What Would You Do With $500,000,000

If you were Graybar?

Yes, it's a lot of money and many people are wondering, perhaps speculating, on what Graybar will do with a half a billion dollar unsecured loan. This gives them $300 million more than they had before.  It's an intriguing question and ranges from "nothing" to "retiring prior loans / lines of credit that had higher interest rates" to "how can they spend the money?"

(And since Allen and I had some time to spend on the phone today, we thought we'd try to spend someone else's money!)

From asking around, we've learned:

• There is no personal liability.
• There are no real estate attachments
• There are no stock attachments nor A/R commitments.
• Part of these loans were renewal of old loans and cleaned up documents from as long ago as 5 years ago.

But, according to some "in the know", there are plans for the money.

But remember, the plan could be keeping the money "dry" and not using it ... essentially saving it for a rainy day.

But, why post something if we can't share ideas on how it could be used....

• $500,000,000 would buy about $2 billion in distributor sales, so could Graybar go on a buying spree? These could be electrical distributors, automation houses (they bought AVAD), lighting distributors, etc.
• Perhaps an expanded renewables initiative .... solar, entering the smart grid marketplace?
• Do they need a cash cushion for business they want to pursue, especially if they are concerned about receivables / delayed payment?
• Could some be invested into their industrial automation strategy? They are hiring many people around the country now (don't know if any are funded by Schneider Electric).
• Or in more salespeople (Grainger is expected to hire 300 new inside salespeople this year).  After all, Graybar's Bill Mansfield was quoted as saying manufacturers are reducing their salesforces
• Perhaps enter a new business through an acquisition ... buy a solar distributor? a PT distributor? an ESCO to support their energy initiative?
• Or expanding their utility business by purchasing HD Supply's utility group (which now includes their electrical group)?
• Or funding the opening of new locations (they are looking to open 7-10 new locations per year for the next several years)
• Maybe take a page from Grainger and do end-user marketing to build their brand and drive business?
• From a financial viewpoint, is the loan viewed as liquidity / cash and an asset for a potential acquirer of Graybar, enabling some internal funding of Graybar being acquired? Could someone like Motion Industries (Genuine Parts) be interested in entering the electrical industry? Or another large distribution company? Or a private equity firm?

Lot's of choices.  With cash much can be done.  It's doubtful that Graybar invested its time to do nothing with the money.  So what do you think they should do? If you had this much money (to spend in the business), how would you spend it?  What could be a "game changer" to accelerate their business?

Technology @ a Crossroads? Motherships and etc.

Back in July, we seemed to have hit a nerve with some distributors and manufacturers about some former Mothership ERP's that are now drifting out of orbit.

As we read emails and listened to phone calls, it became apparent that some distributors had followed a similar path when purchasing their latest ERP system.

• They did a quick survey to make sure they covered their Cardex system functions.
• They talked to their industry buddies to make sure the new system would work (if it is good enough for them it is good enough for us review process!)
• Some listened to tales of poor or waning support; Many did not pay attention.
• Site visits became the norm and many realized that they would never achieve the level efficiency of what they saw. But they wanted it.
• Not happy with their current system's support, many jumped to a system that everyone told them worked. But soon discovered that the support was as bad or worse than what they had left behind in their old system.
• The installation of new systems disrupted their business to the point that they cut short training and data conversion.
• Very few looked at ERP systems that ran on open databases, that would carry them into new technologies. To think that through was beyond their immediate goals. They just wanted a system that ran, regardless that it was 25+ year old technology and not very pretty on the screen.

"ERP systems that worked" But does it later on?

In the rush to install the "new" ERP system most overlooked two crucial items:

1. Complete training and turning on the complete system (like wireless warehouse/bar coding and EDI) These are not all the systems that didn't get turned on.
2. Correcting and cleaning their product data (this is like putting sugar, sand and sawdust into your car's gas tank.) Many just moved the dirty data forward and hoped for the best.

As time went, by distributors began to see the need to control variable costs and they looked at a number of other add-on modules. Many looked at various wireless warehouse solutions, only to find that their product data was so poor that they couldn't implement the process. The extent of the problem is best described in a recent article " Data Drives the Wireless Warehouse" by Beth Badrakan. If you wanted to bar code your data you had to meet certain standards. Many retreated from the project because of cost.

A side note about the data issue and closed ERP systems is that generally it forces you to go back to the original ERP provider, that now may be drifting off into space and no longer the Mothership that everyone thought it was. Even then, some were not successful because of the cost to add-on wireless warehouse.

So some distributors turned their attention to managing margin and cleaning up their data as it was updated by using epaCube. This let the distributor work at their own pace as data flowed in. The payback was over a longer period of time. Still others looked at ways to get at product usage data reports, which many assumed came with the ERP system. Not many mastered the use of the report writer and none had access to the source code. The key to getting access to the data lay in being able to convert the database files using a product like Kore Technologies offers. This allows the distributor to convert files to software products that they most are familiar with.

Game Changer Technology

Just around the corner is technology that will allow "Tablet computers" that are not Apple ,to deliver HD functionality and connectivity using free WiFi or a data plan:

• Log on to a distributor's site or system/send a RFQ or order
• Click on a distributor/manufacturer catalog (PDF), populate an order and send it you the distributor.
• Receive delivery notices
• See signature capture.
• See training videos in HD....etc
• All of this could be done with a distributor's salesperson being in attendance.

Manufacturers, ERP providers and distributors will probably want tablet delivery systems. Distributors for quote/order capability. ERP's will be forced to offer connectivity. Manufacturers will want to deliver training and product videos in the field.

What's a distributor to do with their partially functioning ERP system as they look out across their competitive landscape with changing technology that becomes a game changer?

• How do you hook up to tablet-like technology? Good data is required (and it is a separate discussion of how a distributor can get there ... what is the definition of "good" and who has the scale to deliver it?) What Mothership ERP package will offer that connectivity and open the way for future productivity?
• Is it time to get serious about driving variable cost out of your business? That means letting computers do the work....good data drives three way matching, collecting SPA Rebates, bar coding, accurate price matrix etc
• Good data, along with an accurate pricing matrix, can drive more profit to the bottom line.
• Or, do you start seeking a buyer for your business?
• Or do you seek to open up your ERP system's data in preparation to starting a new ERP search?

What do you think? Share your thoughts with us.

Recent Acquisition Thoughts

The last couple of weeks we've seen a couple of transactions that could be interesting:

• First is yesterday's announcement that Hajoca, the sister company of CED, acquired HD Supply's plumbing and HVAC group.  It wasn't much of a surprise that HD divested of the plumbing group.  Their "contractor" groups have underperformed since HD was created as an amalgamation of acquisitions. And bringing in someone from Ferguson to run it was a signal. It begs the question of "when will HD Supply sell its electrical group?"  They did sell their Canadian electrical group to Sonepar.In thinking of potential acquirers that make sense ... there could be some synergies for Sonepar (as well as some new territory expansion); CED given that Hajoca knows the right people and CED is always an acquirer at the right price; Rexel ????.  It doesn't make sense for HD Supply to sell the parts piecemeal (too many legal expenses).  We wouldn't be surprised to see something happen this year as the outlook for resi / commercial construction remains dismal.

• Secondly, Cree purchasing Ruud Lighting, which also sells to distributors under the BetaLED name.  Interesting that Cree is expanding into the fixture business.  Gives them 2 sets of reps selling LEDs, at least for now, and a business that is known for selling direct to contractors (Ruud). Will this put any more pressure on the major lighting companies to expand their LED offerings? Does Cree think it can accelerate LED sales? Is the fixture business more profitable than being an OEM supplier? Or did Cree think that competition for the LEDs is increasing and it needed its own fixture manufacturer to ensure its business?  With other electronics companies entering the LED space, are there more OEMs out there?  Click here for an interesting interview with Cree and Ruud but the question of "how will this impact the distribution side of your business" wasn't asked.  As a distributor, would you prefer to purchase from a BetaLED, owned by Cree, or purchase from one of the leading fixture manufacturers (Cooper, Lithonia, Philips Lumieres (Thomas Lighting, Lightolier, etc), Juno) or is the name of the game "value-engineering"?

And according to sources, we should expect more distributor and manufacturer acquisitions by the end of the year as there is a drive for market share and diversification at the right price.  As the market is changing, are you having "what if" sessions within your company?  What do you think of these acquisitions?

Free Agency and Electrical Distributors

The recent signing of the NFL collective bargaining agreement signaled the start of the football season.  And pre-season has been a frenzy with a record number of available free agents, a few signing for megabucks, most simply looking for a new home (and a paycheck).  And just like there were no signings (free agents or draft choices) for over 4 months, so has the electrical industry gone without many acquisitions for awhile.

But it looks like a feeding frenzy is starting.

Over the past few months there have been a number of acquisitions throughout the country ... and with some common attributes.  The commonalities:

• Contractor-oriented distributors being purchased


• Companies with limited / no succession plans

Couple this with a tepid, if not disheartening, outlook for the construction markets; the fact that some, if not all, of these companies had no, or minimal, profitability in the past few years; and that the acquisitions represented some strategic synergy for the acquirer and you can see why companies could be enticed to sell.  They saw an opportunity to, like a football player, "take the money and run."

The deals we're referencing include CED purchasing Yale Electric (PA), 3E purchasing City Electric (IA), Sonepar's recent purchase of Independent Electric (CA) and there has been a small deal in west Texas.  We're also hearing rumors of a few other deals in the pipeline.

Which brings us to the question of "how long can some contractor-oriented distributorships hold out in the face of nominal industry performance, uncertain healthcare expenses, taxation concerns and general business uncertainty, especially as we see the industry dynamics favoring companies with a penchant to invest in energy efficiency, solar, datacom, safety, institutional sales and more.  The distributor of tomorrow appears to be either a well-diversified company or a niche player.
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Companies that have been heavily concentrated in the contractor-oriented construction segment, in many markets throughout the country, are challenged to deliver a return to their owners. And if there isn't an avowed succession plan, perhaps now is the time to consider positioning the company for a sale (like the above companies did).

Optimizing your selling price requires planning to improve your top and bottom line while showing an acquirer that there is more value in your business than meets the eye.  Consider:

• Have you gotten your back office as efficient as possible?


• Have you turned on all your EDI capability?


• Are you able to identify all of your non-stock sales? Are you making adequate margin on them?


• Are you claiming all your SPA’s in a timely fashion (inside of 24 days) and therefore giving your manufacturers an interest free loan?


• Are you using a wireless warehouse?


• How fresh is your inventory? Has it gone stale? Have you got product that hasn’t sold in the last year? There are ways to get rid of that inventory.


• How are your margins? Are they the lowest they have been in several years? Do you know the 3 keys to increasing margins relatively painlessly?


• How is your ERP system working for your company? Is it causing you to lose sales?


• How good are you at collecting outstanding invoices with your customers?


• How are your customer and revenue generation issues?


• Do you know where the opportunities are in your marketplace?


• Do you have any brand equity?


• Do you really know your customers current needs?


• Do you know how your customers perceive you vs. your competition?


• Do you know your marketshare and do you have a plan to increase it?


• What is your sales plan? Your marketing plan? Your product mix?


• Where is the growth opportunity for an acquirer? Can you sell them on a vision? On your plan? Are your manufacturers vested into your strategy?

While selling a business is about the numbers, if you're not in negotiations know you still have the ability to impact your numbers? (we know it can be done ... we've done it)

So, do you see more acquisitions happening in the near future? Why (or why not)? And do you think a company can "pretty itself up" to "sign the big deal"? And what does this mean for acquirers ... will acquirers be solely Sonepar, CED and larger independents (does Rexel have the capability? will WESCO go electrical or not? Gexpro and Graybar haven't been acquirers; will Crescent finally make a deal?) 

Much to ponder.  Should be an exciting season!

Does a PAR Win?

Last month NAED released the results of the most recent PAR report, which highlights distributor performance for 2010.  For many this becomes the "Bible" of distributor benchmarking and profitability.  It is also frequently cited to manufacturers as the reason why distributors need better rebates or other financial considerations.

But is PAR the benchmark that privately-owned distributors should use to measure their performance?

According to PAR, distributor net profitability before tax increased from 1.1% in 2009 to 2.4% in 2010.  Doubling profitability in a year of growth, especially after 2009, is admirable.  Unfortunately, rebate as a percentage of sales for distributors in 2010, according to PAR, was between 2.5-2.7% (depending upon size of distributor.)  So rebates = net profitability?

And remember, these are privately-held companies.  Many are sub chapter S companies. But they are privately owned and can do what they want within their company.  In fact, the proper measurement is for each company to aspire to stretch net profit objectives or set an objective with excess funds being reinvested back into the business (or shared with employees).

So what's feasible? There are two companies in the industry that are publicly held ... Rexel and Wesco.  And remember, everyone's business is different ... different market focus, different margins, different objectives.  Wesco just released its Q2 earnings.  They reported a 5.6% operating margin.

Given the breadth of PAR, about 125-150 distributors, and the fact that 33-35% of distributors are in either A-D or IMARK, perhaps a better benchmark would be for each group to conduct its own PAR study and share the results.  Suspicion is that A-D's affilitates would be higher given their industrial weighting (at least over the past couple of years.)

Now for some of us shooting a par would be great on the golf course.  But is striving for PAR good enough for your business?

What do you think about PAR? Is PAR level performance what you strive for or do you set internal goals?

Changes Coming in Servicing the Industrial Market ... New Report

The industrial market continues to power growth for many distributors.  Recently we spoke with a number of manufacturers and distributors to get the current pulse of the industry.  The result ... industrial continues to grow fueled by the OEM market, industrial MRO and capital expenditures.  Additionally, many industrially-oriented electrical distributors are excelling in the energy market (perhaps because they are more used to selling to end-users) and a number are getting into renewables.  Contractor-oriented electrical distributors still, for the most part, are challenged with limited larger projects around the country and it seems fewer small, light construction projects.  There are some exceptions as we spoke with one contractor-oriented distributor who is up 29% ... as they repositioned to focus on the energy market and are in a state that only has 7.6% unemployment.

While industrial is expected to continue to power the electrical industry until more credit is available, companies start hiring and business confidence improves to enable new private commercial construction, there are a number of changes taking place in the industrial market.

Channel Marketing Group recently gathered insights from almost 2000 industrial end-users and industrially-oriented electrical contractors.  They shared their challenges; what they desire from distribution; their move, and acceptance, of "e" initiatives and more.

Some of our key observations:

• The market is getting more nuanced.  Mass marketing won't work in the future.  Customer intimacy will be key to account development, account penetration and account retention.
• "E" is accepted, and growing, for everything from product research, training, account management and procurement.
• Distributors are viewed as transactional or service-oriented.  The key is deciding what you want to be and managing to profitability accordingly.

The report is available for purchase in the Research section of ElectricalTrends.

What are you seeing in the industrial market?

Is Your ERP system a Mother-ship or a Satellite?

Most distributors of any size invested in a distribution-specific ERP system that handles the specific nuances of the wholesale distribution business, save a few goliaths. The goliaths invested in SAP or an Oracle based system. But there are not that many goliaths.

ERP Software Consolidations

If you noticed, there have been quite a few software consolidations that have taken place over the years, and for good reason. The first few were because the distribution industry consolidated for the most part, yielding fewer 'check writers'. Then the industry took a swan dive with the recession, hit bottom and didn't rise very much from there. Capital investment wasn't the number one thing on distributor's minds, so more consolidation among business systems could be expected.

That's exactly what happened. Epicor recently bought Activant, which had previously acquired Eclipse, Prophet 21, Array (TSS), Prelude and Speedware. Activant also has Vista Information Services (which distributors and manufacturers use) and is the platform / partner for IDEA. And Infor just completed purchasing Lawson. And these are just a couple of examples.

So, now what? What happens when an ERP company buys others? Well they want a return on their investment, of course. The way to get that return is to minimize the investment in multiple platforms necessary to keep the profitable part of the customer base. They have issues, though. Distributors tend to hang on to their older systems and don't migrate as quickly as the acquirers would like.

The acquirers do like any stock portfolio manager would do. They look at products like stock and calculate the return they can get. Then they pick the winners and invest in those. And they look for products that cover multiple industries, unless an industry is very large and lucrative. The other products are slowly taken off life support. Sometimes not so slowly, like when we're still in a very slow capital investment environment and they can't rely on new installation income as much to hide the poor performers.

ERP for GROWTH or cash flow?

Having kicked the tires on a few business systems, there are some favorite criteria for choosing ERP systems in different situations. But the probable fate of your system in the ERP maker's portfolio of platforms has risen to number one on the list. And it should rise to number one in your criteria as in this "new" economy.

Here's a baker's dozen of other difference makers you might consider....

1. What comes with the base package? How do they charge for it? How do they install and train your people?
2. What are the add-on modules and what do they cost? What type of pay back do you get?
3. How well do they execute EDI transactions-orders, invoices, automatic shhp notifications, SPA price notifications, SPA claims and credits????
4. How complete and easy is it to use their product data warehouse or file?
5. How complete and easy is it to use their warehouse management/wireless bar code reading equipment?
6. How complete and easy is it to export data to Excel and PDF documents?
7. How easy is it to link your product database to a web store front?
8. How accessible is the DATABASE? Is it proprietary or an open access database like SQL or Oracle?
9. How easy is it for order entry to look up non-stock items in a complete product database outside of the production file?
10. How easy is it to execute matrix pricing? Or load a price matrix you prepare off line?
11. How good is the forecasting and purchasing capability in generating automatic replenishment orders? Can it handle multiple logistics setups, like CDC, hub and spoke, or multiple instances of these?
12. How easy does it execute 3-way matching of orders, thus streamline accounts payable work?
13. What new capabilities are they investing in with this specific system? Like mobile apps. or margin control.

Of course, there are more that can be added to the list. But do you have the above considerations on your list?

ERP Lifespan

Most of all...you really need to determine what the lifespan of your current ERP system is. Will it be supported? If so, how long? How fast will you be able to get support? ("All support technicians are busy, your approximate holding time will be 45 minutes...give or take an hour"). Will they invest in it? What is their deal to migrate you to the "Mothership" package?

This is business,folks. When you have branches that don't deliver or people that don't deliver, you look to serve the customers some other way than through the branch or person that's not making it.

ERP product lines aren't all that different. Whatever is not delivering to the bottom line has to be consolidated or cost reduced. Plus if you slowly draw down the resources devoted to a package (i.e. additional programming investments and installed base support), maybe the buffalo herd won't notice as much and will stick around so you can migrate them over time to your Mothership.

The moral of the story? Get on a Mothership. Start compiling your criteria now if you're not already on one.

And here's another tip. Find out what percentage of the parent company's sales your package is. And if you can get it, the percentage of the total INCOME (revenue) for the company, then you will know where you stand. Is it the Mothership or a small satellite?

Distributor needs change

Tell us how you look at your current ERP system. Does it meet your current and future needs?

Who Should Be Carrying Product ... Reps or Distributors?

Over the past few months we've been talking with a number of reps throughout the country as we work with an electrical manufacturer to review their reps and, in some instances, recruit new reps.  Because of their product type we've inquired about their warehousing capabilities, solely because their competition has a number of reps with warehouses.

In many instances we've had reps tell us that the had had a warehouse but closed it a number of years ago, frequently to positive reaction from medium to large size electrical distributors... and have seen their business grow.

Which then led to a thought, and some conversation about reps as an inhibitor (today) and possibly a contributor (tomorrow), especially for larger markets, of distribution consolidation.

Now you may ask why but consider, whom does a rep warehouse benefit?  In reality it benefits those who don't want to carry inventory ... either due to logistical reason or financial reasons.  Typically this is a small distributor or a small branch.  What would be the impact on small distributors, or small branches, if they couldn't send a truck to a rep warehouse, sometimes multiple times a day, to pick up material?

And couple this with manufacturers increasing pre-pay shipments to cover increased freight fees?

A major role of a distributor is to carry inventory to support their customers' needs.  This can be at a location or through a distributor-owned redistribution system.  Well run medium to large distributors can invest in systems and inventory to bring value to manufacturers and their customers.  The smaller companies frequently don't want to carry the inventory (they can't afford carrying the inventory).

So, could reps be helping small distributors stay in business (and are they getting a premium for it)?  Should reps have warehouses or should product go directly from the manufacturer to the distributor (or customer if it is a drop shipment)?

Would you prefer to work with a rep that has a warehouse and enables your competition (and puts them on a level playing field with a distributor that carries stock) or with one that supports distribution / end-users and you are responsible for your inventory management?

It also makes one wonder if NEMRA has done a study to identify which model is more profitable for a manufacturer and for a rep?

Thoughts?

How Well Does the Channel Communicate?

Communication is critical to developing strong relationships. Be it at the local level, to salespeople, from manufacturer "corporate" to distributor "corporate" and more, sharing direction, information, expectations and performance is important to achieving success.  In fact, this is why most companies take on some type of planning process (albeit with the marketing groups representing about 40% of the industry it has devolved to more target account planning).

A recent study by Channelinsights, highlights how the lack of information available to channel sales executives results in loss of revenue and opportunity. The survey, which solicited responses from 112 senior channel sales and marketing executives — all members of the Baptie Channel Focus Community.
While the research focused on the tech industry which has a history of sharing end-user information with suppliers, the findings also have relevance for the electrical industry.  Conversations with electrical manufacturers is that there are more and more focused on vertical markets rather than broad types of electrical distributor customers.  This means that they want to know where (or what type of project) the product is installed.  The more information, the more opportunity to replicate the sale in other venues.

“In any industry, information and insight are keys to success, but when it comes to channel sales, information is at a premium. Without quick, accurate sales data, companies experience lost revenues, overpayments and ineffective incentive programs,” said Mark Geene, CEO of Channelinsight. “Today’s survey results validate the need for greater visibility into channel sales and demonstrate that companies need new tools to help them attain this information.”


The Channelinsight survey also found that while companies know their partners (87 percent can always or usually segment their channel revenue by partner type), they rarely have insight into market segments (54 percent of respondents said they cannot identify partner market segments).

But the key is that conversations start with information ... about each company's direction / vision as well as needs and expectations, the local marketplace (afterall, the economic influences in Houston, TX may be different than national dynamics), major initiatives, resources and action plans.  Follow-up is critical.  Unfortunately the quality of communication is inconsistent within a company let alone within the channel.

So what type of communication do you expect from your manufacturers / distributors? What are the attributes of a good communicator? And whom are some of the industries best, and worst, communicators (companies only - don't want to make this personal)?

Loyalty & Commitment ... What are They?

I recently posted this on TED Magazine's LinkedIn site and, it seems, it's gotten buried, so I thought we'd re-start the discussion here.

We're working on a project with a manufacturer and during our discussions the topic of "loyalty" and "commitment" came up in the context of distributor programs / rebates.  Essentially, in determining "support" to provide rebate, how to define a "loyal / committed distributor and how to reward them.

In conversations with some distributors, some felt manufacturers should consider loyalty / commitment as something other than sales volume, or sole line relationship, to the manufacturer, but they couldn't define what the "something other" should be (and be something easy to measure and that wasn't too subjective (and hence left to a salesperson to decide!)

In speaking with distributors, they want a manufacturer to be "loyal" to them and to reward them for their "commitment". Manufacturers want the same thing. But most often both parties are doing business with competitors (distributors representing multiple lines, manufacturers selling to multiple distributors in a marketplace covering a comparable customer base - since many manufacturers have barely selective or saturation distribution policies.) Both want to increase their sales and profits.

So, what should be the definition of loyalty? Commitment? Are they the same? How to define, and measure? Or just tie to sales and share the profits (rebate!)?

A Hesitant Marketplace?

Last week was a tough one for the stock market as it dropped for another week with one day dropping 280 points on a quartet of bad news ... low new hiring (only 54,000 new non-farm jobs), the ISM manufacturing purchasing managers' index fell to 53.5 in May from 60.4 in April, the U.S. auto industry suffered its first significant setback in more than 18 months (a 3.7% year over year decline), and the continued decline in home prices (not to mention that it doesn't seem as if any new homes are being built and sold!).  Coincidentally I was also speaking with some distribution management personnel, catching up on industry insights.  One topic seemed to sum up much of the industry's sentiment.

Some want blood from a turnip

Essentially the comment was that everyone seems resource constrained.  Few, if any, are doing any hiring unless it is opportunistic or to grow a niche / target area.  Business owners are concerned about the nascent "recovery", taxes, healthcare, government regulations, the banking system (and lack of credit), the deficit and more.  Employees are focused on keeping their jobs and being able to make their mortgage, given the dearth of available opportunities (jobs).

While there are pockets, and market segments, that are strong, there are a comparable number of areas and segments that are weak.  This marketplace dichotomy, especially after the recent recession, makes business owners hesitant.  And hesitancy drives people to be risk adverse.

While no one had an answer, the consensus was that many business owners may wait till 2013 (elections and the "start" of the new healthcare initiative) to decide if they want to return to being a growth company ... preferring to settle and be a lifestyle company at this time.  While sales have stabilized, or grown for some (especially industrial or energy efficiency-oriented companies), profits have grown at a faster rate due to personnel and expense management.

With housing down, re-locations are difficult, forcing companies to limit searches to local candidates.  Housing also tends to drive light commercial; and larger companies need to continue to grow to justify larger commercial facilities.  Is the export market the economic salvation? (It's helped many industrially-oriented distributors and manufacturers.)


Meanwhile, at the same time we're seeing some of the nationals hiring in selected areas and sniffing / making acquisitions - looking to take share.  And sometimes these acquisitions create opportunities for strong independents in those marketplaces ... are you positioned to be opportunistic when someone creates business for you?!

With many waiting, is this creating opportunities for you to profitably take share? Are you hiring to prepare for future retirements (and new opportunities) or trying to just make it for the next couple of years (and if you are, will your company be as valuable to someone else if you don't have a succession plan and need an exit strategy?)

Are you hesitating or investing and taking advantage of opportunities?

End Run on Distribution?

Recently the big buzz at Lightfair was about a "New Technology" named LED. LED's have been around for a while...distribution has struggled to gain some traction. But there is an end-run brewing in the retail world. It is a little early to be talking about football, but there are some plans that retail has up their sleeves to sell a few LED's.

The trouble about watts and lumens...is Education

LED's have been around since computers gained popularity, in the form of an Off/On button. The problem was that the buying public never recognized the LED for what it could be, namely a source of very bright light that costs less to operate.

But the cost to buy a LED replacement bulb needed some marketing and push. The overriding problem was brought to the surface in a June 1 Wall Street Journal Magazine article entitled "Stores Stock New Bulbs for the Light Switch".

The article describes how Home Depot, along with the help from major LED manufacturers, propose to educate (force) the buying public on what to buy.

And interestingly, in the article, they mention the different "coding" systems some of the major lamp companies will use (which will probably add to consumer confusion) and the article references Home Depot as a major LED brand ... in the same breadth as Philips, GE and Sylvania!

The End run on Distribution

Recently I had to make a quick trip to Lowe's and the local Home Depot along with a side trip to a Wal-Mart (no, I didn't purchase any electrical material!).  In walking the aisles it became apparent that not only were the stores stocked with longtime Name Brand Lamp manufacturers, they were well stocked with less familiar brands (their own private label brands) that were at eye level.

This was true in all three stores that I visited. (and I wouldn't be surprised if the private label product came from the same factory as the branded products)

Coincidentally all these private labeled,  second tier products, were about $4-$8 per unit less than the brand name products.

A Home Depot regional person explained that they intend to market the brand name products as specials and offer coupons for their products. They want the store traffic. Eye level product selection counts for a lot in the retail world.

Somewhere in the past I recall that Philips released some figures that they had sold more lamps through the big box stores than through distribution.

And a couple of other thoughts:

• Did you know that WalMart has 41% market share of the CFL market? Think they are waiting for LEDs to drop in price to then entire the LED residential market bigtime?
• With the cost of LEDs as a replacement lamp currently being expensive and people potentially having the need to relamp their house, could Home Depot or Lowes run a promotion tied to home relamp financing (on the Home Depot / Lowes credit card?)
• Why is Sylvania so focused on selling Lowes special LED lamps and fixtures?

While most distributors have abandoned the home replacement market, could the Home Depot / Lowes also be taking leadership in the education of LEDs.  Could this expand into selling LEDs to contractors? To property management companies? To hospitals, hotels and retail?  Could the lamp replacement market slowly move from distribution to "retail"?

So what is your plan to counter this end run? Tell us what you think can be done. Or do you think LEDs are just a fad and you'll wait till they are the same price of an incandescent?

LightFair 2011 and a Changing Lighting Market

The 2011 LightFair Show, held May 17-19 in Philadelphia, according to all we've spoken to was a resounding success.  While there was some initial trepidation about moving to Philly for a year and the potential for a decline in attendance, exhibitors gave Philly rave reviews ... great attendance, up to 30% less expensive (thanks to NY unions!) and plenty of great meeting space and restaurants.

While much has been written by others regarding LightFair, a couple of observations:

• Have you looked at the exhibitor list?  If not, check out this list and see how many companies you've never (or rarely) heard of?  The lighting industry is expanding exponentially. And all of these companies are selling to someone (and not necessarily through electrical distribution!). I've spoken to one company that had 314 end-user leads for direct follow-up.  This begs some questions:
• Is electrical distribution THE channel of choice or just A channel?  Why has this occurred?  Is this true in your area (and would you know if it isn't?)
• Whom are these companies that are buying direct and as an electrical distributor how do you reach them?
• What channels will customers purchase from?
• Why shouldn't a manufacturer sell projects direct if that is what the "customer" wants?
• As a small / emerging manufacturer, with distribution being difficult to reach due to the need for the "right" reps as well as rebates / marketing groups, what are the fastest, most effective, means to market ... direct? other channels?
• If you are a distributor focused on growing your lighting or energy efficiency business, were you / should you be at this show ... visiting booths and possibly exhibiting? Or maybe bring a "lightfair" show to your area?
• From lighting industry expert Bill Attardi's newsletter, "Did you attend Lightfair this year? In my fortunate life in the lighting industry, I have attended virtually every Lightfair Show.  For me, this was the most exciting show ever as it is clear to those of us who attended this one that the lighting industry is going thru a metamorphosis.  Major electronic conglomerates exhibited and are looking to participate in the unfamiliar digital electronic lighting industry of the future.  The unbelievable focus on solid state lighting (SSL) was something to see. This LEDfair is the harbinger of what's to come. I cannot wait to see how it will all shake out."

Bill sees the changes that are going on in the lighting industry and has designed a unique Solution Selling seminar.  According to Bill, "There is no question that to sell into this eclectic lighting market, new sales skills are a must. Start the learning process with Sales Pro Solution Selling: http://www.attardimarketing.com/salesprosolutionselling/".  Bill is the consummate salesman and with his experience as a manufacturer and in the distribution industry you can be sure that the content is on target.

In speaking with manufacturers and distributors, some lighting industry observations:

• What does it mean when ...
• GE and Philips start to use reps in the electrical industry?
• E-conolight, which sells to end-users / contractors direct (and sends lots of catalogs), is purchased by private equity?
• OSRAM Sylvania launches a line of lighting fixtures and a line of LEDs specifically for Lowes (and eventually they will have stock to make acquisitions with when Siemens spins them off through an IPO)?
• Companies many of us would portray as contractors don't mention the "C" word and position themselves as energy efficiency companies?

Is the lighting model changing or just becoming more diffused? If lighting is an important product category to you, do you want to be a demand creator or just a bidding house? Do you have someone who is focused on the lighting market for you? Are your lamp and key fixture lines sharing information with you about the market?

And what else are you hearing about lighting and lamp manufacturers?Think LEDs are just a short-term craze?  In speaking with a lighting manufacturer, he jokingly said "I actually saw a new technology that everyone seems jazzed up about – it was called LED’s"

Value of Marketing Groups to Manufacturers

Over the past few months, and most recently at the NAED Leadership Summit, we’ve heard from a number of manufacturers lamenting about participation in marketing groups. While some work the groups well and focus on the group’s members with targeted marketing strategies, some of the issues we’ve heard include:

• “All, or substantially all, of our competitors are part of the group. So what is the benefit for me? I recognize that I need to belong just to keep pace.”
• “They keep negotiating for more and more money. Every conversation is about rebate. Few, if any, are about growing my business.”
• “They call themselves ‘marketing groups’, but where’s the marketing?”
• “As an engineered products company (not a commodity) with selective distribution, we’re questioning the value of the groups.”
• “The old rationale of belonging to streamline rebate negotiations and processing is no longer valid. We’re having lots of distributors asking for additional rebate and technology has made the process easier. Our finance people are questioning the value proposition.”
• “With such a high percentage of distributors in one of the groups, I wonder how they can outperform our other groups / chains.”
• "We wonder how much, if any, business we'd lose business if we left the group but redistributed the rebate to those who support us."

Given the comments we’ve heard, we’d like your thoughts.

• What are the benefits of groups to manufacturers, if any, anymore?
• Are groups avenues for manufacturers (who've been in the group 5+ years) to grow their business or are they alternative profit streams for distributors (and why are manufacturers responsible for distributor profitability?)
• Would distributors prefer a reduction in price in lieu of rebates?

Let us know and also take our survey on “Value of Marketing Groups to Manufacturers” (its anonymous and we’ll report back results on ElectricalTrends.)

2011 NAED Leadership Summit (aka National) Observations

The following post was originally posted on Wednesday, May 11. It is being reposted as Google / Blogger had technical issues on Thursday and "lost" the posting.

Last week I attended the NAED Leadership Summit in San Diego (yes, a long way to go for 2 days, but if need to be where the customers are!) and wanted to share a number of observations.
 Overall the feeling from many was "a good meeting", although this posting will be sent to, and read, by more people than attended the conference. According to the registration list, there were 80 unique distribution companies in attendance (84 if you included divisions of Rexel).  The distributor list seemed to have larger companies that are more industrially-focused, hence skewing marketplace feedback.  There were some manufuacturers and distributors that were on the list but never seen ... too busy in their suites having meetings.
 Some thoughts, observations and comments that we heard:

• A number of people commented on the distance (although San Diego had great weather) and the fact that the meeting was only two days.  The two days was an issue as most manufacturers and distributors were booked, having little time to meet with smaller manufacturers / distributors and no time for hallway meetings and networking. In fact, the second general session, which had a good speaker and an economic outlook panel, was poorly attended.
• Some asked about the branding of the meeting and felt that the name may make smaller distributors feel disenfranchised. Additionally, someone commented, regarding the brand, "where are the leadership type seminars to help senior management?"
• Showing the usage of technology, many were texting to confirming meeting times and places. The technological revolution has now hit the electrical industry!
• Heard from many distributors of manufacturers expanding into new product categories that are not their core and where they have no expertise - just looking to sell something or get on the latest craze.  This creates conflict for distributors.
• John Burke from Kirby Risk presented their supplier evaluation report at the Manufacturer Advisory Council Forum. Very comprehensive and professional. Terri Dumas from Rab presented their thorough approach for business development with a distributor.
• Social media was top of mind with a keynote presenter discussing it and a session at the Manufacturer Council (which was open to distributors). This social phenomena is having implications for manufacturers and distributors in how they interact with prospects, customers and employees. The opportunity is there, however, the speakers didn't share approaches or ideas on 1) how to develop an e-strategy, 2) setting goals for a social marketing initiative or 3) ideas for distributors / manufacturers to consider (afterall, everyone has heard of Facebook, YouTube, LinkedIn, a blog, Twitter, and Flickr).
• Overall business reports were encouraging with industrially-oriented distributors up 15-20% (and most have some type of energy initiative).  Did hear of some construction-oriented distributors doing "decent" but they were in larger cities and had been recipients of larger projects.  The resi / light commercial market is "nominal" - at best.
• On the lighting side, from speaking with a couple of fixture manufacturers, "LED, LED, LED" - and the product keeps changing requiring continuous education on the part of reps and distributor salespeople to stay even with customers.
• ElectricSmarts and IDEA announced a "strategic partnership" in conjunction with ElectricSmarts' launch of its new catalog system on Saturday night. Unfortunately didn't hear much about it during cocktail parties / at meetings. Here's an interesting snippet from their press release "Through the strategic partnership, ElectricSmarts Network will provide manufacturer-authorized IDW data to end-users, and IDEA will offer ElectricSmarts’ SMART eCat web-based e-catalog to distributors for use on their websites." The reality is that eCat will probably be syndicated to any distributor that wants it (not just IDEA members). It's interesting that ElectricSmarts is looking to get IDW attributed data to use in its NetPricer product to reach contractors. Does this mean that IDEA has its eyes on the contractor market and is planning to compete with Trade Service's TraSer SX (or let ElectricSmarts do it?) Also interesting that manufacturer content is being syndicated to a non-distributor.  Wonder if manufacturers approve of this?
• IDEA announced a service that they are soliciting feedback on called B2B Partnership Rating Program (PRP) which is essentially a scorecard of a manufacturer's data. They are seeking input and plan to release to the industry in Q3 2012! Sounds like a concept seeking approval. Interestingly, it was placed on general session attendee seats but there was no reference to it during the session ... did it surprise NAED or not receive support?

That was the highlights that we heard (other than we had a number of very effective meetings). If you attended, what else did you hear or find interesting? If you didn't attend, why and what would entice you to attend?

Infor Acquires Lawson Software

Over the past few months rumors have circulated that Infor was looking for the best fit software company to acquire to complement its business. Infor has over 75,000 customers in a number of verticals ranging from distribution to healthcare, automotive to manufacturing. Finally comes word of an agreement for Lawson to be acquired by Golden Gate Capital (GGC Software Holdings, Inc.) and Infor for a deal valued at $2 billion. Click here to read the press release.

The fit for Infor and Lawson is that they both have worldwide user bases that generate huge cash flow streams. Lawson bring to the new partnership a CLOUD offering for internal and external applications. The External offering enables companies to test the Cloud concept before considering a more extensive offering such as Amazon EC2. The Internal Cloud offering offers the business user the opportunity to consolidate their IT infrastructure, while reducing their costs and reallocating IT staff to more strategic activities. To read more about this offering click here.

Within a very short space of time, the electrical industry has witnessed a couple of high profile companies be either rolled up (Activant being purchased and emerging as Epicor) or making an acquisition (Infor along with a Venture Capital company acquiring Lason).

The question becomes, what does this mean to electrical distributors? Will these companies continue to focus and allocate resources to improving their systems? Will customer support be strengthened? Will new products be offered and the systems be more robust? Or will the companies be more financially driven to enable returns to their shareholders?

While we wish each company the very best, what do you think the affect will be if you own an Activant product (P-21, Trade Service Systems Array, Eclipse or Eagle) or an Epicor product or a Lawson product or an Infor SXE or SXA+?

And how does a Cloud offering affect your approach to your ERP needs? Do you foresee yourself considering a Cloud offering in the next 3-5 years?

Frequent Communications Drive Sales, and E-Marketing Generates Awareness

Ran across a couple of things today that caught the eye....over 30 manufacturers are involved in ElectricSmart's e-Cat launch (including some surprising names), ABB used a convention specific blog and did you know that good sales and marketing requires 14 times?

And now the specifics:

• ElectricSmart is launching its SmarteCat product on Saturday night at the NAED Leadership Summit.  The catalog has over 30 manufacturers in the initial launch.  Some of the participating manufacturers are Rockwell Automation, Schneiddr Electric, GE Energy, GE Lighting, Lutron, IDEAL, Ronk, Shat-R-Shield, Thomas & Betts and Philips / Advance.  An impressive array.  The service looks interesting, and if someone signs up for a Premium account, they can have access to pricing. Can easily print or email specific pages to customers (or to self).  And it's neat how there are featured videos embedded into catalogs. The tour is a nice feature.

What this shows is that manufacturers are convinced that more and more customers (end-users and contractors) are looking for information on the web.  I don't know the pricing, but if it is inexpensive enough, could envision manufacturers using this as another document repository to reach more customers.

• ABB held their Automation & Power World Conference last week in Orlando.  Impressive show with over 5000 attendees.  They blogged from the show, sharing important information from various speakers.  Nice way to communicate to various audiences. With the growth in social marketing, this is the tip of the iceberg in how manufacturers, or distributors, can extend the reach of a face-to-face meeting to enable non-attendees to gain value.
• Reportedly 14 is the magic number, as in the number of times you should contact an "inactive" customer to capture some awareness from them. While no salesperson wants to call on a customer 14 times to hear "no, we don't need anything", marketing can play a big role in developing an "interactive sales and marketing engagement strategy".  Marketing has the ability to be an "alternative sales person", helping maintain relationships, share information and eventually generate revenue. This article states 14, I've also seen 18, but the point of the matter is "frequency of communication captures mindshare, mindshare captures marketshare." Do you have an integrated sales and marketing engagement strategy? Do you believe that non-sales engagement can generate sales?

Do you communicate 14 times to underperforming customers? Are you actively marketing via "e"? Should distributors market via "e" or is this a manufacturer's way of going around the channel? Or are they defending their brand in support of the channel?

Gas Beyond $4.00. Impact on Your Business?

I was returning from a meeting with a client this morning and needed to put gas in the rental before the return.  While gas has been creeping up, today was the first time I paid $4.00 per gallon (and yes, I know that there are 5 states that are averaging over $4.00 for regular unleaded).


As we know from the last couple of times that there were gas spikes, typically distributors start to think of how they can reduce costs, shift costs or increase revenues (margins, fees) to minimize the incremental expense, especially with the concurrent erosion in margin over the years (and other increasing operational costs).


This time, while we've heard some comments, there haven't been many nor are we hearing of many distributor surcharges, service revisions, minimum orders requirements, etc.  Is it that we've become used to the increases, the pain isn't enough, you don't think anything can be done because you don't think your competitor will make a change, or we feel this is just the "cost of doing business"?

In 2008 and late 2005 we conducted distributor surveys to ascertain how distributors are responding to soaring fuel costs (click here for some of our 2005 findings).  Should we do it again?

What are you doing with $4.00 unleaded regular gas (and expected to go higher for the summer) and more for diesel?  Will this eventually change an industry business model? What happens if we see $5.00? $6.00? Are manufacturer minimums increasing? Are your's?