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What value does a distributor have?

Once, electronic component distribution was a lucrative business that added value to both customers and principals because of their unique business and customer insights and expertise. Over the years however, whilst service levels went up, margins have declined and the distributor’s value has shifted from customer insights to logistics and operational excellence. Squeezed in the middle, can a distributor still add value?

What IS the difference between Arrow, Avnet, Future Electronics and WPG Holdings? Is it the geographical coverage, their customer support, the depth and width of the product portfolio, the franchised product lines or their services?

For years, the electronics distributors participated in a rat race of expanding geographically, adding product lines and services and merging with and acquiring of competitors.

The result is a group of tier one distributors which are significantly bigger that the next level. No doubt, their strategy of aggressively pursuing scale has improved their competitive position. It did however not improve their margins.

The side effect of pursuing economics of scale

Looking at the top three electronics distributors, it is remarkable that all of them hover around 1.5 million US$ of revenue per employee within a small bandwidth. Equally notable is that three sub one billion dollar tier two distributors are within a similar bandwidth around 1 million US$ per employee, indicating a relationship between size and economics of scale.

Taking gross margin as an (questionable) indicator of how well a distributor is able to sell its value to customers then a different picture emerges. Across the board, distributors with a strong footprint in USA and Europe have higher gross margins than their Asia focussed competitors. With few exceptions, smaller distributors all have higher gross margins varying from a few per cent up to double that of the larger ones. (Note that we exclude catalogue distributors as they have a different business model.)

One can argue the 101 reasons why this is. In our view, the lack of differentiation and the inability to sell the value of the added services, explains why the margins are declining and why the tier one distributors are forced to be the masters of inventory velocity, logistics and planning, rather that electronics experts.

The distributor sales rep and his department store

To sell value, the distributor sales rep has to demonstrate relevancy to his customer. He has to have a good in-depth understanding of his customer’s market, business model, applications, organization and operations. He needs to have the competency to turn these insights in relevant engagements and, using his company’s portfolio, into compelling proposals. In addition, he has to have the ability to demonstrate the value and how these solutions help the customer.

And here is where scale does not help: no-one has enough insights in 1,000's let alone 100,000's of parts from 100 or more principals covering 100's of application areas and a mixed bag of services, to do be able to create convincingly the best proposal.

No wonder discussions often turn into a department store kind of sales: "How can I help you and is there anything else you like?" Possibly, he will try to do an effort to explain that his company’s service or brand is better, but the outcome invariably will be discussing price, terms and conditions.

Big isn't necessarily beautiful

Being an electronics grocery shop is a convenience for customers. Unfortunately, not a convenience customers are willing to pay for. Like with real grocery shops, there is the expectation that scale equals to better prices, terms or conditions.

Scale does generate however confidence with customers. The distributor is perceived to have the means and the (financial) muscles to support or help when in need. For sure, it opens doors, but not necessarily the doors of customers with the preferred profile.

Being a well-managed grocery with a huge inventory and favourable conditions is attractive for a large group of customers but with that, and what made originally a distributor unique or special to both customers and principals – the electronics expert – is lost.

Consequential, customers and principals are looking to engage more directly with each other or with other experts, further undermining the value of the distributor.

Becoming an electronics expert again

Most distributors have the capabilities and competent people in house to be the electronics expert for customers. Often though, these are competency spots not well connected and more opportunity and incident driven rather than a successful structural approach that differentiates them from the others.

The approach could be to acquire another boutique distributor to gain specific expertise, product line or market coverage. However, once the new company is integrated, it starts to think and work in the way of the grocery, diluting the expertise and with likely a loss of expert people.

The alternative could be to create specific units inside the company that address very specific market segments. A real commitment to become the go-to-company for a unique segment, supported throughout the company. Segments could be for example, test and measurement, medical or automotive body electronics. The choice could be based on the current customer base or available competencies and expertise. This creates value for both customers and principals and helps to differentiate, making it easier to add and protect value.

There were some attempts to do this before e.g. the (LED) lighting or solar market, but most of these initiatives were half-hearted, confusingly implemented and more opportunistic than a serious attempt to differentiate.

Final words

Successfully figuring out where and how to add value to your customers and in the chain and turn that into an executable strategy given the business environment, is not a small feat. Therefore, we do not want to suggest that our napkin strategy is any better than the current strategy of the Tier 1’s. They did not become that big by accident. Don’t ignore napkins though ;-)

Jack van Mook
© 2012 EnFeat Pte. Ltd.