During the last several decades, electronic component distributors have evolved from movers of parts to supply chain managers. Through this evolution, distributors began offering additional value-added services such as inventory management, in-plant stores, kitting, programming, and engineering support. These services have helped secure distributors' existence in the supply chain.
Last year, during the rise of the dot-coms, many believed distribution would become synonymous with the dinosaur. However, with the recent fall of the dot-coms, distribution has proved it is a critical link in the supply chain from supplier to customer. As a result, distribution has grown to represent approximately 20% of the global electronics market.
Now that distribution has secured its existence in the supply chain, fended off third-party competitors, and gained mar- ket share, the next challenge is for the industry to get paid appropriately for the services they provide.
Over the last several decades, the distribution industry has experienced significant gross-margin erosion and lower returns on capital. Its focus on market share has come at the expense of margins and return on capital. However, this downward trend may be coming to an end, as we believe the industry is at an inflection point.
After years of acquisitions and global expansion, Arrow and Avnet have pulled away from the pack and have proved they are the clear leaders in the distribution industry. Although market share is still important, it will likely take a back seat to Arrow and Avnet's new focus going forward, which is improving margins and return on invested capital. Francis Scricco, president and chief executive of Arrow, was recently quoted as saying, "We will do more for more, or less for less, but we will not do more for less."
What he means is suppliers and customers that want value-added services will have to pay for them; those that don't, don't have to pay. Avnet is pursuing a similar strategy.
Historically, if a customer wanted an in-plant store, the distributor usually provided it. It was a way for the distributor to gain additional market share at that account. The distributor believed increased volume could make up for the additional inventory and the cost of the store. However, in many cases that did not occur.
Going forward, Arrow and Avnet will have their suppliers and customers choose from a list of a la carte services, having them pay for only what they want. In other words, these distributors are not offering any more freebies.
This may be easier said than done, but since there are only two distributors that can provide these services globally, and they are both pursuing similar strategies, it may have a good chance of working.
Robert C. Damron is an analyst at Tucker Anthony Sutro Capital Markets in Milwaukee. Address comments to EBNletters@cmp.com.