Electrical Apparatus and Equipment, Wiring Supplies and Construction Materials

SIC 5063

Companies in this industry

Industry report:

This category covers establishments primarily engaged in the wholesale distribution of electrical power equipment for the generation, transmission, distribution, or control of electric energy; electrical construction materials for outside power transmission lines and for electrical systems; and electric light fixtures and bulbs. Construction contractors primarily engaged in installing electrical systems and equipment from their own stock are classified in SIC 1731: Electrical Work.

Industry Snapshot

Electrical equipment wholesale companies, or merchant wholesalers, purchase or take title to goods produced by manufacturers and resell the goods to retailers, or other wholesalers, at a profit. They help the U.S. economy by providing retailers with goods to sell and by finding and cultivating markets for manufacturers' products.

According to Dun & Bradstreet, 23,487 establishments employed 245,084 workers in this industry in 2009. Together these firms generated $57.3 billion in sales. Electrical apparatus and equipment represented the largest sector of the industry, with 7,390 businesses and about 42 percent of total industry sales. Other important segments included electric motors, with 858 establishments and 13 percent of sales; electrical supplies, with 3,614 establishments and 11 percent of sales; lighting fixtures, with 2,513 establishments and 5 percent of sales; and burglar and firm alarm systems, with 2,004 establishments and 3 percent of sales. States with the highest number of establishments were California (2,967), Texas (1,872), Florida (1,819), New York (1,374), Illinois (930), and Pennsylvania (927).

Organization and Structure

Historically, this industry has been fragmented, with establishments focusing on local markets and specializing in particular items. For instance, California alone had more than 2,900 electrical equipment wholesale establishments in 2009. Still, throughout the late twentieth century, a few large wholesalers acquired smaller, regional outlets in order to gain efficiency of scale for their operations.

Transactions by merchant wholesalers account for a majority of equipment sales. In addition to merchant wholesaling, some transactions involve agents and brokers. Although the agents and brokers work as middlemen between producers and retailers, they are usually compensated directly by the manufacturer in the form of fees and commissions. The third type of wholesale establishments is manufacturers' sales offices and branches, which sell their equipment directly to retailers.

In addition to buying, selling, and shipping products between producers and retailers, wholesale companies provide more value-added services to their customers. In the case of industrial electrical equipment, wholesalers often provide engineering and technical consulting. They might also arrange to have products customized or repaired. Wholesalers of contractor and consumer electrical supplies might arrange special financing plans, help retailers develop just-in-time inventory systems, or provide overnight delivery services for specialty items. Many wholesalers also incorporate a shifting price scale that favors customers who purchase the most.

The wholesale market for electrical supplies is divided into industrial and consumer products. Wholesalers deliver industrial electrical equipment primarily to utility companies and to firms engaged in heavy industries. The four primary types of equipment are transformers, switchgears, motors and generators, and relays and controls. Transformers are used by utilities to regulate and deliver power to their customers and by industries to change voltage for varying equipment needs. Smaller transformers are used in a variety of products from doorbells to low-voltage lighting and security systems. Switchgear products include panel boards, circuit breakers, fuses, and other devices used to generate, transmit, and distribute electricity. Motors and generators are used by utilities, industry, and residential consumers. Industrial relays and controls are used to start, regulate, stop, and protect electric motors. With the expansion of the Internet and company intranets, an increasing amount of electrical wholesale companies tapped into the data and communications market, offering a wide range of structured cables and systems.

Products offered by wholesalers for residential, commercial, and construction markets were numerous. Major retailers of such equipment included hardware stores, home centers, discount stores, and construction supply centers. Major product categories were: lighting fixtures, current-carrying wiring devices for residential homes, and non-current-carrying devices for commercial applications. These categories encompassed such items as light bulbs, lugs and connectors, insulators, hangers and fasteners, flashlights, conduits, circuit breakers and panels, coaxial cable, capacitors, alarm systems, batteries, wire, and other related supplies.

Background and Development

Although Benjamin Franklin conducted some of the first experiments related to electricity in the mid-1700s, public supplies of electricity were not a reality in most advanced countries until the late 1800s. Not until after the turn of the century, moreover, did identifiable industries arise to meet the demand for industrial and residential electrical equipment. Indeed, rapid U.S. industrialization between 1900 and 1929 spurred demand growth for all types of electrical equipment, as well as for wholesale and retail distributors that could bring products to the market.

The U.S. economic expansion after World War II proved to be a boon for electrical equipment wholesalers. As the population expanded, particularly in the 1960s, sales of industrial equipment to utilities and factories ballooned. Sales of electrical supplies and lighting fixtures to residential markets also accelerated, as housing starts soared past 1 million per year in the 1960s and fluctuated as high as 1.4 million annually during the 1970s.

Wholesalers became an integral factor in the distribution of electrical equipment and supplies to all markets. Hardware stores sprang up across the United States from the 1950s through the 1970s to serve burgeoning suburbia. These outlets looked to wholesalers for help in finding and supplying products, managing inventory, and marketing their goods to consumers. Likewise, agents and brokers, as well as manufacturers' branches, helped to supply and advise industrial and utility customers that sought heavy-duty electrical equipment. Wholesalers also devised catalogs and distribution facilities to help them efficiently supply contractors, property managers, and other commercial customers.

Although sales growth began to slow in the late 1970s, partially as a result of the energy crunch, wholesalers continued to realize steady growth in demand throughout the early 1980s. The reduction in sales growth for new industrial and utility installations was partially offset by an increase in sales of replacement equipment and retrofits. Furthermore, strong commercial and residential construction markets were boosted by a rise in sales of electrical supplies for home remodeling and repair.

By the mid-1980s, wholesalers supplied the lion's share of a $23 billion market for industrial and utility equipment and a $12 billion market for lighting and wiring supplies. Total merchant wholesale sales of electrical goods, which included many products sold by other industries, approached $90 billion. Revenue and profit growth remained relatively steady through 1988, as sales of all electrical wholesale goods climbed to $110 billion and lighting and wiring sales jumped to about $14 billion.

The electrical apparatus and equipment wholesale industry began to experience difficulty in the late 1980s and early 1990s. A U.S. economic recession compounded problems that had begun in the early 1980s. Demand for electric energy equipment, for instance, stagnated at about $21 billion (in constant 1987 dollars), and sales of electric wiring and lighting devices fell more than 1 percent per year between 1989 and 1992. Plummeting housing starts contributed substantially to declines in both market segments. The subsequent economic recovery boosted both residential and commercial construction, which in turn brought growth in the sales of electrical apparatus.

The market for electric lighting and wiring equipment, most of which was served by wholesalers, rose significantly in the mid-1990s, and in 1996, the total value of shipments exceeded $24.5 billion. This figure represented an increase of 24 percent over four years. Wiring devices and lighting fixtures represented nearly equal shares of that figure. In 1997 sales of lighting fixtures for commercial and industrial uses reached $4 billion, almost double the $2.3 billion in sales for residential use. In addition, sales of miscellaneous items, like batteries and flashlights, added significantly to nonindustrial wholesale revenues.

Sales of electrical equipment had indeed picked up significantly. Sales grew 5.2 percent in 1997 over the previous year. However, 1998 marked a slowdown in sales, a trend that continued in subsequent years. Wholesalers of electrical equipment had already responded to the industry's slump of the late 1980s and early 1990s by consolidating with competitors and improving customer service, trends that continued even after the market for these goods began to improve. These steps were made necessary by increased competition from nontraditional outlets for electrical equipment. Still, wholesalers remained the largest category of distributors for these items, sales of which reached $91 billion dollars in 1997. Like other wholesalers, those who deal in electrical apparatus and equipment benefited from the sustained growth of the U. S. economy in the second half of the 1990s.

The total market for industrial electrical equipment in 1998, a large part of which was served by wholesalers, was almost $37 billion. Transformers accounted for 15 percent of the market, while switchgear and complementary apparatus represented about 21 percent. Motors and generators made up about 32 percent of sales, as did relay and control devices. While the market for these items increased by 5 percent between 1996 and 1997, the next two years saw slower growth of only about 1 percent annually.

With the growth in the market for electrical apparatus and wiring throughout the middle and end of the 1990s, major wholesalers became able to use their resources to acquire smaller regional distributors. Besides increasing the larger wholesalers' market share, these acquisitions also created more locations for them throughout the United States. Some large companies also increased their market share by landing exclusive contracts as suppliers for government agencies.

Electrical apparatus and wiring wholesalers sought ways to improve customer service as a means of improving sales. Like wholesalers of other kinds of goods, electrical supply distributors turned to the Internet as a potentially powerful and convenient tool. However, by the late 1990s the percentage of their business done on the Internet remained insignificant. W.W. Grainger, Inc., for instance, received less than 1 percent of its revenue from Internet sales. Explanations for why the customers for these products were slow to make use of the new technology ranged from their lack of computers with Internet capability to their insistence on negotiating prices instead of ordering online.

Another method by which wholesalers attempted to increase customer convenience was through cooperation with noncompeting wholesalers. In these arrangements, a wholesaler of electrical equipment would agree to pool their catalogs with distributors of other kinds of items that might be of interest to their customers. Such arrangements offered customers one-stop shopping.

Competition.
Even as their market grew, wholesalers had to deal with new sources of competition. Giant hardware supply warehouses, such as The Home Depot, Inc., and Lowe's Companies, Inc., continued to expand, encroaching on markets traditionally dominated by hardware and lighting stores. These organizations often sidestepped the traditional wholesale industry by going straight to the manufacturer for their products, often ordering products in bulk at a lower price. Many wholesalers feared that their markets could wane while profit margins withered. Do-it-yourself homeowners, as well as construction and maintenance contractors, discovered that they could obtain lighting, wiring, and other electrical supplies at significant discounts at the larger supply warehouses, compared to electrical wholesalers and specialty distributors. Supply warehouses were not able to compete as easily in the commercial and industrial product markets. Since opening their first stores in the early 1980s, some warehouse chains realized stunning growth rates. By 1999, Home Depot alone had more than 900 stores. In the late 1990s a new form of competition emerged both for traditional wholesalers and large superstores. Manufacturers began offering their wares directly to their customers on the Internet. Direct Internet sales offered manufacturers the opportunity to sell their products directly to the end customer, eliminating the middleman and increasing their profits. This development created agreement among competitors on the same side of the issue, as some traditional wholesalers expressed support for Home Depot's threat not to deal with manufacturers who competed with their stores.

Due to the economic downturn in the early 2000s, the electrical distributor market fell $12 billion from its all time high of $76 billion in sales. According to some analysts, this drop was something the electrical distributors had not experienced in over 25 years. Electrical wholesalers, however, saw a turnaround in 2005, when a surge in housing starts contributed positively to sales.

Overall, the electrical wholesaling industry remained fragmented. There were about 250 distributors who controlled 50 percent of the market in the mid-2000s. Some analysts noted that it would be years before the industry would begin to consolidate. Graybar Electric Co., WESCO Inc., Consolidated Electrical Distributors, Inc., and GE Supply Inc. controlled 16 percent of industry sales. Electrical expanded their presence through the opening of new locations, while continuing to share the market with home centers and discounters.

Current Conditions

The industry benefited from the increase in construction in the early to mid-2000s. According to the National Association of Home Builders (NAHB), single-family housing starts increased every year from 2000 to 2005, when there were 1.72 million new single-family housing starts. The subprime mortgage crises in 2007, however, brought the housing boom to a quick end. Single-family housing starts dropped to 1.05 million in 2007, and the decline continued in 2008 and 2009, when the U.S. Census Bureau reported 622,000 and 445,000 single-family housing starts, respectively.

Despite the dismal numbers of 2009, however, some industry experts expressed hope for a recovery into 2010. Jim Lucy, editor of Electrical Wholesaling, noted the positive effects of federal stimulus dollars that boosted construction and remodeling projects in federal buildings, dams, and military bases. Said Lucy, "Some of this work will be in lighting retrofits, which is an enormous opportunity that goes far beyond the recent flurry of activity in government work." Construction in the education and health care markets was also showing positive signs, as was single-family and multifamily housing and public works. Growth in the commercial building, manufacturing, and utility sectors was expected to remain flat into the early 2010s. Total construction spending was expected to increase 11 percent in 2010 to $466.2 billion, although that figure was still 32 percent less than the $689.6 billion spent in 2006.

Industry Leaders

While some Fortune 500 firms participated in the electrical apparatus and equipment, wiring supplies, and construction materials wholesale industry, many local and regional firms did business around the country. None of the largest companies exclusively sold items that fall into this category. According to Electrical Wholesaling, some of the largest electrical contractors in the United States in 2010 included Graybar Electric Co., WESCO Distribution, W.W. Grainger Inc., and Consolidated Electrical Distributors Inc.

Graybar Electric Company, Inc., an employee-owned company based in St. Louis, Missouri, generated $4.3 billion in sales in 2009, most of it from sales of electrical apparatus and equipment. About 40 percent of its sales went to electrical contractors. Forced to downsize and reorganize during the construction slump of the late 1980s and early 1990s, the company diversified once the economy improved. After buying a minority interest in a Canadian computer networking firm in 1994, Graybar divided its operations between its electrical products and its data and communications line of goods. Graybar continued to expand internationally in 1998, opening a subsidiary in Chile. In 2010 the firm had 6,900 employees.

WESCO International, Inc. of Pittsburgh earned $4.6 billion in sales in 2009. Originally a part of Westinghouse, WESCO became an entity unto itself in 1994. The company embarked on a series of a acquisitions, including Industrial Electric Supply Company and Statewide Electrical Supply in 1999. WESCO expanded from 250 branches in 1994 to more than 330 in 1998, with locations in Europe and Asia as well as North America. By 2010, the company had more than a dozen subsidiaries and 6,100 employees.

Besides selling electrical equipment, W.W. Grainger, Inc. of Lake Forest, Illinois, provided a wide variety of industrial supplies and equipment to its customers. Its total sales for 2009 reached $6.2 billion, a significant portion of which came from electric motors and lighting equipment. Grainger was one of the first electrical wholesalers to use the Internet as a sales tool. Its catalog went online in 1995, and in 1999 Grainger opened the online store OrderZone.com.

Workforce

Employment in the overall wholesaling industry grew slightly along with the U.S. economy in the late twentieth century, even though increased automation in the preceding years had led to workforce reduction. By 2008, 5.8 million people were employed in wholesaling, up from 5.7 million a decade earlier. The Bureau of Labor Statistics predicted a growth of less than 1 percent annually between 2008 and 2018.

In the electrical wholesaling segment in particular, 118,000 fewer workers were employed by electrical contractors in September 2009 as compared to a year earlier. This did not bode well for the industry. As stated by Jim Lucy of Electrical Wholesaling, "Any drop in this statistic has a direct impact on the electrical wholesaling industry, because ... on an annual basis an electrical contractor typically buys $34,605 in electrical products per employee. That's a $4 billion drop in sales potential."

Research and Technology

Technological advances in the electrical supplies wholesale industry were limited primarily due to automation and information systems, namely the incorporation of the Internet into business operations. Major distributors put their catalogs online to allow customers to place orders conveniently. Some wholesalers joined with other companies that distributed different kinds of goods that their customers were likely to need, providing one-stop online shopping by making multiple catalogs available at one web site.

These arrangements appealed to large customers who negotiated prices for bulk purchase in advance. Such firms could use secured Internet connections to conduct their dealings with the wholesalers with whom they had contracts. Some occasional buyers also found the Internet convenient for quickly filling one-time orders. Many purchasers from wholesalers, though, preferred in-person negotiation for their orders. Hardware stores, for instance, had to keep just the right amount of inventory in stock. WESCO developed a way to help such customers in remote areas by sending out trucks stocked with supplies, which the customer could then purchase as needed when the truck arrived. This method cut out the delay between order and delivery that even the Internet couldn't remove.

Other developments in the early 2010s included the just-in-time (JIT) system, which relies on signals during different points in the process of manufacture that tells the company when to make the next part. JIT reduced costs for firms by eliminating waste and reducing the amount of inventory.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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