The Fragmenting of the Industry

People ask “what are we seeing in the market” to correlate it with what they are seeing and to integrate into their planning.

And what we are seeing comes down to with challenges (we’re being nice) in the resi market and commercial construction being significantly curtailed due to high vacancy rates, high unemployment and an inability for many to get credit, there are many distributors, mostly smaller ones, that have significant cash flow, financing, inventory and overall profitability issues and that the larger distributors, be they state, regional or national, are fragmenting their business.

I won’t belabor the financial challenges – suffice it to say that many of these companies have been, and will continue to be, “lifestyle” companies, albeit the lifestyle may be lower. Difficult to sell when there is little, if any, profit. Their alternative is closing.

For the others, consider fragmenting as segmenting or niching their business.  They are looking for new markets, markets within their current customer base (based upon volume, customer segment, market segment and specific applications) as well as developing segmented marketing strategies to drive their business. Remember hearing of the days of one to one marketing? It didn’t take hold in the electrical industry, but to drive future growth in a slow growth market, one to few marketing and selling will be critical.

Consider these tidbits:

• A recent forecast from FMI shows a 25% decline over 2009 in commercial construction expenditures. But they see a potential bright side in home office needs due to high unemployment and the increase in small / home businesses.
• Southwire is reducing the number of employees in its Watkinsville location, and expects more cutbacks this year. Sounds like they are already preparing for continued softness (and yes, they may have some overcapacity due to the AIW acquisition.)
• We’ve heard of a plumbing distributor in NY who is acquiring a few electrical distributors, thereby diversifying.
• Clockwork Home Services, which is a franchise organization with contractors in a number of trades and owns Mr Sparky (electrical contractor) has a national relationship with WESCO’s Residential Division. The service side of the resi business may be the only profitable side (and yes, many WESCO’s don’t have counters, but thinking of the diversification aspect).
• Gexpro formed a relationship with PODs to offer jobsite inventory management for contractors. Contractors don’t want to hold any inventory … its not profitable.
• F&M Electric, a small distributor in CT, promoted its residential lighting group through an interview in its local paper and also positioned itself as the areas lighting resource – appealing to local businesses. PR can pay, and its free!
• ESSCO, a Sonepar division, is diversifying into solar.
• HD Supply’s Facilities Maintenance Group will formally have a national hospitality sales group
• And we know distributors who are expanding into motors, panel building, government sales via GSAs, offering motor and drive services and more.

The key is conducting customer research to see what your customers need.  As a distributor, the key is gaining a greater share of your customer’s spend. From a manufacturer viewpoint, which distributors will be the thrivers as those are the people with the money that 1) can invest themselves and 2) whom you should be investing in.

The market is fragmenting (segmenting). There may not be much worth consolidating.