Editor's Note: This excerpt from The 2009 Electrical Marketer's Survival Guide, the first in a series of articles that Electrical Wholesaling will publish over the next few months from that new book, will give electrical distributors, electrical manufacturers and independent manufacturers' reps a basic understanding of how products get to market in the electrical wholesaling industry. These articles will help industry veterans brush up on some electrical marketing basics and provide newcomers to the electrical business with a solid introduction to how this market works. The graphics accompanying this and future excerpts will answer the questions that EW's editors get asked most often on the structure of the electrical market.
First published in 1999, The Electrical Marketer's Survival Guide quickly became an industry classic. Electrical distributors used it for lunch-and-learns or more formal training programs. Manufacturers bought hundreds of copies and made it mandatory reading for all of their new hires. Vendors new to the electrical market used it to educate themselves on the market's nuances. Senior-level executives still use parts of The Electrical Marketer's Survival Guide at boards of directors meetings and investment bankers read it to educate themselves on the electrical channel.
An update of The Electrical Marketer's Survival Guide is long overdue because many aspects of the electrical wholesaling industry have changed since 1999. Copper prices have just about quadrupled. Dozens of electrical distributors have been purchased by large regional or national players. Manufacturers and independent reps haven't been immune to the merger-and-acquisition craze either, and dozens of them have new signs over their doors, too.
Back then, everyone was worrying about how Home Depot was going to bully its way into the electrical market channel, buddy up with electrical contractors and pulverize any independent electrical distributor in its path. Distributors scrambled to learn what they could from this master of merchandising and remodeled their counter areas to provide a better shopping experience for their customers. Today Home Depot is re-evaluating its interest in serving professional customers.
The Web was in its more formative years when The Electrical Marketer's Survival Guide was first published. Now savvy distributors use the Web to provide 24/7 online information for customers, as a targeted marketing tool and occasionally as an online storefront.
Some things haven't changed an awful lot in the past 10 years. Distributors still live and die by providing a local source of supply and credit for customers, and selling the right electrical products at the right time at the right price. Electrical contractors still account for approximately 40 percent of the typical electrical distributor's annual sales. And while some electrical companies see the sales opportunities in energy-efficient electrical products as a whole new world, other distributors, manufacturers and reps have quietly been making a nice living off of energy-efficient electrical products for many years.
This book will explore all of these changes and age-old market truths and cover some new areas of the business that weren't quite on the industry's radar back then. As with the first edition, you can use The 2009 Electrical Marketer's Survival Guide as a workbook to analyze the electrical market and your company's role in it. It's not a textbook to read once and put on a shelf, because it's full of worksheets, charts and lists of questions that you can borrow, steal and otherwise adapt for your own market analysis, presentations or employee training. Pick and choose which chapters apply best to your own needs and industry experience. Industry veterans may see some of the book's early chapters as too basic, but plenty of meat exists in the market analyses later on in the book that will be of interest. In addition to the printed copies of the book that will be available for sale in early 2009, EW will be posting supporting material for The 2009 Electrical Marketer's Survival Guide on its website.
When you are done reading The 2009 Electrical Marketer's Survival Guide, you will have a basic understanding of the following issues:
The basic structure of the electrical channel.
How to use EW's Electrical Pyramid to analyze your company's role in the electrical market.
The issues that keep electrical distributors up at night.
The role independent manufacturers' reps play in the market.
How to analyze the strengths and weaknesses of your own company and its competitors in local markets.
The key trends driving the commercial, industrial, residential and utility markets.
What it takes to become a first-call electrical distributor.
How to add to your company's arsenal of value-added services.
How to develop a strategic marketing plan.
Competitors to watch out for in the future.
Tomorrow's best sales opportunities — and much more.
The Electrical Market: A World of Opportunity
Somewhere, somehow the electrical market affects everyone. A homeowner turns off a porch light after saying goodnight to a visiting neighbor. A utility crew repairs a downed power line during an ice storm. A baker in a small town turns on an oven at 3 a.m. to get ready for the early-morning rush.
Before you even wake up in the morning, thousands of times the products that electrical distributors sell have somehow affected someone in the world. By lunch, you could count a million more examples. The thousands of different products that electrical distributors sell quietly and efficiently do their jobs, without most people ever noticing.
You notice. Every electrical or electronic product or system in use results from a successful sale. Someone, somewhere, somehow sold that product or system to a person whose company installed it or had it installed for them. The salesperson's old battle cry, “Nothing happens until somebody sells something,” rings true in the electrical business, too, although it could be modified to say, “Nothing turns on, lights up, moves, or gets manufactured unless an electrical system is in place doing its job.”
That concept makes pretty heady stuff for an electrical marketer hungry for another sale. Major sales opportunities exist here — building, repairing and renovating the entire electrical infrastructure of the civilized world. Electrical distributors supply products for the electrical systems powering houses, apartments, strip shopping centers, Main Street America, office buildings, factories, churches, schools, universities, utilities, sports stadiums, roadways, parking lots and dozens of other applications.
In any building and on any street you will find the electrical products that a salesperson for some electrical distributor had to sell. You live in this world. It's a market worth billions of dollars in products alone; and in the United States it's estimated that about three-quarters of it is sold through electrical distributors.
Those facts may surprise some people with Home Depot and Lowe's seemingly moving onto every suburban highway retail strip; cries about the demise of the distributor function because of the wonders of electronic commerce; and the occasional manufacturer that decides to market its electrical product line direct.
Distributors of electrical supplies will sell more than $90 billion worth of electrical materials in 2008 to electrical contractors, facilities maintenance personnel, utilities, commercial, industrial and institutional customers, and to a lesser degree, homeowners. That's a big and steadily growing market. Want a piece of it? Read on.
Let's first take a look at the electrical marketplace as a whole and then break it down into more digestible chunks. The best tool around to look at the electrical market as a whole is “The Electrical Pyramid,” which Electrical Wholesaling first developed 14 years ago. Since the Electrical Pyramid's first appearance in January 1994, it has become one of Electrical Wholesaling's most requested feature articles. This analysis of the electrical wholesaling industry's channels of distribution is a welcome resource for senior marketing and management executives at established electrical companies, manufacturers new to the industry, consultants and university students in industrial distribution curriculums. They all use the Electrical Wholesaling's Electrical Pyramid to gain insight into what makes this business tick.
Companies new to the electrical wholesaling industry also use this resource to select a channel or mix of channels to sell electrical products. For electrical manufacturers analyzing their companies' or competitors' distribution strategies, the EW Electrical Pyramid helps them compare and contrast the various channels of distribution. It's not uncommon for the EW Electrical Pyramid to be used as a discussion point at board of directors' meetings.
It provides a current snapshot of the channels of distribution in the electrical business and is a great launch point for this excerpt of The 2009 Electrical Marketer's Survival Guide.
The size of the electrical wholesaling industry surprises many people. Electrical Wholesaling's 2008 Market Planning Guide forecasts total industry sales through electrical distributors at $94.2 billion for 2008. Other sources estimate total sales a bit lower, but 2008 annual industry sales will probably be somewhere between $80 billion and just over $90 billion. It will be interesting to see what respondents for the 2009 Market Planning Guide survey forecast for their 2008 and 2009 sales. That data will be published in next month's issue.
Ringing up all those sales is a diverse group of electrical distributors. Just how many electrical distributors are out there? Again, the answer depends on whom you ask or how you define an electrical distributor. Electrical Wholesaling's definition of an electrical distributor includes not only the 475 full-line distributor member firms of the National Association of Electrical Distributors (NAED), St. Louis, but also the 3,000 other full-line (pipe-and-wire) electrical distributors, as well as hundreds of distributors of electrical supplies who specialize in residential lighting, lamps, fuses, datacom, automation products, wire and cable, and other products. It's a tough figure to nail down, but our best estimate is that these 4,000 full-line electrical supply houses and niche distributors operate well over 8,000 locations.
While these numbers by themselves are impressive, the electrical marketplace is actually much larger. In addition to using traditional full-line electrical distributors and niche distributors to sell electrical supplies, electrical manufacturers sell through more than 20 other channels. Some of the biggest channels outside of distributors of electrical supplies are home centers and hardware stores. According to data from Home Channel News, Home Depot Inc., Atlanta, and Lowe's, Mooresville, N.C., sold an estimated $5.3 billion and $3.3 billion, respectively, in electrical products in 2007. Approximately 20,000 hardware stores registered an estimated $627 million in electrical products, according to data in that publication and the U.S. Census bureau. Coming up with an exact dollar amount of electrical products sold through different electrical channels is tricky, but when you look at EW's Electrical Pyramid, it reinforces that fact that more options for the sale of electrical products exist than most people probably realize.
Despite challenges from home centers and other alternate channels of distribution, the sales of electrical products through full-line electrical distributors still dwarf the sales of electrical products through all of the other channels combined. Indeed, the sales through 4,400 locations of the 475 NAED member firms distributor firms alone account for nearly $31 billion of the $90-billion-plus electrical wholesaling industry. Most of the largest distributors are members of NAED.
EW's Electrical Pyramid illustrates the profusion of different electrical product marketing channels. Although several dozen individual channels exist today, the electrical market can be sorted into several major channels or layers of distribution:
Full-line electrical distributors.
Product niche distributors such as lighting and utility specialists.
Service niche businesses that get into the sale of electrical products as an adjunct to the function they perform, such as energy service or demand-side management (DSM) companies, motor repair shops and lighting maintenance companies.
Retail or consumer-based channels, such as home centers, super stores, and hardware stores.
Distributors from other wholesale trades, like plumbing or industrial supplies that deal in electrical products as well.
Manufacturer-based channels, such as manufacturers selling direct and buy/sell reps.
Other channels such as Web-based companies, the gray market and manufacturers selling direct.
Within each of these layers, companies may mix and match approaches. A traditional electrical wholesaler may run a catalog business or operate a retail lighting showroom or industrial automation division. A small lighting manufacturer may operate as a distributor of lighting products as well. A number of smaller alternate channels exist, too, that really don't fall under any one category.
Each of these channels has a history all its own, a different take on the manufacturer-rep-distributor-customer equation, and its own competitive problems with other channels. This article will cover full-line electrical distributors; future excerpts from The 2009 Electrical Marketer's Survival Guide will take a more in-depth look at other channels to market.
Different Types of Distributors
Full-line electrical distributors
Full-line electrical distributors are by far the largest single channel for electrical supplies. They can be divided into different sub-channels, or types of companies. Also called “pipe-and-wire” distributors because conduit, wire and cable account for such a big portion of their sales, these companies tend to focus on the commercial/industrial business. Contractor-oriented distributors stock a broad line of construction-related electrical/electronic products for new construction and renovation work in residential, commercial, industrial, institutional and government applications. Industrially oriented distributors tend to carry motors, drives, controls, automation systems and other products for the installation and repair of manufacturing equipment. Their primary customers include electrical contractors, plant or building maintenance personnel and purchasing agents across a wide range of businesses.
Top 200 distributors
The 200 largest electrical distributors account for about 61 percent of the industry's sales, according to Electrical Wholesaling's Top 200 analysis, which appears annually in its June issue. Most industry observers agree this percentage will continue to increase, but don't think consolidation will ever approach the level seen in it the pharmaceutical or electronics industries, where three or four distributors control the vast majority of sales. Still, a few electrical distributors disappear each year from the Top 200 list as larger firms grow larger through acquisitions.
Five national chains are at the top of the Electrical Pyramid: International Electric Supply Corp., Dallas, which operates Rexel USA and Gexpro (formerly GE Supply); Graybar Electric Co., St. Louis; WESCO Inc., Pittsburgh; Consolidated Electrical Distributors (CED) Inc., Westlake Village, Calif.; and Sonepar USA, Philadelphia. With combined 2007 sales of $23 billion, today these five companies account for about 26 percent of total industry sales.
These five companies have acquired dozens of smaller electrical distributors over the years. But plenty of other companies are making acquisitions, too — Electrical Wholesaling and Electrical Marketing newsletter have reported on more than 100 distributor acquisitions since 2005. In the past two years alone, almost $4 billion in sales have changed hands due to distributor acquisitions. Check out www.ewweb.com for a listing of the companies that have been acquired over the past few years. While the number of acquisitions in the electrical wholesaling industry is indeed staggering, compared to some other distribution-based industries like the electronics or pharmaceutical supply markets where four or five companies account for 80 percent of sales, the electrical wholesaling business is still relatively fragmented.
These firms operate in two or more different regions of the United States, but can't yet be considered truly national distributors. The super-regional chains include Border States Electrical Supply, Fargo, N.D.; Crescent Electric Supply Co., East Dubuque, Ill.; McNaughton-McKay Electric Co., Madison Heights, Mich.; City Electric Supply (CES), Orlando; and Kendall Electric Inc., Battle Creek, Mich.
It's worth noting here that when The Electrical Marketer's Survival Guide was first published, City Electric Supply wasn't even on the radar screens of most industry insiders. This British-owned firm prefers to stay out of the spotlight, but it has close to 500 branches and has attracted the attention of the entire electrical industry because of its fast growth and unique expansion strategy. By several accounts, when it moves into a market, it opens up new branches in clusters of four stores. When its small branches hit a predetermined level of sales, CES opens up additional branches in the area.
Regional electrical distributors
These companies typically have five or more locations. Electrical Wholesaling's “Top 200” ranking had more than 130 electrical distributors with at least five locations. The largest regional distributors include Mayer Electric Supply Inc., Birmingham, Ala.; Independent Electric Supply Inc., Oceanside, Calif.; Platt Electrical Supply, Beaverton, Ore.; and North Coast Electric Supply, Seattle.
Other electrical distributors
It's a bit ironic that the majority of full-line electrical distributors get swept into the category of “other electrical distributors.” With one to four supply houses, these distributors are the majority when it comes to mass numbers. More than 3,000 full-line distributors of electrical supplies fit into this category.
Other Key Players
The buying/marketing groups also have a ton of clout in the electrical market. More than 3,200 independent distributors of electrical supplies belong to buying/marketing groups: Affiliated Distributors Inc., King of Prussia, Pa.; IMARK Group, Oxon Hill, Md.; and Equity/EDN, Bluffton, S.C., formed through a 2003 merger of Equity Electrical Associates Inc., and Electrical Distributors Network. These companies operate more than 3,623 branches and control more than $25 billion in sales of electrical products.
Don't underestimate the clout of the marketing/buying groups, which help members pool their purchasing power so they can buy products at comparable pricing levels to the national chains. More than half of EW's Top 200 are members of a buying group, primarily A-D and IMARK. A few are Equity members. The buying/marketing groups also help their distributor members hone their marketing skills, and provide them with opportunities to meet with vendors and non-competing distributors who may share common strategies to overcome sales, marketing and management challenges.
All of these distributors spend quite a bit of time working with the independent manufacturers' reps in their local territories that sell products for electrical manufacturers. Many of these reps firms are members of the National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y. NEMRA offers independent manufacturers' reps and their vendors a forum to discuss joint marketing and sales goals, as well as resources that help reps run their businesses more profitably. The association's 500 rep firms and the 4,500 salespeople they employ sell products for approximately 250 manufacturer affiliates. NEMRA estimates 80 percent of the manufacturers that market their products through the electrical distribution channel use its members to market their products and that NEMRA representatives annually sell more than half of the electrical products, purchased by electrical distributors nationwide.
NEMRA often works with NAED and the National Electrical Manufacturers Association (NEMA), Rosslyn, Va., on joint projects of mutual interest to electrical distributors, electrical manufacturers, and independent manufacturers' reps. NEMA has a strong lobbying presence in Washington, D.C., and focuses on developing technical industry standards for products and standards for electronic communication.
In 1998, NEMA and NAED launched IDEA, which now provides the electrical market with E-business tools such as the Industry Data Warehouse (IDW) and Industry Data Exchange, a Web-based standardized document exchange solution. You will learn more about how the electrical market uses these tools and other industry resources to eliminate cost from the electrical channel in another article.
The other major industry trade associations that should be mentioned here are the two largest associations for electrical contractors — the National Electrical Contractors Association (NECA), Bethesda, Md., and the Independent Electrical Contractors (IEC), Alexandria, Va. NECA and its 70 area chapters focus on union electrical contractors, while IEC's 3,700 member companies are “merit shop” (non-union) contractors.
Who Has the Most Market Share?
- International Electric Supply (Rexel/Gexpro)
- Consolidated Electrical Distributors (CED)
The five largest chains — International Electric Supply (Rexel/Gexpro), Graybar, WESCO, Consolidated Electrical Distributors and Sonepar USA — control an estimated 26 percent of the market.
How Big are the Top 200?
- The 200 Biggest command approximately 61% of the industry's estimated $89 billion in 2007 sales
- 5,355 branch locations
- 80,738 estimated employees
- $519,215 sales-per-employee
How do Buying/marketing Groups Fit into the Electrical Market?
1,240 distributors with 3,623 branches and $25 billion in combined sales belong to one of the three groups.
Affiliated Distributors has 148 electrical distributors in U.S. and Canada with a combined total of 1,369 branches and $11 billion in sales.
IMARK has 172 distributors with 1,000 branches and $8 billion in combined sales.
Equity/EDN has 920 members with 1,254 branches and combined sales of $6.2 billion.