Alternate Distribution Channels Full Report

Alternate Distribution Channels Full Report Frank Lynn & Associates Special Thanks to the NAED Foundation’s Channel Advantage Partnership for their c...
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Alternate Distribution Channels Full Report

Frank Lynn & Associates Special Thanks to the NAED Foundation’s Channel Advantage Partnership for their continued support

Alternate Distribution Channels

Introduction

© Frank Lynn & Associates, Inc. All Rights Reserved

Project Background:

Alternate Distribution Channels

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).

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

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

Alternate Distribution Channels

Objectives:

Project Scope:

- Identify and profile the key alternate channels/competitive threats

- Consider all alternate channels, but focus on those determined to be of most concern*

- Determine the likely impact of alternate channels on electrical wholesaling

- Consider other industries, but focus on implications for electrical wholesalers

- Determine the best strategy for electrical wholesalers to compete against alternate channels

- 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 Methodology

• • • •

Project Start-Up

Secondary Research

Benchmark Research

Distributor Research

Customer Research

Direction Scope Administration CAP input

• Research reports • Financial statements • Analyst studies • Trade magazine articles • White papers

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

• Interviews with 25 electrical wholesalers

• Initial phone interviews • Comprehensive online survey

Scenario Devlpt

Report, Recommendations © Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels

Secondary Research

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels Why is the Industrial/Electrical Market Attractive to Alternate Channels? B2B market is 2x the B2C market

Source: Forrester Research

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

Online sales of industrial products are growing at twice the rate of traditional sales methods Online sales accounted for ~30%+ of sales at Grainger and MSC

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

Source: Hybris Software/SAP

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels 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

0.24

0.07

0.18

0.08

70.13B

9.44B

2.56B

3.33B

0.27

0.44

0.46

0.52

3.17B

1.48B

457.13M

776.21M

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

95

9

4

14

0

400US

100

2,620

Qtrly Rev Growth (yoy): Revenue: Gross Margin %: EBITDA: Operating Margin:

Fulfillment/Dist Centers Branches (NA)

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels 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)     

• • • • • • •

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

Additional Offerings:

• 365 Day Return Policy • Dedicated Customer Service • Dedicated Technical Help • Free Two-day Shipping on Orders over $50 • No Minimum Order Requirements

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels 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. Twentyfive percent of these reported buying from Amazon Supply frequently.”— Aquity Group Research

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels

Net Profit Before Tax

Revenue ($B)

Amazon’s Financials

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels Amazon’s Web Prowess Plays up its strengths Easy search Highlights price, savings

Creates custom, highquality “rich” data

Amazon shows up first in many searches Carefully edits the data it shows Leverages B2C techniques that buyers like

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels 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 © Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels W. W. Grainger Online Strategy Insights  Only 1% of customers purchase exclusively online, while the majority source through a multichannel 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 © Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels

Key Findings—Benchmarks

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels 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

© Frank Lynn & Associates, Inc. All Rights Reserved

Benchmark Research –Key Findings

Alternate Distribution Channels



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 © Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels Distributor Interview List ATI Electrical

Distributor Name Legend Electrical Sales

Atlanta Electrical Distributors

Mars Electric Co.

BA Robinson

Metro Wire & Cable

Bell Electric

ORS Nasco

Canniff Electric

Regency Lighting

Capital Electric Supply

Stanion Wholesale Electric

Hein Electric Supply

Tacoma Electric Supply

Houston Wire

Teche Electrical Supply

IEWC

Wholesale Electric Supply

Irby

Wildcat Electric

Distributor Name

JP Simmons Kansas City Electrical Supply

Wolf Electric Supply Co WVA Electric

Leff Electric

© Frank Lynn & Associates, Inc. All Rights Reserved

Future Sources of Competition

Alternate Distribution Channels

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

No Competition

© Frank Lynn & Associates, Inc. All Rights Reserved

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.”

% of Distributors

100%

75%

50%

25%

0%

Have Taken

Will Take

Uncertain

No Plans © Frank Lynn & Associates, Inc. All Rights Reserved

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. Mixed purchases Complex purchases

• New product • Needs value-added such as job-site delivery, kitting, integrated supply, technical support, special pricing, staging, etc. • Projects

Simple purchases

• Brand already spec’d • Customer knows product • Requires no value-add • Simple re-order

© Frank Lynn & Associates, Inc. All Rights Reserved

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. Will Online Sellers Have an Operating Cost Advantage over Electrical Distributors?

Will Manufacturers Give Equal or Better Prices to Online Sellers than to Electrical Distributors?

No

No

Yes % of Distributors Responding

Yes % of Distributors Responding

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels Pricing to Online Sellers from Manufacturers Equal or Better Prices “Understand physical distribution better than anyone and eventually will build scale for pricing”

Worse 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”

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

“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”

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

“Not sure if they will buy enough to get best pricing” “Loyal distributors will ditch lines if Amazon is getting good pricing”

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels 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”

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels Price Elasticity

Price advantage online sellers need to attract ___% of distributor customers

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

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels

Contractor & Industrial Customer Findings

© Frank Lynn & Associates, Inc. All Rights Reserved

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. 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.

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels Types of Purchases Planned purchases make up the bulk of contractor volume. 70% 60%

% of $ Purchased

50% 40% 30% 20% 10% 0%

Unplanned Purchases

Planned Purchases for General Stock/Truck

Planned Purchases for Specific Job/Project

Other Purchases

© Frank Lynn & Associates, Inc. All Rights Reserved

Types of Purchases by Contractor Size

Alternate Distribution Channels

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. 80% 70%

% of $ Purchased

60% 50% >25 Electricians

40%

5 - 24 Electricians < 5 Electricians

30% 20% 10% 0%

Unplanned Purchases

Planned Purchases for General Stock/Truck

Planned Purchases for Specific Job/Project

Other Purchases

© Frank Lynn & Associates, Inc. All Rights Reserved

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

© Frank Lynn & Associates, Inc. All Rights Reserved

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

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels

Purchase Selection Factors—Planned Purchases (Ranked High to Low) Very Important

Very Unimportant

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels

Purchase Selection Factors—Planned Purchases by Contractor Size Very Important

Very Unimportant

© Frank Lynn & Associates, Inc. All Rights Reserved

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

© Frank Lynn & Associates, Inc. All Rights Reserved

Perceived Distributor Attributes

Alternate Distribution Channels

Electrical distributors, in general, are held in fairly high regard by contractors. Vulnerabilities seem to be in pricing, hours or operation and website quality. Agree Completely

Disagree Completely

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels

Perceived Distributor Attributes by Contractor Size

Small contractors showed a slightly higher regard for electrical distributors than did larger contractors. Agree Completely

Disagree Completely

© Frank Lynn & Associates, Inc. All Rights Reserved

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.

Response by Size of Contractor

% of Contractors Responding

% of Contractors Responding

Overall Response

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels 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

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels 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. 5.0 4.0 3.0 2.0 1.0

Importance

Perception

© Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels 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. 5.0 4.0 3.0 2.0 1.0

Importance

Perception © Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels

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 Good

• Broad line • Knows company • Answer questions • Specialized logistics • Same day • Offers credit • Returned goods • Volume discounts • Low price

Not Very Good

Perception of Distributors

Very Unimportant

• Extended hours

• Web site

© Frank Lynn & Associates, Inc. All Rights Reserved

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

Very Good

Very Important

• Same day • Broad line • Answer questions • Knows company • Specialized logistics • Returned goods • Low price • Volume discounts • Extended hours • Offers credit

Not Very Good

Perception of Distributors

Very Unimportant

• Web site

© Frank Lynn & Associates, Inc. All Rights Reserved

Comparative Ratings of Alternate Channels

Alternate Distribution Channels

Electrical distributors outrank alternate channels in almost all areas. Potential vulnerabilities exist in the areas of pricing, hours, and website capabilities. 5.0 Agree Completely 4.5 4.0 3.5 3.0 2.5 2.0 Disagree 1.5 Completely 1.0

Electrical Distributors

MRO Distributors

Online/Dot Com Resellers

Hardware/Big Box Stores © Frank Lynn & Associates, Inc. All Rights Reserved

Alternate Distribution Channels

Percent of Contractors that Purchase Online (From Any Channel)

Contractors that bought at least something online

% of Contractors Responding

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.

© Frank Lynn & Associates, Inc. All Rights Reserved

Online Purchases by Product Category*

Alternate Distribution Channels

% Purchased Online

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 © Frank Lynn & Associates, Inc. All Rights Reserved

Impact of Age on Online Purchasing

Alternate Distribution Channels

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

© Frank Lynn & Associates, Inc. All Rights Reserved

Percent Purchased from Each Channel

Alternate Distribution Channels

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 real move away from MRO distributors © Frank Lynn & Associates, Inc. All Rights Reserv

E-commerce Purchasing Trends

Alternate Distribution Channels

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

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E-commerce Purchasing Trends

Alternate Distribution Channels

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

E-commerce Purchasing Trends

Alternate Distribution Channels

Why smaller contractors are more prone to migrate to E-commerce  Projects are not as technical or complex as larger contractors, therefore technical and specification support is not as necessary  Projects are not as large as larger contractors, therefore negotiated pricing and volume discounts are not as critical  Smaller contractors do not receive as much attention from distributor sales reps, therefore they may not be as loyal  Price shopping on the web can help smaller contractors better compete against larger contractors  Distributors are forcing smaller customers to purchase via the web in order to optimize sales resources  Yet, smaller contractors rate their electrical distributors very highly

© Frank Lynn & Associates, Inc. All Rights Reserv

Industrial End Users

Alternate Distribution Channels

 Rate distributors highly. Especially 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  Purchasing budgets have declined, so plants are increasingly going online to compare prices on less 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 not via the Web  Safety gloves, tape, batteries, tools, and wire were examples of products purchasing managers were comfortable purchasing via the Web  Most don’t see dramatic shifts in sourcing behaviors for complex or expensive orders in the future  Many pointed to vendor managed inventory via on-site vending machines as a more important trend. © Frank Lynn & Associates, Inc. All Rights Reserv

Alternate Distribution Channels

Research Summary

© Frank Lynn & Associates, Inc. All Rights Reserv

Research Summary

Alternate Distribution Channels

 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 © Frank Lynn & Associates, Inc. All Rights Reserv

Alternate Distribution Channels

Scenarios

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Alternate Distribution Channels 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.

© Frank Lynn & Associates, Inc. All Rights Reserv

Scenario #1 – The “Not Us” Scenario

Alternate Distribution Channels

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 © Frank Lynn & Associates, Inc. All Rights Reserv

Scenario #2 – The “See Spot Run” Scenario

Alternate Distribution Channels

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

© Frank Lynn & Associates, Inc. All Rights Reserv

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

Alternate Distribution Channels

Conclusions & Recommendations

© Frank Lynn & Associates, Inc. All Rights Reserv

Alternate Distribution Channels 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

© Frank Lynn & Associates, Inc. All Rights Reserv

Alternate Distribution Channels Conclusions  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

© Frank Lynn & Associates, Inc. All Rights Reserv

Alternate Distribution Channels Recommendations Distributors should:  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

© Frank Lynn & Associates, Inc. All Rights Reserv

Alternate Distribution Channels 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 (even allowing/requiring vendors to directly update information on the distributor’s site)  Site personalization – allow customers to “sign in” to securely access customized shopping lists, purchase history, credit, personalized offers, order tracking, etc.  Test various social media to determine where and how customers look for information and sources of supply

© Frank Lynn & Associates, Inc. All Rights Reserv

Alternate Distribution Channels 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.

© Frank Lynn & Associates, Inc. All Rights Reserved

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

CAP Council Kirby Risk Electrical Supply Lester & Edward Anixter Family Foundation

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

Kendall Electric, Inc. Kirby Risk Electrical Supply

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

Western Extralite Co.

CAP Associates Associates B & KCAP Electric Wholesale City BElectric Company, Inc. & K Electric Wholesale Electric Supply, Inc. City Electric Company, Inc. Electrical Distributors Co.

Electric Supply, Inc.

Electrical Engineering & Equipment Co.

Electrical Distributors Co.

Hunzicker Brothers, Inc.

Electrical Engineering & Equipment Co.

Hunzicker Brothers, Inc.

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.

CAP Council

CAP Associates

Copyright © 2014 NAED Education & Research Foundation, Inc. All Rights Reserved. Kirby Risk Electrical Supply Lester & Edward Anixter Family Foundation

B & K Electric Wholesale (Advance Electrical Supply Co., Inc.) Lithonia Lighting, An Acuity Brands, Inc. Co. City Electric Company, Inc. This report is made possible through the generosity of the electrical distribution and Lutron Electronics Co., Inc. Border States Electric Electric Supply, Inc. manufacturer members of theElectrical NAED Supply Education & Research Foundation’s Channel Maurice Co./USESI Butler Supply, Inc. Electrical Distributors Co. PartnershipMayer Council. Electric Supply Co., Inc. Colonial Electric Supply Co.,Advantage Inc. Electrical Engineering & Equipment Co. McNaughton-McKay Electric Company Consolidated Electrical Distributors, Inc. Hunzicker Brothers, Inc. No part of this report Raymond may be reproduced any means— de Steiger, Incor copied in any form or by Cooper (now Eaton) graphics, electronic orRevere mechanical, including Electric Supply Co. photocopying, taping, or information and Crescent Electric Supply Company retrieval systems—without written permission from the NAED Education & Research Rexel Holdings USA (Rexel/Gexpro) Dakota Supply Group Foundation. Schneider Electric/Square D Eaton Corporation Siemens Industry, Inc. Electric Supply, Inc. The findings, opinions, conclusions Sonepar USA and recommendations provided herein are based on Elliott Electric Supply independent research,Springfield commissioned and funded by the NAED Education & Research Electric Supply Company Fluke Corporation Foundation, Inc. Information in this report should not be regarded as an endorsement State Electric Supply Co. GE Energy Industrial Solutions or opinion of the Foundation or the National Association of Electrical Distributors. Steiner Family Entities Graybar The Hite Company HD Supply Power Solutions Thomas & Betts Corporation Hubbell Incorporated Independent Electric Supply, Inc. (a division of United Electric Supply Co., Inc. Sonepar USA) 1181 Corporate Lake Drive, St. Louis, MO 63132 WESCO Distribution Kendall Electric, Inc. 888.791.2512 | www.naed.org Western Extralite Co.