10 Trends that Will Shake the Industry

With the 24/7 assault of tweets, blog postings and other social media, as well as the more traditional forms of communication, it's sometimes difficult to figure out which information is just some online blowhard's opinion and which data needs to be assimilated into strategic planning for your business. Part of Electrical Wholesaling's reason-to-be has always been analyzing the most important future industry trends for its readers. When we published the article “Ten Trends that Will Shock the Industry” back in 1996 and used that article as the basis for a seminar at the National Electrical Manufacturers Representatives Association (NEMRA), Portsmouth N.H., we got a ton of positive feedback on our efforts. With the economy improving, advancing technologies and emerging sales opportunities, Electrical Wholesaling's editors felt it was a good time to make our picks for the Top 10 Trends that will have the most impact on electrical distributors, electrical manufacturers and independent manufacturers' reps. Following are our picks, and some ideas for how you can compete against these market forces and take advantage of good sales opportunities and tools for running your business.

1. Full-line distributors will remain the primary sales channel for electrical products, but product specialists, hybrid distributors and alternate channels will steadily nibble away at their market share. Despite body blows from online merchants with no need for local brick-and-mortar branches, home centers and occasional manufacturer initiatives to sell direct, full-line distributors of electrical supplies are standing strong and probably still sell well over $85 billion worth of electrical products — more than 70% of all electrical products.

   That's an amazing figure when you consider that some well-established alternate channels for electrical supplies account for billions of dollars in sales. For W.W. Grainger Inc., Lake Forest, Ill., electrical products accounted for an estimated $1 billion of its total of $8 billion in 2011 sales. Home Depot and Lowe's sell up to $2 billion in electrical items (heavily weighted toward residential lighting fixtures, a product area that full-line electrical distributors no longer focus on very much). And while it's tough to estimate electrical sales for Fastenal Inc., Winona, Minn., the company does have 32,000 electrical stock-keeping units (SKUs) in its catalog and had an astounding 2,652 branches at 2012 year-end — more than the five largest full-line distributors operate as a group. Fastenal opened up 80 new stores last year alone.

2. The five largest distributors will continue to acquire smaller distributors to fill in gaps in their geographic market footprints or to build their presence in new market niches. The Big Five — Sonepar North America, Philadelphia; Wesco Distribution Inc., Pittsburgh; Rexel Holdings USA, Dallas; Graybar Electric Co., St. Louis; and Consolidated Electrical Distributors Inc (CED), Irving, Texas — accounted for no less than 30% of industry sales in 2011 and run an estimated 2,300-plus branches between them.

   Several of these companies — Rexel, Sonepar, Wesco and CED — have been actively hunting for acquisitions to bolster their market coverage. Together with Border States Electric, Fargo, N.D., and Crescent Electric Supply, East Dubuque, Ill., they have been the most active acquirers in the past and can be expected to be the biggest acquirers in the next few years, too. Also, look for one of the big acquirers to buy a distributor of industrial or construction-related supplies in a related market niche like plumbing, HVAC or pipe, valve and fittings to manage the purchase and sale of those products through their ERP systems and to pump those products through their regional distribution centers.

3. In an increasingly global market, more U.S.-based electrical manufacturers and distributors will look to grow outside the United States, and more electrical companies from outside North America will move into this country. By now, electrical distributors have gotten pretty used to the idea that two of the five largest distributors in the North America, Sonepar and Rexel, are owned by companies based in France, and that between themselves they operate 4,000 locations and did an estimated $35.9 billion in combined sales in 2011. And if any industry execs had forgotten that the foreign-based, multi-billion-dollar companies like Schneider, Siemens, Legrand, Philips, and Nexans are well-entrenched in the North American market, ABB's acquisition last year of Thomas & Betts jogged their memory a bit. There's no doubt that despite its recent economic woes, North America is still one of the most lucrative and stable electrical markets in the world. Over the next few years, look for some of the Pacific Rim manufacturers of the LEDs to strengthen their positions in the United States through acquisitions of other lighting manufacturers with strong networks of distributors or local lighting reps.

4. Within five years virtually all electrical distributors will stock LEDs. LEDs are spreading throughout the lighting market application-by-application. The first lighting niches they flooded include exit signs, traffic lights, special effects lighting, hard-to-get-to locations and streetlights. While we don't expect them to push top-of-the-line T5 or T8 fluorescent lighting systems out of too many ceiling sockets in the general office lighting market, don't be surprised if they now start taking over some “statement” applications where customers want to make an impression, like lobbies, conference rooms, restaurants, stores and the like. You won't be alone in stocking LEDs, as all sorts of new channels are emerging. For instance, in Oct. 2012 Apple began stocking the Philips Hue LED lighting kit, which includes three LED bulbs that fit into any standard light fixture and a bridge that connects to existing wireless routers. Hue starter kits retail for $199 and have been available at Apple stores nationwide since Oct. 30. Additional bulbs will be available at $59. Says a press release announcing hue, “Philips hue sets up in minutes and with a quick download of the hue application the system can be controlled from any iOS or Android device.”

5. As the residential market recovers, manufacturers, distributors and reps will find big opportunities to sell products for home theaters, computer networking and security systems. This business is totally attainable for electrical distributors who establish relationships with the national builders doing business in their local markets, as well as more progressive local homebuilders. The residential market usually tops out at around 20% of the average electrical distributor's sales. But they can increase that percentage because adding boxes, cabling, fasteners and related brackets, surge protection, and surveillance cameras to an order for an electrical contractor who's wiring a new housing development isn't much of a stretch. The fact that all signs point to a much better market for homebuilders in 2013 and beyond will make this market even more lucrative.

6. New oil fracking technology will unlock oil and gas resources in more regions of the United States and create exciting new sales opportunities for electrical manufacturers and the electrical distributors and reps. The stories coming out of western North Dakota about the amount of business in the Bakken oil patch could warm the heart of even the most hardened sales manager. Several distributors recently set up new branches in this remote area, and one rep servicing the region even called it an once-in-a-lifetime sales opportunity. The Bakken region will remain king for some time because gazillions of barrels of oil can now be profitably extracted by new fracking technology. But that same technology is helping companies do the same thing on a smaller scale in western Pennsylvania, upstate New York and eastern Ohio, and the reports from the oil folks in Oklahoma, Kansas and Colorado say there's plenty of potential there, too.

7. The solar industry will continue to rely on federal tax incentives and local and state financial crutches, but the utility-scale wind farms will eventually attain financial independence. No photovoltaic (PV) manufacturer has had that Oh-My-God moment in R&D that radically changes the efficiency rate of how PV cells convert sunlight into electricity. That means the only way the return-on-investment for the installation of a PV system in most residential, commercial or industrial applications is even remotely palatable is to rely on federal, state and local incentives. It's a different scenario in the wind industry, where the technology for utility-scale wind farms is a proven commodity, and the industry as a whole is more willing to wean itself off of incentives. Many challenges remain for transporting power from often-remote wind farms to the utility grid, but companies in the wind belt will get some nice incremental business for the construction of these facilities. One big project to watch down the road is the Atlantic Wind Connection, an offshore wind farm in the early stages of development and scheduled to begin construction in 2016. It would supply power to thousands of homes in businesses along the densely populated Eastern Seaboard from New Jersey to Virginia. Bechtel and Alsthom are now working on the project and Google is one of its backers with a $200 million investment.

8. The renovation and modernization of the U.S. electrical grid will pump up profits in the utility niche for more companies in the electrical wholesaling industry. Over the years, there weren't all that many full-line electrical distributors that focused on the utility market in a big way. Border States Electric; Graybar; Hughes Supply (now part of HD Supply); Stuart Irby (now with Sonepar); Kriz-Davis Co., Grand Island, Neb.; One Source Distributors (now with Sonepar); and Wesco have always been key players in this niche. They and a handful of smaller utility specialists handled the bulk of utility products that went through distribution.

   But with the smart grid, integration of renewable power sources like wind and solar onto the grid, expansion because of increased power demands, and the stormproofing of the grid in some regions of the country prone to hurricanes and other storms, we think there's a good chance that more distributors and reps will get into this business. While an awful lot of material is sold direct from manufacturers to utilities in this market because of the size of the orders, look for more companies to play a role when the products go through distribution.

9. Customer use of smartphones, tablets and other mobile devices will push more distributors toward online storefronts and force them to rethink how they manage their digital product information and market their companies. To get a sense of the potential here, electrical distributors don't have to look any further than the smartphone app launched by Grainger in Aug. 2012 to give its customers access to 900,000 SKUs at www.grainger.com and push its annual sales from e-commerce to 40% to 50% of all sales by 2015. The move to mobile will also force many more distributors and manufacturers to make sure the back-end product information on their ERP systems is populated and consistently updated with product data from IDEA, Arlington, Va., or Trade Service, San Diego. It also gives them and reps a very good reason to “mobilize” their marketing and to check out the digital marketing tools offered by industry resources like www.electricsmarts.com.

10. As the younger generation become a bigger part of the workforce in the electrical industry, manufacturers, distributors and reps will need to get more creative in how the recruit, train and incentivize them. Time marches on, and over the next few years more Baby Boomers have to manage their own mortality, retirement, succession planning — and the fact that the young folks they hire won't be wired the same as them or their parents. Talk with your industry buddies about what's worked for them in managing their youngest employees. But most importantly, talk with your best young talent on a regular basis, both informally and in a more structured personnel-evaluation process so you see where they want to go in their careers.

Points to Ponder for the Top 10 Trends

While it's important to familiarize yourself with the market drivers discussed in this article, the real challenge is analyzing how or if they will impact your company, and developing the proper sales, marketing, management or operational strategies to harness or overcome these challenges. The questions below in these “Points to Ponder” may help you in this analysis. Use these questions during your strategic planning sessions to spark discussions with your company's leaders and gather their ideas on key challenges and opportunities down the road. These questions are intended to jump-start the conversations inside your company. When you start developing strategic plans to attack any of these areas, you will find a need to drill down much deeper and come up with plenty of more detailed questions for co-workers, vendors, customers and other buying influences, independent manufacturers' reps and local factory salespeople, as well as non-competing distributors from other regional market areas that have an expertise in some of these areas.

Consolidation

• Who are the distributors in our market most likely to sell their businesses?

• If consolidation totally reshapes the market, what impact will it have on my business?

• (For company owners) Should I sell my business while the market is hot?

The LED Market

• Are the electric utilities in my market offering rebates for LEDs, and if so, how do I get the word out to potential customers?

• How much more does my sales staff need to learn to effectively sell LEDs?

• Who are or will be my key competitors in selling LEDs? What are their strengths and weaknesses?

• On the flip side, what does my company have to do to become the preferred source for LEDs in my market area?

The New & Improved Residential Market

• What is the short- and long-range outlook for housing in my market?

• How big of a factor are the national builders in my market and do I have the necessary contacts with them?

• Which local independent reps or factory salespeople could help me increase my share of the market?

• Are any of my manufacturers actively marketing their products to builders?

• If I want to go after the voice-data-video (VDV) portion of the residential market, how many new lines will I have to stock? Which of my current vendors already manufacture or market these products?

Solar & Wind

• Is it too late to get into renewables in my market? How much longer will the local or state financial incentives last?

• Are any utilities into this business in a big way?

• Are my existing customers looking for new sources of supply in these areas?

• If I choose to get into solar, could I realistically provide my customers with a single source of supply for PV panels and balance-of-system (BOS) products like inverters, framing, overcurrent protection, switchgear, wire and cable, and related fittings and fasteners?

• Are local reps or factory salespeople already servicing other distributors and sources of supply for these products?

Oil & Gas Opportunities

• Is there any talk about oil and gas companies using new fracking technology to drill for oil or gas in my market area?

• If so, do I know any non-competing distributors in other geographic market areas who are in this niche and could give me a few tips on how to sell into this market?

• Are there any state agencies or local oil & gas trade groups that could be good resources in making contacts in this business? How about my manufacturers?

• What types of products would I need to stock to get into this market, and which of my current manufacturers are into this business?

The Utility Market

• How strong are my ties to the buying influences at the local utilities servicing my market area? Is it time to build or refresh my company's contacts with them?

• Do these utilities have any major system upgrades, stormproofing or plans for implementing smart grid technologies in the future?

• Which of my competitors will go after this business? How much it will go direct? Can my company really be a factor in the utility market?

A More Mobile World

• Have I surveyed my customer base recently on how they use their mobile devices and what types of product or ordering information they would like to access with them?

• Is the product data on my ERP system really ready to support an online storefront?

• How can I market my company's products and services to customers on their mobile devices? Which of my manufacturers offer apps or other resources that would be helpful in doing this?

• Where is my company at with mobile devices? Can employees use their own to access the company network or are there security concerns?

New Work-Force Demographics

• Could I offer more training to younger employees on computer systems, products or other job skills?

• If younger employees have a real interest being part of the green movement, can my company be more active in “green” community charities or benefits?

• Am I willing to create a flexible work environment to attract younger workers?

• What types of brand loyalty will the younger generation have that work for customers, and how will it affect my business?