A Weekly Round-Up … Channel Changes Coming?

Sorry haven’t been able to post some thoughts for the past couple of weeks. We’ve been traveling to clients and been in the midst of helping them launch 2009 strategies and adjust operations.

We’ve picked up a number of “random” topics over the past couple of weeks and thought we’d share:

• Andy Grove, he of Intel fame, recently wrote an article for McKinsey regarding the future of electric vehicles, which led us to think, what could be the future role for electrical distributors (notice that both phrases have “electrical” in them?) Especially in light of the fact that Hawaii has just committed to spending $70M dollars with a California company to establish something like 70,000 electric battery recharging / drop-off stations and that a group of utilities are considering banding together to make a large purchase from a U.S. automaker(s) for electric vehicles to launch this product segment.
• We’ve heard from a couple of sources that some manufacturers (and specifically gear manufacturers) are considering, and taking, some large OEM business that has traditionally gone through distribution direct. In some cases this could be at the request of the distributor (but why?) and in others it appears to be a defensive move to retain business. In some instances the manufacturer is paying the distributor a fee, from the manufacturer’s margin, to mollify distributor relations, in other instances the distributor gets paid a fee to handle service issues. We’ve heard this regarding sheet metal-oriented products as well as “kitted” products. Could this be a trend? What would the impact be? How will distributors react?
• A number of large manufacturers have been making the news with large layoffs (and some are making many small ones). Look for a number of distributors to make layoffs in January (perhaps a little more compassionate given the holidays?). Distributors are being triple teamed between the economic slowdown, the precipitous fall in copper and what that meant to November sales and gross margins, and contractor payments. All are resulting in cash flow issues. We’ve heard that a number of the national chains are laying off people and closing some branches. It appears that 2009 will start with a much “leaner” Rexel.
• Speaking of cutting back … with manufacturers “streamlining” their direct sales organizations / regional management, reducing staff in marketing departments, reducing rep commissions and reducing, or eliminating, co-op / MDF budgets, 1) how will manufacturers promote their value-added services? 2) how will manufacturers promote their brands? (or will more and more ”race to the bottom” to retain business, hence reducing more product in the industry to “commodity” status) 3) will distributors care whom they buy from as long as it is quality product? And if this happens, how does it affect the marketing groups and NAED? Food for thought – back about 15 years ago, the airlines analyzed their expenses and realized that travel agents were their #3 expense (after labor and fuel). They asked “why are we paying them?” Or, “if you don’t add value, do we need the expense … can we do it differently?” Could this impact industry “influencers”?
• IDEA is promoting their feedback mechanism, www.highvoltageideas.com. Interesting video from Bob Gaylord … says the industry only has 2.2M SKUs, they have 2.1M SKUs but it appears, based upon TSC’s newsletter, that they have 650 manufacturers and IDEA has reported significantly less. The numbers game is nice (who has more), but the question becomes “who has more (manufacturers and/or SKUs) that I need given my business model?” Anecdotal results from our ElectroIndustry Survey are showing that data synchronization is not a high priority for companies in 2009 (and coupled with layoffs, there may not be many people around to develop and update the data for manufacturers and distributors questioning the short-term payback when they are watching expenses also!). Data synchronization may be right as a long-term strategy, but for today, automating as much as possible as inexpensively as possible is critical to reducing labor costs and collecting rebates/SPAs from manufacturers.
• Speaking of Trade Service, they’ve been making some news lately with strategic relationships with ESC to facilitate data integration, Equity/EDN to support small distributors and Electrical Wholesaling / EC&M to support Trade’s newest offering, a portal named Trade Service Online. It appears that the organization is focused on growing its business and developing new services to support contractors and distributors while broadening the reach of manufacturers whose data resides in its eDataFlex and TRA-SER offerings. Check out their press release page for more details.
• Consolidation leaps ahead. Spoke to a couple of people at national distributors last week. They are starting to receive a number of calls from distributors. Commonalities …. Less than $100M, contractor-oriented distributors with significant wire business who lost much in October / November due to copper’s decline. The drop in copper, which many think will continue for a bit, possibly getting to $1, could be a significant contributor to industry consolidation and a reduction in industry overcapacity. The challenge for a distributor, there are only so many companies who have cash reserves to make acquisitions or are so strong financially that they can go to a bank for credit. This will impact manufacturers, marketing groups (who both may be left managing bankruptcies, with the groups responsible for some of their members’ receivables) and eventually NAED (less independents). Another outcome could be the need for small distributors to aggregate purchases to receive better pricing and lower minimum order demands.

This was some of the highlights. Later this week we’ll have some thoughts regarding the affects of the stimulus plan on the electrical industry