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How fragmented is the electrical b2b distribution industry?
Hello! Thanks for giving us another shot to answer your question about the fragmentation of the U.S. electrical B2B distribution industry. The most useful sources for this research were a 2016 National Association of Electrical Distributors (NAED) report overview and Hoovers.
The short version is that there are 14,954 companies in the electrical B2B distribution market, which is a $160-163 billion industry. Of those, 11,915 or 80%, of electrical distributors are small "mom and pop shops" that make up to $5 million annually. However, those small businesses only comprise 4.9% of the total market. The market is dominated by a few large players with 34.5-35.2% of the market generated by the top 10 companies. Based on a the "four firm concentration ratio" metric, the electrical B2B distribution industry is considered competitive and relatively fragmented.
As requested, I have restricted my analysis to current sources and focused on answering your specific questions. Below you will find a deep dive of my methodology and findings. I have a Masters in International Economics, so I enjoyed analyzing this industry from an economic perspective and assessing its level of market competition.
METHODOLOGY
I began by reviewing the three previous responses for your question. From these reports, I understand that the 2012 U.S. Census data on electrical B2B distribution companies is too old for your purposes and, while the report with data from Hoovers had recent sources, it did not provide a complete picture of the industry. While the current question does not specifically state that you are interested in the U.S. only, I understand from reviewing past work that the U.S. is your market of interest.
I began by determining the current size in revenue of the U.S. electrical B2B distribution market. From there, I researched fragmentation by analyzing company revenue size and employee numbers. Next, I ensured that I answered all of your questions under "What does success look like?" by doing a deeper dive into "mom and pop shops," companies with a large number of employees, and the top 5-10 companies by revenue. Finally, I returned to the overall assessment of market fragmentation and concluded that this industry is competitive. Throughout, I explain all assumptions and calculations; all data is also available in this spreadsheet.
FINDINGS
DEFINING THE INDUSTRY
I independently confirmed that the U.S. NAICS codes for the electrical B2B distribution industry are 42361 and 423610. The U.S. government defines these companies as "Electrical Apparatus and Equipment, Wiring Supplies, and Related Equipment Merchant Wholesalers." While I avoided the 2012 Census data due to its age, confirming this code was still important to ensure that I included the correct companies in my research.
TOTAL MARKET SIZE
Per IBIS World, the current size of the electrical wholesale market was $160 billion in 2016. Per a NAED market overview report, total revenues for the electrical wholesale market were $155.4 billion in 2015 and were forecast to reach $163 billion in 2016. Based on these two recent values, the total size of the electrical B2B distribution industry was worth $160-163 billion in 2016.
NUMBER OF COMPANIES
Next, I independently determined that Hoovers has the most recent and reliable data on companies in the electrical B2B distribution industry. Though my colleague had done the same, I restarted the analysis from scratch to ensure I pulled you the correct data. I confirmed that the Hoovers' data captures the correct industry by matching the NAICS code to their database. Hoover's defines NAICS code 423610 as the "Electrical Products Wholesalers" industry. Using Hoovers advanced search tools and searching on the NAICS code, I broke down the U.S. electrical product wholesalers industry as follows:
This value excludes branch locations to only include whole businesses (IE headquarters and single locations).
>$10 billion = 1
$1 billion - <$10 billion = 19
$500 million - <$1 billion = 20
$50 million - <$500 million = 302
$10 million - <$50 million = 931
$5 million - <$10 million = 941
$1 million - <$5 million = 3,233
<$1 million = 9,425
>5,000 = 15
1,000 - 4,999 = 24
500 - 999 = 38
100 - 499 = 220
50 - 99 = 334
11 - 49 = 234
5 - 10 = 3,290
=<4 = 8,685
You will notice that the total companies under the revenue break-down total to 14,873. This is likely because Hoovers does not have complete revenue information for 81 companies, as many of these companies are likely private and do not share revenue data. Given the small percent difference (0.5% decrease from the total), these values are otherwise reasonable.
SMALL BUSINESS AND DEFINING MOM & POP SHOPS
For the wholesale trade sector under which electrical distributors fall, the U.S. government defines a small business as having up to 100-250 employees for most Federal small business programs and up to 500 for procurement programs. As Hoovers data cuts off at 99 and 499, we see that between 14,657 - 14,877, or 98-99%, of electrical distributors are small businesses.
However, to capture "mom and pop shops" it is more accurate to use a smaller number of employees. Most "mom and pop shops" likely fall under the definition of a micro-business, which has fewer than 10 employees per the U.S. government.
The Hoovers data includes businesses with 10 employees, so may overstate the percent of "mom and pop shops." Based on the Hoovers data, up to 11,975 or 80% of electrical B2B distributors are "mom and pop shops."
I pulled revenue figures for companies with 1-4 employees and 5-10 and determined the following values. Note that the percentages indicate the percent of total companies under each revenue range:
>$10 billion = 0
$1 billion - <$10 billion = 0
$500 million - <$1 billion = 0
$50 million - <$500 million = 2 (.66%)
$10 million - <$50 million = 72 (7.73%)
$5 million - <$10 million = 247 (26.25%)
$1 million - <$5 million = 2,270 (70.2%)
<$1 million = 9,324 (98.9%)
Here we see that the majority of micro businesses/"mom and pop shops" make under $1 million and that 98.9% of all electrical distributers that make under $1 million are "mom and pop shops." Conversely, only 2 companies in this category make more than $50 million.
I was able to relatively quickly pull the total revenues for the companies with the largest revenue sizes, but made a rough estimate for lower revenue categories due to the sheer size of the dataset. For those with 5-10 employees and $1 million to <$5 million, I estimated that on average companies make $1.5 million to account for high outliers. For those with less than $1 million in both employee size groups, I estimated that on average companies in the <$1 million group make $100,000 to account for high and low outliers. You can view all of my calculations and raw data in this spreadsheet.
Based on the Hoovers data and my assumptions, 11,915 "mom and pop shops" generate an estimated $7.91 billion or 4.9% of the total 2016 electrical B2B distribution market. (7.91/160 and 7.91/163 = 4.85-4.94%)
LARGE COMPANIES BY EMPLOYEE SIZE
I next conducted the same exercise for companies with more than 499 employees, which revealed the following values. Again, percentages indicate this group's percent out of total companies in the industry under each revenue range:
>$10 billion = 1 (100%)
$1 billion - <$10 billion = 19 (100%)
$500 million - <$1 billion = 18 (90%)
$50 million - <$500 million = 33 (10.93%)
$10 million - <$50 million = 3 (.32%)
$5 million - <$10 million = 1 (.11%) (26.25%)
$1 million - <$5 million = 1 (.03%)
<$1 million = 0
Here we find the opposite story. The majority of companies with more than 500 employees make above $50 million annually. Moreover, all companies in the industry making $1 billion to <$10 billion have more than 499 employees and 90% of companies making $50 million to <$500 million have more than 499 employees. The largest company by revenue and employees is Consolidated Electrical Distributors.
As there are only 75 companies in this dataset, I was able to pull the exact revenue values for the group of large companies with more than 499 employees. Total, these 75 companies generate $100.36 billion of the industry revenue or 61.6-62.7% of the total market (100.36/160 and 100.36/163 = 61.6-62.7%). All calculations and data are in this spreadsheet.
TOP 10 DISTRIBUTORS
As the top 25 article you provided is based on 2013 revenue information, I pulled a more recent mid-2016 list of the top 10 electrical distributers issued by MGM Research. Please note that the MGM list excludes "master distributors" that sell a variety of different products. I then cross-checked it with Hoovers, which largely had the same list of names and pulled each company's revenue figures.
Top 10 List
Consolidated Electrical: Distributors (CED): $10.04 billion
W.W. Grainger: $9.97 billion
Based on the above, the top 5 electrical distributors generate $42.3 billion or 26-26.4% of the total market.
The top 10 electrical distributors generate $56.25 billion or 34.5-35.2% of the total market.
DETERMINING FRAGMENTATION
The most common and simple measure of concentration vs. fragmentation in a market is to consider the market share held by the top four firms A.K.A. the "four firm concentration ratio." An industry with a concentration ratio of forty percent or lower is generally considered competitive. The closer this percentage approaches zero, the more competitive and fragmented the industry. In this case, 22.2-22.6% of the market is held by the top four companies, as such the electrical B2B distribution industry is relatively fragmented.
SUMMARY
Based on the above data, it is clear that while the majority, 11,915 or 80%, of electrical distributors are small businesses that make up to $5 million annually, the market is dominated by a few large players. By employee-size, 61.6-62.7% is dominated by 75 companies with more than 499 employees. By revenue, 34.5-35.2% is dominated by the top 10 companies. As 22.2-22.6% of the market is held by the top four companies, the electrical B2B distribution industry is considered competitive and relatively fragmented.
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