Digi-Key: Slaying the giant

Once tiny Digi-Key is all grown up—and still growing.

By Heidi Elliott -- Movers & Shakers, 11/1/2004

In the catalog distribution world, Digi-Key has played David to Newark InOne's Goliath. But now Digi-Key is staring Goliath right in the eye, and the company has plans to become even bigger.

Mark Larson, President, Digi-Key

"We are gaining major ground on those guys," says Mark Larson, Digi-Key's president. "This year we will probably be equal to or slightly greater than they are in total sales." That's a bold proclamation from this executive, but he has some history to back it up. His Minnesota-based company has achieved a compound annual growth rate of nearly 22 percent over the past 20 years. That's a remarkable feat, made more impressive by the fact that the growth has been entirely organic.

The company has modest roots. Ronald A. Stordahl started Digi-Key in 1972 as an outgrowth of his interest in ham radio. During his college days, Stordahl assembled and eventually sold a digital electronic keyer kit used for sending radiotelegraph code—called the Digi-Key. After graduating from the University of Minnesota with a PhD in electrical engineering, Stordahl returned to his hometown of Thief River Falls, more than 300 miles north of Minneapolis, where the company still resides. He began selling electronic components to the hobby market, serving customers just like himself. In 1982, Digi-Key started mailing its catalog to the commercial market.

Larson joined the company in 1976 as general manager. When he first started, Digi-Key had revenues of $800,000 and fewer than 20 employees. Under his direction, the company moved away from the hobbyist market and started targeting the designer community. "Those 'hobbyists' were engineers using us for orders for their companies," he says.

Larson became president in 1985. He has moved the company further and further away from its hobbyist roots, first to engineers, then to the OEM market, with the launch of a "traditional" distribution business with larger order sizes. His moves appear to be paying off. Digi-Key projects that its revenue for this year will reach $540 million, with about 40 percent coming from the volume order business.

Larson recalls those early days were all about survival—making sure the company would persevere as a business in much the same way residents of Thief River Falls hunker down for the winter. He did not have big dreams for the company back then. "I remember back in 1976 we had $10,000 in sales one day and I thought, 'If we could only do that every day, what a wonderful world it would be,'" Larson says with a chuckle. "Now, our sales are probably $10,000 every two minutes. I didn't have a full appreciation for the potential."

The Minnesota catalog company consistently rates either No. 1 or No. 2 in a host of customer-satisfaction surveys measuring responsiveness, product availability, Web site, and overall performance. And in a survey earlier this year, for the first time ever, engineers rated Digi-Key first in breadth of product line. Digi-Key has worked to bolster its product line for a decade. It currently stocks more than 200,000 parts from 300 suppliers. "We've got tremendous momentum in this area," Larson says. "And we continue to expand."

What's the secret to Digi-Key's success? The company identifies several attributes that make it unique in the distribution space. Digi-Key has no outside sales force, serves its market entirely from one location, has a fill rate of 90 percent (compared with the industry average of 50 percent), stocks 95 percent of the inventory it offers, and provides same-day shipment on orders placed by 8 p.m. local time (UPS has a flight directly from Thief River Falls to its hub in Louisville).

Digi-Key is a catalog distributor that primarily serves the small-order market of prototype projects and test production runs. Its customer is the design engineer. Because they sell in smaller volumes, catalog distributors generally earn higher margin on their products. Right now, catalog distributors are outperforming all other sectors of the industry, including broadline distributors, public and private companies, and specialty distributors, according to Robin Gray, executive vice president of the National Electronic Distributors Association (NEDA).

Four main competitors play in this space: Newark InOne, Allied, Mouser, and Digi-Key. All are reporting strong to outstanding levels of growth so far this year. Newark was long considered the "bible" of the industry, as the pioneer components catalog. Larson calculates that Digi-Key overtook Newark last year in component sales, though Newark remained an overall larger player due to its non-component sales. This year, Digi-Key believes it can overtake Newark.

Should that happen, the road to becoming the biggest catalog distributor would be paved with Internet addresses. Digi-Key launched its top-rated Web site in 1995, and the company boasts that it can process orders—from order entry to shipping—in as little as 20 minutes. Digi-Key ships 99.9 percent of its orders the same day they are received. Larson knows that Internet sales have been his company's bread and butter. "The Internet is the preferred course for engineers [to order parts]," he says. "They don't want to spend a lot of time talking to someone. They want to just place an order and go back to their design."

And Larson is tapping into that preference in a major way. Digi-Key has gone international without ever leaving Thief River Falls. It's all done virtually. Building on the success of its Web site, Digi-Key launched a Japanese-language Web site in 2002, complete with prices in the local currency. In 2003, it launched virtual catalogs targeting local markets in the United Kingdom and Germany. By the end of this year, it will expand to the rest of Europe, using the Euro as its currency base. By the first quarter of 2005, Digi-Key plans to have virtual catalogs in place in Hong Kong, Korea, China, Singapore, and Taiwan. All of these locations will be served from Minnesota.

And although some distribution analysts caution that the market could subside next year, Digi-Key expects to keep growing. Its growth will come from the additional versions of its Web catalog. "We normally grow one-and-a-half times faster than the industry," Larson says. "Next year it could be even greater because of international growth."