Grainger Turning a Corner?

Continuing our Q3 earnings observations, next up is Grainger which is a traditionally a good barometer for the industrial MRO space and lately has been a case study in value proposition, price and fear of Amazon Business.

From the earnings call and their slides:

• Overall “a solid quarter and there were some positive signs”.
• Seeing growth coming from their price reduction strategy (and given that a vast majority of their business is with large accounts, this also infers retention of these accounts. It would be interesting to understand the ROI on their retail-oriented marketing given the small percent of their business which is small and medium-sized customers.)
• Continuing to manage expenses and “resetting” Canada for profitability.
  • Branch and headcount reductions
  • Canada sales up 7% which is 2% in Canadian currency
• Had some US “restructuring” with consolidation of contact (call) centers.
• Company sales up 2-3% on daily basis
• Volume up 8%, pricing down 4%, gross profit declined 150 basis points to 38%
• Online only sales (i.e. Zoro, MonotaRO in Japan) up 13% showing that there is a customer segment that prefers online and a price-oriented buying experience (as the margins in Zoro are lower than www.grainger.com.)
  • Japanese business was up 20%, hence Zoro is nominal / low single digit growth.
• US
  • Sales up 1% on daily basis to $2.016B
  • Volume up 7% (which projects them through end of year in the 6-8% range).
    • This can also be inferred that the larger MRO buyers are having “needs”.  The question for the electrical industry is “are those needs in the electrical segment?”  Grainger does not break out sales by product category to gain a good perspective.
    • September growth was 9% … so accelerating performance
    • Saw 15% growth, up from 3% in Q2, in sales to medium sized customers, but this audience is slightly less than $1B, or 10%, of total sales.
    • Large customers grew 5%, which accelerated from a 4% growth from this audience in Q2.  This audience represents $6.1 billion for Grainger.  Growth from large non-contract business and spot buys.  (This could be an growth and acquisition indicator for distributors … specialty business vs integrated solution.)
  • Feel that they are taking share as they estimate that the US MRO market, all segments, is growing 2-3%
  • Price deflation of 5%
  • Operating expenses are flat (this is the key to profitability. While many are investing into the digital infrastructure of their business, Grainger has made this investment and is now building on its foundation.)
  • Seeing sequential volume sales with large customers and saw some large spot buys from these larger customers … Grainger capturing some discretionary business that may have gone outside agreements or would they have earned anyways? No way to know.
  • Investing more in digital marketing (this will also have to become a competency, and expenditure, of distributor marketing departments in the future.  An expense, and expertise, that many have not had.)
    • Some branding, some acquisition via discount digital, some email marketing as well as other tools.
  • Seeing a little commodity price inflation.  They are mitigating this internally with their PPO process which is “right assortment at the right cost.” (sounds like negotiating, bringing in “new” / lower cost suppliers, some vendor consolidation, maybe doing more with private label, pushing back on price increases, etc.  Distributors may need to become more vigilant in this area as interest rates, inflation and supplier price increases rise. After all, if its good for the big guy, and he’s getting it, could it be good for you?)
  • Expect expenses to grow lower than volume in 2018.

It sounds like Grainger, at least in the US, is starting to hit on more cylinders.  While it is a company focused on large customers, it’s further penetrating them be they contracted or non-contracted accounts.  They are learning regarding digital marketing to pursue mid-sized customers, but that will take time for those customers to change their buying behavior.  The pricing change, while affecting margin % is realizing increased sales and increased GP$ and, with the delivery going to the same facility, it will inevitably help them leverage their operating costs and improve profitability.

Distributors, if you compete with Grainger, what are you seeing? Longer-term, could you foresee some of your non-contractor customer base, whom Grainger may consider mid-sized businesses, migrating to Grainger … are they / will they be a significant competitor for your non-contractor business? Or do you think your customers will continue to prefer a specialty distributor? Are you developing / investing into a digital marketing plan, even if you don’t have a commerce-enabled site?

Manufacturers, are you seeing this growth rate through Grainger or is the growth in non-electrical categories? What have you experienced in their PPO process?

It looks like Grainger may be turning a corner and will go on the offensive for its core customer profile.