Insights into the forces shaping our industry.
I read the recent research study on the Alternate Distribution Channels commissioned by NAED. The study is interesting in many regards; especially:
- Definition vs. recognition of alternative channels
- Survey results of perceived threats and responses
- Survey construction, methodology and inherent bias
Classical SWOT analysis identifies a company’s (or industry in this example) specific Strengths, Weaknesses, Opportunities and Threats. The NAED study was commissioned to canvass their members and identify the largest threat to their business. The result of that initial survey was online e-commerce competitors. While I agree that e-commerce is a significant threat to any business, I’ve also found that the enemy you don’t see is equally as threatening as the enemy in front of you. The electrical industry is in the midst of rapid change. Change brings new ideas, new entrants and new solutions; oftentimes unrecognized on a local level and unfortunately under-reported by studies that build from ground up; as in the current survey.
Personally, I found the study to be interesting as a look into the minds of the currently affected community of electrical distributors. But just as myopia is beneficial to a local distributor focused on local issues, it is also very difficult to detect growing threats to the channel that may be brewing on a very small or negligible local scale but pandemic in nature across the country. There are a few legacy companies that have evolved into significant channel threats that were relatively ‘unseen’, e.g:
Musco Lighting. Small little company, focused solely on selling sports lighting at the municipal level on a direct to muni or institutional basis. Just as the large lighting manufacturers overlooked their presence, so did the distribution channel. Musco revenues are well north of $350M and are putatively the largest manufacturer of sports lighting in the country.
Orion energy. Small little company, focused solely on selling lighting retrofits to grocery stores, and then retail and then offices and then added ‘qualified’ contractors to function as their selling and marketing channel. At their high water mark, they were over $100M and that was before the explosion of LED.
Ruud Lighting. Small little company, focused solely on selling commodity lighting products direct to contractors out of a printed catalog. As they grew into LED they added BetaLED to enter the C/I channel and appoint lighting agents, but prior to (and after) Beta… they were a bona fide ‘alternative channel’ with revenues north of $100M.
My point is simple… identifying Amazon as a threat is easy for anyone to do… they get all of the press and of course they have the resources to address the electrical industry. But more important is the dozens or scores of companies who are embarking on alternative channel strategies and literally peeling the onion of Lighting and Controls away from the traditional legacy industry; with little to no recognition. The pie is already smaller and Amazon hasn’t shown up yet.
It is very naïve for any legacy channel member to believe that a new entrant with the purchasing power of Amazon won’t get pricing discounts equal to or larger than the best wholesale customers. If a manufacturer is given the opportunity to pick up an additional $20M, $50M or more, they will take that business off the table. And they should, it’s called competition, their competitor will take it and benefit from it.
Distributor responses to perceived threats.
The survey noted that contractors plan on doubling their purchasing via online to 16% of total purchasing in the near future. The results summarized this as ‘small relative to purchases through traditional methods’. And only 40% of the top 200 distributors have e-commerce capability and most distributors were not investing in IT infrastructure. This isn’t a response to a threat, this is abdication of up to 16% of your core stock business. With the added threat of introducing a new vendor with more sophisticated and buyer-friendly transactional processes than you offer currently.
While I can agree that Amazon won’t initially play in the large project business, the financial impact to a local distributor to lose 16% or more of his stock business is financially devastating. Stock business covers the asset investment of the business; it’s the meat and potatoes. Project business is thin gravy; small margins for handling credit insurance for the manufacturers. Writing a project at 7-8% is ‘profitable’ when you can add back the miscellaneous fill-on orders out of stock to complete the project. And yes, the annual rebates at the end of the year are a nice dessert… but running a business at near break-even to earn rebates is a scary way to stay in business.
EVERY survey and experiment is subject to bias. It is near-impossible to receive a nice retainer fee from a client and not report back what they want to hear. I would never accuse the consultants of consciously doing that, but it seeps in. From experimental drug research with sunken investments of hundreds of millions to your kid asking if her book report is good… we all like to report ‘nice’ ‘confirming’ things. NAED represents less than 50% of the electrical wholesale industry, its members pay handsome fees for the benefits they receive and NAED does a nice job of providing a long list of support services to their members. But sponsoring a survey that surveys NECA contractors and not IEC contractors (because they didn’t have email addresses) is called survey bias. Dismissing real channel threats that are growing rapidly but lurk below the level of day to day local distributor lines of sight is called survey bias. Focusing a survey to basically one player, Amazon, is survey bias.
I could cite 20 companies that are quietly siphoning over $1B of revenue out of the electrical industry today; and that’s just a casual review. Now in a $100B industry… that’s not a lot of business; watered down to the local level it’s ‘insignificant’; even invisible. But I’m not including Grainger and MSC and Home Depot and Menards and Lowes…..
Just look at the revenues of the three companies mentioned above and you’ll see that the wholesale pie is diminishing. And recommendations that advise looking at manufacturers for different rebate programs, or trying to bundle commodity items into larger commitments or asking manufacturers to limit their pricing practices with alternative customers…. Aren’t viable solutions to alternative threats.
With the economy growing and prices increasing, the opportunity to foment innovation within your business and become a vendor of choice.. is now; while you’re still in business.
Ted Konnerth, Egret Consulting Group’s founder and CEO, recruits on a retained basis, helping leaders in the electrical and lighting industry identify their next C and V-level hire. He is also the executive director for the International Retained Search Associates, allowing him to liaise with skilled recruiters around the globe. To learn more about how Ted can help your company attract talent view his biography, check him out on LinkedIn or email him at firstname.lastname@example.org.