Outlook Survey Finds Electrical Industry Bracing for More Economic Misery In 2009

Dec. 19, 2008
Electrical distributors and reps are keeping a watchful eye on the continuing decline in the health of the U.S. economy and taking steps to keep their businesses on solid footings while they wait for the market to turn around.

Electrical distributors and reps are keeping a watchful eye on the continuing decline in the health of the U.S. economy and taking steps to keep their businesses on solid footings while they wait for the market to turn around.

When that turnaround will come is anyone’s guess. Predictions from those willing to venture such a guess in an outlook survey this month by Electrical Wholesaling and Electrical Marketing varied over a wide range. None expected the picture to brighten before the third quarter of next year, and some put the turnaround a year further out, in the second or third quarter of 2010.

Asked what’s "the single scariest thing about 2009," many survey respondents raised concerns about customer credit-worthiness and a slow recovery, but most widespread were comments about fears of the unknown.

"How far do we cut cost when we really have no idea just how bad or good next year will be?" Barry Oliver of Electro Link Sales, Albuquerque, N.M., asked. "I think without a doubt next year is going to be scary just trying to stay on top of changes as they occur. It seems that in normal conditions we can budget and plan, because we have a sense of what to expect. 2009 is starting to look like we have no idea what to expect, but we’d better be ready for something almost certainly not good."

More specific to the electrical industry, many respondents pointed in different ways to concerns about business failures within the supply chain. Eric Haines, Haines Sales, Syracuse, N.Y., said, "It’s one thing to read about recently robust financial institutions tanking and being bought by others, but some of the same is bound to happen in the electrical market — probably, with as little notice."

Comparing the present recession to previous economic downturns is difficult, but many industry executives are bracing themselves for the worst recession they’ve ever seen. Some cautioned against relying on the tactics that saw the industry through the last downturn.

"I don’t think I can compare what we may see in the next several years to any other experience in my lifetime," said Vic Jury Jr., Summit Electric Supply, Albuquerque. "The economic indicators continue to degrade, the world is flatter than ever (in Friedman terms) and our industry is in something of a "perfect storm," with the potential for significant commodity deflation, soft demand and tight capital markets constraining investment in projects that would otherwise be funded. I think companies that attempt to use a playbook from a previous recession may be far too optimistic for the good of their employees, investors and suppliers."

All the same, the options for managing a business through a severe recession don’t change all that much. Veteran reps such as Gary Brusacroam, AJB Sales, will be focusing on essentials and attitude. "The economy is what it is, though disconcerting," Brusacoram said. "We have to deal in business realities, which means we have to adapt, close the sale on the present potentials and then go disrupt the market place. Find and get what’s there. These are the times when leadership becomes an art form…we have to pull out some old tried and true selling concepts, get people moving rather than dwelling on negatives, and mix in the present technological marketing and go sell."

The prospect of a protracted downturn has raised the premium on resourceful marketing and solid business practices, and is emphasizing the importance of good, mutually supportive relations within the electrical channel.

Along with several other initiatives aimed at eliminating money-losing activities and reducing risks from trade credit, Summit Electric Supply is focusing on supplier relations. "We are carefully evaluating our supplier relationships," said Jury. "We need to sort out not only who will make the right calls in the coming economy but who our true "friends" are. We need to have suppliers who will respond to deflationary developments appropriately and who will keep us in the market."

Electrical manufacturers are tailoring production for an expected slowdown and cleaning up their balance sheets, said Don Leavens, vice president and chief economist for the National Electrical Manufacturers Association (NEMA), Rosslyn, Va. "Almost everyone is in the process of deleveraging in order to rebuild investor confidence in the underlying soundness of enterprises," Leavens said. "Our member companies realize that 2009 will be dramatically slower than the record levels many achieved in 2008 and are planning for lower demand by cutting back production."

For most in the industry, everything is on the table. "We are going to look at everything, I mean everything. We have to find out a way to cut out some of the fat, without hurting service levels," said Bill Goodwin of Griffith Electric Supply Co., Trenton, N.J.

Even respondents who operate in markets where the impact of the downturn has not been as deeply felt as in the industry as a whole — specialists in energy efficient lighting, for example, and distributors and reps operating in the Midwest where construction projects are still ongoing — see plenty of reasons for concern.

Steve Espinosa, The Lighting Company, Irvine, Calif., expects his market to grow next year, though not without some struggles. "As we service the maintenance and energy- efficient lighting market, I think our market will be larger next year than this year," he said. "The problem will be more competitors entering the market and potentially diluting our sales opportunities for growth. Number two, I expect price erosion next year to be higher than any previous year. Possibly 10 percent, which means we would have to grow our sales 10 percent just to match our ’08 sales."

In the Kansas City market, some large jobs including sports stadium renovations, a new power plant and large commercial and industrial projects may soften the blow for the first half of 2009, but Doug Carlson, C&O Sales, Overland Park, Kan., is still wary of price deflation and the risk that the financing freeze will bring further construction to a halt.

"Deflating prices along with lack of credit might dampen our ability to continue at any pace because it might be cheaper to build at a later time and easier to get credit at a later time so construction stops," Carlson said.

For a broader perspective, perhaps it helps to turn to those who’ve been dealing with the downturn much longer than the rest of the industry. In Syracuse, N.Y., the current turmoil is yet another blow in a market that has struggled for more than 10 years to find its footing after the collapse of some of the region’s largest employers. Eric Haines is counting on his agency’s continued perseverance to carry them through.

"Upstate New York hasn’t been a robust economy in well over a decade," Haines writes. "Haines Sales has responded by becoming leaner and more focused. We have kept current with the latest productivity tools, and we continually look for ways to improve our service while keeping operating costs in check. We will continue to invest in developing pull-through demand for our marketing partners."