With no serious rival in its niche business of parts distribution in the UK, Electro-components's problem is what to do with the dazzling profits - and cash flow - it consistently churns out.
The domed cavernous warehouse, lying on the outskirts of Corby, is, in its own way, a structure that tells us something of the economic history of Britain in the last two decades. Beneath its steel and concrete skin, big enough to hold 2,000 double decker-buses, are encased hundreds of thousands of widgets and gadgets, most still on their racks, others moving around, controlled by computers and laser scanners. The land was fresh and untouched when Electrocomponents acquired it over a decade ago. It had been reserved for the future expansion of Corby's famous steel mills. The steel works, of course, never did expand into this territory. Instead they closed down, making Corby, for a time in the early '80s, a living symbol of deindustrialisation.
That Electrocomponents should be housed on territory once earmarked for steel mills is a telling twist to the tale of Britain's post-war economic transformation. Few enterprises stood closer to the heart of a heavy industrial economy than the steel mills, their furnaces churning out the essential raw material of mass production. And few enterprises are closer to the heart of a post-industrial economy than this distributor of electronic components. The changeover is representative of the shift from mass to flexible production, and from an industrial to a service culture.
For a company with a market capitalisation of just under £1 billion, enough to put it on the fringes of the FTSE-100 index, and which emerged in the latest Management Today survey as Britain's eighth most admired company, Electrocomponents is a surprisingly little known business. But then it doesn't make or sell the kind of things that are seen in people's homes, nor has it ever produced the kind of internal fireworks that would have made it a subject for the business pages of the newspapers. Instead, in its 48-year existence, it has quietly built a major business on seemingly unpromising ground. And it has emerged into the early '90s dominant in the UK market, and with a chance at least of building a substantial global business.
Like many major companies it owes its position as much to luck as to vision. The last half century has not been an easy ride. The business was founded in 1937 by two emigre Jews who had fled to London to escape Hitler. Neither of them had much idea of how to earn a living in their new country, but they had spotted a niche for a small business. Wireless sets, which were becoming an essential part of every home, were notoriously unreliable machines; the valves in particular, which drove the machines in the days before transistors, had a tendency to break down. The British manufacturers, displaying an indifference towards their customers that was later to be their downfall, were little interested in the reliability of their machines. And the bits and pieces for those who wanted to fix their own radios were not easy to come by. This was the market into which the new company moved, distributing parts mainly for home users. Hence the name: Electrocomponents.
From an original base in Maida Vale, in north-west London, the company started its distribution operation locally, and by the end of the war had established the infrastructure of a national distribution company. It prospered through the '50s and early '60s. The radios that provided its initial market did not get any more reliable, and the televisions that moved into people's homes from the '50s onwards were just as likely to break down as the radios. With canny foresight, however, the founders had realised that this was a business which was in essence doomed. The Japanese electronics manufacturers were working on TVs and radios that rarely if ever broke down, leaving the network of repairmen and home enthusiasts which the company serviced as obsolete as blacksmiths.
From the early '60s onwards, the company was redirected towards supplying components to the industrial sector. The founders themselves bowed out soon after the company was listed in 1967 (with a market value of just £2.75 million). They collected their fortune and departed - one for California and Hong Kong, the other for Switzerland. In their absence, however, the company continued to prosper. As much by chance as design the founders had struck a vein of commerce that was to prove very rich. 'The loyalty of the customers is fantastic,' says John Robinson, who ran the company until he was ousted in 1990. 'After 50 years it tends to be. The big issue has always been where to take the company next.'
At the heart of Electrocomponents today lies a business called RS Components, the division that accounts for the bulk of its turnover and profits. Out of total sales of £396.5 million in 1994, RS accounted for all but £37 million. Out of total pre-tax profits of £72 million, RS accounted for £70 million; the one other division, Pact did not make a profit. RS, effectively, is Electrocomponents, and vice-versa. On the surface, it is a very simple business, and one of such mundaneness that it seems unlikely a company could make margins of 20% from it, year-in, year-out. But it is a simplicity achieved only through conquering fearsome complexity. The essence of the business is distributing electronic components. It is the middleman, between manufacturer and consumer, a position that normally implies high turnover and relatively small profits. The spin that RS has been able to put on the business, however, lies in the high level of service and back-up it has put into the task of distribution. 'Historically the business was always product-driven,' says Bob Lawson, chief executive of the group. 'In the past five years, I believe, we have made it service-driven.'
RS Components's customers are mostly small electronics companies, specialising in flexible, batch manufacturing of niche products. Or they are design houses, working on prototypes for major companies. Or they are repair firms, fixing machinery for larger companies. Whichever category they fall into, they are micro-businesses, with specialised needs - needs that the company has made it its business to service. There are two characteristics that stand out. One is that the customers are mostly small firms, which don't have the capital to tie up in stock. They prefer that someone else holds the stock for them. 'We are in effect an outsourced purchasing department,' explains Grant Rabey, managing director of RS Components in the UK. The other characteristic is time. Its customers are firms that need their bits and pieces promptly. 'To our customers time is a scarce commodity,' says Rabey. 'We are trying to save them time.'
The warehouse stocks some 58,000 different lines, any item of which will be dispatched to the customer on the same day that the order is placed, meaning that it can be with them the next day. A bank of telephonists, sitting in front of computer screens, take orders from 8.00 am to 8.00 pm; 65% of them come in during the last few hours of the day, as customers figure out the next day's requirements. After the order is logged into the computer, it can be located quickly within the vast warehouse, transported by computer-controlled conveyer belts to a packing department, where it is boxed and promptly dispatched to the customer. Every day some hundred trucks roll up to the warehouse, delivering fresh supplies, while a similar number of Post Office and Securicor vans roll up to ship the orders out again. The average order size is very small, a mere £90 in value, reflecting the small size of most of its customers. 'You don't come to RS if you want 10,000 of something,' says Rabey. But small orders can add up to a chunky business: with an average of 16,000 orders a day, the Corby warehouse accounts for the bulk of the company's turnover.
Quick delivery and a vast range of stock are two key elements in the service. But the company also provides information and help to its customers. The core marketing tool is the catalogue - a thick, dense tome, running to hundreds of pages, which is distributed three times every year to its customers. For electronics engineers, the catalogue is something of a bible. It lists precise details and prices of all of the 58,000 components in the range, holding the prices firm for the life of the catalogue. Teams of engineers scour the world looking for new components, making sure that they fit the quality standards that the company expects. And once they are added to the range, another team of engineers mans the phone lines at the warehouse, providing customers with constant free advice on how to use the components. 'They are formidable competitors. They keep everyone on their toes,' says a senior executive at one leading UK rival.
The service is constantly updated. This year the company has introduced a CD-ROM catalogue that allows customers to call search through the same information they have on the printed page, and to access pictures and place orders electronically, so long as they have the right computer equipment. The CD is being given away free, and the disc drive needed to run it is being sold by the company at below cost to encourage a rapid uptake.
This innovation is not cheap, although it is far from altruistic. The CD-ROM software alone cost the best part of £1 million to design and develop, and the distribution of the discs and drives will have cost much more. But it has important benefits. Not only does it improve the product for the customer - the CD contains much more information, and is easier to access than the printed catalogue - it also offers significant savings for the company. CDs are much cheaper to manufacture than big printed books: about £2 per disc, compared with £15 for the catalogue. And in time, as more customers are linked up on line, orders will be able to be logged directly via a modem, dispensing with the need for banks of telephone operators to take the orders over the phone. 'It is a first step along a road, and we can't be quite sure where it is leading,' said Lawson. 'But it will lead to new types of services for customers, and that is important for product differentiation.'
It is such steps, however, that have made RS pre-eminent in its field. Within the UK, RS has now a virtual lock on its chosen market. Its one serious competitor, Farnell, is only half the size, and although two large American companies - Arrow and Avnet-have begun targeting the European market,they have so far concentrated on large-scale distribution, and not yet tackled RS's core of small customers. Indeed, so strong is RS in the UK that its British operation alone accounts for virtually all the company's profits. Nor, according to the analysts who track the sector, are its position or margins under serious threat. Its customers have always been able to buy its products cheaper by going direct to the manufacturer, but most are small, and because they order in such small quantities the savings would not justify the extra time. And it is an expensive market to break into. A new competitor would have to spend tens of millions of pounds on stock, warehouses and catalogues - with a very uncertain return.
Cash cows are all very well, but you have to know what to do with the milk. The puzzle for Electrocomponents has always been to decide what to do with the money; how, as Johnson observed, to take the company on. It is a puzzle which cost him his job. In the last decade, with cash flowing in from RS in the UK, the company embarked on an ambitious programme of diversification. To the men in charge at the time it seemed to make a lot of sense. RS was so dominant in the UK that it had become a cyclical business, expanding and contracting along with the economy. Moving into new areas could both feed in new growth, and make it less cyclical.
Presuming, that is, that it moved wisely. During the '80s money was spent on building up Electrolighting, a subsidiary selling lights to retail outlets, but after a succession of disappointing financial results it was closed in late1990. Electrocomponents also spent money on buying companies involved in areas such as computer peripherals in the US, and in the distribution of office supplies - divisions which were later disposed of. Of the diversifications, the only one still part of the group is Pact, a distributor to retailers, which does not yet make consistent profits.
The diversifications soon started to have an adverse effect on the group as a whole. In 1991, profits fell by 6%, a result which reflected poorly on the management of the company. The tensions caused by those results were soon to become evident. In 1990, Robinson suddenly resigned as managing director of the company, and was replaced overnight by Sir Keith Bright - a former chairman of London Regional Transport - as deputy chairman and chief executive. At the time Bright said that his first task was to review strategy, although the company was keen to deny that there had been any kind of boardroom coup. 'It was not an amicable parting,' reflects Robinson. 'But it was more to do with personalities than questions of strategy.'
A boardroom coup or not, changes were quickly made. Bright soon stepped up to the chairmanship and brought in a new chief executive, Lawson, in 1991. Lawson was a veteran of the company, having been sales director of RS between 1979 and 1987, when he left, and had in the intervening period been MD of electrical instruments manufacturer, the Vinten Group. Disagreements over strategy had been, he said, one of the reasons for his departure.
Lawson is a mild-mannered man; he walks around the company dispensing greetings to his employees, his brow constantly furrowed as he examines every aspect of its operations; he is cerebral in his approach, endlessly analysing and reflecting on the business before deciding on his next move. On his appointment as chief executive, the strategy of diversification was quickly changed, with most of the newer, non-performing businesses either closed or disposed of. Meanwhile, RS, unscarred by the chaos around it, was still churning out profits. Lawson, like his predecessors, had to decide what to do with the money. 'We now know what we are doing and we are confident with where we are going,' he said.
His answer to the riddle has been to concentrate on what it does best, but to do it in more places and in more markets; a strategy of expansion rather than diversification. This has meant taking RS into Continental Europe, a move the company had shunned up until the start of this decade. RS Components has now set up greenfield operations in Germany and Italy, and has acquired a business in France. Last year, the international division reported sales of just under £80 million, a 32% increase for the year at constant exchange rates, and, for the first time, made a small profit. 'We chose Germany as the place to start because the size of the market in amazing,' says Tom Anderson, managing director of RS Components International. 'But German engineers are very conservative and getting them to try something new is very difficult. Once you are in a market, however, you can transform it.'
Conditions in Europe, inevitably, differ from what the company is used to in the UK. The Germans, for example, are reluctant to concede that their existing distribution systems could be made any more efficient; they are particularly doubtful that the British have anything to teach them about efficiency. It has taken RS several years to start convincing German engineers that the company can deliver on its promises.
The Italians, by contrast, welcome the idea of improvements on their existing systems but are reluctant to accept fixed prices; they would prefer to haggle over the price.
Anderson maintains that there is nothing quite like RS in the rest of Europe, and as big companies there are replaced by a mass of small, flexible companies, the distribution patterns should change to suit the British entrant. RS has some advantages. It knows the business from its long experience in the UK. And the UK warehouses can be used to feed the European operations, avoiding the need to have full-scale depots in each European country. But the business is still tiny, and profits minuscule.
Lawson has also set his sights on the Far East: a region that should be natural territory for RS, given both the high growth rates, and the strength of the tiger economies in electronics manufacturing. There are already operations in Australia and joint-ventures in Hong Kong, Malaysia and India, and the company has its eye on Korea and China. It starts with one advantage: many of the electronics engineers have been trained in Britain, and have grown up with the RS catalogue as their bible. 'We have been selling to the Far East as an exporter for 20 years,' says Anderson. Engineers in Far Eastern countries regularly place orders with RS in the UK, preferring to wait for the product to make its way East rather than trust local distributors. So far joint-ventures have been established in the Pacific region, with their own small-scale warehouses.
The US, though, is being studiously avoided: there are already competitors such as Newark, as good if not better than RS. 'I am surprised they haven't moved into Europe in a bigger way,' says Lawson, with evident relief.
The other key plank of the strategy is to move into new markets. This year the company has launched a catalogue for mechanical engineers. As yet it is too early to judge the success of this move, which Lawson insists is little more than an extension of its core competence. But by moving beyond electrical components the company shows a desire to break out of its narrow niche. It is already thinking about the possibility of distributing building materials, or chemicals. Certainly the profits from RS would feed that expansion: since it floated in 1967 the company has never had a rights issue. Less certain is whether it has the depth of management to control such ambitions. These moves, if they happen, look dangerously close to diversification.
Steering the new course is Bright's successor (Bright retired in July) Roy Cotterill, a long-time GEC staffer, who has previously been chairman of Telemetrix and Vocalis. He is not the kind of big hitter that might have been expected for a company of this size. And there is concern that, having returned to its core business and demonstrated the resilience of RS, the company may now fritter away its success in a spate of ill-considered diversifications. Much depends on whether Lawson is right in believing that Electrocomponents's core competence lies in distribution. Or whether, more arguably, its excellence is confined to the distribution of electrical components.
ELECTROCOMPONENTS: Financial Facts
Turnover/Profit before tax* (£m)
RS Group 359.5 70.2
Pact International 37.0 (0.3)
Net interest/cash & investments 2.8
Total 396.5 72.7
Turnover/Profit by location*(£m)
UK and Rep. of Ireland 338.0 67.1
Rest of Europe 47.2 0.4
Rest of world 11.3 2.4
Net interest/cash & investments 2.8
Total 396.5 72.7
Shareholders' funds (£m) 168.2
Number of employees 2,646
* for year to 31 March 1994.