Grainger and WESCO, a Preview of Strategy

In late May the 2017 Electrical Products Conference was held.  This conference is an opportunity for publicly held companies in the electrical industry to present their “direction” to analysts so that analysts essentially “talk up” the company.  Grainger, WESCO and 22 manufacturers presented. Click here for a list of presenters and their presentations are also on this website (and if you’d like us to review / comment on any, let us know whom.)

Given that Grainger and WESCO are always of interest, let’s review the highlights of their presentations (and comments are in italics.)

Grainger

Their presentation highlighted:

• Shared sales by strategic focus area.  Of their $9.5B in sales (some sales were excluded) 62% is defined as “US Large”, 9.5% is “US Medium”, 7.4% is Canada, 10.5% is “Single Channel” (like Zoro) and 8.4% is International. (takeaway, they are in the incumbents in many Fortune 1000 companies for the broad basket of MRO supplies and these companies buy from Grainger based upon much more than price.  It also highlights that their core customer base and Amazon Business’ core customer base may only nominally overlap and, if they do, not for significant dollar volume. This could be that the value proposition significantly differs.)
• Strategies
  • For Large and Medium companies
    • Grow spot-buy sales based upon their new pricing initiative (which essentially reduces margins on infrequently purchased / non-contracted / C&D items)
    • Increase digital capabilities (make ordering electronically easier / integrate systems)
    • Grow (focus) on large, complex companies and re-engage medium customers (which means they lost some focus, some of which may have been due to the large number of branch closings as well as focusing on electronic as some of these companies may not be adopting “eCommerce” as quickly as others … and it could have been a pricing issue.)
  • Seeking to improve the cost structure (more consolidation / closings / layoffs?)
• Evolving the Model by 2019
  • Large Account – gain share via
    • Improved onsite execution (storeroom management, product / technical expertise, delivery.  Amazon is challenged on two of these)
    • Increased assortment (offering more manufacturers or being strategic and identifying 1) what don’t sell to customer and 2) what customer buys they don’t offer? Could also mean new sourcing, new private labels and/or acquisitions.)
    • Simplified pricing (based upon experience, this is a double edge sword … were they overcharging (from a customer perspective)? How will it affect overall margins? And in reality, distributors in every industry use a product velocity pricing model, Grainger may be just reacting because of the perception of Amazon within accounts and customers continued pricing objections….and maybe their value proposition has changed or isn’t valued as much)
• Pricing Change Effectiveness
  • Reportedly, since Q4 2015, Grainger volume for affected customers is up 9% and up 3% in Q1 and 5% Q2 through 5/18. (Must be using advanced math to factor out industrial / MRO growth which is occurring organically in the business that they would have received anyways.  The key metric is determining their share of eligible spend within their accounts.)
• Medium Customer Strategy for 2019
  • Reach customers through digital “relationship” and inside sales (hopefully the maintenance guy will take the call … or purchasing will answer … and that the engineer can show his specs via an online process.)
  • Improved assortment, and in stock.
  • eCommerce
  • Pricing

Medium market is projected as a $50B market with Grainger only having 2%. Currently only 30% of Grainger Medium volume is on better pricing program so, can expect margins for this segment to decline and competitors can expect increased pricing pressures within these accounts.

• Launched Gamut.com (but no one seems to understand why, its target audience, the expectations, what the product offering will be, etc.  Grainger positions it as an “R&D site for now.” Maybe someone from Grainger could explain?)
• Expanding fulfillment network by 2019 to provide next day “complete” service while reducing fulfillment costs. (Again, a reaction to Amazon being able to ship next day or truly a customer request?)
• Grainger uses a metric of US Expense / COGS to determine its productivity.  It’s currently about 41% and they want to reduce it to about 38-39% by 2019. The overall reduction is $80-95M which will come through increased sales / seller, pricing efficiency, fulfillment efficiency and contact center consolidation. (They hope customers gravitate to calling a 1-800 # and working with remote inside sales and perhaps a “bullpen / telesales group”.)
• Small Customers – this is considered their “Single Channel” model and is best known, in the US, as Zoro.  Touting their “superior assortment and fulfillment capabilities.
• Expectations for 2019
  • 6-8% growth in US
  • For 2017 expecting $10.2-10.5B in sales or 1-4% growth and a 2.5% growth generates “share gain”

Seems like a company pretty focused on serving large customers, challenged in pursuing medium and small accounts and perhaps overly concerned with Amazon Business rather than being focused on identifying how can further penetrate large customers.  The Zoro and Gamut initiatives may be a dilution of company resources (financial and personnel) for nominal, in the overall scope of Grainger, benefit.

WESCO

WESCO had two PPTs for their presentation.  The first is an executive summary, with some notes below, and the second was a 120 slide detailed presentation which some notes are extracted from.

Executive Summary

• Company overview. Total revenues of $7.3B (not all electrical)
• 500 branches
• Strong emphasis in their “supply chain solutions” and “capital project solutions”
  • Their “Service Capabilities Examples” page could be of interest to distributors seeking to develop, or perhaps better communicate, their services (slide 7)
• Objectives
  • Grow “above market growth rate” by 1-2% (so, since many feel the overall market will be up 5-7%, does that mean WESCO should be at least 6-8%?)
  • Focus on “growth markets” (and they saw acquisitions should add 1-3% annually over the long term.  Reasonable in the electrical space or will diversification be needed?)
  • Expand margins (with strategies focused on growing with strategic suppliers (have many suppliers noticed focused initiatives or a reduction in competition?), simplify / standardize offering (again, suppliers, have you noticed reduction? Are you “paying” for the privilege?), pricing discipline, optimize network (more consolidation / cost containment?) and “tightly manage operating costs.”
  • Invest in growth and acquisitions (wonder if more electrical or diversification?)
• 2017 YTD results
  • Through 5/19 – continued growth in industrial
  • QTD organic sales flat vs PY (for WESCO this is considered positive. We’re hearing growth, 4-6%, for industrial from others, could WESCO have lost share / place within some accounts over the past couple of years, especially with its cut-backs?)
  • Q1 had organic sales down 2%

Detailed Presentation (with focus solely on US)

• WESCO believes that of the $500B US MRO market that it can address $200B of it. There is a charge, slide 19, that overviews the size of each market
• The OEM overall market is projected at $300B with about $100B addressable by WESCO.
• 37% of WESCO sales are industrial, 29% are construction, 18% are utility and 15% is CIG (institutional / government)
  • CIG
    • 83% in US
    • Big focus on data; hoping for lighting upgrades in government, commercial and educational markets
    • Expect to grow low to mid single digits in 2017 (presume they hope to benefit from government infrastructure program and data / data center spending)
  • Utility
    • 89% in US
    • Focus on services / integrated supply program
    • Flat to low single digits
  • Industrial
    • 36% of the business ($2.6B) with 78% of it in the US
      • Presentation highlights many services that they offer, especially for global accounts (national accounts) which appears to be the focus of their industrial business in addition to OEM accounts.
    • Focus on services, industrial networking and anticipating growth in connected lighting
    • Expect low single digit decline to low single digit increase (which would seem to underperfom independents and Grainger’s projections)
  • Construction
    • $450B construction market with $44B WESCO addressable market which, according to WESCO is about 43.7% commercial, 39% institutions and 17% industrial.
    • Construction is 34% of WESCO sales with 65% of this business in the US and 32% in Canada.
    • Focused on services, engineering services, “managing projects”, large renovations that integrate electrical, data, security, etc,
      • Project LED market is a $15B market (’17) with a 15% adoption rate
      • Solar market is $35B with low single digit growth.
• Supply Chain & Operations
  • Have 12,000+ SPAs
  • $800+M in inventory
  • Goal – Drive Operating Margin Expansion
    • Sourcing Optimization (supplier rationalization? requests for more rebate? improve warehousing agreements? dating?)
      • Using reverse auctions in some instances!
    • Inventory Optimization (streamlining inventory and what is carried in RDCs? Increased warehousing allowances?)
    • Pricing Optimization (desire for lowest cost national pricing? more SPAs? Using data analytics? Customer pricing initiatives?
    • The question to manufacturers … are you seeing the benefits in increased business?
• 2017
  • 0 to 4% annual growth expectation
  • Recently conducted a $50M share repurchase
• Through 2020 expect …
  • 3% annual end market growth
  • 1% market out-performance
  • 2% acquisitions
  • 6% total!

Observations

• Hopefully this provides distributors with some high level competitive insights and manufacturers a sense of where these companies are going and where they will be asked to “participate.”
• Knowing the direction of competition should enable distributors to think which customers in their marketplace are purchasing from these companies so that they can consider appropriate strategies to seek growth within the accounts to “win the business.
• Interesting to note that WESCO barely mentions eCommerce / digital in their presentation while it is a focus of Grainger.
• Selected elements of WESCO’s presentation focus on “digital products” (connected lighting, industrial networking, etc) and WESCO frequently mentions its engineering / technical resources and services whereas Grainger presents more as a transactional provider.

So, what are you seeing from Grainger and WESCO?