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Passing the Buck, Part 3: A View From Independents

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Passing the Buck, Part 3: A View From Independents

With lighting manufacturers recently announcing a new round of tariff-driven price increases on LED products, independent distributors share how they “soften the blow” for their customers.

 

Read Part 1 of this article series here. Read Part 2 here.

 

With President Trump recently following up a round of spring 2018 tariffs on Chinese goods by announcing new tariffs of 10 percent on another $200 billion in goods – thousands of items, including many electrical products among them – LED manufacturers across the industry have followed suit by announcing price increases to their distributors.

In Part 3 of our three-part series, lightED examines the response to and handling of recent LED price increases by executives of several independent distribution firms nationwide — including Fil Cerminara, president of F&M Electrical Supply (www.fmelectric.com); Peter Bellwoar, executive vice president of Colonial Electric Supply (www.colonialelectricsupply.com); Seth Canfield, inventory manager at Elliott Electric Supply (www.elliottelectric.com); and Bob Trolander, vice president of marketing and business development at Independent Electric Supply (www.iesupply.com).

 

lightED:  How often do you see price increases handed down by LED manufacturers and what factors do manufacturers typically attribute the price increases to?  How far ahead of time (before the increases take effect) are you usually informed of them?

Cerminara:  In recent years it was annually, but since the inception of tariffs, it’s been CRAZY!  Most manufacturers attribute the increases to copper or steel prices.  Most of the time we get 30-60 days’ notice on lighting.

Bellwoar:  The issue that distribution faced for the past 5 or so years wasn’t price increase notifications, but price decrease notifications, which led to stock devaluations and a big wrestling match between manufacturers and distributors. That all changed in July with the current administration’s application of tariffs on certain imported products, of which LED component parts (mostly made offshore) were significantly impacted. Since July, we’ve received up to three price increases from some manufacturers, while others have only sent one price increase notification, and a few haven’t changed their pricing at all. Some of the notifications took effect two weeks after we received the notice, and some went into effect 45 days from the notification date, but every single price increase notification identified the new tariffs as the root cause. It’s clear that the manufacturing world is taking the opportunity to try to recoup some of their eroded margins — the 25% tariff policy by the administration pertains only to certain items and unless the entire lighting fixture is manufactured offshore, the price increase given to distribution shouldn’t equal the 25% tariff increase. However, in most cases we’re seeing price increase notifications of 25% or more.

Canfield:  Until recently we’ve generally had to deal with price decreases from LED manufacturers, but in the last month that’s changed due to tariffs. We typically ask our manufacturers to give us 60 days written notice of a price increase and get us the price file 30 days ahead of time in order to review and implement it. During the last round of tariff increases, our core partners gave us roughly three weeks verbal notice, but everyone was unsure of exactly which products would be affected or by how much. Smaller lines aren’t so accommodating, with some giving us just 24 hours’ notice, which is painful for us to review and implement.

Trolander: Up until the tariff issue, the overall trend has been price erosion. We would see occasional increases prior to that, due typically to improved functionality. We’re generally informed of price increases 1-2 months in advance.

 

lightED:  As a distributor, do you find that price increases on lighting products help or hurt you in the long run?

Cerminara: Typically, they can help us if planned correctly, but there’s that situation where we may be locked into a quote that we’ll eat.

Bellwoar: Project business has a longer cycle and price increase notifications are a true disrupter. We now have to limit the length of time that a quote is valid because we don’t know how or when prices will change again. We’re working to get “hold for release” orders released and are in discussions with factories and customers on how the price changes will be handled for orders that can’t be released in time. This is a very difficult situation and there isn’t a single solution that can be broadly applied. We haven’t seen a job canceled due to the tariff-driven price increases, but fear this could happen, and the result would potentially be a slowdown in the construction market. There’s also a very real possibility that new construction or even renovation jobs could be put on hold because the price increases will exceed construction budgets; price increases in steel will be the primary driver behind this. In the end, however, we do think there will be some wins. For today’s many tier-two or tier-three offshore manufacturers who try to sell direct via an online website, the tariffs should make their pricing less competitive and thus less attractive for end users to take a risk and buy the unknown brand. Also, as we all know, the more an item costs, the better the gross margin dollars it can generate.

Canfield: As a distributor, I feel that a price increase is a good thing, as long as all vendors in the product category also increase. In theory, if we all go up, including the contractor, we all make more GP dollars.

Trolander: In the long run, price increases generally help distribution as we all work on margin mark-up. From a project standpoint, we have the benefit of a long sales cycle, so hopefully by the time a project is ready to be purchased, we can build in the increases without incident.

 

lightED: How do you explain price increases to your customers and what strategies do you use to ‘soften the blow’?

Cerminara: We don’t really have a strategy – we just try and give them ample notice in an effort to protect any jobs where they might be locked into a contract from a price we quoted.

Canfield: Most of these recent LED price increases are market-wide, which helps provide consistent messaging when we explain them to a customer. It’s generally helpful to have a copy of the manufacturer’s price increase notification so that the customer can see that it’s official and not the distributor trying to present a bogus price increase. It’s also extremely important that the manufacturer and distributor are on the same page because, ultimately, it’s the distributor’s customer and if the vendor gets involved with the customer without communicating with us, it can be confusing and frustrating for the customer.

Trolander: In this particular situation, we have the benefit of a national news cycle to explain the current increase. To soften the blow in other cases, we can offer a more competitive product if they can’t absorb the increase on the original item.

 

lightED: In your experience, how do contractors and other customers typically take the news?

Cerminara: It’s usually not an issue unless the customer is awarded a job based on a quote that our manufacturer isn’t standing behind.

Bellwoar: Because the issues regarding the tariffs have been in the news so much and for so long, contractors and end users know that price increases were imminent. As a result, there’s been very little push-back on the supply side of the business.

Canfield: I believe that in most cases, the contractor understands the increase as long as we have good documentation from the vendor and the whole market is increasing. When you have a manufacturer that doesn’t increase, that can cause the customer to want to bid the product out; if they get a competitive price on that product, they may opt to bid more products out as well, which creates potential headaches.

 

lightED: Is there a way to stay ahead of price increases so that customers know they’re coming and/or can prepare?

Cerminara: NOT without ample notice.

Bellwoar: Certainly the more time distribution has on a price notification, the more time there is to get the message out and work with customers to manage the change.

Canfield: It all about good communication. As soon as we’re informed of a price increase, we send Outlook calendar appointments to all Elliott Electric employees, and we also post it on our website for all to see.

Trolander: Our manufacturer’s reps have been very proactive about notifying us and we need to be equally proactive in preparing our customers for upcoming price increases. For day-to-day counter customers, that may mean something as simple as signage explaining that price increases are expected, coupled with an email campaign leading up to the event which targets the entire customer base and shares the same messaging. This should give our customers enough lead time to react and limit their own exposure.

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Susan Bloomis a 25-year veteran of the lighting and electrical products industry. Reach her at susan.bloom.chester@gmail.com.

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