Electrocomponents, Bechtle AG, & B2B Distribution

In Practise Weekly Analysis

Electrocomponents PLC

Why is this company interesting?

Founded in 1937, Electrocomponents (ECM) is a UK-listed industrial and electronics distributor that provides MRO components, automation and control, and technical electronics products to businesses globally. The company is a high-service distributor that aims to provide value-added service beyond simply selling components that an Arrow Electronics would focus on.

Over the last 10 years, the company has faced gross margin pressure and lower conversion of gross to operating profit that has dampened FCF growth. Lindsley Ruth, ECM's CEO, joined in 2015 and has reorganised the business to focus on value-add services to drive organic growth in addition to multiple acquisitions. ECM has compounded FCF per share at over 10% for 20 years and still has opportunity to expand globally.

ECM is part of our global B2B distributor coverage to understand what drives a sustainable competitive advantage in this business.

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We believe the B2B distribution model is structurally advantaged and we’ve previously studied various distributors including Addtech, Fastenal, and POOL CORP. B2B ‘middlemen’ that supply a wide range of products from a fragmented set of suppliers to a fragmented customer base typically enjoy durable superior economics due to the critical value they create for either side of the value chain.

In PractiseIn Practise

Distributors that offer critical, non-core services to both suppliers and customers create sticky relationships that are hard to break over time. At scale, distributors can not only serve customers with higher-value services, but also offer private label products that drive better economics. Although revenue is transactional, it’s often non-discretionary and recurring in nature which drives stable gross margins and reduces earnings volatility throughout the cycle.

This advantaged position in the value chain enables distributors to typically earn sustainable 20%+ ROIC. More importantly, distributors can often reinvest the FCF into acquisitions of smaller distributors to widen the range or enter new geographies. High-returns with reinvestment opportunities are vital ingredients for long-term compounding.

We plan to study as many publicly-listed B2B distributors we can find that share these attributes. Electrocomponents is potentially one of those businesses.

Founded in 1937 to supply spare radio parts, Electrocomponents (ECM) is a UK-listed industrial and electronics B2B distributor. The company has added various industrial products over time and now stocks 650,000 products from over 3,000 suppliers and serves 1.2m customers globally.

After briefly scanning ECM’s 20-year financial statements, one thing is immediately clear: the gross margin is in structural decline and far more volatile than FAST, POOL, or ADDTB.

Source: ECM 10-K, In PractiseSource: ECM 10-K, In Practise

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