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22/06/2009
 Email to a friend
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Distribution in the 21st Century needs to respond to a change agenda.
 The market for European Distribution has seen many changes over the past 40 years but, in my opinion, the watershed came at the beginning of this Century. Once we as an industry had realised that the Millennium bug was not going to destroy the world of electronics, we moved into the 'Dot Com Bubble' and saw market growth of 30 to 40%, followed quickly by the 'burst' and a market decline greater than the growth.
It's no surprise to discover that the majority of that past growth was driven by component shortages and significant unit price increases: events that had occurred on a fairly regular basis since the 1970s. However, eight years have now passed and, despite strong worldwide growth in 2004/5, we have not seen any shortages or significant price rises. For Europe, this has meant a declining market with several factors eroding the unit price and hence the margin available for distribution.
Customer drivers
The main driver for the customer is the need to be competitive in their own end market and one of the ways in which they seek to achieve this is by reducing their own cost of manufacture. This has driven the migration of manufacturing to lower cost regions. Whilst it can be demonstrated that this happened in the 20th Century, particularly with consumer products, the impact on the overall market was much less, as there were many new start up companies and inward investments to counter balance the outward movement. Today, that is not the case and with many companies across the whole of Western Europe moving their production the impact has been very significant. Although some countries in Eastern Europe have benefited, this has not been enough to compensate for the value that has gone mainly to Asia.
Customers that haven't moved their production outside Europe have looked at closing their in house production, instead using a third party manufacturer. Indeed, nearly 100% of start up companies in electronics today will use a third party rather than invest in their own manufacturing. As a result, contract manufacturers have a large spend – and therefore the ability to negotiate competitive pricing for their component requirements. Those remaining companies who keep their own manufacturing in Europe have a very strong argument for seeking more competitive pricing as they can correctly claim that if they can not be competitive in their own market by keeping their own manufacturing they have to take one or both of the options detailed above.
The net result of all of this for the distribution companies operating in Europe is to reduce average selling price. Unfortunately for the distributor, it is very often not possible for them to reduce the price they pay the manufacturer of the components, and therefore the available margin reduces. At the same time, a number of component manufacturers have opened direct sales routes for all customers who chose to use them and reduced the margin available to distribution, increasing pressure on the overall margin that distribution is able to generate.
Customer needs
However, the demands of the customer, quite rightly, have not diminished. They continue to seek inventory management programmes, high level technical support, 24 hour delivery, a sales and support team to manage the account and, whenever possible, limited liability on inventory and extended payment facilities. Component manufacturers also demand their distributors maintain technical support teams, sales teams and a level of inventory to support their product portfolio, whilst insisting that payment terms are significantly shorter than those demanded by the customer. All of this has to be supported in a declining market with a declining margin – a challenge for everyone involved in the distribution industry.
Whilst, I accept that distribution has always had challenges, I believe the biggest change is that we are not seeing any years in which shortages and price rises allow profits to double or triple – helping to compensate for the tougher times.
All of the challenges detailed above are further compounded by the lack of market growth resulting in virtually all distribution businesses seeking ways of growing outside of their traditional markets. Purchasing via the internet enables companies to take a share of the available market with very limited overhead costs offering few of the services outlined previously.
A people business
Although the growth in internet purchasing is likely to continue, I still believe that distribution is a people business, a fact borne out by the number of small to medium size distributors – franchised or otherwise – in all European markets.
I believe these independent distributors are the reason why we will see further consolidation within the industry. A number of these businesses were started in the 1970s and if there is no planned succession, either within the family or outside, then the only way the owner can realise capital is to sell the business. The lack of growth in the market means there is limitedinterest – if any – from the stock markets, venture capitalists or companies in different industries. Therefore the only potential acquirer is a competitor who can see the benefits of combing two businesses.
It could be argued that all the above points taken together make a very strong case for not being in the components distribution industry – and the last eight years have been considerably tougher than the previous three decades.
However, I do not believe this to be the case: I still see many opportunities for companies who can recognise the changes that are needed and who can structure their business to operate within this changed environment, offering excellent service to customers and strong support for their suppliers, whilst ensuring they are profitable and cash generative in this much more challenging future.
Change is significantly more exciting than maintaining the status quo and those companies within the industry who can respond to the change agenda will continue to succeed in a market that is always going to manufacture goods that form a major part of everyone's life.
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Author
Martin Kent, chief executive of Abacus Group from November 2000 until April 2009
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