A catalogue of success: Interview with Digi-Key president Mark Larson

Digi-Key arrived on the UK distribution scene with a bang less than a decade ago. From nothing, the company has built a significant presence by running adverts in a wide range of magazines and websites. It remains hard to find an electronics related media product without Digi-Key branding. Its initial approach to the UK market was to build the business through mailing large numbers of catalogues. More recently, it has moved to a web only model. And a remarkable statistic is that it has generated significant revenue from the UK without having a single employee based here. Now, there's one. The catalogue was a significant undertaking; several inches thick and produced several times a year. "We printed our last catalogue in 2010," Digi-Key's president Mark Larson noted, "but we mailed the most catalogues in 2008. If you laid all the pages from the catalogues in the last print run end to end, they would have gone around the world twice." Economics, the growing importance of the internet and a response to environmental concerns mean Digi-Key is now completely reliant upon the web for its business. "But we continue to strengthen and to add products and content aggressively," he said. Operating a web based, rather than a catalogue based, business has some serious advantages for its customers. "With the catalogue, the goal was to print something that would be personal – an engineer could have their own copy. Now, customers can personalise the website; we are giving them the tools to do that and it's been well received," Larson continued. One of Digi-Key's main business thrusts is to offer the broadest possible range of components off the shelf. Currently, there are 800,000 different components in stock at the company's Thief River Falls headquarters in northern Minnesota and more products are being added by the day. In fact, he believes Digi-Key to be the only distributor where Altera and Xilinx can be found on the line card. "The web is interesting because we can make changes incrementally," Larson observed. That's not just updating the portfolio; it's also about functionality. "We're making regular – hopefully seamless – changes so users don't feel too uncomfortable. We're providing more functionality and making the site more user friendly." Although he has grown the revenues by 330% in a decade, Larson remains bullish. And, refreshingly, he admits weaknesses. "We haven't been able to progress since 2009," he noted, "and have probably shrunk back by about 4%. It's a reflection of the market and other distributors are running into the same problems." And he is particularly proud of growing revenues by 63% since 2007 simply through organic growth. "We did well," he smiled. Even though turnover is flattening in the short term, the number of customers isn't. "The numbers continue to grow," he said, "but, like other companies, we're selling less to all of them. And we're adding more contacts all the time." But the numbers suggest that Digi-Key is approaching a point where it has to change to address the future. The most obvious issue is that increasing the number of components stocked will become ever harder. "It will reach a limit," Larson agreed. "But where is the limit?" When it has pretty much every component on the shelf, what then? "There's a movement towards looking at other products," he said. "We've mainly been dealing with components, but we've already had some success with board level products." And it's here where Digi-Key may well find growth. "Customers are increasingly looking for solutions," Larson pointed out, "because they don't want to design everything from scratch. We're happy to be experts and I think you'll see more from Digi-Key in this area, including reference designs." Although addressing design engineers overtly, Digi-Key is now generating 30% of its revenues from low volume production business. "When Digi-Key first entered the UK market, it focused only on engineers. But in the last few years, we've got more involved in the production business. It's been successful in the US, but we haven't addressed the UK market aggressively." That situation, Larson hopes, is about to change because the one UK based Digi-Key employee will be focused on growing its production business. Larson remains focused on growth. "In five years, we could be a $2bn company," he said, "but we have to make the right decisions. It will need strong growth, but we have managed to grow at 16% a year historically." Contributors to the target will include increased penetration of the UK and European engineering markets and growth in its low volume business. "China is the great prospect," Larson recognised. "We're starting from almost nothing – our sales were around $40m last year and we should be doing far more than that. But we have to be in the country and we're not there at the moment – and it's the same for India." The seamless changes to which Larson alluded are happening. Not long ago, Digi-Key was a single site catalogue only operation aimed at engineers. Now, it's involved in production and is beginning to open offices in strategic locations. "We now have customer service in the Netherlands, Israel and Hong Kong," Larson said. "We're about to set up in Shanghai, then Korea and Japan and we'll be opening a Munich office focused on production business. "Globally, we've been able to expand from an engineering centric model into low volume, high mix and still hold mindshare; engineers are viewing Digi-Key as strongly as ever and I'm enthusiastic about the future," he concluded.