Catalog distributors weather the downturn
Jim Carbone -- Purchasing, 7/17/2003 2:00:00 AM
Catalog distributors, which specialize in small orders, have fared better than large broad-line electronics distributors during the industry downturn.
Distributors like Digi-Key, Allied, Newark InOne have suffered declining sales, but their revenue declines have not been as severe on a percentage basis as some of the larger distributors. The top 75 distributors' North American average sales decline was 22.4% in 2002. Digi-Key's sales declined 0.1%, Allied's revenue dropped 14.5% and Newark InOne's revenue declined 10.8%.
"Catalog distributors have done better than the average distributor during the downturn," says Robin Gray, executive vice president of the National Electronic Distributors Association. "They have much more diversified customer bases and can sell items that are not as price sensitive," he says. "Because they are willing to sell in small quantities they charge a premium for that service so there is a higher profit margin on those items."
One reason that catalog distributors have been able to hold their own during the downturn is because they supply parts for products in the design and prototyping stages. While many OEMs have cut back on production, they are still designing new products and need parts to build prototypes.
"OEMs didn't wholesale shut down their new product development because it is the lifeblood of the industry," says Anthony Chien, vice president and general manager, electronic commerce for Newark InOne.
While Newark supplies parts to OEMS for new product development efforts, it also offers e-commerce capability and value-added services. Newark Electronics, which had $476.8 million in sales in 2002, sees growing demand for value-added services.
Newark does kitting, some wire and cable assembly, in-plant stores, bar coding and even sourcing for customers, says Chien.
"If we get a bill of materials and there are 100 items, we may be able to cover 80 of them from existing stock and existing suppliers. There may be 20 that don't fall into our core products like computer products," he says. Newark will buy the rest of the materials on behalf of the customer.
Chien sees growing demand for information services concerning parts, especially obsolescence information. "Our industry does not have a wonderful record with obsolescence. A lot of focus is on new products, and suppliers say 'I don't know what you are going to do with that old stuff,'" says Chien. "For us a stranded customer is a bad thing."
He says Newark is improving its knowledge base concerning obsolescence to help buyers with lifetime buys and substituting parts.
"It's a tough issue because everyone wants the information but no one wants to pay for it," he says. He notes that no one pays for data sheets.
"We are going to strike a balance of where we can provide value to customers on obsolescence information without bankrupting ourselves," says Chien.
The volume business
While the business model for catalog distributors involves selling small volumes of parts, Digi-Key is finding success by also supplying larger volume. For years Digi-Key was strictly a catalog distributor. Several years ago, at the urging of customers and suppliers, it decided to sell parts in volume in addition to its catalog operation. The business has grown steadily. About 20% of Digi-Key's business is now from volume sales. That percentage will grow to about 65% in five years, says Mark Larson, Digi-Key president.
Digi-Key has added more lines in recent years including products from Texas Instruments, Motorola and Intel and plans to add more. "There are areas where we probably don't have the breadth of offerings that we should. But that's only part of it," he says.
Building infrastructure for electronic data interchange (EDI) and Web-based purchasing is also important to handle large volumes of parts.
"We believe the infrastructure we have developed is unequaled, but we still have a way to go," says Larson. "There is a group of customers that we have not served before."
Digi-Key is optimistic it will continue to expand sales on the production side because it believes the market is moving toward Digi-Key's business model.
"Over the last five years, there has been a trend among purchasers and engineers to not have face-to-face contact because of time-to-market pressures," says Larson. "They are being asked to do more with less. The pressures are driving customers to have less face-to-face interaction. That plays into our business model because we don't have an outside sales force," he says.
Steve Tsukichi, vice president of marketing for Digi-Key, says 40% of Digi-Key's orders come from the Internet and 20% by fax. "Those two channels don't require even voice contact," he says. "We see a growing trend and we think it's going to extend to the purchasing community as well. We think our business model positions us to address where the customer is going in the future," says Tsukichi.
While Digi-Key will increase its production business, it will not abandon its catalog business. "We know who brought us to the party," says Larson. "We have a strong foothold in the catalog business and a strong following. We are gaining momentum. Fifteen years ago Newark was king of the hill and Allied was bigger than Digi-Key. We are nipping at Newark's heals. In the engineering community we believe we have surpassed Newark's penetration," he says. In fact, the catalog business will help Digi-Key increase its production sales.
"I think there is a serious concern by part manufacturers that demand creation is not being done extensively by large distributors," says Tsukichi. "Helping suppliers create demand for their products will lead to volume business for Digi-Key."
Digi-Key may expand its production volume business and expand sales, but it will likely be at the expense of other distributors as the market is not expected to grow significantly in 2003.
Allied is another catalog distributor that expects to increase sales and market share, despite market conditions "We are the number one catalog distributor in the world," says Rob Birse, director, marketing communications for Allied. "The market is flat. Whatever growth we are driving we are doing so on our own initiative," says Birse. "We are not waiting for the bubble to reappear. We are gaining share from our major competitors, regional and local distributors."
Birse expects use of catalog distributors to grow in part due to the weak economy and the downsizing at many companies. He says catalog distribution is a needed tool because most OEMS are trying to do more with less.
"The luxury of having a dedicated engineer is gone," says Birse. "There are very few specialists anymore. You don't see the instrument engineer, the component engineer, the mechanical engineer. Every time the market drops, there are fewer specialists. They are being replaced by generalists. The catalog supports them because it isn't intimidating," he says.
In fact catalog distributors spend a lot of time and money trying to improve the usefulness and user friendliness of their catalogs.
"We use color in the catalog because buying is visual, customers buy using their eyes," says Birse.
"The catalog is like a Trojan horse. It gets 300 suppliers with 120,000 SKUs (stock keeping units) behind the walls in a company without anyone really knowing about it," says Birse. "When the door opens up, all these products fall out like soldiers coming from the underbelly of the Trojan horse."
Mouser Electronics has enlarged and improved its catalog over the last three years since passives distributor TTI purchased it."We have the fastest growing catalog," says Glenn Smith, president of Mouser.
"We have added 122 pages over the last 90 days from February to May. We had 360 pages over the last 12 months. We think it is the easiest catalog to find products in."
He says Mouser introduced new section guides in 2002. " We have reorganized our catalog around section guides and we are focused on suppliers. Pages are organized by commodity and by suppliers," says Smith.
More specifications, more manufacturers and part numbers have been added. "Of the 122 pages added, 100 of them were for new products, 22 pages were expanded product information," says Smith.
"We have added quite a few new lines, but also got rid of quite a few. We had 280 suppliers in January of 2000. Today we have 280 suppliers, too. Our line card is just about complete, but we are working in the area of semiconductors to do some additional expansion," says Smith.
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