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.
,
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?

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!)?