Turmoil in Texas Creates New Opportunities for Electrical Distributors

Sept. 12, 2003
Once a land of seemingly boundless potential where some distributors became millionaires after just one year in business, the Texas market — and specifically Houston — is being rocked by change.

With Warren Electric’s departure from the Southwest’s electrical market last year, the eyes of Texas are upon the power struggle now underway.

Once a land of seemingly boundless potential where some distributors became millionaires after just one year in business, the Texas market — and specifically Houston — is being rocked by change, according to the September cover story of Electrical Wholesaling magazine.

The state’s industrial base has eroded. Enron and Encompass, one of the nation’s largest electrical contractors, went bankrupt. Texas’ petrochemical business and commercial construction dried up, and after several years are just now showing glimmers of hope. Along with the worst economy in over a decade, Texas’ electrical wholesaling industry is grappling with the demise of Warren Electric, which had been a powerhouse in the industrial market since the early days.

When Warren Electric filed Chapter 11 in October 2002, several distributors purchased different pieces of the company, run for many years by the legendary J.R. Thompson and in more recent years his daughter, Cheryl Thompson Draper. Elliott Electric Supply, Nacogdoches, Texas, was one of the distributors vying to buy Warren Electric, but Allen-Bradley rejected its bid at the eleventh hour. Instead, The Reynolds Co., Dallas, came out a winner and became an even bigger player in the north and central Texas market when it bought eight of Warren’s locations in those regions of the state.

Then, in a blockbuster acquisition that surprised many industry insiders, Summit Electric Supply, Albuquerque, N.M., bought the domestic operating assets of Warren Electric. The deal included 12 domestic branches and one South American location in an acquisition that more than doubled Summit’s locations. Sonepar, the third distributor, bought Warren’s Caribbean operations.

Meanwhile, Texas electrical distributors that didn’t get to play the Warren-acquisition game are still coming up winners. Elliott Electric is reportedly taking some of the market share that’s been up for grabs in the Texas industrial arena, but several sources say Wholesale Electric Supply Co., L.P., may be the biggest winner.

Rexel has also emerged a winner in the Texas shakeout, says John Peterson, who saw the Texas market up close when he was president of Warren Electric during the 1990s, and in his 15 years with Cooper Industries and Crouse-Hinds. Now vice president of sales, Gulf Coast region for EGS Electrical Group, Skokie, Ill., Peterson attributes Rexel’s Texas success to its “very strong local management."

Peterson says the “top-tier” distributors that have emerged all handle robust project quotations and management capabilities and national contracts. In the industrial market, he sees Wholesale Electric; the Gulf Coast locations of Rexel, run from Dallas; Dealers Electrical Supply, Waco, Texas; and potentially Reynolds as “first-tier distributors.” Dealers recently signed a contract with ConocoPhillips, Houston, across Texas and Louisiana. Winn-Lange Electric Inc., Houston, is also a key player in the industrial arena, according to several sources.

Some distributors have distinct niches. Peterson says Wildcat Electric Supply Corp., Houston, does “a great job” in the marine drilling market and with medium and small industrials, and that the Houston location of Turtle & Hughes Inc. has a niche in the engineering constructor market. In the commercial market, he says key players include Elliott Electric and Winn-Lange. Crawford Electric is “coming on” in Houston’s commercial market, he says.

The name of Elliott Electric Supply comes up often as a winner in the shakeout. Although Bill Elliott was disappointed Allen-Bradley didn’t approve his company for the line, he still sees a lot of opportunity. As Reynolds and Summit digest their acquisitions, Elliott sees other Texas distributors grabbing new market share. Elliott says his company has been able to pick up some business from Hoffman and Crouse-Hinds, and has even serviced customer requests for Allen-Bradley by buying equipment from other Allen-Bradley distributors and supplying it to customers.

Several sources say as Summit and Reynolds blend their acquisitions into their companies and get acclimated to the new market realities, they will be forces to reckon with. All eyes are upon how successfully Reynolds handles the Allen-Bradley line in the Warren branches it acquired and several new branches it recently opened.

Walt Reynolds, president of Reynolds, says there’s plenty of industrial business “up for grabs” outside of the Allen-Bradley products resulting from the Warren Electric change.

Summit did not return phone calls by press time, but according to several Texas distributors, the company is busy reducing overhead, condensing its company and closing some locations. “They are in a changing mood at the present time,” says Wholesale Electric’s Clyde Rutland. “When they settle down in a few months, I’m sure they are going to be a factor in the commercial and to some extent in the industrial market.”

Along with the acquisition activity, Peterson said the current business climate is unprecedented in Texas’ industrial market, and is quite different from the market’s boom times in the late 1970s.

“You could open your doors and get certain key franchises and you were a millionaire within a year because there was so much demand. People were stumbling over business,” says Peterson. Houston went through about 14 years of very steady growth beginning in 1983. It was a profitable time where distributors and manufacturers got lulled into thinking the petrochemical economy on the Gulf Coast was bulletproof,” he says.

The bankruptcy of Warren Electric was the most prominent example of a distributor that thought the economy was bulletproof and was not able to make it, he says.

He says other changes in the Texas market are lower inventory levels and manufacturers are less exclusive with their lines. Also, 10 years ago, Peterson says Texas distributors could count on a major industrial or a petrochemical plant to have one major turnaround a year, where the plant is shut down to do critical maintenance. Every turnaround resulted in significant expenditures for electrical products, including conduit fittings, building wire and cable and lighting.

Peterson also says that the many Houston-based engineering firms that used to focus on petrochemical work in the United States now work on plants around the world — where Texas distributors may or may not be a factor.

“It’s really challenged a lot of us to get up to speed on IEC and be able to service the global requirements today of engineering accounts,” he added.