Acuity Controls the Tiers

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Acuity TiersMany distributors know that Acuity has touted its four tier approach to the market.  The first two tiers have essentially been the traditional offering of electrical distributors but there has been some mystique to tiers three and four  via its investment in controls and software, and if there are opportunities for distributors to participate. This week’s Robert W Baird Global Industrial Conference shed some light as Vernon Nagel, Chairman, CEO and President, and Richard Reece, CFO and EVP, were interviewed for about a half hour by senior research analyst from Baird.

Some comments (observations are in italics)

  • The analyst commented “the industry (referring to lighting overall) has been a little slow here in the US over the past 12 months but the company is still gaining share”
    • Acuity response:
      • Up 6% from the year ago period
      • The marketplace was relatively flat for the year (compared to major competitors, yes, but, as we’ve observed previously, distributor lighting sales (fixtures) have increased in units, it’s just that Acuity is not earning as much of the renovation business. As it relates to the larger project market, they may be retaining or increasing sales. We know distributors have discussed this with Acuity, perhaps they need a broader sample size to believe it, or perhaps they choose to ignore it?)
      • Acuity “thinks that the luminaires market was slightly down.”
      • Our Tier 1 and Tier 2 business, which is our primary components, lighting fixtures, as well as building controlled type capabilities represent about 85% of the business. (this is the traditional electrical distribution market)
        • Fourth quarter (Acuity’s 4th) was essentially flat.
      • Tier 3 business, which represents technology-based solutions as well as Tier 4 represents the other 15%, it was up 30% (So, if this is the growth segment, how can distributors play in this segment … even for some of the business. Or can this business be put through distributor, or does Acuity prefer to handle the material movement direct and bypass distribution? How could select distributors participate in this space / help drive leads and sales? Should distributors be asking Acuity to report sales to distributors by Tier and could they be trained / incented to pursue Tier 3 and Tier 4 opportunities? And do distributors want to?)
        • Strategy is to drive technology and value into the marketplace
        • Recently reorganized because want more focus around technology group
      • Feel that there is pricing pressure in the marketplace but see it at the low end of the market.  Believes that represents a small portion of the marketplace (distributors would disagree.  In fact, one distributor shared on a prior post that the market for “unfamiliar” brands could equal, or be larger, than the big name companies.)
      • Thinking about business going forward about the technology opportunities.  Used terms such as “digital lighting”, “lighting sensory network”, “indoor positioning” and referenced other things that enhance productivity of a business. (the challenge is getting contractors to understand the terminology, most distributor personnel to understand and sell at a higher level and explaining the terminology to building designers and senior management in companies that are not used to being involved in lighting and building / facility management decisions. Essentially Acuity is building the market.)
        • Highlighted Target project as well as one for the Atlanta airport with Delta.
  • Analyst asked “what will it take to get the market more of a mid-single digit growth type of market?”
    • Much optimism in the market but nobody has a good reason for why all areas of the country are not performing. Some have labor issues, some people waiting to see what happens with tax reform.
  • Analyst – What tweaks has Acuity had to make to the business model to accelerate Tier 3 and Tier 4 beyond sales to early adopters?
    • Acuity response
      • First explained the sales challenge
        • Tier 3 solution is taking all these luminaries and tying them together using controlled devices, taking this room tying it into this floor, tying the floor into the building. So we have not only lighting but we have building management
          capabilities.
        • The ability to now have a very dense data collection network is what’s at the core of taking Tier 3 and now using that data to help enable a business.
        • Contractors need to understand how to install it … in selling, have had to sell the future,
      • Internal discussion at Acuity … “turning from pilots and tasks to actual implementations.” (which, in the Target opportunity where they started with a pilot, now the issue is scaleability for implementation.  Then the next challenge will be scaleability of a sales process and marketing it “to the masses.)
      • Sales process has involved “talking to the Chief Marketing Officer … talking to HR and how they can make their associates more productive … learned what are these value propositions and who to go to and how to make the ROI argument.  Done a lot of it organically. (In other words, going direct, which is understandable to understand the sales process and messaging needs for a long cycle sale. Question will be, “how many distributor salespeople can carry this message and/or are calling on senior management?”  And if distribution cannot make the sale unassisted, will the order go through distribution? And what is Acuity’s plan for involving its agents who may be able to “place” the order on distribution for them to somewhat participate in the revenue / profit stream?)
      • Tier 1 through 3 – talking to architects, engineers, lighting designers, building owners, electrical contractors
      • Tier 4 is Acuity’s technology group creating a performance specification written around not lighting but the sensory network of lighting and what it can do to optimize the business model.  Achieving this requires calling on the C-suite. (different sale than what distributors are used to, more similar to an enterprise IT salesperson)
        • Reference an example of Acuity C-level calling Delta C-level to reopen a bid, change the specs and have the business awarded to Acuity.
  • Analyst – On Tier 4, “How far away re you from productizing the offerings so that it’s off the shelf?”
    • Acuity response
      • Talked about some big projects, the need to develop apps / open the platform for others to write apps to then access the data.  But no “short term” product for off the shelf. (which probably means no short-term opportunity for electrical distributors although perhaps sales models can be developed, perhaps scaled down, to show how to replicate projects so can be more “turnkey” for distributors to consider.)
      • “Now that we have the technology group and our people calling on to C-suite to change how they view this and create that (performance) specification.” (sounds like a continuation of direct selling of the concept, probably of the material too.)
  • Analyst question – question was about margins and then, for Tier 3 and Tier 4, if the opportunity is a one-time sales or if there is recurring revenue stream to enhance margins.
    • Acuity response regarding margins
      • Margins –
        • Impacted by ramping up some of the sales folds to now make direct calls
        • Have some exceptional people that we’ve hired and others that are planned to be hired where they are very skilled at this (calling on C-suite and solution selling) (continued focus on direct sales. Wonder what Acuity would say if a distributor wanted to get trained / exposed to the process and was willing to dedicate someone in a local marketplace.  Using this model, Acuity will be an elephant hunter focused on Fortune 500 / 1000, but may miss the opportunity for the medium sized / larger local projects? Will / is someone else pursue this market?)
      • Recurring revenue – have a recurring revenue stream of those managing, if you will, the data collection capabilities. The APIs, the SDKs and all this sort of stuff. So we’re helping those folks with this. As as they use more data and consume more data, our profitability or our revenues, if you will, of that recurring revenue will continue to increase (highlights that there is a revenue tail and that distributors and reps could benefit from this, if given the opportunity.)
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