News and New Products

Digi-Key’s Mark Larson: Think local, act global

By Suzanne Deffree, Managing Editor, News -- Electronic Business, 7/18/2008

Electronic Business recently spoke with Digi-Key Corp  President Mark Larson about electronics distribution, growth through Web 2.0, and creating a global business from a small-town headquarters in Minnesota. What follows are excerpts of that conversation.

EDN: What’s the biggest challenge to North American-based distributors right now?
Larson: Clearly there is a lot of uncertainty in the economic conditions and the market is lethargic. That makes it more difficult to plan. It’s not that that puts incredible immediate pressure, but it makes it difficult to plan with great confidence. Certainly another issue, more internationally, is counterfeiting. It will be interesting to see how that plays out because theoretically I think that’s much more difficult for an independent distributor than a franchise distributor, but there’s still more diligence required in processing returns.

EDN: What does Digi-Key, specifically, do to thwart counterfeiting?
Larson: All we do is buy direct from the manufacturer. We don’t buy any product from brokers or EMS guys that overbought. Everything we sell comes directly from the manufacturer. That’s probably the strongest defense you can have.

EDN: Digi-Key increased revenue about 14% last year, despite the lethargic economy. That gain was significant compared to some of your competitors.
Larson: Even last year you could see in the component area a significant weakening of the market, and that has continued and maybe increased some into this year. We’re still having a decent year. We’re probably up about 8.5% for the year, so I don’t think anyone would give us any sympathy. But we are used to being in markets that are a little more robust.

EDN: Digi-Key’s enjoyed a very healthy 22% compound annual growth rate over the last 20 years. And you’ve done it without acquisition, which is uncommon in electronics distribution. Why does Digi-Key choose to focus on organic growth?
Larson: We’ve had plenty of alternatives to capitalize on strategies that would play well into organic growth. Of course the problem with acquisitions is cultural fits. They are complex. What you anticipate as some kind of synergy may actually never materialize. It’s very common in this industry where we’ve had situations where one plus one equals one and a half. Maybe it’s in some ways going the organic growth route was the surest and simplest course. I think had we been stalled along the way we might have been more inclined to look at acquisitions, but we’ve been pretty comfortable with our rate of growth as rated internally.

EDN: You just noted opportunities to capitalize on organic growth over the last couple of years. What can you point to specifically?
Larson: I think you are looking at things like Digi-Key’s volume business division where we have been able to strengthen our infrastructure, make more headway into production business. We’ve been able to develop our international business significantly. Right now, export sales probably represent more than 30% of our sales. You go back even six or seven years ago and that probably would have represented less than 1% of our sales. There have been initiatives that we have been able to implement that have driven the growth that we are comfortable working with without acquisition.

EDN: Do you see acquisition as a strategy you would focus on in the future as the distribution market continues to become more global?
Larson: I would never rule it out, but I would say at this point in time, it’s not one we are considering.

EDN: What are your plans for growth outside North America?
Larson: It’s kind of a unique initiative in the sense that all product ships from Digi-Key in Thief River Falls, Minn. What we try to do is localize our marketing effort as much as possible, working with the local language in terms of advertising and Web sites offering the local currency and try to coincide as much as possible with the local conventions of business. I would say it’s primarily an Internet-based marketing initiative that has allowed us to grow our business significantly over the last four or five years, particularly in Europe and Asia-Pacific. 

EDN: Speaking of Internet-based business, Digi-Key's online sales accounted for 62% of total sales in 2007, as compared to 54% in 2006. And you’ve forecasted in separate interviews with EDN that 70% of Digi-Key's sales will be derived via the Internet in 2008. How do your newer online customers compare to your more traditional customers?
Larson: I don’t know that I can answer that with certainty that there is a great difference or that if there is a difference I am smart enough to see it. Certainly the base of this businesses is still the engineer, the design engineer, and we continue to grow our engineering customer base. I think the new [customers] look much like the former ones, except they may be younger, just coming on the scene, or they may be based in Europe or Asia. In terms of production customers, that’s a newer scene for us. It’s an initiative that’s been built over the last six or seven years. More and more what we are seeing there are customers that were probably very reliant on what I would refer to as ‘relationship’ marketing are gradually much more accepting of performance marketing and saying, ‘Hey, if I buy from somebody and they can do the job, that’s fine, it doesn’t have to be based on a personal relationship, but instead a business relationship.’ And that isn’t something unique to Digi-Key. It’s something that has been fostered by the Internet and advanced by the Internet. Digi-Key’s strength on the Internet is dependent on the continued movement of people to that comfort and less relationship-based business activity.

EDN: Has your Minnesota headquarters ever proved to be a challenge for Digi-Key over the years?
Larson: You would think it would, but it really hasn’t. In fact, in some basic respects I think it really has been an advantage. The not-insignificant advantage is the quality of the workforce. It could be substantiated that it is far better than many areas of the country. There’s a tendency as you get into more highly populated more metro areas, I think often times you see kind of a degradation of commitment in the workforce. I’m talking about the people who take and ship the orders. Here, it’s a very high level of commitment. I believe it’s a positive differentiator.

EDN: How does Digi-Key communicate with engineers and how heavily does the company participate in design chain?
Larson: Pretty heavily. Obviously, if we take a look at it, we try to create an awareness of Digi-Key and our abilities through tradition advertising and through catalog mailings. But more and more we are seeing that the design engineers are going to the Web for product information. We have product training modules that allow engineers to get really in-depth seminars on demand. It gives them unique access for complete designs. But if anywhere along the way--whether they are taking a seminar or looking at a product sheet--they have additional questions, they can talk directly by phone or a Web chat [with Digi-Key technical services]. Then we also have a level where we support specific design.

EDN: Do you break out your revenue by design chain versus pure distribution?
Larson: I would say that about 60% is design.

EDN: Is Digi-Key comfortable with a 60:40 design to fulfillment breakout?
Larson: As long as it keeps growing. When I say growing, I mean in absolute terms. If you look at this point, probably the greatest potential for Digi-Key is growth in relative terms is going to be more on the production side because we just happen to have less market share there. We are much more dominant on the design side. It may be, if we are talking five years from now, that maybe 60% of business is production side. But I would hope in absolute terms we would have a design side that is one and a half times the size it is now.