The market potential for putting modern LED lighting systems in existing buildings dwarfs new construction, but in many ways it’s a more challenging market to serve.
Doug Chandler Blog | Apr 05, 2019
Thanks to the humble light-emitting diode, the lighting market is among the brighter sectors for distributors in an electrical industry that’s growing steadily overall. Most of the attention goes to new buildings where architects and lighting designers are pushing the boundaries of what the latest LED lighting technology and intelligent controls can do.
Meanwhile, look around you at all the buildings that make up your city and you’ll quickly realize that all those offices, shops, conference rooms and lobbies, factories, warehouses and parking garages where people spend their days beneath old fluorescent, incandescent and high-intensity discharge (HID) lighting could benefit from the same technologies that are going into new buildings. The trick is getting them in there.
The scale of the opportunity is hard to estimate and there’s no real consensus. John Engel, CEO of WESCO Distribution, Pittsburgh, told analysts in the company’s quarterly earnings discussion in January, in response to questions about WESCO’s rationale for acquiring Sylvania Lighting Services, that estimates of the lighting retrofit market’s size are in the neighborhood of $300 billion.
“It’s a tremendous growth engine, and there’s a lot of really interesting developments and dynamics occurring in that market,” Engel said.
Using 2016 numbers, a report from the U.S. Department of Energy (DOE) prepared by Navigant found that 874 million of the lighting systems installed through that year in the United States were LED, which captured 12.6% of the market that year.
The report, “Adoption of Light-Emitting Diodes in Common Lighting Applications,” showed that LEDs have seen much more success replacing outdoor lighting, at 29.7% overall, including parking garage and building exterior lighting, both past 30%. Indoors, the penetration rates are smaller at 12.3% overall, but growing quickly. LEDs have taken over 47.6% of small directional light installations, 19.8% of downlighting and 15.3% of directional lighting.
The major lighting category where LEDs have penetrated least among the categories covered in the study is linear fixtures, but even in that application LEDs’ penetration grew from 1.3% in 2014 to 6% in 2016 and by all accounts has continued to grow since then.
Those figures for the lighting market as a whole suggest an even greater untapped opportunity for retrofits, given that LED penetration percentages in existing buildings are still somewhere in the single digits.
Historically, lighting sales were tied closely to new construction. Fixtures and ballasts were installed during construction and after that sales were primarily for replacement lamps and the occasional tenant turnover or refresh. LED lighting has changed that picture fundamentally, making the entire installed base a potential market for new lighting systems.
Getting a handle on the retrofit market means adjusting to some of its nuances. For example, lighting equipment specifications in retrofit projects tend to vary widely, far moreso than new construction due to the variety of incumbent light sources with existing buildings. “A new construction project being specified by a lighting designer or an engineering firm has so much less variation from proposal to proposal,” says Randy Johnson, who sold his lighting distributorship, US Lamp, Inc. to Werner Electric Supply Co. in Appleton, WI in January 2019, and is now Werner’s Lighting Solutions Manager, based in Green Bay. “The specifier will call out his preferred brand of high-bay, based on their designs, and say it needs to have this lumen output, and at least this many lumens-per-Watt, this color rendering index, et cetera. The tighter the spec the less variation there is. On the retrofit side, it’s a whole hodge-podge, because typically the end-user doesn’t hire someone to develop a solution and the product called out for is at the whim and expertise of the vendor quoting the customer, which can vary widely.”
Retrofits also tend to happen on a much faster time frame than construction projects, says John Dellorto, VP of sales for Focal Point, a lighting manufacturer based in Chicago. “Most tenant improvement jobs are fast-track. The landlord doesn’t want to lose rent for too many months. He wants to turn it around in eight to 12 weeks, so he’ll hire an architect or some kind of lighting consultant to do it and they’ll come to us,” he said. “It gets going pretty quickly. The runway on a new construction project is a much longer cycle; you will know 24 months before it’s bid or breaks ground.”
The rapid pace and broad variability of the retrofit market mean that distributors and reps need to be in the loop early on, to keep from “chasing the spec” to get their lines added as equivalent alternatives or worse, resorting to a fight on price.
Cast of Thousands
For distributors, selling lighting systems for retrofit projects involves cultivating relationships with a more diverse set of buying influences than new construction. Construction projects tend to have a predictable flow of influences including the developer, engineers, architects, lighting designers and of course the lighting rep, whose presence is felt throughout. In a retrofit project the tenant may play a central role, or none at all. The property manager or facilities manager may be the key decision maker, or in the case of a large corporate tenant or a university campus they may have an energy manager tasked with reducing energy consumption across all facilities.
Forging strong, long-term relationships with municipalities, school campus, and industrial facilities managers and others may be the best path to growth in the retrofit lighting market. That can start from anywhere, from online queries to cold calls, but the best opening may be your existing customers who are buying other kinds of electrical equipment, says Johnson of Werner Electric Supply.
“In the retrofit market it’s really a matter of going in and making the customer aware of opportunities that are there that they might not realize. What we’ve done, both as US Lamp and Werner, is get a dialog going with whoever we’ve got the relationship with. If it’s product other than lighting that a given person is responsible for, we can have a fundamental discussion about who would be involved with lighting improvements. It might be the energy manager, might be the facility manager, might be the executive committee, but we’ll open a dialog and ask them, ‘Have you looked at any of this LED technology? We’ll come in and do a first-level observation of your facility for you, at no charge, as a value-added service as a current or potential customer to determine what opportunities are present in lighting and controls.”
Developing long-term relationships with the people involved in existing real estate can avoid having the conversation devolve to price. “Distributors are often not in contact with the end customer and, in the bidding process, will offer bare minimum to provide a low bid,” says Jim Williams, president of Chicago-area lighting rep agency KSA Lighting & Controls, Hanover Park, IL. “Too often we see distributors leading with the lowest cost product with no regards to service on the front end or post sales. In the long run they are having their credibility and reputation impacted negatively because of this.”
Jason Barbour, CEO of START Lighting, a commercial lighting manufacturer in Engelwood, CO, spent 20 years in electrical and lighting distribution before moving into manufacturing. He says distributors are under assault by online suppliers and customers who want to buy direct from manufacturers, but he sees distribution continuing to play a pivotal role in the retrofit lighting market.
“I still think distribution has the ability to take control, because it owns the relationships,” he says. He points to some large national distributors who have built sales teams dedicated to the retrofit market. “Those folks pay for themselves relatively quickly. They say, ‘We want to grow our retrofit market.’ You go out and forge relationships and go from there.”
Energy and Returns
Energy savings has been one of the strongest selling points for LED lighting since it emerged on the scene. Lifetime energy savings attracted many customers and utility and government rebates helped to sweeten the deal. Distributors, reps and manufacturers serving the retrofit market say the energy savings are still persuasive for owners and building managers and tenants, but the sale also requires a firm grasp of the financial picture and the ability to convey the savings in terms that are compelling for a financial manager.
“The driving force today in the retrofit market is still by far energy savings, first cost and simple ROI,” says Williams of KSA Lighting & Controls. “Bargain hunters may purchase 3rd tier products at a low cost that on paper provide an attractive ROI not realizing the lumen maintenance and life of the product are not what they expected.
“The good news is that forward thinkers are investing in connected smart lighting and preparing their buildings to be future proofed and IOT compatible,” Williams adds. “These customers understand the value of the connected system with sensors on board each fixture that will provide the granular control and deep energy savings they desire. These energy savings will pay for the cost of the smart system.”
Energy service companies (ESCOs) have focused on selling the financial picture ahead of the specific technologies forever, and the emphasis has shifted a little, says Chris Gersch, president of Verde Systems, an ESCO in Chicago. “The emphasis now is no money out of pocket. The conversation used to lead with ROI and endless savings, but now it’s, ‘Are you cash flow positive?’”
Rebates drove some of the early action in the market and can accelerate the payback on a project, but many utilities have backed off recently or shifted to incentives in other areas. “Rebates were more important two years ago,” says Dellorto of Focal Point Lighting. “Utilities were offering rebates on LEDs but now they assume that’s what will be installed and feel they don’t have to incentivize the customer.”
Meanwhile the competitive landscape of the semiconductor industry that has taken over the lighting market and the influx of low-cost competitors that come with it have driven pricing down across the market, making financial paybacks from energy savings even faster.
The evolution of LED lighting technologies appears to have leveled off lately compared to the breakneck pace of advances seen a few years ago. Some customers see little difference among the product offerings. As one distributor said, in their mind an LED is an LED. Distributors can find themselves feeding into that impression if they don’t stay up with the benefits that continue to emerge, such as the possibilities for productivity improvements from “human-centric” lighting or more generally the aesthetics and design options available with tunable color.
What seems to get customers excited right now, though, comes more from the control side. The emergence of wireless lighting control has changed the game for retrofits, removing the headaches and cost and locked-in feeling of hard-wired proprietary systems while giving end users huge gains in flexible use of their lighting systems.
“The last two years have changed the conversation,” says Gersch of Verde Solutions. “Not so much around LED, everyone knows about that by now. But customers are now far more aware of sensors, whether it’s motion sensors, daylight dimmers, and so on, compatibility with building automation systems and things like that.”
Williams of KSA Lighting & Controls thinks LED fixtures without controls will be uncommon in the near future. “Customers really get excited about the controls and features that a connected smart system offers like setting the AV mode with the push of a button in a classroom, fixtures with daylight harvesting that dim by zone, exterior fixtures that provide the lighting levels they desire for safety and also provide deep savings by dimming 70% or more when the space is not occupied.”
The flexibility to reconfigure lighting zones and control them separately from a mobile device provides compelling benefits for many customers such as large manufacturing operations where changes in production and demand may require dividing up the plant floor space differently over time, or open office settings where desks and seating areas may need to be redone on occasion.
With the advances in wireless controls and the declining cost of LED lighting systems generally, sales people in the field are seeing opportunity everywhere they look. Given the scope of the opportunity it seems likely to continue for many years. But once modern lighting systems are installed in most existing buildings, the conversation is almost certain to change again. The life expectancy of modern LED lighting and the continuing advance of future-ready configurable systems will yield a very different competitive landscape once this fun is done.