Rexel’s Disappointing North American Performance

Rexel recently announced its second quarter/first half results. While company-wide organic growth was 4.5% and the company is actively seeking acquisitions (30 are in various stages worldwide), of interest is Rexel’s North American performance. Key North American highlights include:

• Sales down 1.1% for the half and 1.7% for the quarter (and with Canada up 2.3%, this means that U.S. operations were down even further!). This should be consider in light of economic projections by DISC that 2007 electrical contractor sales will increase by 9% in 2007, driven by the non-residential construction market. (See economic update article)
• According to the report, wire and cable was down 5.4%, otherwise U.S. operations would have been flat.
• North American gross margins for the first half increased to 22.2% from 21.5% due to “purchasing efficiencies” and synergies with Gexpro (ability to negotiate better with suppliers).
• Headcount is down 3%
• The company expects to generate a 5.5% EBITA at the end of the year
• Click here for the full report

While the company attributes the decline to the residential market, other things to consider include:

• It appears that there could be a “people” problem. This week’s Electrical Marketing reports two people who have left Rexel for independent distributors or reps, and conversations with distributors and reps around the country have revealed a number of people have left Rexel, in some cases leaving branches very low on staffing.
• We’ve heard of some branch closings and/or planned closings. This may be for very good reasons (duplication of coverage) and an inability to develop the market.
• Rexel’s private label strategy is widespread, however, it either isn’t generating the level of increased profitability to make it worthwhile, gross margins are down more dramatically and the private label initiative is maintaining margins, or the potential benefits of private labeling (increased gross margin) are being lost due to pricing strategies. Perhaps in future reports Rexel will start to report on the percentage of sales that are private labeled, much like Grainger does.
• Rexel’s growth strategy is focused on acquisitions and pricing to gain share. The company doesn’t appear to be effective, nationally, to sell a value-added / service proposition nor rollout growth initiatives.
• One wonders why Rexel’s industrial and commercial businesses are not more successful, especially since these are the cores of the electrical industry. Given that Rockwell announced Q3 sales improvement (8% in Controls), and that Rexel has a number of Rockwell APRs, shouldn’t Rexel be more successful in these markets? Or is Rexel much too heavily weighted on the residential market (as was HD Supply) and both companies need to balance themselves?

On the positive side, the margin improvement reinforces distributor belief that the larger chains can negotiate better purchasing arrangements (rebates!!) and, in some cases, “street pricing.” Manufacturers are concerned about retaining volume rather than asking these companies on how they can help grow the business…essentially, they pay more for a hunting license!

From an independent distributor viewpoint, this reconfirms that national chains are susceptible. Presuming comparable pricing, customers can be earned through service and a unique business proposition.