Business remains strong for catalog distributors

James Carbone -- Purchasing, 10/20/2005

If there is a segment of distribution that is able to weather the ups and downs of the electronics industry, it is catalog distribution.

Buyers and engineers often purchase small quantities of parts from catalog distributors for prototype builds and small production runs.

Because catalog distributors sell small quantities of parts, their prices and margins are higher than parts sold for volume production. Also because most electronics companies are always introducing new products, catalog distributors see steady, if not rising demand for parts.

That demand is reflected in revenue growth of catalog distributors. In 2004, the top 75 North American-based franchised electronics distributors' average revenue growth rate was 15%, while the average growth rate for franchised catalog distributors was 25%, according to PURCHASING magazine's annual survey of electronics distributors.

Stronger growth rates for catalog distributors will likely continue for several reasons. One is that a lot of design and new product development and small production runs are still done in America.

"It's good to be a cataloger," says Rob Birse, marketing director of Allied Electronics in Fort Worth, Texas. "The beauty of catalog business is that while volume manufacturing may be going offshore, research and development (R&D) is strong onshore. In fact, R&D here may be stronger than ever."

The need for up-to-date information about parts is also helping drive the catalog distribution business. The websites of catalog distributors are chock full of technical data about parts and equivalent substitutes.

Catalog houses have beefed up their websites, making them easier to find part data and to purchase parts.

"We have 16,000 unique people accessing our website each day," says Paul Tallentire, president of Newark InOne in Chicago. "That's up from 10,000 a year ago. They are searching for parts or information about parts. They don't all buy. About 18% buy online, and in the next three years that will move to 40%. The majority of our business is telephone sales."

The percentage of orders placed online will grow as the comfort level of buying parts online grows. Tallentire says the percentage of customers buying online will rise in part because young people working for electronics companies are more Web-savvy than their older colleagues. As time goes on, those younger purchasers and engineers will make up a greater percentage of the workforce and will buy online.

Catalog distributors report that online buying is growing, but the paper catalog complements their websites and vice versa.

Kevin Hess, director of marketing and business development for Mouser Electronics in Mansfield, Texas, says that Mouser's catalog, which is published every 90 days, drives online purchasing.

"We find that the catalog drives Internet sales and the Internet drives catalog sales. The two work hand in hand to give customers all the information they want," says Hess.

Sometimes a buyer will check parts out in the catalog. "Say you need to look up five different types of products. You can flip from page to page and easily find them the way our catalog is constructed," says Hess. "Then you can go to the Internet to build a bill of materials. The site shows the stock and price. You can build an order through the day and submit it online and the order is shipped out the same day," he says.

Other times, customers check out parts online, then refer to the catalog and will call Mouser to place an order.

"They can go to the Internet to see stuff real-time and use the catalog to source a product or cross-reference a product. Each drives the other," says Hess.

Increasingly, buyers are checking out a catalog or a distributor website to look for parts that are compliant with the Restriction on Use of Hazardous Substances (RoHS) initiative.

Catalog distributors report RoHS is helping drive their business. Many OEMs need help to make sure they are not designing in noncompliant products. Virtually every day component manufacturers are announcing that parts that used to contain lead or other hazardous substances are now compliant. But it can be hard to keep track of which parts are environmentally friendly and which still contain banned substances.

"Part of the problem is some component manufacturers say they will not issue new part numbers for compliant parts," says Allied's Birse. Sometimes a date code will be used or the package of parts will be labeled to show the part is RoHs-compliant. "In some cases, an E or an R suffix will be used with a part to show it is compliant," he says.

Another problem is some parts are exempt from RoHS. "That is as much a problem as RoHS compliance issue," says Birse. "Some products are not marked with a RoHS-compliant logo because they are not involved with RoHS. We are thinking about creating a RoHS exempt logo."

Birse says many OEM customers are looking to catalog distributors to tell them if the parts in their design are RoHS compliant.

Catalog distributors will review a customer's bill of materials (BOM) to identify which parts are compliant, which ones aren't and what substitutes would be suitable.

Newark InOne's RoHS Wizard tool performs that service at no cost for customers.

"Customers don't have to go to 40 to 50 vendors to check RoHS compliance for their BOMs, says Tallentire.

While the catalog business generally handles small orders, one catalog distributor trying to expand its model and sell production volumes is Digi-Key, based in Thief River Falls, Minn. It has a volume production business that is growing, says Steve Tsukichi, vice president of marketing.

He says Digi-Key began its volume business at the urging of customers. About 15% of its business is derived from customers who order parts for volume production.

"We have not set a goal for our volume business. In a broad sense our goal is to develop our volume business to the maximum extent," says Tsukichi.

However, it has no plans to abandon its small order catalog business that is geared toward engineers. "In fact our engineering customer base is growing. In 2004 we had 283,000 customers, and 83% of them were engineers," he says.

Tsukichi says that trend will continue although Digi-Key will also grow its number of volume production customers. "As we gain strength in the volume division it will bring that number (the percentage of customers who are engineers) down. However, the pure number of engineers that we service will go up. It may be a smaller percentage of the overall customer base, but we will continue to expand penetration into the engineering world," he says

Most catalog distributors are franchised distributors. One exception is Jameco, based in Belmont, Calif.

Jameco is an independent catalog distributor which says it sells parts for less than other distributors. In some cases 20-30% less.

Ray Bellantoni, marketing director, says Jameco can often find equivalent parts that cost less than name-brand parts, but have the same form, fit and function as name-brand components.

"A particular brand that purchasers buy may be no better or no worse than the equivalent. The brand is often not important to them. If buyers can get equivalent quality product for a lower price it adds to their bottom line," Bellantoni says.

Jameco has also begun selling its own line of components. It has the parts made in Asia.

"We have seen a considerable increase in demand for our own brand of components," says Bellantoni. He says the business is growing because Jameco can sell the parts for less than name-brand or non-name components.