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Riding Out the Industry Consolidation Wave

By Bridget McCrea

In 2014, Southwire Company acquired electrical wire and cable maker Coleman Cable, Inc., in a $786 million deal. Also last year, Western Extralite joined Border States Electric, leaving the latter with a combined 1,900 employees and 82 branches in 16 states. This year, similar developments are already surfacing, starting with WESCO Distribution, Inc.’s acquisition of Hill Country Electric Supply in a deal that was expected to close in May. Known to disrupt existing distributor-supplier relationships and change business dynamics, such consolidation of power could eventually lead the industry to a significantly smaller distributor pool that’s fed by an equally-as-small group of manufacturers.

A phenomenon that tends to take hold when markets are “hot” (and companies have money to spend on acquisitions and target markets in mind) and “cold” (when the same firms are struggling and looking to gain economies of scale or more solid financial footings), consolidation is a natural progression that helps shore up fragmented business environments and that epitomizes the “if you can’t beat ’em, join ’em,” philosophy.

Not Our First Rodeo
Of course, this isn’t the electrical distribution’s first go-round with industry consolidation. Rewind three years to 2012 and in tED Magazine’s What the manufacturer consolidation trend means for distributors and Consolidation trends: What does Eaton’s purchase of Cooper mean?, we looked at the good, the bad, and the ugly aspects of industry consolidation for electrical distributors.

Some NAED members are still grappling with the aftermath of the 2012 mergers and acquisitions. “We’re knee deep in this with two of our major suppliers right now,” says Brad Van De Sompele, president at Frontier Electric Supply in Bensenville, Ill. The mergers he’s referring to are ABB’s 2012 acquisition of Thomas & Betts for $3.9 billion and Eaton Corporation’s purchase of Cooper Industries for $13 billion during the same year. And while it’s been three years since those consolidations were announced, distributors like Frontier Electric are still feeling the impact of such moves. 

“ABB and Eaton represent two major product offerings for us,” says Van De Sompele, who points out that prior to the ABB-T&B merger, his firm was a “team B” distributor. So on one hand, that blending of two suppliers has been a “real plus on the commercial side” for Frontier Electric. “We can combine purchase orders, have a single shipping location, and so forth,” Van De Sompele explains. “These days, we can place one PO with ABB and T&B for either company’s product offering. This has been very beneficial.”

Addressing the Sales Side of the Equation
While Frontier Electric is benefitting on the commercial side from the marriage of two of its most critical suppliers, the sales side of the equation has become “very complicated,” according to Van De Sompele. “We’re still working to cross-train salespeople on the products offered by both suppliers. This is very different from the environment in which certain reps handled ABB’s products and others focused on T&B’s offerings.” In the wake of the merger, Van De Sompele says the distributor ran into issues when “street-level reps just weren’t up to speed on all of the products.” That’s where the cross-training comes in. “Getting those feet on the street trained on the products has been our biggest challenge,” says Van De Sompele, “particularly considering the fact that we’re expected to know more than the manufacturers even know about selling those items.”
 
In assessing the long-term impacts of supplier mergers, Van De Sompele warns distributors to be ready for some management and leadership changes that could also impact the way in which they do business. “In the Chicago metropolitan area, there have been changes at the management level on both a local and regional level,” says Van De Sompele, who adds that go-to-market strategies also tend to change when two large firms combine forces. Ultimately, it’s the electrical distributor that has to work with and answer to its end user customers – regardless of what’s going on behind the scenes on the industry consolidation front.

“We’ve really tried to carry the burden when it comes to serving our customers,” says Van De Sompele. “We’re an OEM-focused distributor, so our sales cycles at the OEM level are very long. As a result, we have to be the face of our manufacturers’ products in front of our customers now more than ever.” That can put a strain on the independent distributor that doesn’t necessarily have the resources or time to help every single customer navigate the changing waters. “Our customers want to work with distributors that can answer their questions,” says Van De Sompele. “I’m not saying that our [suppliers] aren’t supporting us, but the speed at which we get answers to our problems – because of the newness of a lot of the field reps – has become a big problem. It just takes too long to get the answers that we need.”
 
We Win or Lose Together
During the 43 years that has passed since he opened the doors to Elliott Electric Supply in Nacogdoches, Texas, Bill Elliott has witnessed numerous waves of consolidation – both on the supplier and on the distributor side of the industry. In looking at the current business environment, and the most recent rash of mergers and acquisitions, Elliott says, “Because of low capital costs and the use of computers to manage and consolidate activities, NAED members can probably expect more such activity in the near future.” Still, independent distribution competes favorably with national accounts as long as manufacturers see it in their interest to treat distributors evenhanded.  “I don’t think consolidation foreshadows one or two firms supplying 70 percent of the market like they have in Europe,” he points out. “but there will be larger independent firms operating more efficiently.”  

In most instances, Elliott says M&A activity within the electrical industry tends to be driven by the need to reduce costs, gain economies of scale, and expand market reach, but local decision making and flexibility give an advantage to independent distribution, especially in small markets. “Too much consolidation may present problems for manufacturers who have to negotiate with fewer and more powerful distributors,” he notes. 

As NAED members and suppliers keep their ears to the ground for more consolidation announcements in 2015, Elliott says it’s the latter that should be particularly aware of such M&A activity. “We’re at a point where manufacturers need to evaluate their positions on loyalty, and on what loyalty actually means to them, instead of working with less loyal distributors t o get a short term advantage,” Elliott points out. “In some cases, manufacturers may have to sidestep some opportunities in order to get to the more committed long term partnerships that they’re looking for. The most profitable relationship is still the one where we win together or lose together.”

McCrea is a Florida-based writer who covers business, industrial, and educational topics for a variety of magazines and journals. You can reach her at bridgetmc@earthlink.net or visit her website at www.expertghostwriter.net.

 

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