By Ted Konnerth, Egret Consulting Group, reprinted from The Buzz

Disintermediation.

A $2 word for cutting out the middle man.

We’ve talked a lot about the changing channels throughout the electrical industry. Changes are not particularly new to the industry. In those way back years, electrical distributors sold appliances, Grainger created the catalog model for industrial supplies, Anixter created a major disintermediation by specializing in wire as a stand-alone category, etc. In more recent days, ‘structured wiring’ moved from an electrical distributor product line to data/com distribution. IOU’s moved away from distributor support decades ago and most buy directly from the manufacturers.

The trend isn’t unique to the electrical industry; here are a couple of current disintermediation models:

Uber eliminates the need for taxi dispatchers, cash payments and hailing a cab or standing in a cab line. Key to their success; it allows you to communicate directly with the driver, prior to being picked up. You see the driver name, vehicle and a rating system.

Tesla has slowly eliminated the auto dealer experience; state by state.

Most large equipment manufacturer dealerships; John Deere or marine boat supply companies have eliminated a parts counter or inventory. The ability to cross-reference a tractor or boat part based on the exact year and model, from your home and have it delivered 1-2 days later, and be accurate has changed the dealership experience for large equipment dealerships.

And in ultimate irony: Sears invented the concept of direct to consumer marketing via catalog, which is the exact equivalent of Amazon’s business model, except the internet communication medium is faster and more robust than mailing catalogs and receiving orders via mail.

Our industry is facing significant changes. Solar and wind generation have become one of the fastest growth markets for distributed energy sources; but both largely bypass the traditional distributor. LED has transformed lighting, which has typically been a 15-20% category for most distributors. The lighting market is fragmenting rapidly; with the advent of Smart Lighting, IoT and specialty lighting market growth (UV, Horticulture, Agriculture, Biological, etc.).

So, where does that leave the legacy alliance model of traditional electrical distributors and manufacturers? The answer is simple… it’s changing and the key to preserving the legacy relationships is the agreement for both partners to craft a new way forward.

Lighting is now a $30+B market in the US alone (compared to $7B in 1998). LED has created markets that have never existed before, and that implies the channel partnerships to foster those new applications and markets have to be different. Different can mean traditional partners have agreed to mutually target the new markets and create a training program and a commitment to investment to attack and grow those new markets. Different can, also, be the mutual decision to simply admit you’re not interested in making the investment in boot-strapping a new market. Distributors will have to decide how to align their capabilities, investments and talent to achieve the desired outcome. An electrical distributor functions on a local market basis. Hiring an IoT specialist or indoor farming expert to grow a new business model may never make sense on any given local level. But there should be a mutual discussion and agreement that this is not the business model you desire.

We regularly hear from lighting manufacturers that the market is ‘soft’. Those companies are almost unanimously legacy manufacturers. Our clients that have entered new markets are growing aggressively. And they don’t carry the adhesion of 50 years of legacy channel relationships to either help springboard their products; or detract them from their focus.

Most legacy manufacturers have moved into a near 100% project based model of business; get specified, bid and bought for new construction. The days of a brisk and profitable stock and flow business for lighting have diminished rapidly. Most of the larger manufacturers have abdicated that business to smaller manufacturers.

The challenge moving forward is to identify where you want to play. As a national manufacturer, it’s a strategic move to define your product plan, sales plan and talent structure based upon a guiding market channel strategy. No manufacturer will play in all of the new emerging markets; so choose wisely and determine how that strategy correlates or impacts your legacy relationships.

For distributors; the issue is much bigger. Do you want to stay in lighting? Currently, most distributors have become project management specialists for lighting reps. Those project management skills can easily be absorbed into the rep firm; or absorbed into the manufacturers’ customer service responsibilities. The only residual adhesion may be the credit function extended to contractors. In these days of cheap capital; don’t be surprised to see a manufacturer, or rep emerge that will finance a lighting project. If lighting eludes you; then your strategy needs to focus on the products, relationships and services that make money. If I were a distributor; I’d be spending significant time devoted to my strategic plan for the next 2-5 years.

Smart Lighting, IoT, ESCO and emerging markets all require training. Many will likely require different personnel to achieve your goals. There is very little time to craft the plan for growth, or abandonment of your lighting vertical.

Craig DiLouie

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