A brave new world: times are a-changin' for the distribution industry - Distribution

Electronic News, May 20, 2002 by Heidi Elliott

LAS VEGAS--The curse of living in interesting times is certainly true; just ask the distributors that are facing a new business reality and must make changes to their business models accordingly.

And if it wasn't evident before, the kick-off to the annual Electronic Distribution Show and Conference (EDS) here last week hammered home the point. In his keynote speech, called "New Paradigms for Electronic Distribution in a Global Economy," Andy Bryant, president of Avnet Inc.'s Electronics Marketing group, told an audience of his peers at the Las Vegas Hilton that theirs is a world where gross margins have fallen dramatically. Distributors must reverse that trend, he said, or else lose potential investors to companies that have more attractive balance sheets.

In the early years of distribution--the 1950s to 1980s--the emphasis was on growing market share and size. "I woke up believing growth was the mantra," acknowledged Bryant, who has spent more than 20 years in the distribution industry. But the industry's focus is shifting. In the 1990s, the emphasis switched to improving the return on sales (and earnings per share). During those years, the gross margin numbers started to sink lower and lower. And today? The important thing for the distribution industry is to look at whether it's making a return on working capital, as companies realize they have to reverse the gross margin erosion.

Looking at the last six quarters, Bryant noted that return on capital expended by a group of publicly traded distribution companies went from 8.3 percent for the September 2000 quarter to 4.5 percent in the December 2001 quarter. In essence, companies are getting worse at making are turn on the capital they expend, not better. Not good, Bryant said.

To reverse this trend, Bryant argued, distributors have to re-examine their business dealings. And while companies should still ask up front what the gross profit would be on a given deal, they must also take into consideration other factors. Does a given deal have incremental costs to the distributor? How long will the distributor have to hold the inventory? Are the products involved commodity components or something that would be harder to sell to someone else? And how quickly will the distributor get paid? All factors to know before determining whether a deal is worthwhile.

As a result, enter with great fanfare the fee-for-services model ushered in the last year by Arrow Electronics and Avnet, and most recently by Pioneer-Standard Electronics. Distributors have unbundled their service offerings so that customers pay for a service on an ala carte basis-regardless of whether they buy the electronic components from the selling distributor. The services primarily court the supply chain by optimizing the information available to companies within the electronics industry supply chain. For example, when a design engineer is looking to specify a part in a design, the engineer can use a paid service to find out whether a given part is readily available in large quantities, has substitutes, and if it is about to become obsolete. "I don't think this service trend is going to stop. I think it's going to accelerate," Bryant told the audience.