EUROPEAN OUTLOOK

Last year was a difficult one for European electrical wholesalers, and there has been little appreciable recovery in 2002. Our European counterparts have contended with not only global economic tightening but also the challenge of adapting to the new euro currency — with all its implications of compliance, cross-border trading and price transparency.

But the distributor and manufacturer delegates at the 47th General Assembly of the European Union of Electrical Wholesalers (EUEW) who met in Vienna, Austria, recently concurred that industry conditions were showing signs of tentative improvement.

They also were intent on finding ways to make internal operations more cost-effective, and on expanding their business into the former East Bloc.

“Last year there was a definite sense of foreboding that a positive cycle in our industry had come to an end,” reported Yves de Coorebyter, executive director of EUEW. “That fear became a reality over the past year, as the slowdown of our business reflected a generally negative trend. This course will probably continue through the coming months, but from a total European perspective, the end of this current dark period seems to be in sight.”

A wholesaler from the Czech Republic, attending his first EUEW meeting, agreed, saying that “lightning leads to brighter times.”

Consensus is that most countries began seeing turnaround in April or May, but it is unlikely that European distributors will finish the year at the sales and profit levels of 2001.

Distribution Disciplines

In the interests of global cross-fertilization of ideas, the EUEW executive committee invited John SantaCroce, president of Argo International Corp., based in New York City, to discuss the strategic and tactical operating systems his company uses to monitor profitability and hit-rates on orders.

SantaCroce stressed that constant re-evaluation of these indicators through daily, weekly and monthly reports is key to managing the growth of his firm's 27 domestic and foreign locations. The weekly report focuses on bookings, their margins and on quotes. The monthly report targets sales, gross profit percentage, and branch activity relative to the budget over a six-month period.

SantaCroce also discussed methods of tracking the percentage of quotes that are turned into orders, customer classification, and the relationship between orders entered and inventory allocated. Personnel profiling and sales budgeting rounded out the discussion.

Delegates at the EUEW meeting were impressed with the sophistication of the methodology and on the little time it takes to use the reporting system to analyze branch performance once its put in place.

Eastward Expansion

The EUEW meeting attendees also got some insight into market development in the former East Bloc. Christophe Laurent-Atthalin, general manager for Rexel in Eastern Europe, gave a presentation on the electrical markets in the developed countries of Poland, Hungary, the Czech Republic and Slovakia, as compared to Russia, the Baltic States, and the former constituent republics of Yugoslavia and the Soviet Union.

Laurent-Atthalin said this market includes about 20 countries with a population of 400 million. According to Laurent-Atthalin, the economic patterns in this region are relatively predictable, and GDP growth rates throughout are above European Union (EU) standards.

“In terms of electrical usage,” he said, “the closer the countries are to the EU, the higher the consumption, and this is a prime indicator of development. There is a significant growth potential for electrical manufacturers and wholesalers in this region.”

Utilities in many of these countries are in a process of accelerated deregulation. Although this represents a distinct opportunity, there is the challenge of reconstructing this industry as a private sector enterprise.

Commercial building has been hot over the last decade, but new residential construction and renovation will see bigger sales opportunities in the years ahead, added Laurent-Atthalin. This will mean more diffuse product sales and an emphasis on value-added services that only the wholesaler can provide.

The industrial market, especially MRO, continues to experience high expansion rates throughout the region. The driver here is foreign investment, which involves the investor's habits of brand recognition in many cases, and this will have to be coordinated with strong local manufacturer presences in various countries.

Laurent-Atthalin concluded that the wholesaling industry in Eastern Europe emerged as a result of the post-Communist political and economic changes, and it is now experiencing consolidation in the same way electrical distribution has been doing so globally.

National Reports

The executive directors of the various national federations gave these individual reports on the status quo of their national economies and the existing conditions in their electrical markets.

Austria

The introduction of the euro continues to be a challenge for the Austrian economy, according to Martin Weigend. The inflation rate is about 2.7 percent and is expected to increase further.

GDP increased in 2001 to 1.2 percent and unemployment stands at 8 percent, but Austria's foreign trade has increased to some 48 billion euros.

In the electrical wholesaling industry, sales volume was down 0.6 percent. Total construction activity has decreased by 5.3 percent, and new housing is down 1.3 percent.

Reflecting the construction downturn, installation materials and wire and cable sales were off 4.8 percent and 7.3 percent, respectively. But lamps and fittings were up 6.2 percent and technical electronics showed a strong 13.4 percent gain.

United Kingdom

The most recent general business surveys indicate a slowing of economic activity in the UK, with manufacturing performance especially weak, reported Nigel Ellis.

GDP growth is expected to be between 1.5 percent and 2 percent. Interest rates are now low, but it is anticipated that they have bottomed out and will start to rise.

Electrical wholesalers reported a 0.28 percent decline in sales volume and are somewhat perplexed about the future. On balance, the feeling is that there will be a little more price deflation, a little bit of growth, and increased pressure on margins.

Sales of both installation materials and wire and cable were off 5 percent, while lamps and fittings showed minimal gains of 1.5 percent. The only strong showing was in the traditional domestic appliances sector, which was up 7 percent.

Italy

As in many European countries, the terrorist attacks of Sept. 11 caused an initial slowdown in a number of industries and markets, but there was a rise in sales of security products in the industrial, commercial and residential marketplaces.

Sales of electrical supplies were up 5.35 percent in 2001, said Luigi D'Alo, with installation materials up 2.9 percent, wire and cable up 13 percent and lamps and fittings up 6.2 percent.

Overall, the Italian electrical and electronic wholesale industry remains strong, and the expectation is that once international economic conditions improve, residential, retail and industrial demand will increase significantly.

Portugal

There has been a general drop-off in economic activity, with general construction and residential activity slackening by about 10 percent, according to Jose Valverde.

It is estimated that industry sales in 2001 increased by 2.1 percent in terms of current prices, but this represents a real decrease of 2 percent when taking into consideration inflation and other economic factors.

Belgium

Overall sales volume was up a marginal 0.7 percent, reported Yves de Coorebyter. The number of building licenses issued decreased by 6.2 percent, and the building of new homes was off 7.6 percent while renovation projects dropped 4.8 percent.

Cable sales, up 5.4 percent, and HVAC, up 5.3 percent, were the only truly positive numbers. Installation materials gained only 0.9 percent, while all other sectors showed declines.

Republic of Ireland

Wholesalers reported a marked downturn in business during the first quarter of 2002, with decreases ranging anywhere from 7 to 15 percent, said Gerry Kelly. The construction industry expects a further slowdown through the rest of the year.

Margins are still under pressure and will probably increase because the current downturn is expected to continue into the foreseeable future. Major difficulties are reported in the credit and collection area.

Switzerland

The Swiss economy has been on hold for the first half of this year, held back by weak foreign trade and low capital spending, according to Jörg Reimer.

Hopefully, in the second half, exports as well as consumer spending should pick up again, producing a positive momentum. It is expected that real GDP growth in 2002 will be 1 percent.

For 2001, the general turnover of wholesalers increased 3.4 percent. Wire and cable was up 3.5 percent, lighting up 6.2 percent, and installation materials 3.6 percent.

Thus far this year, results have been not as strong, but better performance is expected in the second half.

Germany

Post-unification problems continue to affect the entire German economy, said Dr. Horst Beckers. There is ongoing unemployment and dissatisfaction in the old eastern sector, which may have some negative implications in coming elections.

In the construction market, the number of completed flats declined from 600,000 in 1995 to about 300,000 in 2001, even though interest rates were as low as 5 percent. Accordingly, both installation materials and cable sales were down 5 percent.

By market sector, the only positive results were seen in electronics, up 5 percent and HVAC, up 13 percent.

Some wholesalers achieved net profits of 2 to 4 percent of turnover, but the average was considerably lower, a condition that reflects distributors continuing to perform many value-added functions at no cost.

A specific problem in the German marketplace has to do with the closing of the Siemens i-center distribution network. Some of the 90 outlets have been acquired by independent wholesalers, so that experienced employees still remain within the professional work force.

France: Currently, the unemployment level stands at 9 percent and inflation at 2.2 percent. Forecasts of the GDP have been revised downward from 2.5 percent to 1.5 percent for 2002, but most observers consider this to be an ambitious goal.

The situation of the electrical wholesaler deteriorated steadily throughout 2001, according to Michel Nicolas. The growth rate was up 6.1 percent in January and had fallen to less than 1 percent by the end of the year.

Finland: The national GDP grew 0.7 percent in 2001, and is expected to increase by 1.6 percent this year. Although it was widely believed that the Euro would increase prices at the beginning of this year, economists are now forecasting a stabilization of inflation at 1.5 percent.

For 2001, Finnish electrical wholesalers saw a growth rate of 5.3 percent, stated Tarja Hailikari. This has slowed considerably, and no real growth is expected for 2002.

As in other countries, HVAC showed a strong sales increase, up 9 percent. Wire and cable, lamps and fittings, and electronics registered growth of between 6 and 7 percent.

Sweden

The electrical wholesaling sector saw growth of 7 percent last year, reported Björn Högborn.

Industrial activity has entered a period of recovery in Sweden, and the construction sector has stabilized. The forecast for increased residential building is optimistic at 10 percent, but investment in commercial and industrial construction is expected to be off by as much as 15 percent.

By product, the industry realized some very positive results: installation materials up 4.8 percent, wire and cable up 7.5 percent, lamps and fittings up 9 percent, electronics up 8.5 percent, and HVAC 12.6 percent.

Additionally, the telecommunications company, Telia, which is partly government-owned, has out sourced projects involving setup and maintenance of networks, representing a considerable new business opportunity for electrical wholesalers.

Norway

In 2001, Norwegian electrical wholesalers saw a growth in turnover of 2.5 percent.

Residential building increased by 8 percent, but is expected to decline by some 3 percent this year. Commercial building dropped 7 percent in 2001 and is expected to fall another 3.5 percent this year, according to Jens-Dag Vatndal.

Nevertheless, installation materials sales increased 4.8 percent, wire and cable 1.6 percent, and HVAC 7.4 percent.

A joint private sector effort of the wholesalers' federation and other electrical industry associations to establish an independent organization to handle the waste disposal of electrical products has proven successful and far more cost-effective for all the industry parties concerned than any externally proposed initiatives.

John Paul Quinn is a free-lance writer and international communications consultant based in Stamford, Conn. He can be reached at (203) 323-9850 or via e-mail: [email protected]

ECONOMIC OVERVIEW

Dr. Horst Beckers, executive director of the German federation, and co-director of EUEW's statistics program, made these observations regarding the overall picture for the 13-nation organization:

• Total 2001 sales volume for EUEW stands at 27.14 billion euro, up 2.3 percent from the previous year.
• The average gross margin was 21.8 percent, up slightly from the previous year's 21 percent; France and Norway led with 24 percent, followed by the UK, Sweden, and Switzerland with 23 percent, and Austria, Belgium, Finland, Germany, Italy and Spain with between 20 and 21.5 percent.
• Sales by product category: 47 percent installation materials, 18 percent lighting, 16 percent wire and cable, and 19 percent miscellaneous.
• Sales by customer group: 63.5 percent contractors and installers, 16.7 percent industrial, 11 percent retail and consumer, and 8.8 percent miscellaneous.
• Prices in the industry increased 2.7 percent, with Ireland, Norway and Portugal registering 3 percent gains; and Austria, Belgium, Finland, Germany, the UK, Italy and Sweden showing an increase of 2 percent.
• Overall GDP in the 13 countries increased 1.9 percent in 2001, down from a gain of 3.4 percent in 2000, while unemployment dropped in 2001 to 3.9 percent in comparison to 4.2 percent in 2000.