Over a century and a half ago, when Charles Dickens penned the famous line “It was the best of times, it was the worst of times” to open his classic novel A Tale of Two Cities, he could just as easily have been writing about the economic and business landscape in today’s electrical distribution industry.
With America’s current political instability and the pricing volatility introduced by tariffs over the past 18 months, it’s been a wild ride, and the upcoming year, with its prominent presidential election looming, promises to keep things equally interesting.
IMARK Electrical Now tapped a number of key executives at IMARK Electrical member companies for their perspectives on the most pressing economic and business challenges and opportunities driving the electrical industry, both today and tomorrow.
IMARK Electrical Now: How do you feel the economy performed in 2019 YTD versus the same period in 2018?
Wes Smith (Mayer in Birmingham, Alabama): It’s performed in line with expectations and for us was slightly better than 2018. It’s been up and down and not smooth on a month- to-month basis, with more peaks and valleys than planned, but taken all together, it’s on plan.
Chris Cunningham (The Mathes Group in Pensacola, Florida): The economy and our business are on two different tracks due to an unusual increase in demand for our services over the past two years, so our business has been about the same but the economy has been up a bit. We foresee a continuation in new home building and small-to-medium-sized commercial projects, with a few large commercial projects.
Jeff Corrick (Stoneway Electric in Spokane, Washington): In our neck of the woods (the Pacific Northwest), aside from some heavy weather in February, 2019 started out stronger that 2018 did. Many larger projects were completed last year and early this year, so the concern is more for 2020 and beyond. Industrial has been solid for us.
Rodney Jason (Maltby Electric Supply in San Francisco, California): During this last year, we’ve seen growth versus 2018 as many construction projects in our area have progressed. This has allowed us to grow as a company and take advantage of the strong market in our area.
Chris Scarbrough (Springfield Electric Supply in Springfield, Illinois): 2019 has been a solid year for Springfield Electric and overall, each market segment we serve has been strong. Q1 started off better than mostyears and carried over into Q2 and Q3.
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IMARK Electrical Now: Looking ahead, how do you see economic conditions shaping up in the first half of 2020 and why do you feel that way? Are there any particular bright spots ahead?
Scarbrough: We’ve booked several projects in 2019, mostly in the commercial and utility construction segments of our business, that will take us into 2020. Solar has been a bright spot (no pun intended!) due to some state incentives and industrial opportunities that have picked up, primarily due to new service offerings. A diversification of service offerings is key in today’s wholesale distribution business.
Corrick: As 2019 was tough in Q1, Q1 2020 may start out better year- over-year, but the reality is that it’s likely to be on a flat-to-slightly-declin- ing trajectory. Backlogs for commercial contractors are generally solid, so a decline may be pushed out until 2021. Commercial construction has been very strong and will be solid. As it slips a little, the labor issue may soften up.
Cunningham: Mathes started up a new Industrial Department recently and that’s starting to grow, creating new business from new customers we’ve never had before, so that’s a bright spot that’s still developing and expanding. While I hate to inject politics into this, I believe that the upcoming elections will have an influence. If policies and elected offi- cials continue a course of lower taxes and reduced regulations, the economy and our business can continue to prosper. If different policies and elected officials return to raising taxes and increasing regulations, that will have a negative effect.
Jason: Although we have solid projects booked for 2020, we anticipate a downturn in the economy overall. The combination of an election year, multiple years of strong growth and a general shortage of skilled labor are all factors in our outlook.
Smith: 2020 will be hard to predict, being an election year and in light of the particular acrimony we’re dealing with. I expect a slowing, given all of the uncertainty. With that said, I expect non-residential construction to be firm, government to hold its own, residential to be slow and industrial to be flat.
IMARK Electrical Now: How would you describe the challenges of dealing with pricing uncertainties resulting from tariffs and how have customers been responding?
Corrick: While tariffs have been hard to keep track of overall—e.g., first they’re on, then wait, now they’re delayed, now they’re back, etc.—we believe we’ve been able to pass on the price changes. We’ve been very clear with customers that this is out of our hands and there aren’t choices, the price change is real.
Smith: Generally speaking, customers get it and support what’s happening. While painful, I haven’t seen the kind of pushback one would expect. For a distributor, who basically prices from cost, it’s pretty easy. There are two ways manufacturers are passing it along— either via a price increase per item or a line item tariff charge. We need suppliers to simply put it in the product, because distributors can han- dle that. A line item is hard to spread to products and customers don’t like to see it as a line.
Jason: In an effort to deal with tariff increases, we’ve seen many customers commit to material earlier in the project and in greater volume to secure the best prices they can.
Scarbrough: For the most part, our customers have responded with relative indifference to price challenges driven by tariffs. Since tariff discussions are heard 24/7, I think our customers are pretty numb to the situation. I’m not aware of jobs that have been postponed due to the tariff scenario. The challenge as a distributor has been the on-and- off-again price increase notices that we’re receiving from our supplier part- ners, which make it difficult to plan.
Cunningham: If price increases from tariffs (or other external factors) affect our stock items, we do cost/price updates and it gets passed along to customers; this doesn’t really hurt us as long as all of our competitors operate under the same conditions.
On project job quotes, tariff-driven price increases complicate the process of closing an order. Since several weeks or months can elapse between bid date and award date, we have to verify our current costs and then nego- tiate with the customer to close an order. Sometimes they’ll absorb some increase, or else we may have to settle for less margin or say no to an offer of business.
IMARK Electrical Now: Are you seeing a lot of labor shortages and, if so, do you consider this to be a limiting factor on growth? Is your company seeing an increase in demand for value-added services that might help mitigate the labor shortage?
Scarbrough: We do see a labor short- age in some markets and it’s placing a greater demand on distributors relative to logistics and the handling of project business. In response, we’re offering greater labor-saving services, some we can charge for and some which have become a cost of doing business.
Smith: The labor shortage is real and affects all industries and vertical markets. To address it, customers and distributors have created pre-fab shops, modular construction is taking hold and innovation and productivity are a focus in every segment. Con- struction is a segment that hasn’t seen real productivity gains in a long time. It’s welcomed because labor shortages are a long-term, systemic problem and productivity is the only way to deal with it; demographically, more people are retiring and aren’t being replaced at the same rate. To maintain our growth rates, it must come from productivity gains. We perform many value-added services, some of which are now just expected services and others that are unique and which we feel give us a competitive advantage.
Cunningham: We’re having more difficulty finding entry-level warehouse and delivery driver associates, and wages are increasing. Recently we’ve been searching for qualified counter, inside and outside sales people, and these openings were somewhat limit- ing our growth, but we just hired for two out of four of those positions. Regarding value-added services, we haven’t seen an increased demand for them, but we’re trying to create increased demand so we can benefit from it, as we have salespeople with technical skills in lighting design and power equipment field service.
Jason: We hear about the shortage of skilled labor every day from our customers and how it limits them from taking on additional work. As additional skilled workers retire in the upcoming years, this trend will only continue to worsen if we’re not able to get the younger generations who are just entering the workforce to con- sider working in the trades that keep our county growing. One of the ways many contractors are dealing with the labor shortage is by taking advantage of the value-added services offered, such as wire cutting, kitting, job carts, staging, etc.
Corrick: Everyone wants in while it’s hot, so their project goes first. I don’t know how we could have had any more cranes in the sky in Seattle, but there may have been even more had they been available and if more trades- people magically showed up. Our area has had a strong economy for several years, so we’re well down the path of everything from staged deliveries to floor deliveries, kitting and other value-added services. Pre-fab is strong with both manufacturers and customers alike.
IMARK Electrical Now: While we’ve all seen consolidation occurring in the distributor and manufacturer segments of our industry, how would you assess the state of consolidation among contractors? Are you seeing some of the smaller businesses selling out or closing? Are the big getting bigger?
Smith: Absolutely, and this will accel- erate. The industry is fragmented and major investments have to be made due to technology. For those who are unable to invest, the path is to band together with others. The ingredients are there and the market for it is ripe. Distributors should evaluate those in their customer portfolio whom they believe, directionally, will be consoli- dators versus consolidated. Scale isrequired and those who are scale-enabled will be consolidators.
Jason: Consolidation is a trend that continues to change our market and customer base as our smaller contractors team up to compete and remain profitable. I don’t think that this will change in the coming years, as more contractors look to survive in a market that’s increasingly competitive. This trend has helped allow many large contractors to grow, as they have the ability to take on both an increased number of and larger projects with a workforce that can accomplish this and help them be successful.
Cunningham: We’ve seen some larger contractor customers have an electrician spin-off into a new one or two-man operation, but we haven’t seen consolidation in our area.
IMARK Electrical Now: The Trump Administration has made it a priority to ease the regulatory burden on business. Have you (or your customers) benefitted from any of these efforts and, if so, how?
Cunningham: We’ve benefitted from reduced regulations in health care plan reporting and some accounting procedure changes. In addition, the lower tax rates have enabled us to undertake facility improvements, purchase delivery trucks and hire more employees.
Smith: We’ve definitely benefitted and across all segments. When the government gets out of the way, good things in free enterprise happen. Companies aren’t inherently bad and, in fact, most are doing responsible things on their own, so we don’t need to be told by government to do good. The oil and gas industry is an example. When you’re now the world’s largest producer of gas, jobs are created and infrastructure is built; any manufacturer or distributor serving this end market has seen growth.