Private Labeling Ignites Controversy Over The Value Of Traditional Electrical Brands

Jan. 12, 2007
A debate over privately labeled electrical products is taking shape in the electrical market

A debate over privately labeled electrical products is taking shape in the electrical market.

To gain a better perspective on the breadth and depth of this debate, Channel Marketing Group, Raleigh, N.C., and Allen Ray Associates, Arlington, Texas, teamed up to survey electrical distributors and to publish a series of articles on private labeling in Electrical Wholesaling. The first of those articles will appear in this month’s issue of the magazine.

The survey was designed to determine the prevalence and potential future of private label products (by distributor name or brand) within the electrical wholesaling industry. (The survey is still open and can be taken at or

Distributors, manufacturers and reps have strong opinions for and against private-labeled products. Allen Ray, president, Allen Ray Associates, and David Gordon, principal, Channel Marketing Group, said the purpose of the survey and series of articles is not to make a pitch for or against private-labeled products, but to report on current opinions on the subject and to share observations on this practice based on the survey results.

Some large independent and national distributors now private-label products. They source material directly from overseas suppliers, product brokers or partner with brand-name manufacturers to produce or package product exclusively for them. Because of the reported reductions in material costs and reported increases in margins, many other distributors now wonder if private labeling is an opportunity for them.

It appears that private labeling is a natural stage in a maturing industry undergoing consolidation. It’s commonplace in the automotive aftermarket, apparel, grocery and pharmaceutical industries. In the distribution world, the plumbing and industrial supply industries have been exposed to privately labeled products and distributor-imported products for several years.

More electrical distributors are thinking about offering private-labeled products. For some, the conversations have centered around increased profit margin potential and very quietly about the potential product liability. For the most part, the distributors who have dabbled in private-labeled products offer a few product categories and limited stock-keeping units (SKUs). With the increase in the number of electrical manufacturers that now source products versus manufacture them, electrical distributors sense an opportunity to improve their margins — sometimes reportedly increasing their margins by over 50 percent.

Responses from the 130 electrical distributors who have answered the survey so far indicate that many of them are giving private-labeled products serious consideration. While respondents are very concerned about the related product liability and marketing issues, private labeling is apparently a strategy many distributors still want to explore because of the potential for increased margins and their need to offer lower-priced products. Additionally, the responses reflected a growing belief that many electrical manufacturers are not investing in their brands, product innovation and sales/marketing support. Many respondents apparently believe most manufacturers don’t manufacture, but instead source products.

The survey also detected a definite trend in the size of electrical distributors that consider private labeling. While many larger distributors are apparently considering private labeling, respondents from smaller electrical distributors don’t seem to believe private-label products are a viable solution for them, because they don’t believe their companies have the critical mass to take advantage of the cost benefits of private-labeled electrical products.

Many of the respondents who do not want to private label products still want a low-cost alternative brand to offer as appropriate. But these distributors believe if they build their brands, differentiate themselves, have strong customer relationships and partner with leading manufacturers, they can effectively compete with the privately labeled electrical products that they believe are inferior in quality to the lines they stock from traditional electrical manufacturers.

Survey says. Although more than 65 percent of the survey’s respondents said their company currently does not offer private labeled product, more than 50 percent of these distributors said their company is considering the possibility of offering some private-labeled products.

Two-thirds of respondents said they know of other electrical distributors now offering private-label products. When asked whom, the most frequently mentioned companies were CES (City Electric Supply), Orlando, Fla.; Rexel Inc., Dallas; Graybar Electric Co.; St. Louis; HD Supply, Atlanta; Hagemeyer North America, Charleston, S.C.; Ferguson Enterprises Inc., Newport News, Va.; and W.W. Grainger Inc., Lake Forest, Ill. (Note: this is based upon survey response and has not been verified by the authors.)

Products to private label. When asked which types of electrical product they are either currently private labeling or believe are feasible to private label, the top five product categories were tape, connectors, fittings, recessed lighting and wiring devices. Several respondents said Rexel and CES currently private label a wider array of products.

Profit potential. While private-label products are not thought to represent a significant percentage of total distributor sales, they apparently can significantly impact distributor profitability. In the survey, 57 percent of respondents feel that these products will represent only 1 percent to 10 percent of distributor sales. However, 28.7 percent of the respondents believe these sales could represent up to 25 percent of a distributors’ revenues. Another 9.5 percent of the respondents believe private-label products represent even more potential.

From a profitability viewpoint, respondents said private-label products can represent incremental margin opportunities of 20 percent to 50 percent. Almost 51 percent of respondents said private-labeled products must generate a minimum of a 20 percent advantage.

Judging from the survey results, a number of these product categories may very well be slowly migrating to private labeling. But these product categories tend to represent a small percentage of distributor sales, and the corresponding margin improvement would generate small incremental gross profit dollars.

It can be assumed electrical distributors that do not pursue a private-label strategy will either pursue lower pricing from their incumbent manufacturers or be forced to seek additional suppliers that will help them remain price competitive on selected product categories where price is a bigger than normal issue. Residentially oriented distributors said their customers are extremely price sensitive, and that while they desire quality, price is the primary product determinant. In the residential market — and products that crossover to the commercial market — high-volume stock-keeping units (SKUs) will be the most susceptible to private labeling and will require more aggressive pricing by manufacturers to retain their volume through non-private labeling distributors. Perhaps Wal-Mart’s “Everyday Low Price” strategy will migrate to the electrical industry.

Distributor concerns. A number of distributors said they are “ready, willing and financially able” to pursue a private-label strategy, but either don’t have the personnel resources, time or knowledge to enter the market at this time. When asked about their concerns over offering private labeled products to their customers, the top five concerns were:

  • Product liability
  • Losing influence with a manufacturer for other products. (Influence was defined as sales support, access to remainder of product line at the “right” price, marketing resources and rebate income)
  • Product certification (UL, CSA)
  • Customer acceptance of the product
  • Responsibility to market a private-label brand

Product liability concerns. Many electrical distributors currently try to shield their businesses from product liability by using various manufacturer/broker insurance riders or umbrella insurance policies. Recent events across the marketplace are now making distributors wonder if this means of liability product protection is really worth it. There have been reported incidents where distributors have sought legal remedies to get manufacturers or product brokers to honor insurance commitments.

For some distributors that have had consigned manufacturer inventory and have been burned by the manufacturer’s insurance carrier subrogating back to the distributor’s insurance carrier, they feel “umbrella liability” policies will cover their product liability, even if the distributor offers private-labeled offshore product.

In considering their potential liability, survey respondents are using, or considering, the following options: existing liability policy (28.6 percent); an agreement with the private-label manufacturers that lists them on that manufacturer’s insurance policy (21.4 percent); separate product-liability policy for private-label products (11.4 percent); and a direct contract with a reinsurance company or group such as EDIC (2.9 percent). It’s tough to say that these options will always be adequate.

Summary. As with any new product initiative, there are many pros and cons to offering private label products. While private labeling does represent an opportunity to improve margins, there are a number of potential risks which include affecting manufacturer relationships; becoming responsible for the sales and marketing of a product line; developing demand forecasting; managing container loads of material and the associated warehousing and distribution of these products; and interacting with customs; as well as potential product liability insurance concerns.