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The Top 50 Distributors: Focus on growth, plan for change

This year’s ranking of the top 50 distributors is a story of both stability and change. There is relative stability in the positions of the largest distributors, both in terms of ranking and in their relative share of the total available market. But there are undercurrents of change rippling through the ranks as new technologies and market dynamics compel distributors to adjust their business models to remain competitive.

Top-ranked Avnet is a case study in the tension between stability and change. Yes, the Phoenix-based distributor retained its top ranking in 2016, despite the fact it reported global revenue that was $2 billion lower than 2015. (See last year’s ranking.) At the same time, the company is in the middle of a 18-month transformation aimed at focusing the business on component sales and extending its reach upstream into the design engineering community.

Combined, top-ranked Avnet and second-ranked Arrow account for 58% of the 2016 global revenue of the top 50 companies. Their share of the North American businesses is lower, accounting for 39% and 44%, respectively, which reflects the fact that many of the smaller distributors predominantly service the North American market.

Global revenue of the top 10 distributors for 2016 was $80 billion, which represents a whopping 95% of the top 50. Four of the top 10 companies are foreign-owned—WPG, Electrocomponents, Premier Farnell and Rutronik Elektronische—and account for about a quarter of the global revenue for the top 10. These figures have remained relatively stable in recent years, with companies occasionally swapping rank as a consequence of business practices and acquisitions.

Growth ahead

SourceToday asked all the companies on the Top 50 list for their business priorities and what they are projecting for revenue growth in 2017. Overall, the mood among the Top 50 is positive, with the majority saying that their primary target is to grow revenue. Other priorities include global expansion and introduction of new products and services. We also asked if the company was considering acquisitions and/or mergers. Twenty-one companies responded “yes,” including four of the five top-ranked distributors: Avnet, Arrow, WPG and TTI.

Coming off a lackluster year of slow or no growth in 2016, a good number of distributors are projecting double-digit growth this year. For example, sixth-ranked Digi-Key is projecting 20% growth for 2017, while eleventh-ranked Smith and eighteenth-ranked Advanced MP are projecting 20% and 15%, respectively.

This optimistic outlook is reflected in the first quarter figures for North American distributor component sales, which saw a relatively strong uptick of 6.1%, compared to the first quarter of 2016, according to the Electronic Components Industry Association (ECIA).

“As a North American distributor, we are used to seeing growth in Asia and Europe, but this time we’re seeing it spread across all three regions [including North America],” says Dave Doherty, Digi-Key’s president and COO. However, North American growth is not coming from the traditional technology sectors, such as computing, he says.

Instead, the growth is getting a boost from infrastructure development, expanded resource development, and defense spending, according to ECIA. The computing sector, specifically the server market, is under pressure as companies move their data centers to the cloud and software-defined networking and network functions virtualization takes hold. Case in point, network equipment maker Cisco Systems is shifting to become more of a software company.

Planning for change

Software-centricity is one of the big changes impacting distributors, both those selling components to computer companies and those with their own systems divisions. And it was a contributing factor to Avnet’s decision last year to sell its Technology Solutions business unit to Tech Data; the deal closed in February 2107.

“We concluded that the world changed over the last five years,” said William Amelio, Avnet’s CEO. “[The computer systems business] is still a big market but it’s shrinking; what’s growing is the cloud, [which is] a different sales process than the datacenter business. It’s a software-led sales process.”

Avnet is doubling down on its electronic component business, with an emphasis on targeting the engineering and maker community. The company acquired Premier Farnell, which includes Newark/element14, in October, 2016. (The 2016 Top 50 lists Premier Farnell/Newark as an independent entity.) Together with the purchase of Hackser.io, Avnet now has direct access to upwards of 600,000 engineers, which enables it to engage early in the product development process.

One are of focus of many of these innovators is Internet of Things. As companies like Nest have proved, a successful IoT device can rapidly disrupt established markets. According to Amelio, Avnet has a run rate of roughly $200 million in IoT devices, comprised of sensors, processors and communications devices. “There is plenty of margin and growth opportunity in the devices” he says.

The increasing focus by top-tier broadline distributors on building relationships with engineers and entrepreneurs to seed the market puts pressure on the likes of Digi-Key and Mouse that have focused on serving the small-order engineering customer for decades.

“We used to be in a niche market, flying under the radar screen. That’s not the case anymore,” says Doherty. “The transformation of others is causing an explosion. It’s making us accelerate our pace, and look at how to become more competitive.”

One area of focus for Digi-Key is to speed up logistics. “The digital platform serving the community has to evolve quickly. It requires huge investments to handle transactions efficiently, at the speed of digital,” Doherty says.

Transformative change ahead

These days, every distributor must operate at the “speed of digital.” That’s because the bar is not being set by competitors, it’s being set by the customer’s experience with Amazon Prime, Netflix and other digital service leaders. Artificial intelligence, including machine learning, natural language processing, and predictive analytics are rapidly becoming table stakes for B2B relationships.

According to a recent SourceToday survey of engineering and procurement professionals, about 60% of the 877 respondents either already have or are evaluating or planning to move to the cloud and adopt artificial intelligence. (See Figure 1.) The majority are either considering, planning, or have already adopted tools that enable them to sense real-time demand at a granular product level. And they are investing in agile, demand-driven supply chain.

Souce: SourceToday

When respondents evaluated their supply chain partners for digital maturity, distributors come out on top. Three quarters of respondents say their distributors are on the path to digital maturity or already there. (See Figure 2.)

Souce: SourceToday

Indeed, top-tier distributors are in the thick of AI. At Avnet, this includes utilizing IBM’s Watson and investing in big-data analytics. “We get an unbelievable amount of data that can tell you about the way the market is moving and where the big ideas really are where we should be investing,” he says.

While the growth prospects for distributors look promising in 2017, it’s likely that the ones focusing on speed and investing in digital services and AI will be best positioned to gain a competitive edge in 2017.

Methodology

SourceToday’s annual Top 50 Electronics Distributors ranking is compiled from nomination forms submitted in February and March 2017. Each company on our list is ranked according to its total global sales volume for 2016. All figures are reported in U.S. dollars. We use self-reported data from each company and verify the information against annual reports and earnings statements, where possible.

Figures for Avnet Inc., ranked first, and Arrow Electronics, ranked second, include the sale of computer products, which comprise large segments of each company’s business. The ranking for privately held Future Electronics, ranked fourth, is based on a SourceToday estimate.

Figures for Allied Electronics, ranked seventh, are included in worldwide sales of the UK-based parent company Electrocomponents plc, which operates RS Components in Europe. Likewise, Newark sales are included in the figures of its parent company, UK-based Premier Farnell, for the year ended Jan. 31, 2017.

For additional details, see footnotes on the chart.

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