The first 40 years of my electrical background was based on a premise that everyone in our industry made more profit through stock. I worked initially for a wire manufacturer who drove our philosophy to support those distributors who supported us with their stock business because we all made more with loyalty, and that deserved support.

Where Did Distributor Profitability Derive From?

25 years ago, while having a meeting with an owner of a large independent with multiple branches, he addressed “true cost” of inventory including purchased price, warehousing, insurance, manpower, delivery to job expense, and items I had never considered. Every employee of his company; sales, counter, warehousing, and truck drivers went through that training segment. (If I remember correctly, NAED had a training program developed by Al Bates called Managing Customer Profitability that highlighted this and they had some tools that distributors could use to show their people how they made money. I don’t know if they still have these programs, or if they are used.) The reasoning to his people was to understand the cost of doing business and accept only margins they could survive on. His company had an excellent reputation for service and the only complaint by contractors were that his pricing was higher than his competition. It should be related at this point that, in the city where he had headquarters, only his company remains from those competitors, other than a national distributor. The others either sold or closed.

About 5 years ago, while having lunch with a different distributor owner, he related that his company had converted their inventory, goals, and objectives to favor job business. They would certainly continue to support and promote stock; however, he found his company to be more profitable with jobs given his cost of warehousing.

Inventory, Job Business, Rebates, and Direct Sales Are Reshaping Distributor Margins

A few months ago, a distributor manager for a large international distributor advised me that projects were now his company’s motivation and that the most important part of his charge was increasing rebates. He said “profit” on his sales had never once been mentioned to him. In fact, he related stock business seldom moves the needle in rebated dollars.

Why the stock-versus-project profitability question is becoming harder for electrical distributors to answer

Today’s available dollars make decisions even more difficult. Given the significant increases in copper, tariffs, transportation, and fluctuations in pricing, how do you know when to purchase stock? There are certainly quality systems for forecasting and inventory management available, but the costs of inventory have never been higher. In many cities, delivery to job sites means dodging traffic, scheduling at the site for elevator time and making sure all is received correctly. More and more cities require truck deliveries to limited times with minimum amount of product stored at the site due to storage space availability.

In those areas distributors are now being required to store products for various jobs to be released when needed. Sometimes it is a requisite to win the order. Sometimes they can change for the space.

This week, on their quarterly earnings call, Home Depot stated that their residential business is “frozen.” Most areas report that commercial construction is at best stable with the majority of support in institutional, or some cases, industrial, construction. Certainly, Data Centers has remained strong to this point, however, new restrictions based on local concerns for rate hikes and health may well begin slowing this business. Utilities that were going strong to support data centers and EVs see the potential slowdown from the data centers and reduction of tax advantages for EVs along with significant customer complaints over vastly increased electricity costs.

Much of the direct shipments have obviously been directed on these larger projects. Although states like Pennsylvania were slower to develop data centers, today’s main issue, to this point, is the lack of qualified electricians. According to NECA, this is a national issue.

Another issue is the increased direct selling by manufacturers to EPCs, General Contractors, and electrical contractors (and sometimes end-users) on larger jobs. What began with switchgear because the delivery extended beyond times when the subcontractor was determined has now expanded into lighting and other supplies.

A General Contractor told me once he had an account open with a manufacturer, he was able to buy repeatedly, regardless of the project. One distributor told me he felt helpless to combat this trend, other than to tell his customers who had purchased product directly, they would need to go to that manufacturer for any assistance they needed. He thought this strategy was somewhat effective given how poorly most services from manufacturers were.

Are there any answers? Are distributors aware of those manufacturers selling directly and how it is spreading? Do they know their reps are also usually closed out when direct sales are made? A rep told me that his manufacturer complained that much of the direct sales required reduced margins and that this was the logic behind a very significant decrease they implemented to their reps’ commissions. His comment was how sad it was that this manufacturer that he represented did not pay them on direct sales, even at a reduced rate, yet somehow could justify his losing commission on all of his sales. His response: “I am looking to represent a competitor!”

Our business is changing, but is it evolving or is this just shorter term? What are the expectations of our customers, and if we are able to meet them, will they support and understand our strengths? What is this doing, or will do, to distributors when they don’t support stock and when manufacturers are not supporting the electrical distribution channel?

The distributor I first spoke about has maintained and grown their business long after the original owner has passed, yet they have kept his philosophy on making a reasonable profit while having services that far surpass much of their competitors.