Markets

The global electronics distribution markets in which the Group operates is split between “high volume” distributors, who handle the supply of large quantities of components for scheduled manufacturing of electronic equipment, and the high service distributors who handle the requirements of EDEs engaged in the design of new products and MRO engineers who maintain, operate and repair the installed product base of electronic equipment. Premier Farnell falls into the second category – high service distribution – and is one of just four global players operating in this space. The chart below shows the life cycle of an electronic design – from prototyping through to the end of its useful life, Premier Farnell operates in the two circles identified. The overall global electronics distribution market is approaching £200 billion, of which the high service element is estimated at approximately £15 billion.

The high service market is highly fragmented, with only an estimated 20% in the hands of the four global players, leaving the remaining 80% served by small and medium sized local competitors. This presents Premier Farnell with significant opportunities to leverage our high service proposition to win new customers and gain market share. Our model and our commitment to ongoing automation has resulted in the barriers to entry being raised, and smaller distributors finding it more and more difficult to compete in the high service space. Customers are looking for a wide breadth and depth of stocked product, superior logistics and high quality, reliable product data and information delivered through innovative web solutions. They also want access to a wide selection of leading suppliers and technologies from a company that works to ensure the integrity of its supply chain, provides the most accurate, updated product information available and offers same or next day delivery. Small, local distributors are finding meeting these needs ever more challenging.

Farnell has a strong position in many European markets and Newark is one of the leaders in North America. Across the globe however, there remains very significant opportunities for the Company to grow market share, underpinned by a competitive advantage from its global reach to customers and broad range of suppliers.

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. We support a huge range of customers in over 156 different industries.

This diversification of geography, customer segments and suppliers has historically limited the Group’s exposure to regionalised economic cycles. In the current economic downturn, our exposure to the faster growing international markets and our ability to target specific vertical markets ensures that the Company is well placed to find growth. The global electronics design market as forecast by Henderson Electronic Market Forecast will continue to grow, albeit at reduced rates from the 6–8% we have previously seen, as sales slow and there is increased volatility through the recession.

Both Newark and Farnell offer customers a very broad range of products for use in electronic equipment, with a strategic focus on the design part of the life cycle.

Since the 1950s, the pervasion of electronics into everyday life has increased steadily and the aesthetics as well as the functionality of these products has become increasingly important, creating more design work. As awareness of individual and corporate carbon footprint increases, re-design around power management has grown. We also expect to see increased focus on re-design work to take out cost in the current climate.

Overall this means that, despite the global economic downturn, we remain confident in our EDE strategy delivering a growth rate above the overall electronics market. The strategy, which has provided us with strong growth since its inception, is equally as relevant in recession.

The level of maintenance and repair activity varies by geography, reflecting the indigenous manufacturing environment, and tends to be tightly tied to 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 more immediately through these businesses.

Growth in more challenging markets

We continue to identify opportunities for growth, even as the global economy slows. Our strategy has identified the EDE market as a faster growing segment, and although it is not exempt from the slowing global economy, there continue to be segments that are demonstrating strength: power management, biometrics, medical devices and light emitting diodes (LED) are all forecast to grow through the recession. Our rich web environment is attracting new customers and drawing existing customers from our more manual sales channels. There are also burgeoning design industries in China, India and Eastern Europe which serve both export and domestic markets. These developing international markets are all expected to continue growing throughout this global downturn, making our strategy ever more relevant in these challenging times.

We are also using technology as a source of competitive advantage. Design engineers are early adopters of new technology and they seek to do business with companies that can meet their needs as they evolve. We have embraced Web 2.0 and as such have created environments where our customers, suppliers and industry experts can share information, collaborate and work on their innovative designs.

As the world economy slows, our strategy continues to be appropriately positioned to take advantage of market opportunities.

Outsourcing

With mounting pressures on industry in the US and Western Europe to become more efficient and cut fixed cost bases, purchasing professionals are turning to their distributors for more assistance than ever before.

Many organisations are streamlining or outsourcing their procurement 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.

One of our key innovations in 2009 was the launch of iBuy, a free online procurement management tool allowing cost centre reporting and budget centre control – the rapid uptake of the tool is indicative of how strongly this type of innovation resonates with our customer base.

Environmental influences

There is an important and growing list of environmental legislation, particularly in Europe, that impacts the Group’s customers and especially EDEs. The 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 expected 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 of these pieces of legislation have become important considerations for new design work and impact our customers immediately. Premier Farnell has made significant market share gains by embracing this important legislation and supporting our customers around the globe with advice, support and information. This continues to be an important area of differentiation for our MDD businesses and one which customers clearly value.

Customer proposition

Our proposition for the EDE customer is based on the breadth of our product offering from a wide variety of component suppliers, availability of product for shipment that day or the next day, quality and quantity of technical information to support their work and the integrity of the supply chain, all making Premier Farnell a distributor of choice for high service needs.

EDE customers heavily utilise the web in their work, far beyond simple product searches, and the development of a solution-based approach to our website is central to our EDE proposition. The web is where our customers research new technologies, discuss and review products and interact with each other. By recognising, valuing and supporting that usage we firmly believe we can differentiate our business.

Our EDE customer experience is built on:

Ease of identification, selection and ordering from a choice of channels (including call centres, web, field sales teams and printed catalogues);
Web fundamentals of speed, simplicity of use and search capability;
Broad in-stock range from every leading supplier with all of the latest products;
Fast and highly reliable logistics model;
Full suite of technical information and data sheets;
Value-adding services such as technical support and legislation advice; and
Reduced transaction costs through efficient processes such as eProcurement and iBuy.

The proposition to support our MRO customer base is also service led, with the availability of product and multi-channel capability valued by these customers too. And as with EDEs there is a migration of this experience to e-channels where we can leverage much of our EDE work.

Suppliers

Our MDD division constitutes a powerful marketing and support capability for our franchised supply partners to reach end users and, specifically, to reach EDEs around the world to “seed” the design side of the market with innovative new components. 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.

Our multi-channel approach to the market is an effective means of ensuring that our large, dispersed and global customer base can reach us however and whenever they want to and provides rich engagement opportunities for our suppliers.

We also offer our suppliers the ability to communicate with their target customer base through us, enabling them to understand better the requirements of EDE and MRO users of their products

Suppliers benefit from:

Multi-channel communication 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 and our leadership in key emerging geographies;
Effective marketing to specific customer groups within the Division’s 2,000,000 customer contacts and other website visitors; and
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 suppliers and 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.