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The Changing World of Electrical Distribution

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The Changing World of Electrical Distribution

There was a time, not too long ago, when an electrical distributor could easily identify his competitors, usually other local distributors. Today, that has all changed as competition is coming from the big boxes, national or regional chains, third party Internet providers and new ones yet to be identified.

The Internet of Things (IOT) and the Industrial Internet of Things (IIOT) mean new competition, including software providers. One expert we consulted says there is a host of offshore companies that plan to enter the electrical/MRO marketplace, possibly circumventing traditional distribution and create new competition.

Few people would have predicted five years ago that electrical distribution would look the way it does today. Some older, well-known distributors have either bought competitors or been acquired themselves. Regional distributors are moving into other sections of the country by buying other distributors that already have a presence in those areas. Combine this with new entrants such as Amazon Business, growing regional chains that have expanded nationally, and new technologies. One can readily see there will be more substantial changes in the next few years, possibly more than what has occurred in the previous decade.

Certainly a striking change that was mentioned at the NAED national meeting, is competition coming from outside, not just within, the traditional electrical channel. In addition, the blurring of lines between electrical, automation, fluid power and electronics is causing a shift in a distributor’s strategy.

So how do distributors succeed in the future?

Distributors will need to be innovative, re-examine their existing business model, find ways to improve their logistics capabilities, and speed deliveries to customers who expect same day or next day delivery. That was a point driven home by Halsey Cook, president Sonepar U.S.A. , who was a panelist during an NAED  discussion that was aptly titled, “Are You Predator or Prey?”

“The need for delivering products faster is putting pressure on us to change our business model,” he said. He gave the example of being able to take an order up to midnight and having it delivered to the customer by 5 a.m.

“We have to make the distinction between being a generalized distributor and having everything to sell, and being a specialized distributor that really brings unique knowledge and a set of services to solve a local problem,” he said.

The problem for many distributors is that it isn’t any easier to fight against the competitor you know than it is to fight against new entrants into the marketplace who aren’t playing by the “traditional rules.”

Some of these competitors such as Amazon Business are using improved logistics, big data, seamless transactions and fast delivery as competitive weapons.

Amazon Business topped the $1 billion mark in sales in its first year of operation and reportedly is growing 20 percent month to month.  Amazon itself shipped 1 billion parcels of its own goods last year and is now forecast to handle a greater volume than FedEx in 2019. And more and more distributors are using Amazon Business as its fulfillment center just as E-Bay launches a new platform called E-Bay Business Supply that focuses on MRO products. And, yes, the new site includes products such as electrical wire, cable, ground fault breakers and LED lighting, all categorized in the construction section.

Amazon’s main rival, Alibaba, also made similar moves in the logistics space. Cainiao, a logistics company formed by Alibaba and others three years ago, announced plans for $16 billion supply chain investment.

What do all these changes mean for the electrical industry?

Frank Hurtte, founder of River Heights Consulting, Davenport, Iowa, worked in the electrical distribution area for many years and was a former branch manager/VP of sales for Van Meter, said there may not be a “pure” electrical distributor in the future.

“We have already seen this as distributors launched into the datacom world a little more than a decade ago,” says Hurtte, who is often a speaker at industry association meetings. “Today we see electrical distributors in the safety business, fluid power, power transmission and the industrial market.  Over the course of time, this will accelerate.

“Why is this happening?  First, for solutions-based distributors, customers are demanding it. They want to buy a full solution, not just the electrical components.  For MRO/Logistically focused distributors, the emphasis is similar; providing a larger market basket of goods to their customer base.

“In the past, distributors have launched out into adjoining lines of trade only to discover that breaking into the field was more difficult than they imagined.  For most the move took five years or longer.”

This move has substantially changed the traditional distribution model.

Wesco is one of those companies that has successfully branched out from being known mainly as an electrical distributor and has moved into other product areas, such as safety and integrated supply. It also provides supply chain solutions and has successfully implemented its One Wesco Value Proposition that offers customers electrical, data communications, industrial, general MRO and OEM products.

Wesco did not return calls for comment for this article.

And several years ago, few would have imagined Kaman Industrial Technologies, a well-known fluid power and PT distributor, adding electrical products and automation to its product lines.

Last year it acquired electrical distributor G.C. Fabrication, Inc. (GCF) of Northvale, New Jersey.

The acquisition expands Kaman’s Automation, Control & Energy platform into the New York metro market. It had previously acquired Minarik, Target Electronic Supply and Zeller. Kaman is expected to add to those complementary product lines through acquisition.

But probably one of the most glaring examples is MSC Industrial Direct, long known as a top MRO distributor, which has expanded into the electrical area by forging an agreement with Schneider Electric to give MSC manufacturing customers access to Square D and Telemecanique products

The distribution agreement provides MSC customers in the United States with access to more than 50,000 electrical products in 80 electrical product categories marketed under the Square D, Schneider Electric and Telemecanique brand names. The MSC-Schneider Electric relationship represents one of the largest Square D product offerings available to industrial customers.

Non-traditional electrical distributors that have existing MRO/OEM customers now offer electrical products. But as technology continues to emerge in areas such as LEDs and controls, it will require additional training and expertise, a benefit for specialized electrical distributors who better understand the market, new products, and total solutions compared to a general line distributor.

And then there are, of course, the major changes being caused by an acceleration of mergers and acquisitions, something that will continue in the years ahead.

“I don’t think there’s any doubt the 100 largest electrical distributors will continue to acquire other distributors, but distribution is like politics. It’s all local,” says Ted Konnerth, an electrical industry veteran and former global VP of sales for a $1 billion sales segment of Cooper Industries.

Konnerth is the founder of Egret Consulting. He meets with and consults with some of the major electrical companies in the world and has watched the myriad changes taking place in the industry, including M&A activity.

Konnerth says the bigger chains don’t have any interest in acquiring the $5 million to $10 million company and instead are looking for the $50 million to $100 million acquisition. The reason is simple, he notes. “It would be just as hard for them to integrate a small distributor than it is to integrate a $100 million acquisition.”

And larger distributors are ready to pounce if an acquisition presents itself. One CEO told investors that as the industrial economy continues to struggle along, some distributors will have problems carrying inventory and meeting customer demands. That will lead to lower valuations and more opportunities for acquisitions, he says.

Konnerth believes there are many ways for smaller distributors to be successful in the future. No one thinks distribution is going away.

“I think there are opportunities for electrical distributors who carve out a base of customers, define what their needs are and service them,” he said in an interview.

He elaborated on that point in his blog at egretconsulting.com.

“Distributors have a meaningful and impactful role in the efficient transfer of goods in the country. They have a meaningful and impactful role in the efficient transfer of goods in the country. But distributors have to adapt to the changes. They will lose their bargaining rights to Lighting if they can’t compete successfully in moving lighting goods.”

Frank Hurtte agrees.

“Competing against much larger distributors will require a shift in the business model. If a small distributor goes head to head with a larger distributor on product availability, price or e-commerce capability they will lose-period. However in the past larger companies struggle to provide a customized set of services to closely match customer needs. This is particularly in highly technical areas,” he says.

He points to distributors with business models that have morphed into something outside the normal value-add model.

“They have added engineering, fee based-service and have imbedded themselves into their customer’s process in a way which builds their importance to both customers and manufacturers.  Their model crosses over the line into what used to be viewed as the duties of manufacturer’s reps and systems integrators,” he says.

Whatever model is adopted, there is little doubt that E-commerce will play an important role as customers demand a user-friendly web site.

Yet Konnerth expresses surprise that more electrical distributors have such sites.

“Frankly, it astounds me that larger distributors don’t  have fully automated e-commerce platforms in place,” he adds.

There are exceptions. Crescent Electric, for example, is a 100-year-old electrical distributor that has successfully implemented an e-commerce program that other distributors can learn from if they are going to be around in the future.

Michael Mayer, director of e-business commerce strategy and commerce for Crescent Electric, wrote an article for B2B E-Commerce World that says employee involvement is one key to driving e-commerce sales.

He said that after first rolling out e-commerce for Crescent customers in 2013 adoption grew at a “snail’s pace.

“After almost a year, we pulled a 180-degree turn and redirected our focus to getting our employees on board,” he wrote. “This was the best decision we could have made, and it has since contributed to a 60% growth rate. Additionally, our customers spend almost 10% more when they use the website as an additional way to do business with us compared to when they weren’t using the site.”

While E-commerce will play an ever increasing role, distributors are also faced with technology companies coming into the marketplace.

Particularly telling is the emergence of software companies.  As just one example, the industry is now seeing partnerships between major technology companies and lighting manufacturers, a move that will only grow in the future.

Konnerth says the recent Distributech Exhibition and Conference emphasizes the change in competition.

At that show, which is the largest transmission and distribution conference covering the utility industry, 40 to 60 percent of the exhibitors were software companies.

The utility industry, Konnerth notes, is changing rapidly.  Solar and wind power are growing exponentially.  Uncertainty in investment in both solar and wind has largely been removed leading to greater growth and opportunities for electrical distributors.

Wesco, for example, has a solar catalog and  hosted a Lighting Efficiency Trade show. Other distributors are setting up separate divisions to meet the challenges associated with solar and other forms of alternative energies like wind.

What will be interesting is how electrical distributors might have to change their product mix from what they are selling today, versus what they will be selling in the years ahead.

Hurtte offers a warning for distributors who just want to sell electrical products.

“For small distributors, tying to electrical products alone is a recipe for quick financial disaster, most likely during the next major recession,” he says. “For mid-size distributors, the strategy will equate to longer term stagnation.  If the ownership is 50+, they will most likely survive until retirement; just don’t encourage the kids to get into the business.”

 

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Jack Keoughwas the editor of Industrial Distribution magazine for more than 26 years. He often speaks at industry events and seminars. He can be reached at john.keough@comcast.net or keoughbiz@gmail.com.

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