Industrial Market Drivers, Can You Compete Differently

Over the past few weeks distributors and manufacturers are reporting an uptick in their industrial business and, in some cases, a significant increase.  The reasons vary from “general optimism” to the increase in oil rigs; from replacing / upgrading aging equipment to responding to the need for increased capacity; from consolidation of operations requiring investment in a “centralized location” to adding lines for new offerings; and more.  Or maybe it’s the natural evolution of the economy?  Regardless, there are a number of business drivers that could determine who wins (or retains) the business.

And the reality is that from an electrical distributor / manufacturer viewpoint, the reason isn’t that important.  What is important is the resultant growth.

In addition to core MRO and capital expenditures, more distributors are asking about IIoT and where they play other than in just hardware as well as getting into the lighting space.

The business is changing and there are opportunities and threats on the horizon.

In no particular order:

• Amazon Business wants to “focus / target” on the industrial space. Really they want to focus on transactional interactions and appear to have their sights on Grainger.

• Some thoughts:
  • Most manufacturers who sell to Amazon direct utilize their retail group … which typically means that manufacturer reps do not earn a commission. It can make selling to Amazon more profitable or enable Amazon to improve their profitability. But, will a rep recommend / sell or service an account who buys via Amazon but the rep is not earning commission?  The same, for many manufacturers, occurs with Grainger.  Again, does a rep support or will a rep prefer an electrical distributor?  Will manufacturers need to reconsider their rep agreements and get POS / POT information from Amazon and Grainger (if they currently don’t) and compensate their reps or risk reps redirecting the business?
  •  What percent of industrial decision makers know the difference, and value, that their company receives from a product specialist (electrical) vs a transaction-oriented company?
  • But there is value, from an end-user viewpoint, to having a wide selection.  Some distributors are seeking to broaden their offering by expanding into industrial supplies, fasteners, power transmission, fluid power, etc … and some of those companies are coming into the electrical space.  It’s about “share of wallet”.

• Services.

• • Everyone talks about wanting to generate revenue from them but few, if any, are generating significant revenue (i.e. even 10%). Rockwell distributors are typically the best at this albeit “selling” Rockwell services.  Some things to consider:
  • IIoT … where could there be a role? DOn’t think it is gaining traction? Then you should be reading some of the end-user / automation publications.  It’s happening. Your issue is your salespeople are probably uniformed, not asking the right questions and are not at the right level in your customers where these discussions are probably occurring.
  • There is an engineering personnel deficiency.  Look at job listings in your market.  Many companies are looking for electrical engineers.  Could that represent an opportunity … handling some of the “basic” needs? Perhaps generating an engineering staff? Operating / acquiring an engineering consulting organization? Hiring EE”s from your local college(s) and then having your manufacturers educate them (after all, many manufacturers don’t have enough application specialists / sales engineers on their staffs as they are concerned about having FTEs (full-time equivalents) on their payroll due to worrying about Wall Street.)
  • Productivity is a key concern … but are you at a high enough level in your customers to discuss this?

• Business is local.

  • Local plants want to work with distributors who can service them locally (inclusive of branches of national chains).  While leveraging their business for better pricing can be important, inevitably service is key (and nowadays, and moving forward, this can’t solely be anecdotally.)  Can you, and do you, communicate your value to a company at a high enough level.
  • Consider the national account market.  Most would agree that they major players are WESCO, SupplyForce, Vantage Group / Rexel and Graybar.  Grainger also plays in this space but their “sale” is more than electrical (their value proposition gets into reducing procurement costs and their breadth of offering).  With these core companies, it is estimated that they represent about $2-3 billion in sales which is about 5-8% of the industrial electrical market.  It can be price sensitive, especially during downturns, so margins are typically lowered by these companies which can also compromise service.  We’ve heard that WESCO, which historically has been the market leader (revenue-wise) in this segment, has had a tough three years with loss of business (somewhat expected with the decline in industry industrial revenues), however, we understand that they’ve lost share with SupplyForce increasing revenues.
    • End result … independents are out-servicing accounts.  WESCO’s potential solution? Perhaps increased margin erosion.
  • We’re hearing that a number of national accounts are trying to increase distributor DSOs and extend terms to 120 days. Consider what this can do to a distributor with significant industrial national account business, reduced margins and now being extended while the Federal Reserve increases interest rates?  Your salespeople understanding account profitability to best manage pricing and service commitments (and what services should be chargeable, or maybe periodically waivable) will be important.  An educated business-oriented salesperson could be your greatest asset.

• Where suppliers excel

  • The recent SupplyForce sales meeting sheds some light on independents (and SupplyForce also includes branches of national accounts when requested by the end-user.)  Their Supplier of the Year was Dialight with Shat-R-Shield and Appleton being runner-ups.  Those are companies that work through reps and, for the most part, do not have strong, across the board (corporate), relationships with chains. It comes down to working together at a local facility.
  • At the same time, All Current was recognized by WESCO with their Extra Effort Award.  While congratulations is in order for All Current for serving WESCO and supporting their need, it also may say something about WESCO inventory levels for selected products? And yes, this can be an excellent strategy for managing inventory levels.
  • Grainger and Amazon can face the same issue.  While industrials can wait at times, but when its critical … it needs to be local.  And if services are needed (i.e. product input, troubleshooting, specialist support, storeroom management, etc), local matters (which helps Grainger).

• Distributor consolidation will impact the industrial segment.

  • The number of Rockwell distributors continue to shrink (and are expected to shrink more in the coming months) with those remaining being of a size that would require a significant investment.  Active ownership (and/or ESOP) will be key as absentee / passive ownership, unless they have emotional ties, can quickly generate significant wealth with a divestiture. Rockwell distributors will be at a premium.  Square D, Eaton, Siemens and GE distributors have potentially more suitors.

• Growth in lighting

  • Over the past couple of years more industrials have been looking upwards to their rafters.  They have been investing into lighting and two of the three SupplyForce nominees are representative of this.
    • The question then becomes, how well educated are distributor’s industrial sales organization on lighting? And this then quickly evolves to IIoT, PoE, sensors and more.

• eCommerce is growing

  • For some customers.  Not all will want to use for all of their purchases and not every order will be applicable for eCommerce.
  • Our research to date shows that about 10-15% of “parts and pieces” get purchased online (in multiple industries), but is growing.
  • Customers want an omni-channel option.  They want to be self-sufficient when they want to (looking up pricing, checking inventory, getting spec sheets and then placing orders).  But they also want access to salespeople for customer service and product / technical / factory interaction questions.
  • Product data and speed of search is key
  • eCommerce is also considered EDI / eProcurement. Grainger excels here. Amazon has “written” over 25 interfaces. Distributors need to determine what they need to offer and perhaps could jointly undertake this initiative to reduce their costs.
  • Many AD distributors are poised to launch commerce-enabled sites in the next few months as they’ve been building them for the past year. Creating effective adoption strategies and ensuring sales support will be critical to achieving an ROI on this investment.

And these thoughts don’t preclude companies (end-users) trying to do more with less as well as suppliers focusing on verticals and application-specific initiatives.

The industrial market is undergoing change. Will electrical distributors retain all of the business? No.  The reason? Every company values its suppliers differently.  The question then becomes, how do your industrial customers value you? And are you willing to adapt or focus your efforts (and perhaps better target customers that meet your parameters)?

How is your industrial business and what business dynamics / drivers are you seeing?  How does this influence your longer term (maybe 3-5 year) plan?