Grainger Keeps Motoring Along; Amazon Business Out of Sight?

Grainger shared its 2018 Q2 performance earlier this week and, given their industrial MRO focus, highlighted continued strength in this customer segment. And while they are not focused in the electrical space, they are about a $1B electrical player as almost 10% of their business is classified as electrical, lighting and motors.

On their call they shared:

• 11% volume growth in the US. (Total company was 9%) They attribute this to market growth as well as benefits from their “pricing action” which has helped them accelerate sales to medium customers while picking up some “tail” spend in their larger contract accounts.
  • The result is higher GP $ growth (more focused on dollars than percentage!)
  • “Mid-sized” customer growth was 29%! Mid-sized customers represent about $.9 billion whereas large customers are $6.2B, hence 12.7% of US business.
    • Grainger is being able to reactive lapsed customers. Aside from tracking sales, they also are tracking the number of transactions by account and the number of contacts within an account (An analysis and marketing lesson here for distributors!)
  • For this year they expect to outpace the market by 3 points.
• Their “online businesses” segment, which is defined as Zoro, Morota and Gamut were up 25%
• Feel that they are gaining share (not a surprise as was on a couple of calls with a number of large MRO buyers the last two weeks … industrial and commercial … and none said they were doing any significant business with Amazon Business. The key reasons included Grainger pricing, when a contract is negotiated, is less than Amazon; integration into system; more focused catalog offering; easier to reconcile billing than credit card; easier to ensure contract utilization and that Grainger and its core competitors have stronger technical product knowledge.)
• Regarding pricing / gross margin, the company is at 39.8% … and this is after their pricing strategy change. Consider:
  • 23% of sales are from private label products with 2/3rds or more of it sourced from China
    • Have already identified alternative non-China sources that can more to if tariffs are expanded and the price differential warrants change.
  • Price adjustment did not significantly impact large contract accounts as those accounts already had competitive pricing. Grainger solely improved / went to a price matrix process.  For a point of comparison, the margin difference at MSC between contract accounts and small accounts is 10 points.
  • Reportedly price deflation is improving
  • Manufacturers pay for their large sales meeting (which attracts 4000+ people … customers!)
• Saw some supplier inflation (price increases) due to tariffs that were passed on to customers … and expect to pass on future increases due to tariffs (Probably not as much as electrical distributors saw due to a lower percent of sales of products that are steel or aluminum. And the benefit of passing on the price / tariff increases … added GM$, especially since with MRO sales product consumption is not impacted by nominal cost increases on the overall spend.)

Analyst questions and feedback:

• Grainger has added some salespeople and is, according to management, seeing some benefits of their CRM system in managing the sales force and guiding conversations.
• In considering their approach to medium sized customers, once those customers recognize that Grainger can be price competitive, Grainger is being effective in promoting its value proposition which includes product assortment, tech support, search, etc (What should be of note to distributors is that they are promoting their value proposition of saving them money / time and providing technical expertise … not promoting products. This is a difference in sales and marketing messaging between Grainger and most electrical distributors.)
• Grainger is projecting 6-8% growth in preliminary 2019 planning.
• From Robert W Baird & Company: “The entry of Amazon Business into the B2B marketplace is mainly headline risk, in our opinion, due to the very large market, complexity of many products, and high levels of customer service provided by companies like Grainger.” This coincides the feedback we’ve heard from large MRO accounts.  It appears that Amazon Business, at least to date, may be more successful in the smaller MRO customers and/or ad hoc opportunities.
• From William Blair:
  • Grainger continues to debunk e-commerce competition and secular price deflation fears.
  • Grainger said the industrial economy is healthy with no signs of slowdown.
  • Pricing actions and a better economy are driving improved volume growth with U.S. large and medium customers.

So, it would be fair to say:

• MRO business remains strong
• Grainger remains the leader focused on the large customer segment with continued growth coming from next tier customers
• it doesn’t appear that Amazon Business has made a significant dent in the business or taken much share from Grainger (Amazon Business could be taking it from other places.)
• Passing on supplier price increases is good!
• Communicating their value proposition through sales and digitally.
• Positioning to mitigate COGS increases from tariffs which could enable them to increase margins on private label and/or could result in share shift with suppliers (differentiate between suppliers that are impacted by tariffs vs those not.)  This is something that distributors, especially large ones, could consider as they gain insights from their suppliers and it also depends upon your perspective of how long the “trade war” may last.)