Strategy

In two years we have successfully transformed many key parts of our business with the three simple themes of EDE, web and internationalisation giving clear direction to our actions.

Our strategy is one of profitable growth through focus on our EDE customer base, the ongoing utilisation and development of our web proposition and the internationalisation of our business model as we expand into new higher growth international territories.

All of this is increasingly relevant in a time of recession. Our focus on EDE, particularly EDE in emerging geographies and key vertical segments, continues to offer growth.The web provides efficiencies and real speed to market – in 2009 alone we launched five new language sites to expand our model.

Focus on EDE

Central to the strategy is Electronic Design Engineering – an attractive market which offers above average gross margin and growth rates, values our proposition, and where customers have the potential to buy more lines per order than other parts of the market.

The global EDE market consists of customers involved in the design of electronic products and components and is estimated at circa £15 billion worldwide. EDE customers have similar service requirements wherever they are located around the world – these include a broad product offering, technical support and reliable and prompt delivery.

Electronics continue to pervade all aspects of our lives, driven by aesthetics, size, functionality, legislation and the environment. Even in recession, key industries like medical and biometric security are forecast to grow, and while volume production in areas like motor and consumer electronics may decline, the number of design projects is forecast to be less affected than production volume.

While our intelligence leads us to believe that MRO will decline over the coming months we still believe that EDE will grow and is driven by key geographies and segments. That, combined with our low market share and strong customer acquisition programmes offer potential topline growth.

In our key emerging territories we saw strong growth driven by these customer acquisition programmes below under Internationalising our model.

An important part of the proposition is the product range that we offer to EDEs. At the beginning of our strategy, we announced that we intended to add approximately 70,000 products to our current stocked range with a further 50,000 lines to be available on demand. We have made good progress this year and have added over 90,000 new products (before deletions) into stock and have made further available on an as needed basis.

We have set as a goal for this part of our strategy that 50% of MDD revenue will come from EDE customers by the end of financial year 2010 and remain committed to that goal even in the current climate.

Enhance our web and eCommerce platforms

This part of our strategy is intended to provide design engineers and purchasing professionals with a fast and efficient channel to access the holistic solutions that they seek – combining access to products, information and technical support.

The web is increasingly the preferred channel for EDE customers and as well as offering them an efficient solution, it is how they interact with the broader technical community.

It also offers Premier Farnell a lower cost to serve channel compared with more traditional sales channels. We clearly recognise the importance of this in the current climate and have programmes in place to enhance our web further and accelerate its adoption by our customers. Our aim is to provide excellence in e-com solutions that don’t just benefit us in terms of efficiency, but also offer our customers unique benefits. In 2008, two key initiatives were launched online – iBuy offering purchase controls to procurement professionals, and eQuotes offering US customers the chance to request and pick up quotations via the website.

This part of our strategy is a key element of our multi-channel end to end customer experience plan, which includes both our EDE and our MRO customer base.

We set a goal for this part of the strategy that 50%-70% of our MDD revenue will be via eCommerce by the end of financial year 2010. We are now achieving 32.0% of sales via eCommerce channels and some regions are already trading over 65%.

Internationalising our model

Despite this period of deep recession, China, India and much of Eastern Europe are among the few areas still forecast to achieve overall market growth, with China in particular already committed to major government investment to maintain economic growth.

The Chinese market for small volume electronics is estimated at over £1 billion annually and growing at a rate faster than Chinese GDP. This market is highly fragmented, offering a significant growth opportunity and potential for us to achieve market leadership with the growing number of design engineers graduating from Chinese universities every year and engaging in design activities in their local industries.

Our Premier Electronics business in China continues to make good progress after its launching in 2007. The business is focused on the local design community supported by local inventory and next day delivery available in over 110 Chinese cities. Growth in 2009 was 39.4%, driven by strong customer acquisition programmes.

The expansion of the European Union and the highly fragmented nature of these new markets also offer growth opportunities. Our programme of expansion into Eastern Europe has progressed strongly and showed growth of 68.4% with a clear focus on customer acquisition, EDE and the web – five local language websites were launched in the region during the year with a number of additional planned. We also successfully completed the acquisition of the end user business of our former distributor in Poland, Hungary and the Czech Republic – Microdis – further driving growth in the region.

In January 2008, we successfully completed the acquisition of the high service distribution business of Hynetic Electronics in India. This business, which had sold the Farnell product range for over six years as a distributor, has offices in nine locations across the country, its own localised Farnell website and a local catalogue for the Indian market.

In 2009, 17.6% of our MDD revenue came from developing markets, making good progress towards our stated goal of 20%.

Initiatives to drive operational and cash efficiencies

As part of the strategic review in October 2006, we completed a thorough analysis of our business processes. While this confirmed the robustness of our existing processes, we identified areas where efficiency improvements could be made and we have been implementing those improvements over the last two years.

The web continues to delight customers and has resulted in tangible benefits across the organisation. Over the next two years we anticipate that we will be able to reduce our operating expenses as a percentage of sales by 2 percentage points (approximately £16 million). During the year the web reached a critical mass which allowed us to re-evaluate the structure of certain operations and remove costs. The annualised benefit of these reshaping actions executed in the fourth quarter was £12 million, £4 million of which related directly to our transition to the web.

Continued rationalisation of operations will be ongoing as we continue with our plans to achieve an overall operating expense reduction of approximately £16 million. Subsequent to year end we took further action to expand our customer reach, touch more customers more frequently and further realise the benefits of our significant investments in the web and our unique multi-channel sales approach. In North America, we are restructuring our branch network and in Europe we are rationalising our structure to leverage our pan-European talent. Detailed customer transition plans are in place to ensure that customers will continue to experience excellence from our multi-channel proposition, including expanded contact centres and a rich web environment.

Combined these actions will reduce operating expenses as a percentage of sales by 2 percentage points (approximately £16 million) and once the benefits are fully realised, the Group is targeting operating margin as a percentage of sales to rise to 12.0%.

In order to finance our strategic transformation, the Group committed to reducing working capital as a percentage of sales by 2 percentage points, a saving which would pay for the required incremental investment. We still have one more year in our initial three year strategy, and thus far have seen working capital as a percentage of sales, increase from 27.1% in 2007 to 28.4% due to the slowdown experienced in the fourth quarter of 2009. We remain confident that the processes we have put in place will ensure we meet our target.

Actions which have reduced our working capital (before the impact of currency movements) include, more flexible arrangements with certain suppliers, purchasing products for our global distribution centres in the lowest cost regions, and improved web efficiencies.

Key performance indicators

The Group’s strategic transformation is intended to deliver increased shareholder value over the period through the successful execution of the elements described throughout this annual report – EDE, the web and internationalisation. As the economic climate has changed, the appropriateness of our strategy has been reinforced. All areas of our strategic focus continue to grow and create new and exciting opportunities. The Key Performance Indicators which were set out when the strategy was announced in 2007 are discussed in more detail within the Key Performance Indicators area of this site. They comprise both strategic and financial metrics. The strategic metrics are those that are used to track our success in executing the building blocks of our strategy and the financial metrics measure the outcomes of those strategies in conjunction with the successful performance management of our core business prior to the execution of the strategy.

Strategic and financial measures:

• Sales per day growth focus on the faster growing EDE segment and operating in the faster growing regions of the world should deliver revenue growth in the 6%–8% range.

• Sales via eCommerce channels % this content rich and lower cost to serve channel is expected to become the primary channel for customers around the world, with 50%–70% of orders placed via eCommerce channels.
• Sales from developing markets % developing markets are continuing to grow and produce good opportunities, with a target of 20% of revenue from these international and developing markets, the Group is committed to continue investing in the areas where we see growth.
• Gross margin % gross margin stability is a key platform to deliver operational gearing. EDE margins are higher as are web margins and these work together to mitigate the impact of lower margins in the emerging and historic MRO markets.
• Return on sales % is a function of both the gross margin stability and the success of efficiency programmes as well as reflecting the multi-channel cost to serve impact of our strategy.
• Return on net operating assets % reflects the effective and efficient investment of funds and is important when evaluating the success of our strategic initiatives.
• Free cash flow to revenue % this is a combined measure of both the improved profitability and cash flow targets of the strategy. We have set as a goal that we will achieve a ratio of 6%.
• Employee engagement as a service business, our results are achieved through our people. Part of our investments in the strategy have been in ensuring that we have the right people in our business and that our employees are actively engaged.
• Working capital as a % of sales this is a measure of the success of our cash efficiency programmes.

Carbon footprint

We are aware that all businesses have an impact on the environment in which they operate. As part of our strategy, we are seeking both to limit the effect of the strategy on the environment and to work actively to reduce the impact of the Group’s existing business. The actions being taken to address our carbon footprint are outlined in our Corporate Social Responsibility Report.