Markets

The overall electronics distribution market in which the Group operates comprises the “high volume” distributors, who handle the supply of large quantities of components for the scheduled manufacturing process of electronic equipment manufacturers around the world, and the low volume, high service distributors who handle the requirements of EDEs engaged in the design of new products for consumers and businesses. Premier Farnell falls into the second category – low volume, high service distribution. The Group also supports MRO engineers who are maintaining and repairing the installed product base of electronic equipment. The chart below shows the nature of customer demand for products over time. The overall global electronics distribution market is approaching £200 billion, of which the high service element is estimated at approximately £15 billion, less than one-tenth of the total market.

Whilst the market remains quite fragmented the barriers to entry are being raised all the time and increasingly there are fewer distributors who can compete in the high service distribution space. Customers are looking for a breadth and depth of product, superior logistics and high quality, reliable product data and information. They also want access to a wide selection of leading suppliers and technologies from a company that can guarantee its product integrity; provide the most accurate, updated product information available and offer same or next day delivery. Premier Farnell is one of the distributors able to meet these exacting requirements.

Farnell has a strong position in the UK and Australian markets and Newark is one of the leaders in North America. Outside these markets, though the businesses are recognised and respected, there remains significant opportunity for growth. Premier Farnell’s competitive advantage rests in its global reach to customers and suppliers offered by the combination of these two businesses.

The other businesses within MDD, namely CPC and MCM, operate primarily on a national basis in their home markets (UK and Ireland, and North America, respectively) and are focused on a particular subset of the overall electronics distribution market.

Economic cycles

MDD supplies a variety of industries in a variety of geographic markets. Not only does no customer account for more than 2% of sales, no supplier accounts for more than 5% of product. This diversification of geography, customer segments and suppliers limits the Company’s exposure to regionalised economic cycles. We support a huge range of customers in over 156 different industry types. Additionally, personal credit is rarely extended to MDD customers as orders are relatively low average value and customers pay at the time of order. The average order value in Europe and Asia Pacific is £100 and in North America is £220.

Both Newark and Farnell offer customers a very broad range of products for use in electronic equipment. Since the 1950s, the pervasion of electronics into everyday life has increased steadily and the aesthetics of these products has become increasingly important, as has the long term impact of their creation and disposal on our health and planet. Whereas electronic design activity was previously focused on introducing new product types, this has now been supplemented by improvements to the look and feel of existing products, how they affect the user, and the environmental implications. This has an impact on the growth rate that we expect from the EDE customer base. The level of maintenance and repair activity varies by geography and reflects the indigenous manufacturing environment and the general level of economic activity.

CPC and MCM supply electrical and electronic ranges, such as audio-visual and security products, to very broad customer bases, from specialist retailers and small businesses to large organisations. The level of general economic activity therefore also influences MDD’s sales.

Migration of manufacturing

The market opportunity available to us in our main geographic markets continues to grow as design engineering stays predominantly indigenous compared with the migration of higher volume manufacturing to lower cost economies in recent years. While lower wage rates have attracted high volume manufacturing to Eastern Europe and Asia, the migration of design, research and development (R&D) and small scale manufacturing has not occurred in the same way. As the EDE market continues to grow the opportunities for us grow with it.

In addition, there is a large installed base of electronic equipment that needs maintaining in our traditional geographic market. Our profitable MRO business continues to meet customers’ needs. As volume manufacturing has migrated to emerging markets, these countries have grown their industrial infrastructure and their installed base of electronic systems and Premier Farnell is meeting the requests of a number of larger customers and suppliers to support their expansion in these regions.

Outsourcing

With mounting pressures on industry in the US and Western Europe to become more efficient, purchasing professionals are turning to their distributors for more assistance and product information than ever before. Many manufacturing companies are streamlining or outsourcing the procurement of their MRO product requirements in order to reduce the total cost of purchasing. These customers are reducing inventory and ordering closer to their point of need – so requiring reliable supply, late ordering capability and next day service. Premier Farnell’s MDD businesses are well positioned to create operating efficiencies for such customers by reducing the number of suppliers that they deal with and by offering a range of other services, such as electronic procurement and guaranteed integrity of the supply chain. These services enable customers to reduce administrative expenses associated with placing hundreds, or even thousands, of small orders each year, and turn to a trusted source for quality products and accurate information.

Environmental legislation

There is an ever growing list of European environmental legislation that impacts the Group’s electronic component distribution businesses. The Restriction of Hazardous Substances (RoHS) legislation restricts the use of certain hazardous substances in electrical and electronic equipment. These substances are restricted to complement the ease of recycling, re-use and recovery at the end of a product’s life under the Waste Electrical and Electronic Equipment (WEEE) Directive. Beyond Europe, countries such as China, Korea and Australia are all looking to implement their own versions of RoHS, with others to follow.

The Energy using Products (EuP) Directive looks at the energy consumption of a product from mining the raw material right through to its recycling at end-of-life. Finally, the REACH regulations impose tighter controls over the use of 30,000 chemicals in Europe.

All these pieces of legislation impact, and are clearly communicated to, the Electronics Design Engineer.

Customer proposition

The proposition for the EDE customer is based on the breadth of product offering from the appropriate component suppliers, availability of product for shipment, quality and quantity of technical information to support their work and the integrity of the supply chain. EDE customers typically seek a broad range of products from a single source. They want products to be in stock and for small, mixed orders to be delivered quickly and reliably. This customer base is generally very web-savvy and conducts an increasing proportion of work on the web, including search, selection and procurement.

Accordingly, an excellent web experience is also important for this customer group. They also benefit from:

Ease of identification, selection and ordering from a choice of channels (including call centres, eCommerce, field sales teams and printed catalogues)
Web forums where engineers can exchange technical information
Speed, simplicity of use and search capability
Reduced stockholding costs
Other value-adding services such as technical support
Reduced transaction costs through efficient processes such as eProcurement and through supplier reduction

The proposition to support our MRO customer base is also service led, with the availability of product and multi-channel capability valued by the customer. They also value the level of technical support available, particularly through the call centres.

Suppliers

The MDD constitutes a powerful marketing and support capability for our franchised supply partners to reach end users. Our multi-channel offering is an effective means of ensuring that our large, dispersed and international customer base, can reach us however and whenever they want to. Our speed of response, web based ordering, extensive stock holding and superior next day delivery offering helps our customers meet their own ‘time to market’ challenges. We also offer the ability to market actively to their target customer base through the customer relationship tools that we use and to understand better the requirements of EDE and MRO customers. The seeding of new products and technologies to the design engineering community is particularly valuable to suppliers as any of their components that are specified in the early phase of a design will be required in large volumes when that design goes into production.

Suppliers benefit from:

Multi-channel offering which offers improved time to market
Fast and reliable global distribution, supported by the integrity of our supply chain and the technical help for customers
Improved support of new markets through local language websites
Effective marketing to specific customer groups within the Division’s 2,000,000 customer contacts and other website visitors
Market intelligence and feedback

We are committed to ensuring that our product offering is focused on our customer base and it is our intention to continue to add further products into our stocked inventory to enhance our product offering for the EDE customer. We believe that this will also benefit our MRO customer base as well as making us more attractive as a partner to other suppliers.