The evolution of the electric sector in an increasingly digitalized world

The commercial proposals of electrical distributors entail products and solutions targeting professionals operating in various sectors: construction (including housing), industry and applications for utilities. Their operating platforms include distribution centers and branch offices. Large or small, based in the north or the south, specialist or generalist, virtually every distributor has its own unique formula for turning a profit in the market.

In general, companies in the electrical distribution sector are adapting in different ways to the current context which is being revolutionized by digital technologies. Legacy companies need to manage their assets and deal with shareholder expectations; smaller companies may want to avoid embarking on a digital journey and focus on a niche approach instead; larger companies have bigger budgets for contending with digital change.

While on the one hand new technologies are disrupting our outlook on the world, on the other hand, they give rise to incredible opportunities, even for electrical distributors whose business is to market their products to professionals.

After doing an extensive literature review, our study analyzed the global trends in digital, with a special focus on B2C and B2B distribution. We identified three main areas of analysis:

1. the relevance of the company: service coverage area (regional, enhanced regional, multiregional); membership (or not) in a purchasing group (small or large vs independent); integration model depending on the level of centralized control (kind, emperor, president, dictator)
2. the role played by culture, commerce and people (the human side): founding families, external executives, points of sale, specializations
3. the importance of technological infrastructure: the supply chain model (centralized vs distributed); the role and scope of IT; the level of digital skills

Next, our study explored the specific dynamics that occur in these three areas by investigating 87 companies based in Italy belonging to the Federation of Electrical Material (FEM) over a period of six years (2012-2017). Financial reports, web monitoring, an ad hoc survey and informal interviews made it possible to collect relevant data. We were able to conduct the correlation analysis by taking a multiple statistical approach.

We studied the current business models by quantitatively analyzing the three areas outlined above. Then we created an index of wholesalers to assess each company's future profit potential in a digitized world. This led us to formulate a future scenario for the sector and compile a list of recommendations.

Our research produced interesting findings:

1. Size is not necessarily correlated to performance.
2. Specific business models, in particular if they are powered by technical competencies, can be highly profitable.
3. Regionally-based companies are currently the best performers, but the future is multiregional.
4. The role of founding families is still a prominent one, but external distributors are setting an evolution in motion.
5. Different post-acquisition integration models differ in terms of performance.
6. EDs are only just beginning to adopt digital technologies, so the growth opportunities are enormous.

Based on the literature review, our classification of the business model, the result of the wholesaler index and the transformations caused by the digital revolution, we predict that in the near future, small generalist distributors will disappear. (The conventional definition of a small distributor is set at a threshold of €50 million). The disruption of the digital evolution can be seen in two areas in particular: (1) the concept of infinite inventory with immediate (next day) availability of virtually any item, at least from major brands; (2) the lack of a robust IT/logistics infrastructure capable of processing orders and delivering within 24 hours to the customer. The impact of these two trends will soon become very difficult to manage for small independent companies, which mainly focus on the residential segment (which is subject to aggressive attacks from pure and do-it-yourself players).

In addition, even the smallest specialists will be able to survive, as long as they actually maintain a substantial advantage over generalists. However, by staying small these players will not be able to deal effectively with the digital evolution. In fact, two scenarios will likely emerge: their profitability will suffer, or they be forced to merge to achieve critical mass. Lastly, the largest wholesalers will have a tremendous opportunity to buy out smaller regional operators. 

Of all the recommendations we can make for companies that operate in the ED sector, four seem to be particularly relevant.

1. Invest in specialization, highly innovative products, and a qualified workforce.
2. Transform operations from mostly physical to mostly digital. The biggest POS will become experience centers, where technology, new products, and consultants will be available for customers, but distribution will mainly take place online. Probably the number of stores will have to be optimized; product assortments will be broader than today and concentrated in automated warehouses. Predictive technologies will help handle product assortment and constantly perfect supply and demand.
3. Trial B2C distribution. For producers, the difference between B2B and B2C will blur more and more with every passing day.
4. Seriously consider a private label.

The evolution that is turning value disciplines into digital disciplines and the unstoppable emergence of the experience economy will radically change the landscape of the electrical distribution industry.