Editor’s Note: This is the first in a three-part MDM Premium series. See Part 2 here.
Wesco International, one of North America’s largest distributors in any channel, continues to branch out from its primary electrical market with expanded services and offerings. As a former senior leader for two businesses now a large part of the Wesco family (HD Supply Power Solutions and Anixter), I will share some personal opinions and insights on their recent major moves and initiatives as part of MDM’s distributor analysis series.
As any good story should I want to start at the beginning. Westinghouse Electric Supply Company (WESCO) was officially founded in 1922, but the company’s roots can be traced back to the time of visionary entrepreneur, George Westinghouse.
If you do not know much about George Westinghouse, I would recommend you search your streaming service for “The Current War,” a 2017 movie on Westinghouse and Thomas Edison that I predict you will enjoy as a distributor or manufacturer.
Wesco grew steadily across the U.S. and North America, and roughly 70 years later, they had grown to 250 locations and 2,800 employees by 1993. They are currently the top electrical distributor in MDM’s 2024 Top Distributors rankings.
If you are familiar with Maslow’s hierarchy of needs, the most important human needs are air, water, food, shelter, sleep, clothing and reproduction.
I like to joke that after those top seven needs, most people would rank electricity and strong data connections as the next most important. Wesco provides my tongue-in-cheek next level of human needs as their core business, which creates a level of stability to their business no matter the market conditions.
As a public company, Wesco shares the required public financials and reports and augments them with select press releases and some annual investor presentations. We will provide additional market insights and analysis as we examine their recent major moves and strategies.
Let’s dive in by starting at the 30,000-foot level. Wesco’s 2023 annual report states that the company focuses on three enterprise strategies:
- “Extend our industry-leading scale and value proposition.”
- “Further develop our team and our culture of excellence.”
- “Digitalize and transform our B2B business.”
This MDM Premium article focuses on that first strategic pillar. Stay tuned for Parts 2 and 3 in this series, along with a comprehensive Wesco analysis report on MDM later in July.
At the end of 2019, Wesco had sales of $8.359B with an adjusted EBITDA margin of 5.2%. By the end of 2023, their sales were $22.385B with an adjusted EBITDA margin of 7.6%.
The extension of Wesco’s industry-leading scale, which included the large acquisition of Anixter International in 2020, has driven them to the top of the electrical supply market in North America.
Business Breakdown
Wesco structures its business into three divisions:
Electrical and Electronic Solutions (EES): $8.6B in 2023 Sales (38.4% of total)
I would call this segment traditional electrical distribution — selling everything from switchgear to PLCs to electrical contractors, industrials and OEMs.
Wesco has perhaps the largest number of competitors ranging from the nationals — CED, Sonepar and Rexel-types — to single-location local distributors. This is U.S. wholesale distribution’s most competitive market in terms of the total number of end customers and major competitors.
In North America (where Wesco has the vast majority of its total business), I have always used an analogy that the EES market is like a broken windshield. Each local market has its own universe. For example, I have worked for electrical distributors where we were the No. 1 distributor in Orlando, but just three hours away in Jacksonville, we might be in last place. Size and scale are hard to leverage as easily as it is in other channels. The market dynamics, relationships, manufacturer partnerships and alliances vary widely market-by-market across all 130+ U.S. and Canadian markets. We will dive into these market dynamics in more detail in our full report.
Wesco is arguably the overall market leader in North America in EES, but that position is hard to leverage nationally in the EES division. It requires a market-by-market approach with strong local leadership, which Wesco has in place, but the market dynamics are such that growth is normally driven by taking market share (often slowly and surely) and acquiring competitors. This is a branch-driven environment, with locations near the end -customers carrying ample stock supported by regional distribution centers to serve potentially hundreds of thousands of contractors and local end-user industrials and OEMs. Wesco reports that it sells to over 150,000 total customers (across all three divisions) and most of those customers reside in their EES division.
Utility and Broadband Solutions (UBS): $6.6B in 2023 sales (29.5% of total)
This unit is focused on utility and broadband, and more exclusively now that Wesco sold its Integrated Supply division to Vallen for $350 million in early 2023 That Integrated Supply component was included in this UBS unit’s 2023 figures seen above.
Wesco is the market leader in UBS in North America as it and Anixter were the 1 and 1A market leaders prior its 2020 acquisition. There is some strong competition in utility from distributors such as Border States, Dakota Supply, Irby and others like GRESCO (a distributor co-op owned by utilities). There are few competitors when compared to the EES division. For example, I was part of a billion-dollar electrical distributor that did close to zero business in utility. Either you are in this business or not, and most U.S. electrical distributors do the vast majority of their business in what Wesco calls EES.
There are a limited number of North American utilities that provide power. For example, approximately 180 public utilities supply power to more than 70% of the U.S. population. The dynamics of large customers (Comcast, Lucent, etc.) are also similar in the broadband market. The USB market is primarily huge customers with annual RFPs, large orders with many lines and end customers with large buying power. These large end customers often buy more direct (from manufacturers), bypassing distributors for larger parts of the business. With this buying power, gross margins are lower than the EES channel, but this is profitable business as you do not need as many people to serve the customer. The combination of big orders with a small number of customers to call on and serve creates strong profits even with lower overall gross margin. In 2023, Wesco UBS had a sales-per-employee ratio of $2.48M ($7.2B in sales and 2,900 employees). This is a much higher sales-per-employee ratio than the EES and CCS divisions.
Communications and Security Solutions (CSS): $7.2B in 2023 sales (32.2% of total)
Early in my career, this business was often called Datacomm, but it has now broadened in scope to include network infrastructure, security and data centers.
Since the Anixter acquisition, Wesco has been the North American market leader in CSS. Its major competitors are Graybar, some regionals in Datacomm-like categories and ADI Global in security categories. (ADI is considered by some to have North American-leading market share in the security-only categories).
Serving the market in CSS is highly technical with relationships and line access being critical and more constrained. For example, major manufacturers with highly-integrated CSS solutions often have strategic distribution where the end customer has a limited number of distributors with proper franchise agreements to serve them. The market dynamics of limited distribution (when compared to EES) and smaller number of contractors and end customers to serve is a recipe for a profitable business.
As an industry veteran, I would concur that Wesco has made progress in its strategy to extend its scale and value proposition across all three divisions, and the Anixter integration of a strong CSS, UBS and EES businesses has added to that level of success.
In terms of recent major acquisitions, since 2020 WESCO has chosen to limit their acquisitions. Anixter was a large company to integrate over the last few years. As someone who helped integrate a large business that Anixter bought, I can confidently report from experience that it was a very successful and complex business.
The Takeaways from Wesco
So, what can you learn from Wesco first strategic pillar and what does it mean to you as distributor or manufacturer?
Smart Silos and Business Segmentation Work
Each of the markets that Wesco serves — EES, UBS and CSS — are unique. The company makes investments and business decisions based on the end customer needs. There are clear differences between each division — different margins, suppliers, number of competitors, direct versus stock sales mix, end users and more.
Many outsiders to distribution might look at these silos and recommend that these business silos be broken down to create synergies between them. Ideas like combining the sales forces to sell across the silos may seem like a clever idea, but in reality, may be disastrous. Outside of backroom accounts payable/receivable, IT systems, etc., the commonalities might be very limited, and a one-size-fits-all business model does not work.
If your distribution channel business has long-standing silos that you are considering breaking down, it might be wise to proceed cautiously. I would make sure you have strong end customer research and feedback and develop a strategic framework before making any major changes. Then, I recommend you make the changes slowly while having the tracking mechanisms and feedback loop to correct any mistakes quickly.
Focus on Strengths and Expand Your Core Business Selectively
Since the Anixter deal (almost all the pre-acquisition Anixter business was already segmented as EES, UBS and CSS), Wesco has been very selective in acquiring businesses. It has had several smaller acquisitions that were focused on expanding its data center business (already part of CSS) and the company divested its Integrated Supply business earlier in 2024.
That Integrated Supply unit was part of UBS, but really is a different business model than utility and broadband. So, Wesco sold a business that really was outside their key three divisions. The Integrated Supply business could be viewed as a fourth silo it had to focus energy and resources on.
From my observations, Wesco has chosen to focus its efforts where it has talent, experience, relationships and proven performance for the last century. These two takeaways can apply to just about any distributor’s and manufacturer’s channel business.
More to Come
In Parts 2 and 3 of our Wesco series, I will cover the company’s second and third strategic pillars: “Further develop our team and our culture of excellence” and “Digitalize and transform our B2B business.” The insights from this series and more will be packaged into a report to be available in the MDM Store.
John Gunderson’s “Big Pivot” case study on Fastenal — published in December 2023 — is available here in the MDM store.