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Alternate Distribution Channels

Executive Summary Frank Lynn & Associates

Special Thanks to the NAED Foundation’s Channel Advantage Partnership for their continued support

Project Background: The NAED and its members have seen the rise of alternate channels coming for some time; first from retailers, such as Home Depot and Lowes, then broad-line industrial distributors and most recently from online resellers. The creation of Amazon Supply--offering 500,000 industrial items with free two-day shipping for purchases above $50 to Amazon Prime members, a free 365-day return policy, a dedicated customer service center and lines of credit for businesses--has led many industry analysts to predict dire results for MRO distributors, as well as many specialty industrial distributors. While Amazon Supply is the most notable online competitor, specialized dot coms, E-Bay, industrial distributors’ web sites and even Google represent potential alternate sources of supply. The NAED wants to assess its memberships’ views concerning alternate channels, including a prioritization of these channels in terms of greatest competitive threat. The association also wants to develop a deeper understanding of these competing firms’ intentions, strategies, goals, strengths and weaknesses. The NAED would like to focus on the most viable of these alternate channels* by evaluating how contractors and industrial users perceive this channel(s).


© Frank Lynn & Associates, Inc. All Rights Reserved * Note: Findings from the subsequent research with electrical distributors indicated that the online channel represented the greatest competitive threat and the remainder of the research focused on this channel

Executive Summary: The Executive Summary features highlights from the Alternate Distribution Channels full report which is now also available on the NAED website. The full report is a comprehensive look at the impact of alternate distribution channels on the industry. It includes an in-depth information regarding: • Online companies who pose the biggest threats • Complete results from the contractor purchasing survey • Possible scenarios that outline the potential fallout from their presence, and; • A range of conclusions and recommendations to consider

Objectives: - Identify and profile the key alternate channels/competitive threats - Determine the likely impact of alternate channels on electrical wholesaling - Determine the best strategy for electrical wholesalers to compete against alternate channels


© Frank Lynn & Associates, Inc. All Rights Reserved

Project Scope: - Consider all alternate channels, but focus on those determined to be of most concern* - Consider other industries, but focus on implications for electrical wholesalers - Primary geographic focus on the United States * As will be shown, the research identified online-only channels, e.g., Amazon.com, as the highest-rated threat. MRO distributors such as Grainger including their e-commerce sites were rated as the next highest concern

Project Start-Up

Secondary Research

Benchmark Research

Customer Research

• Direction • Scope • Administration • CAP input

• Initial phone interviews

• Comprehensive online survey

Distributor Research

• Interviews with 25 electrical wholesalers

• Research reports

• Financial statements

• Analyst studies • Trade magazine

articles • White papers

• Interviews with key players in related industries facing similar alternate channel threats

Scenario Devlpt

Report, Recommendations

Project Methodology

Why is the Industrial/Electrical Market Attractive to Alternate Channels?


B2B market is 2x the B2C market Online sales of industrial products are growing at twice the rate of traditional sales methods

Source: Forrester Research

40% of top 200 electrical wholesaler websites lack e-commerce capability

Source: Hybris Software/SAP

Several electrical categories, e.g., lighting, have a high margin to weight ratio

Online sales accounted for ~30%+ of sales at Grainger and MSC


Secondary Research Secondary research phase provided an overview of the online retailers that are of the greatest concern for electrical distributors including Amazon Supply, W.W. Grainger, and MSC

FL & A provided an overview of these companies, including their objectives, target market, and product offerings. Much of the focus was on Amazon Supply:



Amazon

Market Cap: 170.46B

Employees: 88,400

Qtrly Rev Growth (yoy): 0.24

Revenue: 70.13B

Gross Margin %: 0.27

EBITDA: 3.17B

Operating Margin: 0.01

Net Income: 132.00M

Online % 100%

SKUs 600K

Fulfillment/Dist Centers

95

Branches (NA) 0

Amazon competes against industries not individual competitors

“Your profit is my opportunity” – Jeff Bezos

“Amazon is focused on the growth of free cash flow per share rather than immediate profit. Consequently, the company seeks “to increase sales of products and services . . . [by] focus[ing] on improving all aspects of the customer experience, including lowering prices [italics mine], improving availability, offering faster delivery and performance times, increasing selection, increasing product categories and service offerings, expanding product information, improving ease of use, improving reliability, and earning customer trust.” – Amazon 10-K, 2012

Alternate Distribution Channels Benchmark Research –Key Findings

Amazon, EBay, others want to attract specialized users (such as electrical contractors/industrial users)

because they also buy other things

Online sellers don’t always get big discounts from suppliers, but can still beat specialty distributors/retailers on lower operating cost and willingness to take small profits (and not collect taxes)

Amazon is good at dynamic pricing – constantly adjusting prices based on new information or changing situations

To succeed, traditional resellers need to understand to whom and when price is more important…and when it isn’t

A winnable strategy – emphasize localism, human factor; provide new and extraordinary customer services

Manufacturers are schizophrenic – need independents to build demand and online/big box channels -- Walmart, Amazon, etc. (or Grainger, HD Supply, etc.) to deliver volume

Multichannel is the winning strategy for resellers . . . and manufacturers need to support it

Amazon is willing/wants to stock all parts – even the C parts. Customers will come there if Amazon is the only one stocking them

Amazon hasn’t figured out how to sell to large accounts, but we need a “seat at the table” in case they do figure it out


Alternate Distribution Channels How Distributors Are Responding to Alternate Channel Threat Electrical distributors are beefing up sales and technical skills and pushing manufacturers to “pay for value.”

0%

25%

50%

75%

100%

Have Taken Will Take Uncertain No Plans

% o

f Dist

ribut

ors


Alternate Distribution Channels Simple vs. Complex Purchases Distributors admit that a large, and growing, percentage of purchases are simple or transactional in nature. The Internet is helping customers conduct research on their own.

Complex purchases • New product • Needs value-added such

as job-site delivery, kitting, integrated supply, technical support, special pricing, staging, etc.

• Projects

Mixed purchases

Simple purchases • Brand already spec’d • Customer knows

product • Requires no value-add • Simple re-order


Alternate Distribution Channels Cost and Price Advantages Electrical distributors strongly believe that online sellers will have an operating cost advantage. However, most distributors believe they can offset that with value-based discounts from manufacturers.

No

Will Online Sellers Have an Operating Cost Advantage over

Electrical Distributors?

Yes

% of Distributors Responding

No

Will Manufacturers Give Equal or Better Prices to Online Sellers than to

Electrical Distributors?

Yes

% of Distributors Responding



Will Online Sellers Develop Value-Added Capabilities? Yes “For technical help, but not much else” “Some of the services, but not new project work“

No “Won’t be able to wirecut, showroom, 24/7 response” “Inventory management, wire cutting, technical expertise will be lacking” “No counter service or product expertise” “Won’t provide engineered/custom solutions” “Can’t do large volume orders, manage inventory, complex sales” “Too costly for them to provide high tech/engineer service, no project management,

no takeoffs” “Geared toward smaller accounts and OEM replacement”



Price Elasticity Distributors believe online sellers will need to price significantly lower to attract contractors and industrial customers.

Pric

e ad

vant

age

onlin

e se

llers

nee

d to

att

ract

___

%

of d

istr

ibut

or cu

stom

ers


Alternate Distribution Channels Contractor and Industrial End-User Findings Frank Lynn & Associates interviewed an initial list of 15 contractors and end users to develop and test questions for an online survey. Using an e-mail list from the National Electrical Contractors Association, FL & A conducted an online survey of 251 contractors*. These consisted of 96 large contractors (>40 employees), 55 mid-sized contractors (16 – 40 employees) and 100 small contractors (15 employees or less). Unable to find a list of industrial end-user e-mail addresses, we randomly contacted a small number by telephone: Atlas Copco Berry Plastics Kaiser Aluminum Lufkin Industries Wastequip Zenith Fabricating

* A CAP council member suggested that NECA contractors are primarily union shops and questioned whether non-union contractors responses would vary significantly. Without an e-mail list we contacted a small sample by phone and did not find sufficient variation to justify additional research.


Alternate Distribution Channels General Satisfaction with Electrical Distributors Contractors are either very or somewhat satisfied with their electrical distributors. More so for smaller than larger contractors. The responses indicate at least some vulnerability for distributors among their larger customers. How could distributors improve their performance?

• More inventory and better lead times • Pricing consistency • Better response time and handling of quotes • Improved customer service and order follow-up • Better trained salespeople • Extended hours (more weekends) • E-commerce capabilities


Industrial end users also rate electrical distributors very highly. They value working with distributors/suppliers that know the customer’s business operation, are reliable, can deliver product in a timely manner and offer a competitive price

Alternate Distribution Channels Types of Purchases by Contractor Size

Smaller contractors were somewhat more likely to make unplanned purchases when compared with larger contractors.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Unplanned Purchases Planned Purchases forGeneral Stock/Truck

Planned Purchases forSpecific Job/Project

Other Purchases

>25 Electricians

5 - 24 Electricians

< 5 Electricians

% o

f $ P

urch

ased


Alternate Distribution Channels Purchase Selection Factors—Comparison of Unplanned vs. Planned Purchases Somewhat to our surprise, selection factors did not vary much between planned and unplanned purchases. However, the small differences we found were as expected – contractors are more concerned about price, volume discounts and credit in planned purchases where the purchase volume is presumably larger.

Very Important

Very Unimportant


Alternate Distribution Channels Perceived Distributor Attributes Electrical distributors, in general, are held in fairly high regard by contractors. Vulnerabilities seem to be in pricing, hours or operation and website quality.

Disagree Completely

Agree Completely


Alternate Distribution Channels Online Purchases by Product Category* On average, about 55% of contractors sometimes buy online (excluding those who didn’t buy in the category), representing about 8% of their total volume. The threat (or opportunity) of online purchasing varies significantly by product category with tools, cable/wire, and circuit breakers most purchased online currently. * Used mid-points of ranges and 25% for the range of >20%. Excluded respondents that did not purchase anything in a given product category

% P

urch

ased

Onl

ine



Impact of Age on Online Purchasing Not surprisingly, the younger the purchasing agent the more they (or their company) purchased online.


Alternate Distribution Channels E-commerce Purchasing Trends

While contractors might not expect to change their purchasing sources, they do plan to almost double the amount they buy online. Distributors will need to upgrade their web capabilities in order to fulfil the expectations of their contractor customers.

Overall Response By Contractor Size

© Frank Lynn & Associates, Inc. All Rights Reserv

Alternate Distribution Channels Research Summary Online and multi-channel sellers represent the most likely alternate channels.

Among specific alternate channel companies Amazon Supply is the biggest concern – mostly because of its past track-record, low-price strategy, and technological competency

Most at-risk customers? Small to mid-size accounts making simple purchases, re-buys

Most distributors expect to successfully compete based on value-added

Most distributors expect to continue receiving deepest discounts of any channel from manufacturers

Contractors are very satisfied with the services they receive from electrical distributors, with the exception of distributor websites

Contractors will almost double their online purchases, but these will still be small relative to purchases through traditional methods

More commoditized products are more vulnerable to online alternate channel poaching

Electrical distributors should address some looming vulnerabilities:

Smaller customers who may feel over-looked Making spot market/unplanned purchases Who want better prices, return policies, and credit And, may turn to online companies with better-designed websites



Research Conclusions

Online searching, shopping, and purchasing have become commonplace in the consumer market and is increasingly impacting the B2B market

The websites of MRO distributors, such as Grainger and of pure-play online companies such as Amazon Supply represent credible threats

In other industries online competitors, particularly Amazon have shown a willingness to use aggressive pricing and a compelling online buyer experience to gain significant market share

However, our research indicates that electrical distributors are likely to retain their customers and most of their market share despite the entry of alternate channels

Value-added services and already aggressive project pricing are among several factors insulating electrical distributors

A shift by suppliers to grant Amazon or other online channels deeper discounts is not likely, but would be a concerning development

Despite the seeming security of their position, electrical distributors need to make larger investments in their website and online capabilities and staff



Recommendations for distributors: Continually assess their customers interest in value-added services – who wants which services how

often?

Support suppliers who provide function-based rebates rather than suppliers solely relying on volume discounts

Advocate for manufacturer-sponsored minimum resale price policies for online sales

Use bundling and volume discounts to their customers to mitigate against the risk of losing commodity SKU sales to online competitors

Hire/retain competent IT directors and require an online plan as part of the annual planning process

Upgrade web capabilities for improved customer experience. For example, enhance product search, site navigation, and personalization that allow customers to “sign in” to securely access customized shopping and purchasing history, for example.


About Frank Lynn & Associates: Frank Lynn & Associates (FL&A) is a consulting firm specializing in “go-to-market” strategy. The company works with manufacturers, distributors, and industry associations to foster strong channel partnerships that meet the needs of its clients and the end-customer. Headquartered in Chicago, the firm has a European office in London and works through two affiliate companies one in Sao Paulo and the other with offices throughout Asia. For over 40 years, FL&A has provided consulting, research, and educational services to clients in a wide mix of predominantly B2B markets. The company’s clients include many of the leading manufacturers in the electrical products industry. FL&A’s consulting services include customer segmentation, customer buying practices, channel economic analysis, discount/rebate structure design, competitive assessments, and overall channel strategy. Research for this project was conducted from November 2013-June 2014. The full report is also available on the NAED website. Contact Information: For questions relating to this study, its conclusions or recommendations, please contact Bob Segal of Frank Lynn & Associates at [email protected] or 312.558.4808.



http://www.naed.org/

mailto:[email protected]

Lester & Edward Anixter Family Foundation (Advance Electrical Supply Co., Inc.) Border States Electric Butler Supply, Inc. Colonial Electric Supply Co., Inc. Consolidated Electrical Distributors, Inc. Cooper (now Eaton) Crescent Electric Supply Company Dakota Supply Group Eaton Corporation Electric Supply, Inc. Elliott Electric Supply Fluke Corporation GE Energy Industrial Solutions Graybar HD Supply Power Solutions Hubbell Incorporated Independent Electric Supply, Inc. (a division of Sonepar USA) Kendall Electric, Inc.

Lutron Electronics Co., Inc. Maurice Electrical Supply Co./USESI Mayer Electric Supply Co., Inc. McNaughton-McKay Electric Company Raymond de Steiger, Inc Revere Electric Supply Co. Rexel Holdings USA (Rexel/Gexpro) Schneider Electric/Square D Siemens Industry, Inc. Sonepar USA Springfield Electric Supply Company State Electric Supply Co. Steiner Family Entities The Hite Company Thomas & Betts Corporation United Electric Supply Co., Inc. WESCO Distribution Western Extralite Co.

CAP Council B & K Electric Wholesale

City Electric Company, Inc. Electric Supply, Inc. Electrical Distributors Co.

Electrical Engineering & Equipment Co.

Hunzicker Brothers, Inc.

CAP Associates

We would like to thank all of the NAED members who offered their insights throughout the research process. We are grateful to the Channel Advantage Partnership for their ongoing support of The NAED Education & Research Foundation’s research and educational initiatives. The NAED Foundation wishes to thank the CAP Steering Committee for their guidance and insight throughout the project process. We are indebted to all volunteers for their participation, survey responses, and interviews on behalf of this project. Thank you.

Kirby Risk Electrical Supply Lithonia Lighting, An Acuity Brands, Inc. Co.

We would like to thank all of the NAED members who offered their insights throughout the research process. We are grateful to the Channel Advantage Partnership for their ongoing support of The NAED Education & Research Foundation’s research and educational initiatives. The NAED Foundation wishes to thank the CAP Steering Committee for their guidance and insight throughout the project process. We are indebted to all volunteers for their participation, survey responses, and interviews on behalf of this research.

CAP Council

Lester & Edward Anixter Family Foundation (Advance Electrical Supply Co., Inc.) Border States Electric Butler Supply, Inc. Colonial Electric Supply Co., Inc. Consolidated Electrical Distributors, Inc. Cooper Industries Crescent Electric Supply Company Dakota Supply Group Eaton Corporation Electric Supply, Inc. Elliott Electric Supply Fluke Corporation GE Energy Industrial Solutions Graybar HD Supply Power Solutions Hubbell Incorporated Independent Electric Supply, Inc. Kendall Electric, Inc. Kirby Risk Electrical Supply

Lithonia Lighting, An Acuity Brands, Inc. Co. Lutron Electronics Co., Inc. Maurice Electrical Supply Co./USESI Mayer Electric Supply Co., Inc. McNaughton-McKay Electric Company North Coast Electric Company Revere Electric Supply Co. Rexel Holdings USA (Rexel/Gexpro) Schneider Electric Siemens Industry, Inc. Sonepar USA Springfield Electric Supply Company State Electric Supply Co. Steiner Family Entities The Hite Company Thomas & Betts Corporation United Electric Supply Co., Inc. WESCO Distribution Western Extralite Co.

CAP Associates

B & K Electric Wholesale City Electric Company, Inc. Electric Supply, Inc. Electrical Distributors Co. Electrical Engineering & Equipment Co. Hunzicker Brothers, Inc.

Lester & Edward Anixter Family Foundation (Advance Electrical Supply Co., Inc.) Border States Electric Butler Supply, Inc. Colonial Electric Supply Co., Inc. Consolidated Electrical Distributors, Inc. Cooper (now Eaton) Crescent Electric Supply Company Dakota Supply Group Eaton Corporation Electric Supply, Inc. Elliott Electric Supply Fluke Corporation GE Energy Industrial Solutions Graybar HD Supply Power Solutions Hubbell Incorporated Independent Electric Supply, Inc. (a division of Sonepar USA) Kendall Electric, Inc.

Lutron Electronics Co., Inc. Maurice Electrical Supply Co./USESI Mayer Electric Supply Co., Inc. McNaughton-McKay Electric Company Raymond de Steiger, Inc Revere Electric Supply Co. Rexel Holdings USA (Rexel/Gexpro) Schneider Electric/Square D Siemens Industry, Inc. Sonepar USA Springfield Electric Supply Company State Electric Supply Co. Steiner Family Entities The Hite Company Thomas & Betts Corporation United Electric Supply Co., Inc. WESCO Distribution Western Extralite Co.

CAP Council B & K Electric Wholesale

City Electric Company, Inc. Electric Supply, Inc. Electrical Distributors Co.

Electrical Engineering & Equipment Co.

Hunzicker Brothers, Inc.

CAP Associates

We would like to thank all of the NAED members who offered their insights throughout the research process. We are grateful to the Channel Advantage Partnership for their ongoing support of The NAED Education & Research Foundation’s research and educational initiatives. The NAED Foundation wishes to thank the CAP Steering Committee for their guidance and insight throughout the project process. We are indebted to all volunteers for their participation, survey responses, and interviews on behalf of this project. Thank you.

Kirby Risk Electrical Supply Lithonia Lighting, An Acuity Brands, Inc. Co.

1181 Corporate Lake Drive, St. Louis, MO 63132 888.791.2512 | www.naed.org

Copyright © 2014 NAED Education & Research Foundation, Inc. All Rights Reserved. This report is made possible through the generosity of the electrical distribution and manufacturer members of the NAED Education & Research Foundation’s Channel Advantage Partnership Council. No part of this report may be reproduced or copied in any form or by any means—graphics, electronic or mechanical, including photocopying, taping, or information and retrieval systems—without written permission from the NAED Education & Research Foundation. The findings, opinions, conclusions and recommendations provided herein are based on independent research, commissioned and funded by the NAED Education & Research Foundation, Inc. Information in this report should not be regarded as an endorsement or opinion of the Foundation or the National Association of Electrical Distributors.

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