What Can Distributors Learn From A National Chain?

National chains, as we now, are large (by definition) and have the resources to theoretically make investments to capture share. In reality many of them, fortunately or unfortunately, do not operate like national entities. Rather than emulate a national retailer and have operational consistency or like a franchise environment that allows some autonomy, or a collection of independents that operate under different names by leverage common resources, a number of national chains in the electrical space act as disjointed elements.

One company under pressure right now, that provides an opportunity for a lesson to distributors, appears to be WESCO.

• Recently we shared observations from their Q1 report and their investor day. Somewhat a dichotomy when you looked at the numbers and an obvious miss perform on the numbers, although it is becoming more of a challenge in understanding what they are really doing in the electrical space when they combine multiple elements and sometimes multiple countries and then use, in our terms “funky math” to account for weather days. They missed the consensus analyst estimate of $1.01 by .11. (Remember, this as the analyst aspect may be important.)
  • Here’s an analysis of their quarter.
• And then we saw an investor activist get involved in buying WESCO stock.  Activists only get involved if they feel companies are underperforming and that they can go in, buy the stock “cheap”, affect change and either sell stock to achieve a significant upside, affect management decisions to unleash shareholder value or affect a change in management or ownership.
  • According to one report the company has a market capitalization of $3.28 billion; another said the acquisition cost could be about $4.5 billion (market cap + $1.4 billion in debt with a cash flow of $128 million). Not a lot of money for private equity and we could conceive of some other interested parties.
• And then we saw them buy Hill Country Electric Supply, a contractor-oriented Square D distributor in San Antonio. Interestingly, the activist said they needed to grow by acquisition and needed to diversify their customer base. This is the first diversification into a non-Eaton gear offering.
• Then we’ve seen other activists get involved in the stock.  When sharks circle, are they smelling blood?
• Now we’ve heard that WESCO is instituting significant layoffs and has a number of managers taking “unpaid leave of absences”.  We’ve had a number of calls about this to verify.  Some specifics of what we’ve heard (and we’re sharing as we don’t know which sometimes is 100% correct but understand a number of the details have been shared within HQ)
  • 232 people being laid off.  A dozen (or so) unpaid leave, or 10% of electrical sales organization, 12% of corporate and 20-25% of regional management (the percentages may equal the 232, we don’t know)
  • Some people in departments that have been leaving over the past couple of months due to “tension” in the air in Pittsburgh
  • Plus, we’ve been told about
    • meetings held where attendees couldn’t have electronic devices
    • operational issues that relate to delivery and invoice accuracy
    • unattainable goals being assigned (30% sales increases)
    • business taken at low / no margin
    • a crises of confidence in leadership (nice people but do the inspire and can they turn the ship)
    • and more
  • And yes, the industrial market appears to be slowing … oil / gas, OEMs, export markets due to currency issues, but there are construction and retrofit opportunities in the market.
• And now we see analysts expecting Q2 earnings consensus to be $1.16 per share with the stock price staying about where it is now.

So, could they be doing what they can to achieve a top line number and be thinking (internally) we can get to the bottom line number through cost-savings (these number of layoffs could generate $20-40 million in annual savings by our calculations)

Now, to the part of what independent / non-public distributors can learn given that WESCO has been known to focus on industrial MRO, national accounts, low margin blanket contracts and large projects on the electrical side of the business:

• Agility – it is important to be able to react to markets, competitors, changing ordering processes and value offerings quickly
• Customer and market diversification – at any given time, different segments of the market will outperform or under-perform. Being diversified in the types of customers you serve as well as focusing on a diverse offering helps insulate from ups and downs.
• Operational Excellence – good isn’t good enough anymore. Customers expect more. Distributors need to seek to achieve “great” and measure their progress. Customers have options of whom to purchase material from. From customer satisfaction research we’ve conducted, the basics of the business are still key to customer retention; relationships to individuals, or a team at a branch drive loyalty.
• Respect the field – seek input from customers and those closest to the customer (your sales organization). Ivory tower corporate environments don’t grow businesses, they “create” work.
• Be proactive – you need to seek growth on a regular basis. Measure organic growth, account penetration, the number of new accounts and sales from new accounts and new product sales. You need to create demand, communicate (market) to your customers, seek new accounts (make it part of your culture) and fund sales channels (including salespeople) to drive growth. Buying business can enable you to dig the hole deeper and faster.

While large can be good, being smart about getting there and engendering a culture that is customer focused is key.

And for those WESCO people who are caught in the middle, if you want to stay in the industry, three good industry recruiters are Electrical Career Specialists, Egret Consulting and GRN Coastal. Or, feel free to email us your resume and if we know of someone in your area who may be looking, we’ll share your information.  Good luck.