Use This Industry Resource to Calculate Your Market Share, Develop New Markets and Analyze Changes in Key Industry Segments.
Battered, bruised and at times a bit dazed, the electrical wholesaling industry has almost made it through 2009's house of horrors. It's been a year of record sales declines, round after round of layoffs and market turmoil the likes of which the industry silverbacks and greybeards have never seen. It will all be something you can tell your grandkids about if they come into the family business — or never, ever tell them if you want them to stay with the company or sleep through the night.
As David Wyss, chief economist, Standard & Poors, New York, said in his presentation at the 2010 McGraw-Hill Construction Forecast, “Bad things have stopped happening, but the good things haven't quite started happening yet.” It feels like the electrical market has found or is near a bottom and that business will start creeping back to respectability within the next two quarters.
A Small Asterisk with Our Forecast
Sales of electrical products through electrical distributors will increase by approximately $2.2 billion next year. This forecast puts U.S. sales for 2010 at $77.5 billion, a 2.9-percent increase from our 2009 estimate of $75.3 billion, (a level of sales last seen in 2005). That 2009 sales figure is a 14.4 percent drop from 2008, one of the largest one-year decreases in industry history.
Our gut feel at Electrical Wholesaling is that the 2.9-percent increase for 2010 may be a wee bit optimistic. That percentage may have something the do with the methodology we have used since the late 1970s to produce this survey. The percentage we offer for the rate of change in sales through electrical distributors between 2009 and 2010 is actually the mean (average) of all the responses rolled together. This year that number seems to have gotten pulled upward by a handful of surprisingly optimistic (or downright whacko) respondents who said their sales would improve in the high double-digits. The largest cluster of respondents said they thought their business would stay the same as 2009, a sobering thought considering what EW's readers have just been through, but at least a bit more realistic.
Our forecasts are based upon responses to Electrical Wholesaling's annual Market Planning Guide (MPG) survey. Each year, the magazine asks electrical distributors for their previous year's final sales results, sales predictions for the current year, and predictions for the following year. It also asks respondents how sales for the first six months of the current year compared with the first six months of the previous year. This year, Electrical Wholesaling mailed 3,050 surveys (both by mail and via e-mail) and received 271 usable surveys for a 5.9 percent response rate (an excellent rate by any survey standards). Respondents reported an average sales-per-employee number of $554,269 for 2008, close to the $541,872 respondents reported last year for 2007 but quite a bit lower than the $644,684 average sales per employee for the 120 respondents to this year's Top 200 survey who provided both sales and employee figures for 2008. Regional sales-per-employee numbers are provided on page 13. Be sure to check how your company's productivity compares with the national and regional averages when it comes to sales-per-employee.
Okay, enough about statistics and our bookkeeping. Let's move on to how you can use all this stuff. We are going to try something different with the format of this year's Market Planning Guide, and instead of just providing the next year's forecasts and updated market and employment data and teaching you how to use it, we are going to throw out a few ideas for markets and trends that you may want to consider when you sit down with your management team to develop your strategic plans for 2010.
1. If You Never Did Much in Government Projects, Now Might be a Good Time to Start
The American Recovery and Reinvestment Act (AARA) is starting to pump billions of dollars into the economy, and the first wave is starting to hit federal buildings and facilities. With $130 billion earmarked for construction and renovation of these facilities, there will be major opportunities in energy-efficient lighting upgrades and general electrical retrofits of older buildings. You can keep tabs on projects in your market area at www.recovery.gov and www.fbo.gov.
2. Get to Know Your Local Utility
With utility business accounting for only 5.5 percent of the average electrical distributor's sales, relatively few wholesalers make a big deal out of utility work. That may be changing. The federal government will be spending big bucks to make the smart grid a reality, and that may affect your company directly or indirectly in the near future. Two other very good reasons to familiarize yourself with your local utility — rebate programs for the installation of energy-efficient electrical systems and utility-grade photovoltaic PV plants and wind farms. Utility rebate programs are nothing new, but they are bigger and better than ever and give your customers even more good reasons to buy green electrical products.
Depending on where you live you may already be very familiar with utilities' interests in large-scale renewable power. Wind farms are already big business in the wind belt stretching north from Texas through Oklahoma, Kansas, Nebraska, Iowa and the Dakotas. Solar power is getting more publicity than ever in California, the Southwest and, surprisingly, New Jersey, which has a very lucrative rebate program for homeowners who install residential PV systems.
3. Get Real about Green
The pages of Electrical Wholesaling are loaded each month with good reasons to take the green market seriously. It's time to start studying (if not actually stocking) LEDs because they are starting to revolutionize certain applications, including areas where lighting is on 24/7 or is hard to access or maintain, such as street lighting and parking lot lighting. Check out EW's July issue (available online at www.ewweb.com) for an introduction to the LED market.
4. Look at K-12 Student Enrollment Trends in Your Market
During the next decade, K-12 growth will come almost entirely from three regions — the South Atlantic, South Central and the West, and 17 of the 20 states with the largest projected enrollment increases are from these regions, according to projections by the National Center for Education Statistics. In McGraw-Hill's 2010 Construction Outlook, Robert Murray, vice president of economic affairs, said the top five states — Texas, Florida, California, Arizona and Florida will increase K-12 enrollments by a combined 2.1 million students — 71 percent of the expected increases over the next 10 years. That study says the Northeast will lose 240,000 students and that the Midwest will gain 136,000 students.
5. Get Ready for a New Wave of Home-buyers — Sons and Daughters of Baby Boomers, Immigrants and Baby Boomers Downsizing or Buying Second Homes
The demographics are in place for a surge of residential building once the current excess housing inventory shrinks a bit more and unemployment improves. The size of homes they will be buying won't be the McMansions of the past. They will be smaller, but they will be packed with home offices, multiple flat screen televisions and big kitchens. Electrically speaking, that translates into increased sales of VDV cabling and related boxes and brackets and higher-end dimming systems.
Watch Commercial Loans Carefully
Just because the economy may improve in 2010 doesn't mean you can stop being vigilant with credit — your own and that of new or existing customers. One wild card that could erase all the forecasts for a slow recovery are toxic commercial loans. If too many of them implode in the same manner as residential loans last year it could spark another financial crisis, says McGraw-Hill's Murray. “The scary thing is what is happening with commercial real-estate loans. It's possibly the second wave of the financial crisis and it could affect smaller regional banks.”
The market-planning data is divided into nine regions of the United States. For each region and state, you'll find sales forecasts for this year and next year, along with the three prior years' sales. In addition to the sales forecasts, which are prepared by Electrical Wholesaling's research department, you'll also find an economic snapshot of the region and employment statistics for four of electrical wholesalers' major customer groups: electrical contractors, the commercial market, the industrial market and government.
The employment numbers help develop forecasts for customer buying potential. If you're looking for sales breakdowns for full-line distributors' key customer and market segments, explore the Customer Mix and Market Mix. The Market Mix data was updated this year.
The Product Mix data gives valuable insight into the product areas that have the most mind share with electrical distributors. This data was updated in 2007, and some of the product categories have been consolidated or eliminated because their contribution to electrical distributor sales were consistently less than one percent over the years. See the text accompanying the chart for a full explanation of the changes.
Getting the full picture on a market area isn't that difficult. When developing any market forecast, gathering some basic data on the size and makeup of the market is the first step. Let's take a look at some of the ways you can crunch the numbers we've provided to tailor them to your specific business and market.
There's a ton of information here. Here are some ideas on how distributors, reps and manufacturers can use EW's Market Planning Guide.
- Assess market size.
- Determine market share.
- Document market penetration.
- Identify market boundaries.
- Justify new branches.
- Determine areas with the greatest sales potential so you can concentrate your salespeople's efforts in the most productive directions.
- Keep on top of changes in the market area (customer make-up, business volume, product needs).
- Direct advertising and promotion to the places where it will have the most impact.
- Target untapped customer types or industries.
- Identify new accounts.
- Spot new opportunities in products or technologies.
- Determine necessary product line additions.
- Estimate the rate of purchase or usage of a product over the next year to anticipate inventory requirements.
- Document to suppliers or potential suppliers why they should do business with you.
- Explain to suppliers what they can expect from you in the way of market coverage.
- Verify or challenge what suppliers expect from you in sales.
- Set sales quotas for salespeople, territories or product lines.
- Calculate the number of salespeople needed to cover an area.
- Compare how well salespeople in different territories are doing with the same product on the basis of market potential.
- Evaluate salespeople.
- Set up a call pattern to contact customers productively.
- Back up intuition.
One of the most common uses of this resource is for developing a business plan, whether it be for internal use as your guide for next year or for a presentation to an investor or banker. You will need something that states the size of the local market, and these sales figures are a documented source you can use “as is.”
This data will also be helpful in establishing a sales forecast for your company and your region, comparing nearby or far-flung markets with an eye to opening or closing a branch, and evaluating promising areas of new business. One question distributors should ask themselves — and suppliers will be asking — is: “Are our sales into the market at the level they should be?” Look at the estimate of the overall sales in your market in comparison with your company's sales.
Employment in Major Customer Markets
In addition to sales forecasts, employment numbers make up a large part of the regional profiles. The number of people employed by a company or in an industry tends to rise and fall with the volume of business it's doing. Employment figures, therefore, act as a gauge to business prospects and conditions in end-user markets.
With the employee counts from each market, you can compare the relative sizes of various end-user groups in your area.
- You can also compare the makeup of one market area to another, and consider new customer markets or ones that you could be serving better.
- If you track the employment figures for each market over time, you'll see broad economic trends unfolding in your market.
- You can also use these employment figures to make your own multipliers or you can use the national multipliers we've already calculated.
Each multiplier is a dollar figure that represents the average amount of electrical products that electrical distributors sell to each particular type of customer, on a per-employee basis or other “economic factor.” When used with the employment figures in the regional profiles, the multipliers help you establish the amount of business electrical distributors could do with major customer groups in your area, and in total.
For instance, you can go into greater detail by using locally available sources of information on employment or other measures in end-user industries. The professionals at the nearest business library should be able to direct you to a source for the numbers you need. These multipliers are also a good option for determining sales in an area of the country not covered in the list of major metropolitan areas in the regional profiles. The same approach applies if you want to look at one county in an MSA that covers six counties. You would have to obtain employment figures or economic factors from local sources.
For instance, to find the number of electrical contractor employees in a place like Addison, Ill., a city not detailed in the East North Central regional profile, you could contact the local Chamber of Commerce, a nearby union chapter, the state university, the state's department of commerce or the local library to track it down.
These multipliers come in handy if you want to approximate the amount of sales available from a particular account. For example, if a manufacturer employs 300 people, by applying the national multiplier of $582, you would expect the facility to purchase about $174,600 worth of electrical MRO product.
You can also estimate the size of the market with multipliers by building up sales potential piece by piece. According to the Bureau of Labor Statistics, there were 3,520 electricians working in Salt Lake City, Utah. If you multiply that number by the multiplier for electricians ($44,418), you get $156.6 million in potential sales. You would do the same for each of the other customer markets electrical distributors serve to reach a grand total for Salt Lake City. The electrical contractor multiplier should be used carefully because of a change in the employment data published this year. In the past, we relied on government employment data for electrical contractors, and electrical contractor sales estimates from EW surveys. Because last year we started offering the more current electricians employment data, it's not an exact apples-to-apples match with previous years. However, for the purpose of a basic market estimate for sales from this important customer group, it's close enough. If you need something more exact, create your own multiplier by taking the annual sales you get from an electrical contractor in your market and then divide it by the company's total employees.
Using multipliers results in a dollar figure for market size that tells the level of business electrical wholesalers in the area could do if every potential customer there bought a typical amount of product from them. It tends to be a larger number than actual distributor sales.
You can also use EW's multipliers to track sales through different types of customers over time. Let's do that for sales through electrical contractors. As you can see in the chart on page 15, electrical contractor employment has its ups and downs. The challenge for electrical distributors is that since sales to contractors account for an estimated 36 percent of their sales, any change in contractor employment affects their sales pretty fast.
Let's run a quick calculation. At the peak of the current business cycle in October 2007, electrical contractors had 943,700 employees, nationally. Using EW's multiplier of $34,605 in sales for each electrical contractor employee, that's $32.7 billion in sales at the market peak.
The most recent number available through August shows 812,400 employees employed at electrical contractors in the United States — a staggering drop of 131,300 employees. By using EW's multiplier for electrical contractors, you can see that translates to $4.5 billion in lost sales, a -14% drop in the electrical wholesaling industry's most important customer segment.
A basic forecast you can use for your cocktail party conversations over the next few month is this: The electrical market will bottom out by mid-2010 and conditions will improve market-by-market with the Midwest leading the country out of recession, followed by individual states and MSAs that didn't fall as far in the recession. The last regions to recover will be the markets that crashed the hardest because of loose residential lending and speculative real estate markets — Florida, Phoenix, Southern California and Las Vegas.
Before the downturn, these four areas were among the fastest-growing in the United States, and by many measures supported a huge amount of the national economy's growth during the past decade. The big question is how fast these regional markets will rebound, and if or when they will hit their previous growth rates.
Each area has its own unique challenges. Florida actually lost population for the first time since World War II, with 50,000 more people leaving the Sunshine State than moving in. Southern California has a massive diversified economy that is certain to endure, but one wonders if the high cost of living will eventually price too many people out of the market. Las Vegas and Phoenix grew throughout several boom-and-bust cycles over the past decade, but many economists believe they will have to diversify their economies more so they can withstand the next economic shock.
That's our story, and we are sticking with it. Happy forecasting!