Alternate Distribution Channels Full Report - NAED Matters/Alternate... · Alternate Distribution...

Alternate Distribution Channels

Full Report Frank Lynn & Associates

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

Introduction


© Frank Lynn & Associates, Inc. All Rights Reserved

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 remainderof the research focused on this channel

Full Report: The Alternate Distribution Channels report which 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



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 phoneinterviews

• Comprehensiveonline survey

Distributor Research

• Interviews with25 electricalwholesalers

• Researchreports

• Financialstatements

• Analyst studies• Trade magazine

articles• White papers

• Interviews withkey players inrelatedindustries facingsimilar alternatechannel threats

Scenario Devlpt

Report, Recommendations

Project Methodology

Secondary Research



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


Challenger Matrix


Amazon Grainger MSC Fastenal

Market Cap: 170.46B 16.30B 5.18B 13.01B

Employees: 88,400 18,400 6,133 17,277

Qtrly Rev Growth (yoy): 0.24 0.07 0.18 0.08

Revenue: 70.13B 9.44B 2.56B 3.33B

Gross Margin %: 0.27 0.44 0.46 0.52

EBITDA: 3.17B 1.48B 457.13M 776.21M

Operating Margin: 0.01 0.14 0.16 0.21

Net Income: 132.00M 797.04M 232.11M 448.64M

Online % 100% 30% 40% 10-15%E

SKUs 600K 1.4M 700K 1.3M

Fulfillment/Dist Centers 95 9 4 14

Branches (NA) 0 400US 100 2,620


Amazon Supply


Overview Launched/Founded: April 2012 Objective: Identify unmet industrial customer needs; eliminate inefficiency Key Metric: Free cash flow per share rather than immediate profit Origin: Acquired Small Parts, an industrial distributor in 2005 Target Market: Aims to fulfill the parts and supply needs for the business,

commercial, scientific and commercial markets Product Offering: 1M+ SKUs across 18 industrial product categories (in some, but

not all of its ~96 fulfillment centers)

Additional Offerings: • 365 Day Return Policy • Dedicated Customer Service • Dedicated Technical Help • Free Two-day Shipping on Orders

over $50 • No Minimum Order Requirements

• Abrasives & Finishing • Cutting Tools • Fasteners • Food Service & Grocery • Fleet & Vehicle

Maintenance • Hydraulics, Pneumatics &

Plumbing • Industrial Electrical (11

subcategories - 75,479 SKUs)

• Janitorial & Sanitation • Lab & Scientific • Material Handling • Materials • Occupational Health &

Safety • Office • Power & Hand Tools • Power Transmission • Test, Measure & Inspect


Amazon’s Strategy


Amazon competes against industries not individual competitors “An Amazon opponent doesn’t just get one battle. It gets a coordinated multi-front war . . . . Amazon doesn’t open up all the fronts . . . at once. It wants you to succumb rationally at a controlled rate.” – Forbes, 12.14.11 “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 “Your profit is my opportunity” – Jeff Bezos “Almost half of B2B buyers with $100K+ budgets have purchased from Amazon Supply. Twenty-five percent of these reported buying from Amazon Supply frequently.”— Aquity Group Research


Amazon’s Financials


Net Profit Before Tax

Reve

nue

($B)



Amazon’s Web Prowess

Leverages B2C techniques that buyers like

Creates custom, high-quality “rich” data

Plays up its strengths

Easy search

Highlights price, savings

Carefully edits the data it shows

Amazon shows up first in many searches


W. W. Grainger


Overview: Launched/Founded: 1928 Origin/History: Began as a distributor of electrical motors. Its original

MotorBook evolved into the current Grainger catalog listing over 1 million products. Company went public in 1967. Grainger introduced a MRO catalog on CD-ROM in 1991, launched its corporate Web site in 1995 and began taking orders online in 1996. One of the pioneers in industrial online sales (with scars to prove it)

Objective: Shareholder value creation through organic and acquisition-driven market share growth

Target Markets*: commercial/facilities managers (18%), heavy industrial (18%), government (15%) and building contractors (12%)

Product Offering*: Safety and security (17%), material handling (13%), metalworking (8%), cleaning/maintenance (8%), pumps/plumbing (8%), test equipment (7%), electrical (7%), hand tools (7%)

Additional Offering: Supply chain solutions, materials management and procurement outsourcing

*2012 figures


W. W. Grainger


Online Strategy Insights

Only 1% of customers purchase exclusively online, while the majority source through a multi-channel approach; grainger.com, sales force, mobile, branches/inventory services, or KeepStock

Continues to make significant investments in e-commerce and e-mobile. 30% of 2012 sales generated via e-commerce with expectations it will reach 50% in the next few years

Feels Amazon is targeting smaller customers while 95% of Grainger’s customers are medium to large who value sales reps and service

To protect its small customer share, Grainger has investments in pure online distribution channels, including Japan-based MonotaRO and U.S. based Zoro Tools, to compete with Amazon Supply

Grainger has increased its sales force from less than 2,000 in 2010 to close to 2,500 this year, with plans to increase that number to 4,000 in the foreseeable future. It also intends to hire 300 IT and e-commerce employees over the next several years

Continued product expansion; Grainger’s 2013 U.S. catalog includes 570,000 in-stock products, which is six times that in 2005. In total, more than 1M products are available on grainger.com. Customers often perceive Grainger as more likely to have core products in stock vs. electrical and other specialty distributors



Key Findings—Benchmarks



Benchmarks We interviewed the following organizations and companies for their perspective on competing with or selling through Amazon and other online resellers: The American Booksellers Association

Hewlett-Packard (talked to the consumer PC/laptop division)

MSA – safety products Industry

The National Bicycle Dealers Association

United Stationers – office supplies industry

Zebra Technologies – leading manufacturer of bar code equipment


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



Distributor Interview List

Distributor Name ATI Electrical Atlanta Electrical Distributors BA Robinson Bell Electric Canniff Electric Capital Electric Supply Hein Electric Supply Houston Wire IEWC Irby JP Simmons Kansas City Electrical Supply

Leff Electric

Distributor Name Legend Electrical Sales Mars Electric Co. Metro Wire & Cable ORS Nasco Regency Lighting Stanion Wholesale Electric Tacoma Electric Supply Teche Electrical Supply Wholesale Electric Supply Wildcat Electric Wolf Electric Supply Co WVA Electric


Alternate Distribution Channels Future Sources of Competition

Pure online channel and multi-channel MRO distributors are seen as alternate channels of most concern

No Competition

Significant Competition


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 do 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



Pricing to Online Sellers from Manufacturers

Equal or Better Prices

“Understand physical distribution better than anyone and eventually will build scale for pricing”

“Amazon equals distribution and efficiency. If they can sell enough for GE, GE will give them better pricing” “Once Amazon gains scale in certain categories, they will be able to get pricing”

“Amazon has distribution figured out better than almost any other company plus they won’t have the same sales support… pricing will depend on volume”

Worse Pricing

“Key distributors will drop supplier lines if Amazon starts getting better pricing”

“No reason to give Amazon best pricing just to sell product, need to see if people buying it first”

“Not sure if they will buy enough to get best pricing”

“Loyal distributors will ditch lines if Amazon is getting good pricing”



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



Contractor & Industrial Customer Findings



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. Then using an e-mail list from the National Electrical Contractors Association, we 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.



Types of Purchases

Planned purchases make up the bulk of contractor volume.

% o

f $ P

urch

ased

0%

10%

20%

30%

40%

50%

60%

70%

Unplanned Purchases Planned Purchases forGeneral Stock/Truck

Planned Purchases forSpecific Job/Project

Other Purchases


Alternate Distribution Channels Types of Purchases by Contractor Size

Smaller contractors were somewhat more likely to make unplanned purchases when compared with larger contractors; this is probably due to better systems and management in larger firms.

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—Unplanned Purchases

Same day availability and a broad inventory leads a long list of desired purchase factors for unplanned purchases. The availability of a good website, while desirable, was last on the list.

Very Important

Very Unimportant


Alternate Distribution Channels Purchase Selection Factors—Unplanned Purchases by Contractor Size Overall, larger contractors were more demanding than smaller ones. If anything, smaller contractors were relatively more interested in better return policies and lines of credit. Not surprising, we suppose, given their presumed weaker financial position.

Very Important

Very Unimportant


Alternate Distribution Channels Purchase Selection Factors—Planned Purchases (Ranked High to Low) Very

Important

Very Unimportant


Alternate Distribution Channels Purchase Selection Factors—Planned Purchases by Contractor Size Very

Important

Very Unimportant


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 Perceived Distributor Attributes by Contractor Size Small contractors showed a slightly higher regard for electrical distributors than did larger contractors.

Disagree Completely

Agree Completely



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.

Overall Response

Response by Size of Contractor

% o

f Con

trac

tors

Res

pond

ing

% o

f Con

trac

tors

Res

pond

ing


General Satisfaction with Electrical Distributors


General Satisfaction with Electrical Distributors

How could distributors improve performance? Key Themes include:

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


Attribute Importance vs. Perception—Planned Purchases

For planned purchases, contractors give electrical distributors high marks on those attributes deemed most important, with perhaps a slight concern regarding pricing. Where distributors fall off (hours, website), those attributes are less important to contractors.


1.0

2.0

3.0

4.0

5.0

Importance Perception


Attribute Importance vs. Perception—Unplanned Purchases For unplanned purchases, distributors again do well in the important areas. A very slight area of concern could be same day availability (some contractors reported going to Grainger for products not in stock at their electrical distributor). Again, distributors fall behind on their websites, but that is a lower rated attribute.


1.0

2.0

3.0

4.0

5.0

Importance Perception


Attribute Importance vs. Perception—Planned Purchases

Looking at the same data in another format illustrates potential areas of concern. For planned purchases, electrical distributors are rated highly in important areas such as credit, returns, etc., but not as highly as they could be. These may be areas where alternate channels, especially those using online advantages, press the attack against electrical distributors.


Attribute Importance Very

Important Very

Unimportant

Perc

eptio

n of

Dist

ribut

ors

Very

Goo

d

• Knows company

• Offers credit

• Same day

• Extended hours

• Answer questions

• Broad line

• Low price

• Volume discounts

• Specialized logistics

• Returned goods

• Web site

Not

Ver

y Go

od


Attribute Importance vs. Perception—Unplanned Purchases The same general areas of concern arise for unplanned purchases too.


Attribute Importance Very

Important Very

Unimportant Pe

rcep

tion

of D

istrib

utor

s

Very

Goo

d N

ot V

ery

Good

• Knows company

• Offers credit

• Same day

• Extended hours

• Answer questions

• Broad line

• Low price • Volume discounts

• Specialized logistics

• Returned goods

• Web site



Comparative Ratings of Alternate Channels

Electrical distributors outrank alternate channels in almost all areas. Potential vulnerabilities exist in the areas of pricing, hours, and website capabilities.

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Electrical Distributors MRO Distributors Online/Dot Com Resellers Hardware/Big Box Stores

DisagreeCompletely

Agree Completely



Percent of Contractors that Purchase Online (From Any Channel)

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.

% of

Con

trac

tors Re

spon

ding

Contractors that bought at least som

ething online



Online Purchases by Product Category*

The threat (or opportunity) of online purchasing varies significantly by product category with tools, cable/wire, and circuit breakers most purchased online currently.

% P

urch

ased

Onl

ine

* Used mid-points of ranges and 25% for the range of >20%. Excluded respondents that did not purchase anything in a given product category



Impact of Age on Online Purchasing

Not surprisingly, the younger the purchasing agent the more they (or their company) purchased online.


Alternate Distribution Channels Percent Purchased from Each Channel

Contractors show very little inclination to change their buying sources over the next three years.

* The decline from 4% - 1% in MRO buying is probably within the survey margin of error and therefore may not indicate a realmove away from MRO distributors

© Frank Lynn & Associates, Inc. All Rights Reserv

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


Alternate Distribution Channels E-commerce Purchasing Trends

What will account for the change in purchasing behavior?

Key Themes Improved e-commerce capabilities in the future (nobody there yet) 24 hour/day ordering capability “I know exactly what I need” mentality Price shopping will be more prevalent

Yet some contractors feel….. Preference to deal with an actual person Can get better pricing dealing with salesperson Prefer having distributor enter the order

© Frank Lynn & Associates, Inc. All Rights Reserve

Alternate Distribution Channels E-commerce Purchasing Trends

Why smaller contractors are more prone to migrate to E-commerce

Projects are not as technical or complex as larger contractors, thereforetechnical and specification support is not as necessary

Projects are not as large as larger contractors, therefore negotiated pricingand volume discounts are not as critical

Smaller contractors do not receive as much attention from distributor salesreps, therefore they may not be as loyal

Price shopping on the web can help smaller contractors better competeagainst larger contractors

Distributors are forcing smaller customers to purchase via the web in order tooptimize sales resources

Yet, smaller contractors rate their electrical distributors very highly


Alternate Distribution Channels Industrial End Users

Rate distributors highly. Especially value working with distributors/suppliers that know thecustomer’s business operation, are reliable, can deliver product in a timely manner and offer acompetitive price

Purchasing budgets have declined, so plants are increasingly going online to compare prices onless technical items or replacement parts

Plants will use web pricing as leverage in manufacturer and contractor negotiations

MRO/Broad-line distributors and electrical distributors are the primary channels; however,purchasing managers indicate they are comfortable purchasing MRO items and smaller orders($500 - $1,000) online from traditional or pure play Internet channels

Critical components of production process equipment generally ordered through a rep and notvia the Web

Safety gloves, tape, batteries, tools, and wire were examples of products purchasing managerswere comfortable purchasing via the Web

Most don’t see dramatic shifts in sourcing behaviors for complex or expensive orders in thefuture

Many pointed to vendor managed inventory via on-site vending machines as a more importanttrend.



Research Summary


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 – mostlybecause 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 frommanufacturers

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

Contractors will almost double their online purchases, but these will still be small relative topurchases 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



Scenarios



Scenario Development

Given the uncertainty in the future development – timing, scope, business model -- of online channels, Frank Lynn & Associates with input from CAP Council members developed several scenarios regarding how the alternate channel threat might evolve. The purpose of the scenario development was to provide NAED members with various signposts to consider as events unfold over the next several quarters and years.


Alternate Distribution Channels Scenario #1 – The “Not Us” Scenario Scenario Description - Amazon Supply and other online resellers compete successfully for MRO/catalog customers and industrial users; but mostly leave electrical contractors and distributors untouched. Price transparency driven by these Web-based competitors do push down prices negatively affecting electrical distributor margins slightly.

Driving Factors: Value-added services (e.g. wire-cutting, kitting, etc.) required by customers Same day (not next day) pick-up requirements Greater electrical product depth carried by distributors Supplier reluctance to grant preferential pricing to online resellers Improved distributor websites Selection and usage advice offered by distributors

Implications: Distributors will need to invest in and enhance the value-added services they offer. They will also need to increase their marketing to remind customers of these value-added services. Electrical distributors need not match the online capabilities of Amazon Supply, but they will need to keep pace with standards, such as stock availability, saved lists, ease of search/navigation and rich content. With a downward pressure on prices/margins, distributors will need to find greater efficiencies or cut expenses.

Signposts: Steady level of value-added services as a % of total revenue Steady level of counter/same day purchases as a % of total revenue No more than slight decline in average prices and gross margin


Alternate Distribution Channels Scenario #2 – The “See Spot Run” Scenario Scenario Description – Seeking lower prices industrial users and some contractors run to online resellers to make smaller or occasional “spot market” purchases. Large projects remain the province of electrical distributors. The online channel uses their operating cost advantage to beat electrical distributors on prices for these spot purchases. Customers are willing to wait for overnight delivery to access these lower price levels.

Driving Factors: Customer willingness to accept overnight delivery instead of same-day pick-up Online prices that are 5% or more lower than electrical distributor prices Supplier willingness to price online channels on a par, or in the case of Amazon Supply, below

electrical distributors Customer price sensitivity in commodity product categories such as wire and cable

Implications: Distributors will see a significant hit in the spot/unplanned/pick-up business. To compensate they will need to start charging for some value-added services and try to raise prices in the project business. However, faced with price conscious project buyers distributors will likely feel a sizeable squeeze on gross margins. Smaller distributors may not be able to sustain the business in the mid to long term.

Signposts: Significant decrease in counter/same day purchases as a % of total revenue Greater than 3% decline in average prices and 1-2% in gross margin


Alternate Distribution Channels Scenario #3 – The “To Have and Have Not” Scenario Scenario Description – A strong online capability becomes a key factor in the industry. Not only do contractors and industrial users turn to the Web consistently for product information, stock availability, and other data, their preference to actually place, track, and pay for orders online grows substantially more than forecast. The ability to easily access and analyze data relating to purchases becomes an attractive reason to conduct business online. Electrical distributors fall into two camps – winners that aggressively upgrade their online capabilities and losers that conduct business as usual.

Driving Factors: Younger purchasing agents and electricians drive industry behavior Software companies create contractor-specific tools to help them evaluate their purchases Larger distributors commit more dollars to their online capabilities and hire Web, data, and social

media savvy employees

Implications: Online-only competitors, like Amazon Supply, do very well, mostly taking share from smaller and less tech savvy electrical distributors. However, more savvy, often larger distributors also benefit from this share grab frequently outcompeting pure online companies with tools, configurators, and data that are more specific to the electrical customer. Surviving distributors hold and possibly even increase gross margins due to an increase in new, data-driven services, and associated revenue streams.

Signposts: Notable decline in the number of (smaller) electrical distributors Emergence of unique software tools targeting electrical contractors and distributors Increase in percent of budget spent on IT by selected/larger distributors Increase in the want ads/hiring of IT managers by electrical distributors © Frank Lynn & Associates, Inc. All Rights Reserv


Conclusions & Recommendations



Conclusions

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

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

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

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



Conclusions

Value-added services and already aggressive project pricing are among several factorsinsulating 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 largerinvestments in their website and online capabilities and staff



Recommendations

Distributors should:

Continually assess their customers interest in value-added services – who wants whichservices how often?

Support suppliers who provide function-based rebates rather than suppliers solely relyingon 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 losingcommodity SKU sales to online competitors

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



Recommendations

Distributors should upgrade their web capabilities, focusing on the following:

Improved product search and site navigation

Inventory/stock level visibility

Online offers with “deep links” to product pages

Frequent or real-time updating of product and pricing information (evenallowing/requiring vendors to directly update information on the distributor’s site)

Site personalization – allow customers to “sign in” to securely access customizedshopping lists, purchase history, credit, personalized offers, order tracking, etc.

Test various social media to determine where and how customers look for informationand sources of supply


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 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.



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 CorporationElectric 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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