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Continued progress has been demonstrated – we are
committed and confident about our future >>>
Ian Mason,
Group Chief Executive |
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Overview
Economic conditions in almost all the markets in which
we operate have been depressed, making for a difficult
year as a whole, with the second half being more difficult
than the first. The reasons for this global downturn are
well known, however, a specific impact in our case has
been the very dramatic fall in the electronics sector
which particularly affects our US business.
Our businesses are resilient but not immune to the prevailing
economic conditions. Sales growth rates in all of our
markets have been impacted. On a full year basis: reasonable
growth was achieved in Europe and Japan; Asia was relatively
flat; the UK experienced a moderate, and the US a significant,
decline in sales. e-Commerce sales increased strongly
in all our markets.
Our management strategy in these difficult times is very
clear. We will not be deflected by short term economic
pressures from doing what is right for the long term growth
of the Group. Our businesses have enormous growth potential
and we have maintained our strategic investments in them.
In parallel, we have continued to manage our gross margins
and the cost base to offset in part the impact of sales
shortfalls. Stock has been reduced significantly whilst
maintaining our exceptional service levels, and the already
strong cash generation of our business was improved. Net
debt was reduced by £22.5m even after a substantial
increase in capital expenditure.
These external trends are cyclical, economic conditions
will improve, and our views on the long term growth potential
of our business model worldwide remain unchanged.
During the year, the senior management structure beneath
Board level, which manages and controls the day-to-day
operations of the business, was realigned to reflect the
increasingly global nature of the business. The Group
Executive Management Team (GEMT) was formed, whose membership
consists of the Executive Directors and the Regional and
Process heads. This team meets regularly to develop strategy
and drive the sharing and implementation of best practice
around the Group.
I will now summarise the performance of our businesses
by geographic region.
UK
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RS UK |
2002 |
2001 |
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Sales (in UK) |
£379.7m |
£412.4m |
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Adjusted sales (decline)
growth |
(7.6)% |
2.7% |
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Sales (by origin) |
£393.0m |
£426.0m |
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Adjusted sales (decline)
growth |
(7.4)% |
3.3% |
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Contribution |
£126.2m |
£136.2m |
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Contribution % |
32.1% |
32.0% |
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The growth demonstrated by the RS UK business in 2001
was short lived in the face of general economic difficulties
and the continued pressure on the manufacturing sector.
In 2002, overall sales declined by 7.4% (adjusted for
trading days) to £393.0m. Growth among customers
in some sectors of the economy (transport, services, etc)
was insufficient to offset declines, particularly in manufacturing
and telecommunications. Due to these factors and the impact
of rationalisation within our customer base, the total
active customer numbers also declined by 7%. UK sales
in the second half declined by 10.7% (adjusted), but exited
the financial year at a slightly lower rate of decline.
Despite lower sales, the UK contribution margin improved
to 32.1% from 32.0% through good control of gross margin
and local costs, which demonstrates effective management
in difficult times. RS UK remains a highly profitable
business and extremely cash generative.
We strongly believe in the growth still available to our
UK business. All types of business value our services
and we have customers in all Standard Industry Classification
codes. Many businesses, however, have not yet become our
customers. Even within the manufacturing sector, we estimate
that our penetration is only 6% of our relevant market,
and this declines to 1.5% in non-manufacturing. Although
half our customers by number are now in non-manufacturing
businesses, they generate only approximately 40% of our
sales. There are also many other potential users within
our current customer accounts who do not yet buy from
RS. Our task is to reach more businesses and more individuals
within them and convince them of the value of the RS service.
Currently we are generating one thousand new customers
each month.
We also aim to increase the frequency and breadth of purchase
(the number of different products purchased) of our customers.
Many of our customers currently purchase within a narrow
range of products: they can be encouraged to broaden their
use of our very wide product offer and come to rely on
RS for more of their small order needs. At the end of
the year the catalogue contained 132,000 products, but
many customers bought only a small number of these products
compared to their potential requirements from our range.
To realise our customer potential the UK business invested
during the year in increasing its field sales force and
undertook a major sales force development programme. Our
telesales activities were increased and we have successfully
introduced a new customer acquisition programme. This
reduces the time it takes for new customers to increase
their frequency of purchase.
Sales coverage has been intensified around each of our
13 trade counters, to increase our penetration of customers
in each area. We continue to see considerable success
with our Managed Stock Replenishment service from our
trade counters to large customers: in this service we
monitor our customers’ stores for them and ensure that
they have what they need when they need it. We have seen
increases of around 40% in sales to participating companies.
We have made the task of running their businesses easier
and saved them substantial amounts of money, proving the
value of using RS.
We have increased the focus of our marketing programmes
on growing sectors, such as health, defence and transport.
Direct mailing programmes have been very successful in
stimulating customer activity, and we continue to use
specialogues (small catalogues) to improve the relevance
of our offer to customers.
I discuss our e-Commerce activities for the Group as a
whole later in this statement. Within the UK, trading
over the internet at the end of the year represented over
10% of sales, up from 7% at the end of last year.
Exports from the UK to distributors and direct to overseas
customers declined by 4.8% as the global economy suffered
and Sterling remained strong.
Rest of Europe
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RS Rest
of Europe |
2002 |
2001 |
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Sales |
£210.7m |
£203.6m |
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Adjusted sales growth |
4.1% |
21.8% |
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Contribution |
£40.4m |
£38.5m |
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Contribution % |
19.2% |
18.9% |
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Sales in Europe grew by 4.1% (adjusted for trading days
and at constant exchange rates) from £203.6m to
£210.7m, which is now 28% of Group sales. Trading
in the second half was more difficult than the first half
and there was a small sales decline (adjusted) which persisted
at the year end. Even at these more modest growth levels
the success of the RS strategy (sales growth with improving
contribution margins) was demonstrated and contribution
margins improved by 0.3 percentage points to 19.2%. Managing
the scale curve, tight cost management and improving gross
margins all led to the improved contribution margin. “The
Prize” potential in the Rest of Europe remains enormous
when compared in relative size terms to the UK and we
are following our well established strategy towards achieving
this “Prize”.
We are managing these markets on a more common basis and
during the year a Regional General Manager was appointed
for the Rest of Europe, covering businesses in France,
Germany, Italy, Austria, Scandinavia, Ireland, Spain and
Benelux.
The transfer of best practice between these businesses
has continued with encouraging results. For example, RS
Italy successfully piloted a scheme which promotes relevant
or interesting products to customers as they order other
products. This was successful and we were able to roll
it out swiftly and efficiently to other markets. Similarly,
another Italian initiative increased orderfill (the percentage
of orders we can fulfil immediately from stock) by ensuring
that good alternative products are offered if a product
being sought is temporarily unavailable: consequently
orderfill increased by about one percentage point. Again
this experience has been rolled out.
We continue to exploit our very strong position in continental
Europe. Our approach combines local nationals managing
each business to drive growth through implementing the
RS Core Business Model, together with Processes providing
world-class support to drive effectiveness.
Through the year service levels in all markets improved,
even though the level of stock was reduced.
Our more advanced e-Commerce capabilities developed in
the UK, discussed later in this report, have now been
rolled out across the Rest of Europe at a cost of over
£5m.
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RS Rest of Europe – sales, customers
and products |
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Adjusted |
%
Increase in |
Number
of |
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sales
growth |
active
customers |
products |
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France |
3.3% |
3% |
95,000 |
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Germany |
6.7% |
1% |
82,000 |
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Italy |
1.1% |
4% |
80,000 |
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Smaller businesses |
4.7% |
1% |
55,000 |
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The modest increases in customers reflected the more difficult
economic conditions within these markets as the year progressed.
The product offer reflects the different stages of development
in each of our markets.
For much of the year Radiospares in France has
been preparing for the first implementation of our significant
systems development (as discussed in Richard Butler’s
report) which should go live in the second half of this
year. This will subsequently be extended to all companies
in Europe (including the UK). Radiospares should be the
first business to generate the substantial efficiency
benefits and rewards from better customer service that
the improved processes and systems will support.
Growth of our businesses in Italy and Germany
has driven investment in new warehouse facilities in these
countries. The move to the Italian warehouse has been
completed without problem, and the fit-out of the new
German facility is progressing to plan. This is a major
new investment situated in Bad Hersfeld, about 140km north
of Frankfurt, where our current facility is located. The
new building and systems in this more central location
will enable us to increase our service levels and to take
orders for same day despatch until later in the day than
we can in our current facility.
The smaller businesses in Europe had differing
results. Radionics in Ireland was significantly affected
by a steep decline in the technology sector while Spain
showed good growth throughout the year. Austria and Benelux
were broadly flat for the year. Scandinavia showed growth
in the year, even without the contribution of our distributor
in Norway since its acquisition in September 2001. This
Norwegian business has now been integrated into our Scandinavian
operations. With the creation of a regional management
structure for continental Europe, we will increasingly
see the smaller businesses leveraging off their larger
neighbours.
North America
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Allied
North America |
2002 |
2001 |
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Sales |
£110.5m |
£148.7m |
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Adjusted sales (decline)
growth |
(27.6)% |
24.6% |
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Contribution |
£15.9m |
£26.4m |
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Contribution % |
14.4% |
17.8% |
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Sales of our Allied business in the US declined by 27.6%
(adjusted) to £110.5m. Allied experienced the combined
effects of sharp economic slowdown and what was the worst
slowdown in electronics demand since 1959 according to
the Semiconductor Industry Association. The National Electronic
Distributors Association reported that US distributors
suffered an average year-on-year sales decline of 40%
in the fourth quarter of calendar year 2001. Allied is
an electronics rather than a broad range industrial distributor
like the RS businesses and so was particularly impacted.
Allied’s customer base was much more stable, however,
declining only 3%. The downturn is cyclical, as was the
previous year’s upturn, and we are confident that as market
conditions improve Allied will return to its long term
trend growth.
Allied’s decline in sales was steepest around the half
year. Since then the rate of decline has more than halved.
Allied’s profit contribution on sales declined by 3.4
percentage points to 14.4%, despite actions on gross margins
and costs. The decline in sales was almost entirely due
to a fall in average order value, which also resulted
in lower discounts. This, together with selective pricing
adjustments, increased gross margin by over 2 percentage
points.
Cost management has resulted in labour headcount being
reduced by 16%, substantially all of which was part-time
and contract labour. However, the extensive sales branch
network and sales force have been sustained, as we believe
that these provide competitive advantage. The branches
give customers the personal contacts they value and ensure
that we meet their service requirements better than less
capable competitors. Management has not reacted to the
downturn in any way which will prejudice the future long
term growth potential of the business.
Different parts of the US economy had different experiences
and resources have been targeted on growing segments,
for example, defence, health and utilities. Over a million
new potential customers have been identified who are now
being targeted using various tools including direct mail
and personal follow-up from the local sales offices. A
number of incentive programmes were introduced to increase
our penetration of growing customers, and these campaigns
have produced good returns.
Allied’s stock was reduced by 27.5% whilst maintaining
superior customer service levels. Allied was rated number
one in product availability in North America in customer
surveys conducted by Electronic Buyers News, a major US
trade magazine. The product offer was 125,000 at the end
of the year.
e-Commerce sales have increased by 45.0% and are now 6%
of total sales. “Punch-out” technology, which enables
customers to build orders by “punching” through their
own firewall to our website before returning to have their
purchases authorised, is being used with several large
national accounts who have e-Procurement software for
order processing.
Japan
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RS Japan |
2002 |
2001 |
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Sales |
£9.0m |
£8.6m |
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Adjusted sales growth |
15.3% |
184.8% |
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Contribution |
(£4.7m) |
(£6.3m) |
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Sales in Japan have grown by 15.3% (adjusted) to £9.0m.
Losses of £4.7m were down from £6.3m last
year. The low growth compared to the previous year is
attributable to a rapid downturn in the Japanese economy,
particularly in the electronics and manufacturing sectors.
We have seen sales to some of our more established electronics
customers decline because they have made a number of their
engineers redundant, some of whom were our customers.
However, the total number of customers served by RS Japan
has grown by 15% and the average order frequency of these
customers has also grown. This demonstrates that the Japanese
engineer continues to value the RS service. This experience
reinforces our view that the market potential remains
huge.
The second half growth of 8.1% was lower than the first
half, and this rate persisted to the year end.
Marketing activities have been implemented to accelerate
the rate of customer acquisition and to increase the breadth
of purchase of existing customers. The sales force has
successfully targeted “recession proof” customers, for
example, universities and government institutes.
We continue to follow our well-proven strategy of implementing
the RS Core Business Model in Japan: increasing the product
range through adding new technologies and increasing the
number of customers and the breadth of purchase of those
customers. The number of products has grown to 43,000,
which is an increase of 70% since launch. The range of
products has started to widen to cover electrical and
mechanical products in addition to electronics, as we
build up to our typical broad range industrial offer which
can satisfy our customers’ needs.
e-Commerce business in Japan has grown to 19% of total
sales. Our more advanced internet capability, entirely
in the Japanese language, was successfully launched in
April 2002. A dedicated team has been created to drive
sales through this exciting new e-Commerce opportunity.
To meet the potential in this market we have decided to
relocate the business to a larger warehouse in a better
location for serving customers. This will happen in the
summer of 2002.
Given the trading backdrop and additional investments,
the business is now planned to break even at the end of
the 2004 financial year.
Rest of World
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RS Rest
of World |
2002 |
2001 |
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Sales |
£36.4m |
£37.0m |
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Adjusted sales growth |
1.0% |
17.1% |
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Contribution |
£0.2m |
£1.8m |
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Contribution % |
0.5% |
4.9% |
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Sales in the rest of the world grew by 1.0% (adjusted)
to £36.4m. The second half declined by 1.2%, but
the businesses were growing again by the end of the year.
Asia accounts for most of this segment.
Asia: Asia sales declined by 2.3% (adjusted) as these
markets are closely linked to the US and have therefore
seen very difficult economic conditions.
The Asia region is being managed on an integrated basis
by a Regional General Manager. The primary focus has been
to improve the sales effectiveness across the region and
to transfer best practice.
Sales for the whole of North Asia
were level (on an adjusted basis) with last year. This
reflects growth in China and declines elsewhere.
Sales in China grew by 10.8% (adjusted). China held up
longer in the global economic downturn, with the first
signs of this downturn seen during the second half in
the manufacturing centres of Southern China. Strategic
investment in catalogues and fulfilment during the year
amounted to £1.4m (2001: £2.5m).
Over 5,000 new customers were acquired in the year. Our
Shanghai warehouse gained approval for same day despatch
from the warehouse with retrospective customs clearance,
so allowing us to improve considerably the service level
offered in the Shanghai region. Following its entry into
the World Trade Organisation, however, China has begun
to place more controls on imports. Although these restrictions
are not fully operational, they have caused us some disruption
that we expect to continue until the new procedures are
implemented consistently.
In some months, up to 30% of Chinese sales came via the
internet. This was driven by particular incentive programmes,
and shows the relevance of e-Commerce to all of our markets.
Hong Kong and Taiwan faced difficult trading because of
the dependence of their markets on world trade levels
and electronics. Our sales declined in the year.
Sales in South Asia declined
by 7.1% (adjusted) with Singapore being particularly badly
affected because of its strong links to the US economy,
and the importance of electronics. In spite of this, our
marketing and sales actions grew the customer base by
9% to provide a sound platform for recovery. During the
year significant investment was made in systems to support
future growth.
Sales in Australasia declined
by 1.2% (adjusted). The Australian economy grew in the
year, but not in the sectors where our customers are concentrated.
Our efforts have been to broaden the customer base. Our
smaller business in New Zealand continued to grow. The
Australasian business again generated good profits.
Other Markets: Sales in
our other smaller markets grew by 38.5% (adjusted), driven
by particularly strong growth in South Africa.
e-Commerce
e-Commerce is a powerful way to market for the Group where
we have developed clear leadership. This channel builds
on existing strengths in fulfilment, content management
and our relationship with customers. As well as serving
existing customers we are attracting new ones and providing
services not possible through other channels.
Sales over the internet represented over 8% of total Group
sales at the year end. They amounted to £51.1m for
the year as a whole, and grew by over 50%.
The roll-out of the Euro Internet Trading Channel (EITC)
was completed during the year. Capital expenditure was
£1.5m (2001: £3.6m) with development and launch
costs expensed of £7.7m (2001: £4.0m). The
roll-out has taken our most advanced and proven functionality
(developed in the UK) to 11 European countries and all
on a single platform. Each country site is in its own
local language and is integrated into the local business
systems so that all existing customer information remains
available.
This roll-out has resulted in record levels of internet
sales being achieved in all markets in which the EITC
has been launched. Sales have grown by over 100% in some
markets compared to the previous internet trading site,
which demonstrates the value that our customers place
on this new functionality. Our understanding of customer
purchasing patterns is being enhanced, which will be the
foundation for future marketing programmes. The power
of this platform is that as new techniques are trialled
and proven in one of the markets, they can then be deployed
quickly to all the others.
The launch of our new PurchasingManager™ functionality
in February 2002 has also been enthusiastically welcomed
by customers. This is a simple to use but powerful e-Procurement
package which manages customers’ transactions with RS.
The benefits are demonstrable control of purchasing by
the purchasing professional (through setting limits for
spend, approval, etc) combined with empowerment of the
end-users to purchase what they need without a cumbersome
paper-based approval process. The net result is a significant
reduction in transaction costs and happier end-users and
purchasing professionals. We expect PurchasingManager™
to be a significant revenue driver in the future.
As mentioned previously, we successfully launched the
equivalent functionality of the EITC in Japan in April
2002. e-Commerce revenues in Japan were already 19% of
sales in the year and so we are particularly excited about
the likely impact of the new functionality. Early results
are encouraging.
Summary
Our strategy remains unchanged. As a Group we have huge
growth potential in the markets we serve. Even during
the current economic difficulties, continued progress
has been demonstrated, as has our capability for good
gross margin and cost management. The very strong cash
generation capability of our Group has again been demonstrated.
Despite the current cyclical downturn, which we will successfully
manage through, we are committed and confident about our
future.
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