely unsettled the copper market.”
Speculation on copper prices by hedge-fund traders is another contributing factor to unsettled copper prices. These speculators make money betting on wild swings in prices in a specific commodity, and while prices for building metals such as copper, zinc and aluminum were cyclical, copper pricing historically wasn't volatile enough to attract their interest.
Today, huge swings of 40 cents and 50 cents in a day are common, but not realistic in terms of real demand, say several wire distributors. Some electrical distributors are reportedly speculating that prices will continue to increase and are stockpiling wire and cable.
“The smart electrical distributors today are buying exactly what they need to be in business,” says one specialist. “They are not pushing to buy truckloads. They are not buying less and waiting for it to come down, and they are not anticipating the market and speculating. People who speculate in this market are going to get burned. The people who make money speculating are speculators. They do it for a living. We don't do it for a living.”
The Datacom Dilemma
The inventory mix of the specialists that sell to full-line electrical distributors tends to reflect the market focus of their distributor customers. Several specialists agreed there haven't been many changes in their product mix in the past few years. However, when full-line electrical distributors were attempting to service large-scale datacom installations in the 1990s, they were relying on specialty distributors to provide them with the necessary cabling products. Wire experts say this segment of the voice/data/video (VDV) market is different than the residential VDV market where many full-line distributors are now seeing some success.
Communication Supply Corp., Anixter and Graybar Electric Co., Clayton, Mo., had a huge head start in the commercial datacom market because they had the sales expertise, product inventory, back-office systems and customer relationships in place long before full-line distributors became interested in the business, says CSC's Riordan.
“Full-line electrical distributors saw this product area growing back in the 1990s, and they jumped in,” he says. “But when the market turned down in 2001-2002 and they had a tough run of it, full-line electrical distributors bailed. They weren't willing to make those investments in a dedicated product group where they weren't seeing immediate returns. Today, the three national distributors in the datacom arena are Graybar, Communications Supply Corp. and Anixter. The barriers to entry in this market space have never been taller or wider.”
Omni Cable Corp.'s Siegfried draws a clear distinction between the residential VDV market and the commercial datacom market, and says supplying products electrical contractors need for residential structured wiring systems makes much more sense for full-line electrical distributors. “Years ago, when distributors were getting involved in datacom, they didn't buy enough to make minimums, and they often didn't know what to buy. The truth of it is that they were going to have to compete with Anixter and Graybar, who had all the franchise lines. It's all specified products. It was very difficult for them to enter into a very big and very complicated market.”
The Wire World of Tomorrow
As electrical distributors refine their businesses to operate as efficiently as possible, it would seem the logistical expertise wire and cable specialists have could help full-line distributors slash their operating costs and ultimately increase their service levels. At least one electrical distributor tapped into a specialist's wire management expertise on a grand scale. Van Meter Industrial Inc., Cedar Rapids, Iowa, worked with Omni Cable Corp. to build what Jeff Siegfried calls a “state-of-the-art wire and cable processing facility” to more efficiently cut cable to length, track cable inventory and provide 24-hour delivery.
Omni helped Van Meter select the wire-handling machinery and assisted in the installation of the machinery and the training of workers to run it. Omni Cable also taught Van Meter how to best utilize software that tracks wire cuts and manage an inventory that would serve customers' wire and cable needs.
Siegfried says this type of business relationship is what separates his company from wire distributors that don't provide additional services beyond shipping cable. On the surface, wire and cable may seem like the simplest of products for electrical distributors to sell. But once you dig into the business, it becomes clear why wire and cable specialists have established such a strong foothold in the electrical market.
10 Value-Added Services that Make Wire Specialists Special
Wire and cable specialists live in a world where the value-added services they offer are the differentiating factor between themselves and competitors. They often must overcome the fact that many of their customers slap a “commodity” label on their reels of cable. Occasionally, someone will develop a unique composite cable for multiple applications that has a unique blend of insulation and conductors, but that's the exception rather than the rule. Here are the 10 most important services wire and cable specialists use to differentiate themselves.
Have the necessary expertise to match the proper cable to unusual applications.
Cut wire to length.
Stock oddball lengths.
Customize cable for customers for identification purposes by printing on or dying the insulation.
Bundle cables for specific job applications.
Offer dependable 24-hour delivery of “B” and “C” items so distributors can invest in more inventory of the fast-moving “A” items.
Help distributors better manage their overall inventory investment by allowing them to invest in the stock customers order most frequently.
Offer online order tracking.
Teach distributors how to handle their wire inventory more efficiently.
Help distributors select the proper wire management equipment for their warehouses.