Changing Channels of Distribution

When you live and breathe business publishing like the editors of Electrical Wholesaling, it's always a quiet thrill when you hear an article you published someway, somehow helped a reader sell more electrical products, run his or her business more profitably, or taught them something about the Electrical Wholesaling industry. One article that has consistently accomplished all of those missions over the past 16 years has been Electrical Wholesaling's Electrical Pyramid, which analyzes the various channels that manufacturers of electrical equipment use to bring their products to market.

In the past, EW's editors have used the Electrical Pyramid to help readers analyze the electrical wholesaling industry on a national level. In this issue, we are showing electrical distributors, electrical manufacturers and independent manufacturers' reps how they can tailor the Electrical Pyramid to analyze the changing channels of distribution in their own local markets of interest.

We think the timing for this article is good. Everyone is all too familiar with how hard it has been for the U.S. economy to crawl out of the recession. For that reason alone, it's a good time to take a step back and reevaluate how your company is doing in its local market. But on top of the uncertain economic conditions, EW's editors are hearing all sorts of vibes from sources inside and outside the electrical world that the flow of electrical products is starting to trickle into some new channels and increasing in some existing alternate channels:

• Manufacturers are quietly becoming big players in the design and installation of electrical products on big construction or retrofit projects. This puts them in direct competition with local independent electrical contractors and privately owned design firms — and has an impact on where products are purchased for these projects.

• With sales forecasts calling for the energy retrofit market to double or even triple in the next 10 years, energy-service companies (ESCOs) are sure to become even bigger players in turnkey retrofits for Fortune 500 companies, federal projects and the MUSH market (municipal, state/local business, K-12 schools and universities and health-care facilities). Some ESCOs are looking for electrical distributors to provide a steady stream of lighting products for their retrofit projects.

• In a related trend, all sorts of companies are trying to establish themselves as the channels of choice in the renewables segment of the green market. Some industry observers say it's like the Wild West in the photovoltaics (PV) market, with some PV manufacturers selling direct; others going with PV specialty distributors or dealers; Web-based companies trying to grab some share; and other business models that combine these strategies.

• Two distributors of electrical products that many full-line electrical supply houses mistakenly overlook — W.W. Grainger Inc., Lake Forest, Ill., and Fastenal Inc., Winona, Wis. — are positioned to quietly increase their sales of electrical products. And although HD Supply, Atlanta, is wrestling with some financial challenges right now, with an estimated $1 billion in sales of electrical supplies and a major position in the utility market, they are still a force to reckon with.

• Power transmission distributors are becoming more of a force in the automation end of the electrical market.

The next few issues of Electrical Wholesaling will explore these trends in depth. This month's article on how to use the EW's Electrical Pyramid to become the channel of choice in your local market and the upcoming articles on these market trends aren't meant to be all-points bulletins that full-line electrical distributors are losing their dominant position as the channel of choice for an estimated 75 percent or more of the electrical products sold in the United States. But there's no denying the fact that the electrical market is now at a flashpoint, and that it's a good time to reevaluate your company's position in it. The editors of Electrical Wholesaling hope these articles will help you do just that.

A brief but entertaining history of EW's Electrical Pyramid

The Electrical Pyramid was initially sketched out on a paper tablecloth in a Sausalito, Calif., coffee shop in 1994 by the late EW Chief Editor Andrea Herbert, as she and the magazine's braintrust at the time tried to figure out how to illustrate the many changes the industry was going through then. We constructed the first Electrical Pyramid brick-by-brick in that coffee shop, inspired by the magnificent view of San Francisco Bay, great coffee, and the fact that the coffee shop was once a hangout for several famous 1960s-era San Francisco rock bands who would jam all night long at a nearby recording studio and stop by to cure a bad case of the munchies.

I brought that coffee-stained sketch back to our Overland Park, Kan., office and worked with EW's editorial staff to convert it into a magazine article that immediately caught the attention of industry leaders. CEOs of manufacturers told us it helped them educate their boards of directors about the electrical market. One Texas A&M University professor asked us to enlarge it so he could use it as a teaching aid for the classes he taught in industrial distribution. The president of the National Association of the Electrical Distributors (NAED), St. Louis, at that time sent us an angry letter asking us to never publish it again because he didn't like the fact that we were telling readers there were other companies out there selling products besides members of his association. Then as now, the 470 or so NAED distributors that operate an estimated 4,400 locations are by any measure the largest and most influential distributors of electrical supplies, but they probably account for less than half of all the electrical products sold in the United States.

And that in many ways is exactly what EW's Electrical Pyramid is all about — it's the clearest way we have found to illustrate the fact that manufacturers do have other options to sell electrical products, and that if full-line electrical distributors want to continue being the largest single channel for electrical products in the United States, they better be darn good at what they do, or they will be replaced by other companies that do a better job of providing local sales support, credit, warehousing and delivery.

EW's Electrical Pyramid is just a snapshot of the electrical market as a whole. It can be an even more valuable tool when you “localize” it to analyze the channels of distribution in your geographic market of choice. So get out your paper tablecloths, magic markers and whiteboards and start drawing your own electrical pyramids (See “How to Build Your Own Electrical “Pyramid” on page 20). EW's editors think this article does a pretty good job of summarizing the biggest channels to distribution in the electrical market. If you find other bricks in the pyramid, draw them in and send them to us at [email protected]. We will include them in our next edition of Electrical Wholesaling's Electrical Pyramid.

One other key thought to remember before you dig into the valuable exercise of building your own electrical pyramid: Remember that there really isn't any right or wrong combination of channels of distribution. EW's Electrical Pyramid is in some ways more like a kaleidoscope than a snapshot of the electrical channel, in that the bricks in it shift on a product-by-product or market-by-market basis.

For instance, a manufacturer that wants to grow in the New York-New Jersey metropolitan area may have entirely different Electrical Pyramids for the five boroughs of New York and suburban Westchester County or Long Island in New York and Bergen, Hudson and Passaic Counties in New Jersey because the channels of distribution and local buying influences can be very different. And the bricks in the pyramid that a local electrical distributor will build to analyze his competition for a slice of that same market will look different from that manufacturer's pyramid.

How to Build Your Own Electrical Pyramid

The Electrical Pyramid is going to be much more valuable if you build your own and customize it to your own unique market needs. But like lots of things, the devil is in the details. It's a fun exercise, so don't be afraid. Here's how to get started.

Schedule at least a half-day

Invite your management team and best strategic thinkers to this session. If you can do it off-site in a conference room, all the better, but if time or budget don't allow it, find a quiet room in your building where you can spread things out a bit.

Bring the right equipment

If you are leading the discussion and are a white-board type of guy or gal, you will have fun with this assignment. Bring ample erasable markers — you will be building an Electrical Pyramid brick-by-brick and will be thinking on the fly. Or, if you aren't into white boards, get hold of a large roll of newsprint from an art supply or craft store and bring along a handful of markers. Other resources you should have on-hand include laptops (internet access a big plus in this meeting); copies of this article; and sticky notes. If a PDF of this article would be helpful for the session, contact EW at [email protected]. The analysis in this article will provide a high-altitude overview of the various channels (bricks) in each tier of the pyramid. Your job in this exercise is to bring this analysis down to ground level for the market area under discussion, and identify all of the key players in it.

If you want to get really creative and make it a fun hands-on exercise, you may even want to try bringing along some large wooden building blocks, and Legos or Duplo bricks. Assign the person in the room with the most artistic talent with the job of inscribing each brick with the channel of distribution under discussion.

Assign one person to be the “scribe.”

If you are going with the building block idea, you have your man or woman. But make sure you have someone who is copying down all of the ideas sure to be flying around the room.

Build your pyramid level-by-level, starting with full-line distributors

Here's where you will need a copy of EW's Electrical Pyramid illustration shown on page 17. You may find it easiest to start at the top with full-line electrical distributors and work your way down through the seven tiers shown in the illustration. The rest of this article will walk you through each tier:

• Full-line electrical distributors

• Product niche distributors

• Service/product niche distributors

• Hybrid distributors

• Retailers selling electrical supplies

• Distributors from other trades selling electrical supplies

• Other channels

If you are a distributor, go around the room and start listing all competitors. Group them by national chain, regional chain or local independent. If you are an electrical manufacturer or independent manufacturers' rep, do the same thing, but you may want to group them by the amount of business you do, don't do or want to do with them. Depending on the type of analysis you are doing you may also want to pencil in which buying/marketing groups the distributors are in, if any.

And don't forget to factor in the huge role independent manufacturers' reps play in any local market. Depending on your position in the market (distributor, rep, manufacturer, consultant, etc.) you may or may not want to list and profile all of the independent manufacturers' reps in the market, and possibly the factory-employed field salespeople who cover the market as well.

You may find that creating an Electrical Pyramid leads to the creation a “customer pyramid,” where you analyze your market's key accounts by size, type of company, market focus, the level of service required and how they buy product. And remember psychologist Abraham Maslow's “hierarchy of needs” pyramid from that Psychology 101 class, which illustrated our basic need for food, water, shelter, companionship, respect, etc.? You could draw up a customer's “hierarchy of needs,” where you illustrate the importance of price, delivery, education, return policy, etc.

Okay, now the hard work starts. Compiling a list of distributors (or reps) in your market may unearth a few surprises and provide some valuable information. But to make this information really work for you, now sketch out a profile for each of these companies and drill down to their strengths and weaknesses. The basic company profile should include key management personnel; estimated sales volume; market share; and primary market focus. You also need to get answers from your assembled team to questions such as:

• “What value-added services does this company provide that we currently don't offer?”

• On the flip side, “Which services do we offer where we have a clear advantage?”

• Who are their biggest accounts?

• With which customers are they most vulnerable?

Product Specialists: Lamp specialists are coming on strong

Now move down to the next tier of the Electrical Pyramid. Go around the room and get people to brainstorm about all of the niche distributors in your market area that focus on a specific product category. The biggest product specialists typically include residential lighting, lamps, wire and cable and utility products. Others include fuses, voice-data-video (VDV) products and utility supplies. You may be surprised by how many product specialists in your market area compete with you on a few product lines. Depending on how in-depth you want to go with your analysis, you may or may not want to develop company profiles for each of these product specialists.

Pay special attention to the lamp specialists in your market. These companies do much more than just stock hard-to-find or oddball lightbulbs. Like most other product specialists, in the big scheme of things, their market niche may only be a few inches wide compared to the thousands of stock-keeping units (SKUs) that full-line distributors stock. But their market penetration and expertise within their specialty runs many miles deep compared to electrical distributors, and many lamp specialists nowadays are experts in state-of-the art lighting systems and carry a broad array of lamps, ballasts and a growing assortment of lighting equipment. These specialists could very well emerge as the channel of choice on LEDs because many of them have watched this product area for years and have a ton of insight into it. The trade association for these lamp specialists, the National Association of Independent Lighting Distributors (NAILD), Buffalo, N.Y. (www.naild.org), has approximately 180 members.

Service/Product Niche Distributors: Find out what ESCOs and lighting maintenance companies are doing in your market

Service/product niche distributors have a heavy emphasis on design, installation or repair. Although they sell electrical supplies, product sales may not be their primary function. These companies focus on providing a complete service solution to their customers.

Pay special attention to ESCOs, which provide the most sophisticated package of design, technical, financing, technical assistance, audit and, in some cases, installation services in the energy market. The sale of electrical products is a relatively small piece of the overall package of products and services that ESCOs provide. As you will learn in an upcoming article in the “Changing Channels of Distribution” series, many ESCOs are looking for distributors to provide local warehousing support and logistics for their lighting retrofit projects. The National Association of Energy Service Companies (NAESCO), Washington, D.C., offers some good insight into the world of ESCOs at www.naesco.org.

You should also pencil in lighting-maintenance companies into this tier of your pyramid. These companies, which typically have contracts for the maintenance and retrofit of lighting systems in stores, parking lots and other retail or commercial facilities, are emerging as skilled players in the energy game.

If you want to get a sense of how far these companies have evolved, check out the training resources at www.nalmco.org, the web-site for the National Association of Lighting Maintenance Companies (NALMCO), Des Moines, Iowa. NALMCO's training resources help school its members in the latest in energy-efficient lighting systems. Some full-line electrical distributors are now members of NALMCO, including Border States Industries, Fargo, N.D.; Facility Solutions Group, Austin, Texas; and Graybar Electric Co., St. Louis.

Hybrid Distributors: Don't overlook Grainger and Fastenal

Grainger and Fastenal are tough to categorize because they don't carry a full line of electrical products. But they are definitely competitors to full-line distributors because of their intense focus on the industrial MRO and facility maintenance markets, rock-solid balance sheets and progressive internal operations. Electrical products probably account for somewhere in the neighborhood of 20 percent of Grainger's total sales. But because of its sheer size, willingness to invest in its e-business capabilities, distribution network and branch infrastructure, the company is a formidable competitor for full-line distributors. If you have a Grainger branch in your neighborhood, add a brick to your pyramid for them.

By some measures, Fastenal may be a peripheral player in the electrical market. But with 25,000 stock-keeping units in electrical products and 749 new branch openings since 2004 you need to keep an eye on them. Add another brick to your pyramid for them — if they aren't already in your market, with this kind of branch growth they could be very soon.

You may also want to include Anixter International Inc., Skokie, Ill., on this tier of your pyramid if they have any locations nearby. They could also be called a product specialist because of their primary emphasis on wire and cable, but because they also sell a line of fasteners and provide some unique customized supply chain services for customers. EW's editors put them in this tier.

Retailers Selling Electrical Supplies: Keep an eye on what Home Depot and Lowe's are doing

When you figure that Home Depot or Lowe's does an estimated 10 percent of their total sales in electrical products, you realize why you still have to watch what these big boxes are doing in their electrical aisles. It's true that a huge chunk of their electrical business is in residential fixtures, which may or may not be a concern. And although all of the talk about home centers going after the contractor market in a big way seems to have died down a bit, Lowe's recently invested in Recurve, San Francisco, a licensed general and solar contractor that specializes in home energy audits and green energy remodeling for existing homes.

Distributors from Other Trades Selling Electrical Supplies: That distributor down the street may be a competitor

When you have at least 1,000 industrial distributors, 1,000 tool specialist distributors, and more than 200 specialists in power transmission products in the United States, you know some electrical sales are flowing through these often-overlooked channels. If you have any of these types of distributors in your market, as well of distributors of electronics components, HVAC equipment, plumbing supplies or other specialty distributors, they may be worth further study to see what kinds of electrical products they might be stocking.

It makes a lot of sense to get to know the distributors from other trades in your local market area. In a sense, you are in the same business but are just shipping different stuff in the boxes. Find some non-competing distributors from other trades and compare best practices in sales, warehousing, delivery, e-business and operations. You may also want to consider joining the National Association of Wholesaler-Distributors (NAW), Washington, D.C., which provides some terrific venues for networking with distributors from other trades and an insider's perspective on legislative issues of interest to distribution firms.

Other Channels: Always changing but always growing

Any single brick in this level of the pyramid probably may or may not account for a ton of electrical sales in your market. This level of the Electrical Pyramid may be toughest to track because it's where the new and potentially competing channels of distribution first start out.

Do you have any reps in the spec-grade lighting niche selling direct? Pencil them in. And if solar is growing in your market area, find out who is selling the photovoltaic (PV) equipment. It might be a small PV contractor who is also a dealer for a limited number or lines.

Put in another brick in this level of the pyramid if you are seeing any electrical manufacturers selling direct in your market area. This historically hasn't been a widespread issue in the mainstream electrical wholesaling industry. But some distributors are starting to question the move by some of the electrical industry's largest distribution equipment manufacturers to run their own in-house design and installation businesses to service turnkey project business like sports stadiums or large energy retrofit projects funded by the American Resource and Recovery Act (ARRA). It's unclear if their local distributors are handling any of the stocking, staging or delivery of electrical products for these projects, or if the manufacturers are handling them direct. Electrical Wholesaling will explore this trend in a future article of the “Changing Channels of Distribution” series.

Compare your Electrical Pyramid with EW's National Pyramid analysis on www.ewweb.com

Just to make sure you haven't missed any bricks while building your own Electrical Pyramid, compare it against EW's Electrical Pyramid and the updated analysis of changes in national distribution trends available at www.ewweb.com. And don't forget to look for next month's article on the biggest potential challenges to the existing channels of distribution.

10 More Ideas for How to Use Your Own Electrical Pyramid

1. Electrical manufacturers new to the electrical market can use the Electrical Pyramid to “mix and match” a combination of channels to suit their own unique marketing needs.

2. Distributors can use it in conjunction with Electrical Wholesaling's Market Planning Guide to map out future sales strategies on a market- by-market basis.

3. Distributors, reps and manufacturers can construct a “Green Pyramid” to analyze all of the channels of distribution for energy-efficient electrical products in your market area.

4. Distributors can build Electrical Pyramids for new geographic areas where they want to set up branches or buy distributorships.

5. Electrical manufacturers can analyze a competitor's channels of distribution to see where they are weak and strong.

6. Independent electrical manufacturers' reps can use the Electrical Pyramid to see if the market area has any potential customers from outside the traditional channels of distribution they may have overlooked.

7. Reps, manufacturers and distributors can all use the Electrical Pyramid as a training tool for new employee orientation.

8. Larger companies with boards of directors can use it to familiarize board members from outside the distribution industry with the electrical market.

9. Manufacturers can build an Electrical Pyramid to provide additional insight into how their local salespeople are penetrating the various channels of distribution.

10. If you are looking for a business loan, an Electrical Pyramid could be used as background information to show a lender where your company fits into the local business community.